OECD: Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule is Signed by 9 countries

| OECD Headquarters 2 Rue André Pascal, 75016 Paris, France. By Polymagou - CC-BY-SA

The international community has made an advancement today in the pursuit of a fairer global tax system, particularly for developing nations, by implementing the Pillar Two Subject to Tax Rule (STTR). Nine jurisdictions signed a new multilateral Convention to facilitate the early adoption of this rule: Barbados, Belize, Benin, Cabo Verde, Democratic Republic of the Congo, Indonesia, Romania, San Marino, and Türkiye have signed the Convention. The following jurisdictions have expressed their intent to sign the Convention:  Belgium, Bulgaria, Costa Rica, Mongolia, Portugal, Senegal, Seychelles, Thailand, Ukraine, Uzbekistan.

The STTR is part of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) and is designed to ensure a minimum level of taxation on cross-border payments. The new rule prevents income from being subjected to low or no taxes due to disparities in international tax regimes. It expects to end the possibility for multinationals to exploit such loopholes, which particularly affect developing nations, where outbound payments often escape adequate taxation.

PILLAR TWO STTR: A SAFEGUARD FOR DEVELOPING COUNTRIES

At the heart of the Pillar Two initiative, the STTR ensures that jurisdictions can "tax back" income when it is taxed below the minimum threshold of 9%. This provision is especially critical for developing countries, which often face significant outbound payments taxed at very low rates in the recipient country. The STTR ensures that these nations can reclaim their share of tax revenues, helping to secure their tax bases and protect public finances.

Under the framework, members with nominal corporate income tax rates below 9% are obligated to integrate the STTR into their bilateral tax agreements with developing countries. With more than 70 developing country members eligible to request the inclusion of the STTR, the rule is seen as an essential mechanism for leveling the tax playing field.

SIMPLIFIED TAXATION PROCESS FOR DEVELOPING COUNTRIES

Developing countries are particularly vulnerable to the effects of profit shifting and base erosion by multinational corporations, resulting in significant losses to public revenues. The STTR directly addresses this vulnerability by enabling countries to tax outbound payments when they are insufficiently taxed by the recipient jurisdiction. The rule provides a straightforward and efficient tool for these countries to secure fair tax revenues.

This rule can be implemented either through the new Multilateral Instrument (STTR MLI) or via bilateral amendments to existing tax treaties. The multilateral nature of the STTR MLI allows for swift, efficient, and broad-based adoption, helping developing nations streamline the incorporation of the rule into their tax agreements.

GLOBAL COMMITMENT TO FAIRER TAXATION

The signing ceremony that took place September 19, 2024 marks a milestone in global tax reform. Nineteen members of the Inclusive Framework participated, with several others signaling their intention to join once internal processes are complete. The event underscores the global commitment to the principles of the STTR and the larger Two-Pillar Solution aimed at addressing the challenges posed by the digitalization of the global economy.

OECD'S VISION FOR A FAIR GLOBAL TAX SYSTEM

OECD Secretary-General Mathias Cormann hailed the signing as a pivotal step in combating tax base erosion and profit shifting, particularly for developing countries. "The imminent entry into force of the Multilateral Instrument will make a tangible difference by enabling developing countries to automatically incorporate the STTR into bilateral tax treaties. This ensures that these countries can benefit from consensus-based solutions aimed at making the global tax system fairer," Cormann stated.

Cormann further emphasized that the implementation of the Two-Pillar Solution is vital for stabilizing the global tax landscape. It aims to curb harmful tax competition, reduce incentives for multinationals to shift profits, and relieve the pressure on countries to offer low-tax regimes in exchange for investment.

A FAIRER GLOBAL ECONOMY FOR ALL

As the STTR nears implementation, it is expected to generate significant additional revenue for governments, particularly in developing countries. The rule also plays a crucial role in ensuring that multinational businesses contribute fairly to the economies in which they operate, marking a significant stride towards achieving a balanced and equitable international tax system.

This signing ceremony is an important moment not only for the Inclusive Framework but for global efforts to combat profit shifting and enhance transparency in international taxation.

The convention can be accessed via the link below.

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• Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule | OECD