- Pillar Two: Tools
- Pillar Two: Systems Changes for MNEs
- Pillar Two Report: MNE Systems Planning
- Tax Data Mapping Assessment
- 122 Data Points for Pillar Two
- Decentralized Data Management for Pillar Two
- Pillar 2 Impact Assessments
- Benefits of a Pillar 2 Impact Assessment
- Roadmap for a Pillar 2 Impact Assessment
- Why MNEs Should Reassess SPVs
- Deferred Tax Tracking
- Pillar Two: Summary
- Pillar Two: Scope
- Pillar Two: Scope Overview
- Is there a Pillar Two MNE Group?
- Pillar Two: 750 Million Euros Threshold
- Identify Constituent and Excluded Entities
- Pillar Two: Trusts and Foundations
- Pillar Two: Permanent Establishments
- Pillar Two: Tax Transparent Entities
- Pillar Two: Pension Funds
- Pillar Two: Investment Property
- GloBE Income
- Financial Accounting Net Income or Loss
- Pillar Two: GloBE Adjustments
- Pillar Two: GloBE Income Requirements
- Arms-Length Requirement
- Qualified Refundable Tax Credits
- Transferable Tax Credits (MTTCs)
- Intra-Group Financing
- Allocation of Income
- Pillar Two: GloBE Income Elections
- Capital Gain Carry Back Tool
- Adjusted Covered Taxes
- Covered Taxes
- Adjustments to Covered Taxes
- Post-Filing Adjustments
- Allocation of Covered Taxes
- CFC Pushdown Limitation – Interactive Tool
- Deferred Tax
- Deferred Tax and Pillar Two
- Total Deferred Tax Adjustment Amount Simplified
- Deferred Tax Recapture Rule
- Deferred Tax Recapture – Interactive Tool
- Pillar Two: GloBE Loss Election
- Pillar Two: Foreign Tax Credits
- GloBE Loss Election – Interactive Tool
- Pillar Two: Deferred Tax Asset Calculator
- Pillar Two: Deferred Tax Liability Calculator
- ETR Calculation and Top Up Tax
- ETR Calculation and Top-Up Tax
- Simple Top-Up Tax Calculator
- Minority-Owned Entities
- Top-Up Tax Allocation
- Substance-Based Income Exclusion
- Substance-Based Income Exclusion Calculator
- De Minimis Exclusion
- Qualifying Domestic Minimum Top-Up Taxes
- Qualifying Domestic Minimum Top-Up Tax
- Designing a QDMTT
- Treatment of CFC Taxes: QDMTTs vs GloBE Rules
- QDMTT Legislative Tracker
- QDMTT Interactive Tool
- Imposition of Top Up Tax
- Income Inclusion Rule: UPE, POPE’s and Intermediate Parent Co’s
- Identify the Amount of Top-Up Tax Allocated under the Income Inclusion Rule
- Income Inclusion Rule Calculator
- The Under-Taxed Payments Rule
- Identify Top-Up Tax Subject to the UTPR
- Allocate Top-Up Tax to Relevant Jurisdictions
- Simple UTPR Calculator
- Switch-Over Rule
- Pillar Two: Investment Funds
- Investment Funds and Pillar Two
- Non-Tax Transparent Investment Funds
- Pillar Two: Investment Company ETR Calculation
- Investment Funds: Impact of the ETR Calculation
- Pillar Two: Investment Companies Top-Up Tax Calculator
- Tax Transparency Election
- Taxable Distribution Method Election
- Tax Transparent Investment Funds
- Pillar Two: Insurance Companies
- Pillar Two: Insurance Investment Entities
- Pillar Two: Joint Ventures
- Pillar Two: Distribution Tax Regimes
- Pillar Two: Restructuring
- Pillar Two: Intra-Group Asset Transfers
- Pillar Two: Corporate Reorganisations – Share Purchases and Disposals
- Transitional Rules
- Transitional Rules for Deferred Tax
- Intra-Group Asset Transfers
- Initial Phase of Activity Exemption
- Pillar Two: Administration
- Pillar Two: Implementation
- Pillar Two: Safe Harbours
- Transitional CbCR Safe Harbour
- Transitional Penalty Relief
- Simplified Calculations Safe Harbours
- QDMTT Safe Harbour
- Transitional UTPR Safe Harbour
- Pillar Two: Financial Accounting
- Pillar Two: Rapid Assessment Tool
- Pillar Two Elections
- Subject-to-Tax Rule (STTR)
- Subject-to-Tax Rule: Analysis
- Subject-to-Tax Rule: Global WHT Map
- Domestic Law
- Pillar Two: Accounting Standards Tracker
Contents
- Overview
- Taxing Right
- Other Treaty Provisions
- Payments Subject to the STTR
- Calculating the Tax Rate
- Graduated Rates
- Provision of Information
- Preferential Adjustments
- Excluded Entities
- Mark-Up Exclusion
- Mark-Up Exclusion – Example
- Contractual Arrangements
- Contractual Arrangements – Example
- Connected Persons
- Connected Persons – TAAR
- Materiality Threshold
- Administration
Overview
Pillar Two is comprised of two key rules, the GloBE Rules and the Subject-to-Tax Rule (STTR).
