With a view to addressing the base erosion and profit shifting (BEPS) risks arising from the digitalisation of economy, the Organisation for Economic Co-operation and Development (OECD) on July 1, 2021, issued a “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement)” to ensure a fairer distribution of taxing rights in respect of profits of large multinational enterprises (MNEs) and to set a global minimum tax rate. A total of 130 out of its 139 member jurisdictions (including Hong Kong) have jointed the Statement and agreed on a way forward to address the tax challenges arising from the digitalization of the economy. 

Two-pillar solution

Pillar One (profit allocation rules)

• Targets large MNE groups (including digital enterprises) with global turnover above EUR20 billion and profitability above 10%.

• Will be reduced EUR10 billion contingent on successful implementation with the relevant review beginning 7 years after the agreement comes into force, and the review being completed in no more than one year. Extractives and Regulated Financial Services are excluded.

• Involves the reallocation of taxable profits of MNEs to “market jurisdictions” in which customers and users are based. 20% - 30% of the excess profit above 10% profit margin will be reallocated for taxation in “market jurisdictions”.

Pillar Two (global minimum tax rules)

• Targets large MNE groups with global turnover above EUR750 million. 

• The minimum effective tax rate will be at least 15% and should be calculated on a county-by-county basis and not a global or entity basis.

• If the jurisdictional effective tax rate of an MNE group is below the global minimum tax rate of 15%, its parent or subsidiary companies will be required to pay top-up tax in the jurisdictions they are located in respect of the shortfall. 

Implementation timeline

The OECD aims at finalising the technical details of the BEPS2.0 package by October this year and implementing the package in 2023.

MNE groups who may be affected by BEPS2.0 should consider to do or re-do an impact analysis on which parts of their business may be affected. 

For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk