Consensus on a global minimum tax rate – the latest

The convergence, announced in July 2021, on a “consensus-based solution” on base erosion and profit shifting (BEPS) by members of the OECD/G20 Inclusive Framework (IF) will have escaped the attention of few people active in the global insurance industry.

Under ‘Pillar Two’ of the ‘Two Pillar’ solution (‘Pillar One’ does not apply to financial services), large multinational businesses will pay a minimum rate of tax of at least 15% on profits in all countries, and there will be an additional “top up” tax on parent entities.

If implemented, the solution will overhaul the international tax system that has applied for the last 100 years, according to which businesses are generally taxed where they are based, and will stamp out tax competition.

At time of writing, 134 of the 140 IF members have signed up (including Bermuda, which was an early signatory), with only Ireland, Nigeria, Estonia, Kenya, Hungary and Sri Lanka so far not consenting. Cyprus has not consented but is not an IF member.

The OECD hopes to attain full agreement on detailed proposals at a meeting of IF members scheduled for 8 October 2021.

If an agreement is reached this month, it is expected that the solution will be completed in 2022 with implementation from 2023.

A frenzy of lobbying and international diplomacy is on-going. G7 finance ministers meeting on 29 September 2021 reported progress on a joint position. The Biden administration has begun steps to introduce domestic legislation through Congress. Various governments have published position papers.

For those with an interest, an overview of Pillar Two is scheduled to this article.

There are, however, various features of Pillar Two that – without adjustment – may be detrimental to the global insurance industry.

  • Pillar Two discriminates against financial services and unfairly favours “traditional” economic activity, such as manufacturing. Pillar Two contains a substance carve-out for income that is at least 5% (in the transition period of five years, at least 7.5%) of the carrying value of tangible assets and payroll costs. The exemption for tangible assets only favours manufacturing over financial services. The global insurance industry is lobbying for amendments that would provide a similar exemption for normal levels of return on regulatory capital. This would bring the treatment of the sector in line with the exemption of tangible assets.
  • The carve-out amount in excess of income recognized under the Pillar Two rules in the relevant period cannot as currently drafted be carried-forward to reduce future income. Yet the insurance industry is peculiarly exposed to fluctuation in expenses (such as acquisition costs) from year to year that need to be evened out. The industry is lobbying for changes to mitigate the effects of the current plan resulting from long-term timing differences.
  • The solution disregards the importance of tax neutrality to structures in which capital and risk are pooled for international investment and reinsurance. The availability of tax neutrality under today’s international system makes the structuring of such investment in reinsurance vastly less complicated and provides much-needed certainty about tax consequences. Where risk and capital are pooled from international sources, the same underlying income and gains potentially stand to be taxed at least three times over: on the underlying business; the reinsurance company itself and on dividends in the jurisdiction of residence of investors. Double taxation treaties and exemptions can mitigate some of these by-products, but, with a large number of jurisdictions, achieving certainty is as challenging as it is complex and expensive. Tax neutrality is a simple and pragmatic solution to those challenges.

Even if the rules are implemented globally, the wide divergences in how corporate profits are calculated among different jurisdictions mean that there may well be inequality in tax burden across jurisdictions, indirectly leading to yet further tax competition. It remains to be seen how the IF members will address this. Harmonisation of methodologies in recognizing and calculating profits may be too ambitious.

Many doubt that full consensus will be attained or – if it is – that the rules will be implemented in practice. Despite this scepticism, global insurance groups should assume that the rules will be implemented. They should monitor developments vigilantly and participate where they can, through industry bodies, to promote a more balanced implementation of the rules.

Pillar Two overview

Pillar Two involves the introduction of a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax that countries can use to protect their tax bases.

Pillar Two tools include:

  • Two interlocking domestic rules (together the Global Anti-Base Erosion rules (GloBE rules):
    • An Income Inclusion Rule (IIR), based on traditional controlled foreign company (CFC) rule principles which triggers an inclusion at the level of the shareholder where the income of a controlled foreign entity is taxed at below the effective minimum tax rate (ETR - see below for further details). Pursuant to the IIR, a parent entity that applies the IIR is required to pay a top-up tax on its share of the income of each affiliated entity it controls that is located in a low tax jurisdiction. It is complemented by a switch-over rule (SOR) that removes treaty obstacles to its application to certain branch structures.
    • An Undertaxed Payment Rule (UTPR) preventing taxpayers that are allocated top-up tax under the UTPR from deducting intra-group payments to a low-tax affiliated entity that they control or requiring an equivalent adjustment under domestic law that results in the taxpayer having an incremental tax liability equal to the allocated top-up tax amount. UTPR does not apply in respect of an entity in a multinational enterprise (MNE) group that is controlled, directly or indirectly by a foreign entity in the same MNE group that is subject to an IIR.
  • A treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate, ensuring those source countries receive a fair share of the additional tax revenues expected to be generated by Pillar Two. The STTR will be creditable as a covered tax under the GloBE rules. IF members that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties and a defined set of other payments would implement the STTR into their bilateral treaties with developing IF members when requested to do so. The taxing right will be limited to the difference between the minimum rate and the tax rate on the payment. The minimum rate for the STTR will be between 7.5% and 9%.

The IIR mechanism is designed to collect a top-up tax based on the parent entity’s direct or indirect ownership of low-taxed controlled affiliated entities. The UTPR is a backstop mechanism to the IIR designed to collect any remaining top-up tax in relation to incomes that do not fall within the scope of an applicable IIR.

The minimum tax rate used for the purposes of the IIR and UTPR will be at least 15%. The same mechanics are used for determining the MNE’s jurisdictional ETR under the UTPR as the IIR and the amount of top-up tax allocable under both rules.

Under the GloBE rules, the top-up tax is determined using an ETR test that is calculated on a jurisdictional basis by dividing (i) the amount of covered taxes (i.e. any tax on an entity’s income or profits assigned to the relevant jurisdiction (including any taxes on distributed profits, any taxes imposed in lieu of a generally applicable income tax, and any taxes on retained earnings and corporate equity)) by (ii) the amount of income as determined under the GloBE rules by reference to financial accounting income (with agreed adjustments consistent with the tax policy objectives of Pillar Two and mechanisms to address timing differences).

The jurisdictional ETR computation requires assignment of the income and taxes among the jurisdictions in which the constituent entities of an MNE operates and in which taxes are paid. In respect of existing distribution tax systems, there will be no top-up tax liability if earnings are distributed within three to four years and taxed at or above the minimum level.


The GloBE rules will apply to MNEs that meet a €750 million threshold as determined under BEPS Action 13 (country by country reporting). Countries are free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold.

Rule status

The GLoBE rules are not mandatory. IF members may elect to apply them. However, IF members must accept the application of the GloBE rules applied by other IF members including agreement as to rule order and the application of any agreed safe harbours.

Rule design

The IIR allocates top-up tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80%.

The UTPR allocates top-up tax from low-tax constituent entities including those located in the Ultimate Parent Entities’ (UPE) jurisdiction under a methodology to be agreed.

Government entities, international organisations, non-profit organisations, pension funds or investment funds that are UPEs of MNE Groups and any holding vehicles used by such entities, organisations or funds are not subject to the GloBE rules.