The STTR is a key component of Pillar Two, and unlike the GloBE Rules focuses on source jurisdictions.
On July 17, 2023, the OECD issued the model provision and commentary for the STTR.
This is a treaty provision to be inserted in certain double tax treaties with developing countries that allows a source State to recapture some of the taxing rights on intragroup payments, where the income is taxed in the residence State at a rate less than 9%.
The STTR will be included in bilateral double tax treaties with members of the Inclusive Framework (IF) when requested to do so by developing countries. IF jurisdictions considered as developing for this purpose are those with a Gross National Income per capita, calculated using the World Bank Atlas method, of USD 12,535 or less in 2019 (as updated).
STTR Multilateral Instrument
The Multilateral Instrument (MLI) implementing the STTR was open for signature from 2 October 2023.
The MLI applies to Covered Tax Agreements, which are existing bilateral tax treaties that are explicitly identified by each of the parties to those tax treaties, and directly amends Covered Tax Agreements in order to implement the STTR.
There are two new additions:
– Annex IV to the MLI provides that jurisdictions can decide to adopt their specific definition of the term “recognised pension fund” for applying the STTR or use their existing treaty definition;
– Annex V includes an optional circuit-breaker provision that switches off STTR when a developing country becomes a developed country (and switches it on in a reverse case).
Jurisdictions are required to notify the OECD of double tax treaties that they wish to apply the STTR MIL to. In addition further notifications are required if:
– they apply a tax calculated other than on a net income basis (Article 4) (e.g. imposing tax on gross income as a resident jurisdiction or by reference to equity (e.g. a capital tax), or the tax base for which is calculated by reference to multiple components (e.g. income and equity such as zakat)); or
– they do not impose corporate income tax on items of covered income when that income is earned, but instead impose tax at the point of profit distribution (either a deemed profit distribution or an actual distribution) (Article 5).
Taxing Right
The STTR effectively claws back some of the taxing rights over certain forms of income that has been given to the residence jurisdiction under a double tax treaty. It only applies where the income is subject to a tax rate in the Country of residence below 9%.
For example, if in this example the UPE was taxed on the royalty payments at 5%, Sub Co would have the right under the STTR to apply additional tax on the royalty payments at 4%. If the Sub Co was based in a regime that levied withholding tax at 15%, the STTR would not apply as it already applied tax at a rate above 9%.
The tax that can be levied by the source-state is the:
specified rate * gross amount of covered income
The specified rate is the difference between 9% and the tax rate applied to the covered income in the residence State.
For instance, if the tax rate on income of 1M was 5% in the residence state, the source state could levy tax of up to (9%-5%) 4% * 1M = 40,000.
Note, that the source state isn’t required to tax this full amount, but it cannot exceed it.
Other Treaty Provisions
Paragraph 3 of the Model STTR Article provides specific treatment where another provision of a double tax treaty (DTT) taxes the income.
Where another DTT provision taxes the income at the specified rate (so that the total tax rate is at least 9%), as you’d expect, the STTR does not apply (as it is unnecessary).
If another provision of a double tax treaty allows the source State to tax income at a rate below the specified rate, the taxing right under the other provision is preserved and the STTR simply tops up the rate to 9%.
