Model GloBE Rules by OECD- Pillars of Global Anti-Base Erosion Rules

The Global Anti-Base Erosion (GloBE) proposal is a part of the Base Erosion and Profit Shifting (BEPS) developed by the Organisation for Economic Co-operation and Development (OECD) to address the tax challenges arising from the digitalisation of the economy. The OECD released these GloBE Rules, also known as Global Anti-Base Erosion Rules to prevent Multi National Enterprises (MNEs) from shifting profits to low-tax jurisdictions and thereby eroding the tax base of other countries.

GloBE Rules will be applicable to multinational enterprises having a revenue of at least €750 million and the group having operating in 2 or more jurisdictions. Let’s see a detailed explanation of the GloBE rules by OECD, their objectives, and how they work.

Objectives of GloBE Rules

The primary objective of the GloBE rules is to prevent the base erosion and profit shifting in lines with the BEPS objectives. One of the ways to ensure this is by mandating MNEs to pay a minimum level of tax on their profits regardless of where they are located or where their economic activities take place. The GloBE rules target two specific types of base erosion and profit shifting activities:

1. Income Stripping: MNEs can artificially reduce their taxable income in high-tax countries by deducting excessive interest payments to related parties located in low-tax jurisdictions. The GloBE rules aim to limit the amount of interest deductions that can be claimed by MNEs and ensure that they are commensurate with their economic activities in the country where they are claiming the deductions.
2. Anti-Avoidance Measures: MNEs can artificially shift profits to low-tax jurisdictions by using transfer pricing techniques and other tax planning strategies. The GloBE rules aim to prevent such activities by introducing a global minimum tax rate that MNEs must pay on their profits. This global minimum tax rate will ensure that MNEs cannot escape taxation by shifting their profits to low-tax jurisdictions.

How GloBE Rules Work?

The GloBE rules are structured around two pillars that have been agreed by 137 nations out of 141 members of the OECD/G20 Inclusive Framework on BEPS. Following are the two pillars of the GloBE Rules:

Pillar 1: Allocation of Taxing Rights

The first pillar of the GloBE rules aims to allocate taxing rights to the countries where MNEs conduct their business activities, regardless of whether they have a physical presence in those countries. This is a significant departure from the traditional international tax system, which is based on the principle of physical presence.

Under the first pillar of GloBE Rules, the profits of MNEs will be allocated to the countries where they have "market" or "user" jurisdictions. Market jurisdictions are countries where the MNEs sell goods or services, while user jurisdictions are countries where the MNEs have a significant number of users or customers.

The allocation of taxing rights will be based on a formula that takes into account factors such as sales, assets, and employees. The aim of the first pillar is to ensure that MNEs pay their fair share of tax in the countries where they conduct their business activities, regardless of whether they have a physical presence in those countries.

Pillar 2: Global Anti-base Erosion Rules

The second pillar of the GloBE rules aims to prevent MNEs from shifting profits to low-tax jurisdictions by introducing a global minimum tax rate. The global minimum tax rate is designed to ensure that MNEs pay a minimum level of tax on their profits, regardless of where they are located or where their economic activities take place.

Under the second pillar of GloBE Rules, MNEs will be subject to two rules that impose the top-up taxes:

1. The Income Inclusion Rule (IIR): The income inclusion rule requires MNEs to include in their taxable income an amount equal to the income that has been subject to low or no taxation in a foreign jurisdiction. This means that if an MNE earns income in a low-tax jurisdiction, it will have to pay tax on that income in its home country at a rate that is equal to or greater than the global minimum tax rate.
2. The Undertaxed Payment Rule (UTPR): The undertaxed payment rule denies deductions for certain payments made by MNEs to related parties located in low-tax jurisdictions. This means that if an MNE pays interest, royalties, or other payments to a related party located in a low-tax jurisdiction, it will not be allowed to deduct those payments from its taxable income unless it can demonstrate that the payments are in line with the economic activities that gave rise to them.

Global Minimum Tax Rate Under GloBE Rules

The GloBE rules introduce a global minimum tax rate of 15% on the profits of MNEs. This minimum tax rate will be applied on a country-by-country basis, which means that MNEs will have to pay tax at the minimum rate in every country where they have a taxable presence.

Impact of GloBE Rules

The impact of the GloBE rules will be significant, especially for MNEs that currently engage in aggressive tax planning strategies to shift profits to low-tax jurisdictions. The GloBE rules will ensure that these MNEs pay a minimum level of tax on their profits, regardless of where they are located or where their economic activities take place.

The GloBE rules by OECD will also provide a more level playing field for businesses operating in different jurisdictions. By introducing a global minimum tax rate, the rules will reduce the incentive for MNEs to shift their profits to low-tax jurisdictions and thereby erode the tax base of other countries. This will help to ensure that businesses operating in high-tax countries are not at a competitive disadvantage compared to those operating in low-tax jurisdictions.

In a Nutshell

The GloBE rules by OECD are an important development in the fight against base erosion and profit shifting. The rules are structured around two pillars, which aim to allocate taxing rights to the countries where MNEs conduct their business activities and prevent MNEs from shifting profits to low-tax jurisdictions. The GloBE rules will have a significant impact on MNEs that currently engage in aggressive tax planning strategies to shift profits to low-tax jurisdictions. The rules will ensure that these MNEs pay a minimum level of tax on their profits, regardless of where they are located or where their economic activities take place while provide a more level playing field for businesses operating in multiple jurisdictions. For any assistance in international tax planning and strategies, feel free to contact the ASC Group. 

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