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Jakarta, Ideatax -- At the end of 2021, the OECD finally released the long-awaited rules regarding Pillar Two on Base Erosion and Profit Shifting (BEPS). The OECD Pillar Two is expected to be a solution and guide for OECD countries in implementing international tax system reforms, especially in the face of economic digitalization. OECD (2021) as an international institution concerned with international tax issues, states that the rules developed in Pillar Two will provide more guidance for tax authorities in facing tax challenges arising from digitalization and globalization.
In general, in this Pillar Two, the OECD began to introduce a solution called the global minimum tax. Global minimum tax is a tax that must be paid by multinational companies in every tax jurisdiction where they conduct activities. The aim is to provide fairness for both source and domicile countries. The amount of global minimum tax is set at 15% of income in each jurisdiction. The global minimum tax will originally be imposed on multinational enterprises (MNEs) that have gross income of more than 750 million euros or 12.7 trillion rupiah a year.
Furthermore, the OECD also regulates that the global minimum tax is paid in each tax jurisdiction where they operate. Thus, if an MNE operates in a country and earns consolidated income of 750 million euros or more, then the MNE is required to pay a global minimum tax of 15% of income in each country. In addition, Pillar Two also regulates the treatment of acquisitions and disposals of business units, including but not limited to the holding structure and tax neutrality regime.
Background
Historically, the OECD Pillar Two discussion began in October 2021. At that time, 135 taxing jurisdictions were involved in reforming the international tax system to ensure that MNEs pay taxes fairly to the taxing jurisdictions where they do business (OECD, 2023).
There are two agendas discussed in the reform: Global Minimum Tax and Subject To Tax Rule (STTR). STTR is a tax treaty rule that allows taxing jurisdictions to tax intra-group transactions that are taxed at less than 9%. On the other hand, the Global Minimum Tax focuses on taxing MNEs. OECD (2023) mentions that the implementation of the global minimum tax is based on the Global Anti-base Erosion (GloBE) model.
The OECD (2023) states that the GloBE rules introduced in the domestic rules are designed to work together with other taxing jurisdictions to create an integrated tax system designed to make MNE groups pay tax on the income they receive in each taxing jurisdiction in which they operate.
The GloBE Structure
The GloBE Structure as explained earlier, the GloBE is prepared as a template that can be used by tax jurisdictions to develop their domestic rules related to the global minimum tax. The GloBE rules consist of ten sections which include the definition, regulatory scope and effective tax rate calculation mechanism. In addition, the GloBE rules also cover the adjustment, application and filing of annual tax returns. Therefore, to mitigate the global minimum tax of 15%, there are several mitigation and self-diagnostic steps that can be taken by MNEs as follows:
The first step that needs to be taken in the implementation of the GloBE, which is then derived into the Pillar Two of the OECD, is to identify the scope of regulation of the global minimum tax. It should be noted that the GloBE or global minimum tax rules only apply to multinational companies that have a consolidated profit of more than 750 million euros or 12.6 trillion rupiah. Furthermore, OECD (2023) regulates that to identify the scope of the GloBE, there are several steps taken, among others, by determining whether the business group has a BUT in a jurisdiction or not.
Next, the MNE group needs to identify whether it has global revenues of more than 750 euros. Lastly, the MNE group needs to identify whether there are entities that are exempted from the imposition of the GloBE. The illustration of the GloBE scope identification is as follows:
The second step that MNE entities should take is to allocate income based on tax jurisdiction. After the MNE can identify the scope of the GloBE rules, the next thing that needs to be done by the MNE group is to determine the location and income of each entity. Each entity is identified based on its location and revenue generated. In detail, the second step that needs to be done by MNE is as follows:
The third step that needs to be done in mitigating the GloBE rule is to calculate the profit or loss of each entity and make several adjustments aimed at aligning with taxable income, making appropriate income allocations between jurisdictions and adjustments to align with the policies of each taxation authority. The illustration of the adjustments is as follows:
The fourth step that MNEs need to mitigate is by determining the adjusted taxes. After the profit or loss of each entity is calculated, the next step is to calculate the taxes associated with the income. The steps in calculating the adjusted tax are as follows:
The fifth step that needs to be done by the MNE is to calculate the effective tax rate and top-up tax. The effective tax rate is calculated by dividing covered tax based on tax jurisdiction with the GloBE income, which is also calculated based on tax jurisdiction. Meanwhile, the top-up tax is calculated by reducing the minimum tax rate between the effective tax rate. The calculation is as follows:
The last step that needs to be taken in mitigating GloBE is to impose additional taxes. Those are some self-diagnostic steps that can be taken by multinational companies in mitigating the global minimum tax. We are hopeful that the government will soon issue technical regulations regarding the global minimum tax so as to maximize the tax potential in Indonesia.
References
OECD. (2021, December 20). OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax. Retrieved from OECD: https://www.oecd.org/newsroom/oecd-releases-pillar-two-model-rules-for-domestic-implementation-of-15-percent-global-minimum-tax.htm
OECD. (2023). Minimum Tax Implementation Handbook (Pillar Two). Paris: OECD.
