![]() On December 20, 2021, the OECD published model rules to serve as a template for countries that wish to adopt the pillar 2 global minimum tax. Pillar 2 provides a framework for countries that wish to adopt a 15 percent minimum tax on the nonroutine profits of large MNEs. 6 For signatories of a new multilateral convention, pillar 1 would reallocate taxing rights for a portion of residual profits of about 100 large multinationals. IntroductionĪs of November 2021, 137 jurisdictions had agreed to a two-pillar solution to address tax challenges arising from digitalization and globalization of the economy under the inclusive framework. References to QRTCs and QFTBs in the pillar 2 model rules, commentary, and administrative guidance are contained in the appendix. Treasury of converting general business tax credits and other federal income tax incentives to QRTCs. Section IV estimates the potential revenue cost to the U.S. Section III assesses the differential treatment of QRTCs and nonqualified tax credits from a policy perspective. 117-169), that is, direct-pay and transferrable credits, also are discussed. income tax credits enacted in the Inflation Reduction Act of 2022 (IRA, P.L. Section II compares the treatment of tax credits under the model rules with analogous rules in the financial accounting literature and the U.S. ![]() Section I of this article briefly summarizes the pillar 2 model rules and examines how they account for different types of tax credits. The distinction between QRTCs and other tax credits is important for tax policymakers to consider in the design of tax incentives and for MNEs in scope of pillar 2 to consider in determining the timing, location, and amount of activities eligible for income tax incentives, such as R&D. Special rules also are provided for qualified flow-through tax benefits (QFTBs) in recently released administrative guidance. Consequently, QRTCs may reduce the ETR by less than other credits and thus may result in less top-up tax. ![]() QRTCs are treated as government grants, that is, an increase in pretax income (or a reduction in pretax loss), while other income tax credits are treated as a reduction in tax liability. 4įor purposes of determining the ETR, the model rules distinguish between qualified refundable tax credits (QRTCs) and other income tax credits. As a result, the UTPR can nullify tax incentives provided by the home country to promote domestic research and development, low-income housing, clean energy, recovery from economic downturns, and other important economic, social, and environmental objectives. Thus, the UTPR allows other countries to tax income earned by a parent company in its home country if not otherwise subject to a pillar 2 ETR of at least 15 percent. The UTPR applies not only to the low-taxed income of an MNE’s foreign affiliates but also to income earned in the MNE’s home country. 3 The UTPR is intended to prevent countries from competitively advantaging their resident MNEs by refraining from imposing the IIR. If a top-up tax is not imposed under the IIR, any country where the MNE has foreign operations may impose a backup top-up tax (referred to as the UTPR, formerly the undertaxed profits or undertaxed payments rule) on its pro rata share of the income (determined based on the location of employees and tangible assets). Under pillar 2, the home country of an MNE may impose a top-up tax (referred to as the IIR, formerly known as the income inclusion rule) on the parent company to the extent the effective tax rate on income earned in any foreign jurisdiction is less than 15 percent. 2 Specifically, the pillar 2 model rules provide a framework for countries that wish to adopt a 15 percent minimum tax on profits, whether or not the profits relate to digital business models. ![]() 1 The second pillar seeks to strengthen the ability of countries to tax profits of a multinational entity when another jurisdiction with taxing rights applies a low or zero effective tax rate to those profits. Since 2018, over 130 members of the OECD inclusive framework on base erosion and profit shifting have sought to develop a global solution to the tax challenges arising from digitalization, based on a two-pillar approach. Article 3.2.4 Qualified Refundable Tax Credits.References to Qualified Refundable Tax Credits and Qualified Flow-Through Tax Benefits in OECD Model Rules, Commentary, and Administrative Guidance.Revenue Estimates Without Behavioral Response ![]()
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