BEPS 2.0 Reform of the international tax rules

What is BEPS 2.0 and what are the implications of introducing global minimum taxation. In this blog you will get an overview and introduction around BEPS 2.0.

What is BEPS 2.0?

Reforming international tax rules to address digitalization (BEPS 2.0) is a top priority on the OECD agenda. The reforms had recently been called for mainly due to the acceleration of digitalization, the COVID pandemic and increasingly empty government coffers. Added to this is the development of a degree of zero tolerance for tax avoidance by multinationals. BEPS 2.0 is thus intended to pre-empt unilateral and uncoordinated tax measures by individual countries. The main goal is clearly defined as the shifting of higher tax revenues of the market location and the regulation of zer global minimum taxation of large companies.

Pillar I

Pillar BEPS 2.0 is currently based on two pillars. Pillar I focuses on the redistribution of taxation from the country of domicile to the sales markets. In detail, this means an extension of the taxation rights of the market countries, provided that the company is actively and sustainably involved in the economy of a country. In this case, taxation is to become possible even without a physical presence. In addition, the allocation of a share of the residual profit of a multinational company will become possible. So far, a number of questions remain unanswered in this regard. These include, for example, the amount of the minimum turnover and the minimum profitability. The greatest criticism of Pillar I comes from business associations, as implementation and application could prove to be extremely complicated.

Pillar II

The second pillar, Pillar II, aims to come closer to the goal of global minimum taxation. Countries are to be given the right to apply certain internationally agreed tax rules if the income of the multinational company is taxed below the agreed minimum rate (effective tax rate). The global minimum taxation rules (GloBE) are composed as follows:

  • Income Inclusion Rule (IIR)
  • “Post-taxation” of foreign income at the parent company to achieve a minimum taxation.
  • Undertaxed Payment Rule (UTPR).
  • Withholding limitations or the imposition of a withholding tax in case of insufficient taxation.
  • SWITCH-OVER clause
  • Allows a state to switch from the exemption method to the imputation method in certain permanent establishment constellations despite a DTA.
  • “SUBJECT-TO-TAX” clause (STTR).
  • No DTA benefits of intra-group payments to low-tax countries.

The current legislation of the United States with the US GILTI (Global Intangible Low Taxed Income) regime is considered Pillar II compliant. However, the minimum tax rate to be agreed is still under discussion.

The most important points on a glance:

  • The reform of international tax rules (BEPS 2.0) is a top priority for the OECD.
  • The reform is currently based on two pillars (Pillar I and Pillar II).
  • Pillar I regulates the redistribution of taxation from the home countries to the sales markets.
  • Pillar II aims to come closer to the global minimum taxation.