Chapter 28: Latest Developments in International Taxation

The foundational OECD report, Addressing Base Erosion and Profit Shifting (2013), concluded that no single tax rule on its own enables BEPS. Rather, BEPS is generated by the complex systemic interplay of multiple deficiencies:

• Uncoordinated domestic laws and mismatched bilateral tax treaties;
• International tax standards failing to keep pace with digital and globalized supply chains;
• Pervasive information asymmetry and lack of transparency at the level of tax administrations; and
• Widespread availability of harmful tax regimes and preferential intellectual property boxes.

In 2015, the OECD and G20 nations delivered a comprehensive package of 15 BEPS Actions designed to restore international tax coherence, realign taxation with economic substance, and enforce transparency (e.g., Action 1 on Digital Economy, Actions 8-10 on Transfer Pricing Intangibles and Risks, Action 13 CbCR, Action 15 MLI).

Ongoing Monitoring: Member countries committed to monitoring compliance with minimum standards via peer reviews to ensure uniform implementation across jurisdictions.

Aims to ensure a fairer distribution of taxing rights among market jurisdictions with respect to the largest and most profitable multinational enterprises. Under Pillar One, an MNE is evaluated on a consolidated entity basis:

• Amount A: New international framework reallocating 25% of residual profits (profits exceeding 10% profit margin) of giant MNEs (revenues > €20B) to market jurisdictions where goods/services are consumed.
• Amount B: Simplified and streamlined transfer pricing approach standardizing arm's length returns for baseline in-country marketing and distribution activities.

Establishes a multilateral floor on corporate tax competition, ensuring multinational enterprises pay a minimum effective tax rate across all operating jurisdictions:

• Global Anti-Base Erosion (GloBE) Rules: Minimum effective tax rate of 15% for MNE Groups with annual revenues of €750 million or more, enforced via QDMTT, IIR, and UTPR.
• Subject to Tax Rule (STTR): A bilateral treaty-based rule operating at a 9% minimum nominal tax rate, permitting source jurisdictions to "tax back" undertaxed intragroup payments.

Amount A reallocates exactly 25% of the MNE's residual profit to market jurisdictions. Residual profit is defined mathematically as profit in excess of 10% of revenue:

The allocable pool is distributed across qualifying market jurisdictions using revenue-based allocation keys.

To eliminate double taxation, Amount A incorporates a Marketing and Distribution Profits Safe Harbour (MDSH):

• Where a market country already taxes an MNE's residual profits through a local distributor under routine transfer pricing rules, the Amount A allocation to that country is capped or completely eliminated.
• Ensures an enterprise is not taxed twice on the same residual profitability in the market jurisdiction.

• Baseline marketing and distribution represents the single most frequent fact pattern MNEs encounter globally.
• Significantly reduces protracted transfer pricing disputes, eliminates benchmarking litigation, and provides high tax certainty.
• Specifically assists low-capacity tax administrations that frequently suffer from a severe shortage of local market comparable companies.

• 19 February 2024: Inclusive Framework released initial Report on Amount B.
• 17 June 2024: Publication of pending design aspects (operating expense cross-checks).
• 24 February 2025: OECD/G20 Consolidated Report on Amount B formally published.
• 17 February 2026: OECD released the latest Amount B Pricing FAQs and revised Pricing Automation Tool!

The GloBE Rules apply to Constituent Entities that are members of an MNE Group with annual consolidated revenues of €750 million or more in the consolidated financial statements of the Ultimate Parent Entity (UPE) in at least two of the four fiscal years immediately preceding the tested fiscal year.

Entities that are explicitly excluded fall completely outside the operative GloBE charging rules (their revenues are counted toward group scope, but no top-up tax is levied on them):

• Governmental entities;
• International organizations;
• Non-profit organizations;
• Pension funds; and
• Investment funds or Real Estate Investment Vehicles that are UPEs of the group.

The Effective Tax Rate is computed annually for each sovereign jurisdiction in which the MNE group operates:

• Adjusted Covered Taxes: Current tax expense under financial accounts, adjusted for timing differences, deferred tax assets/liabilities (capped at 15%), and tax credits.
• Net GloBE Income: $\sum \text{GloBE Income} - \sum \text{GloBE Losses}$ of all local constituent entities. If Net GloBE Income is a loss, ETR is not calculated and no top-up tax is due.

The GloBE rules mandate Jurisdictional Blending. All constituent entities of the MNE group located in the same sovereign jurisdiction blend their profits, losses, and covered taxes together:

• High taxes paid by one local entity automatically shield the low-taxed profits of another entity located in the same country.
• However, cross-border blending (e.g., blending profits of Country A with taxes of Country B) is strictly prohibited!

Key Statutory Note: The Top-up Tax Percentage is calculated by reference to the jurisdictional ETR, but it is applied only to the Excess Profit (Net GloBE Income less SBIE), ensuring that the substance-based carve-out is directly reflected in the final top-up tax payable.

At the election of the filing entity, a jurisdiction is excluded from the full ETR calculation and top-up tax computation where:

• The Average GloBE Revenue of the jurisdiction is less than €10 million; AND
• The Average GloBE Income or Loss of the jurisdiction is a loss or less than €1 million.

Policy Intent: Avoids onerous compliance and audit costs where the amount of any resulting top-up tax would be trivial.