Payments Subject to the STTR
Under Paragraph 4(a) of the Model STTR Article, payments subject to the STTR (referred to as ‘Covered Income’ in the STTR Article) are:
– interest
– royalties
– payments made in consideration for the use of, or the right to use, distribution rights in respect of a product or service;
– insurance and reinsurance premiums;
– fees to provide a financial guarantee, or other financing fees;
– rent or any other payment for the use of, or the right to use, industrial, commercial or scientific equipment; or
– any income received in consideration for the provision of services.
It should be borne in mind that these definitions are based on applicable treaty definitions. As such when considering the scope of interest or royalties for instance, jurisdictions may have different interpretations. The OECD Model Tax Convention includes the observations and positions that jurisdiction have taken.
The following are not include in covered income under Paragraph 4(b) of the Model STTR Article:
– rent or other payment for the use of, or the right to use, a ship to be used for the transportation of passengers or cargo in international traffic on a bare boat charter basis; or
– items of income derived by a person whose domestic tax liability is determined by the tonnage of a ship.
The inclusion of services within the scope of the STTR list is likely to be of key interest to source jurisdictions, particularly as regards digital intermediation services.
Inclusion of ServicesInterest and royalties are often subject to rates of withholding tax domestically (and under treaties) that are above 9%, and therefore the STTR wouldn't apply in any case to these payments. By contrast many jurisdictions have difficulties levying tax on digital intermediation services provided by a non-resident supplier. As these are included within a general definition of services, this allows source jurisdictions to tax payments up to 9% where they were subject to an adjusted nominal tax rate of at least 9% in the non-resident suppliers jurisdiction.
Sign into your account to access this analysis
Not a Subscriber?
If you haven’t got a subscription you can join up below.
Get Started
Already a Subscriber?
Lee is a qualified Chartered Accountant and Chartered Tax Adviser.A former Senior Tax Analyst at Bloomberg Tax, Lee began his career inErnst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience.Lee's books have been recommended by The Times, The Guardian and The Telegraph.
Latest Articles
Malta Enacts EU Minimum Tax Directive With Art. 50 Postponement
February 21, 2024
On February 20, 2024, the Maltese Government issued Legal Notice 32 of 2024 which enacts the EU Minimum Tax Directive with the Article 50 postponement.
Read More »
OECD Issues Final Rules for Amount B Under Pillar One
February 20, 2024
On February 19, 2024, the OECD published its final report on Pillar One Amount B, aimed at providing a simplified and streamlined approach to the application of the arm’s length principle to baseline marketing and distribution activities.
Read More »
Interaction Between Bonus Depreciation and the Substance-Based Income Exclusion
February 16, 2024
In this article we look at the interaction between deferred tax on bonus depreciation and the substance-based income exclusion on investments in tangible assets.
Read More »
Renegotiating Tax Stabilization Agreements For Pillar Two
February 14, 2024
In this article we look at the impact of Pillar Two on tax stabilization agreements, and the benefits of renegotiating agreements.
Read More »
GloBE Country Guide: Estonia
February 12, 2024
Analysis of the domestic implementation of the Pillar Two Global Minimum Tax rules in Estonia. Updated for the Draft Law of February 8, 2024.
Read More »
Estonia Issues Draft Pillar 2 Law Including Art. 50 Postponement
February 9, 2024
On February 8, 2024, the Government approved the ‘Act supplementing the Tax Information Exchange Act, the Tax Organisation Act and the Income Tax Act’ which includes provisions to implement Article 50 of the EU Minimum Tax Directive.
Read More »
GloBE Country Guide: Lithuania
February 8, 2024
Analysis of the domestic implementation of the Pillar Two Global Minimum Tax rules in Lithuania. Updated for the Draft Law of October 27, 2023.
Read More »
GloBE Country Guide: Latvia
February 6, 2024
Analysis of the domestic implementation of the Pillar Two Global Minimum Tax rules in Latvia. Updated for the Draft Law of January 30, 2024
Read More »
Blended CFC Regimes and Avoiding Unrelievable CFC Taxes
February 5, 2024
Top-up taxes under a QDMTT are added to covered taxes of a CFC but only for the purposes of calculating the allocation of Blended CFC Taxes. The way the rules operate is aimed at minimising unrelievable CFC taxes under Blended CFC Regimes. Read more.
Read More »
We use cookies on our website to give you the most relevant experience. By clicking “Accept All”, you consent to the use of all the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.