Page 18 - Layout 1

Tax
Taxation in a digitalised economy
In the second of their two part article, Gavin Gafan, Senior Tax Manager and Vickram Khatwani, Tax Director, Deloitte, focus on the proposals of the OECD's Pillar Two
On 5 June 2021, the G7 group of largest economies communicated a high-level agreement on global tax reform, including the reallocation of the global residual profits of the largest businesses to market jurisdictions and a minimum effective tax rate on profits in each country in which businesses operate.
These reforms follow from the G20/OECD “Two Pillar” approach addressing the tax challenges arising from the digitalisation of the economy. The OECD has published two detailed “Blueprints” on potential rules for addressing these challenges.
In July 2021, the OECD Inclusive Framework on Base Erosion and Profit Shifting (“Inclusive Framework”), released a statement confirming that, as of 5 July 2021, 131 jurisdictions (including Gibraltar) have agreed to this “Two Pillar” approach.
In the last edition of this publication, a summary of the Blueprint on Pillar One was provided, covering the allocation of taxing rights between jurisdictions, which considered several proposals for new profit allocation and taxable presence (nexus) rules.
The second Blueprint, on Pillar Two, proposes a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries as set out below.
A. The Income Inclusion Rule and the Undertaxed Payments Rule These rules have been designed to ensure that large multinational groups pay tax at a minimum level in each jurisdiction in which they operate, and is governed by the following:
l Income Inclusion Rule - This principle rule triggers additional ‘top-up tax’ payable in a group’s parent company jurisdiction where the profits of group companies in any one jurisdiction are taxed at an effective rate below a global minimum tax rate; and
l Undertaxed Payments Rule - This captures any low-taxed group companies not controlled by a parent company subject to the Income Inclusion Rule.
l The minimum tax rate for the purposes of the Income Inclusion Rule and
Continued p20
18
Gibraltar International
www.gibraltarinternational.com