I. Introduction to BEPS

Tax challenges due to cross border transactions is not new to the tax payer and to the tax departments across the globe. It is equally true that the global consensus to resolve the tax challenges for appropriate taxing rights to respective jurisdictions including challenges related to Base Erosion related issues have received a significant momentum in the recent past. Base Erosion and Profit Shifting (“BEPS”) refers to the actions of Multinational Entities (“MNEs”) to arrange its affairs in a cross-border scenario, in a manner that they erode the tax base from one jurisdiction and shifting the profits to low (or nil) tax countries. This is primarily achieved by exploiting the mismatches between different countries’ tax regimes.

In this article, we shall try to explain the concept of BEPS Pillar II proposals which are expected to be implemented from 2024. Additionally, our aim is to also delve into the opportunities and challenges in relation to its implementation from the perspective of the tax department, tax payer as well as tax consultants.

The G20 countries along with Organisation for Economic Cooperation and Development (“OECD”) undertook the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting, popularly known as “BEPS project”.

In the first phase of BEPS Project (BEPS 1.0), various Action Plans were identified to counter specific BEPS measures. For example:

  1. Action Plan 3 dealt with Controlled Foreign Country regime,
  2. Action Plan 5 dealt with countering Harmful Tax Practices
  3. Action Plan 6 dealt with Prevention of Treaty Abuse (including Principal Purpose Test),
  4. Action Plan 8-10 providing Transfer Pricing related measures
  5. Action Plan 13 provided for Country-by- Country reporting.

The outcome of the Actions Plans under BEPS 1.0 was implemented through a Multilateral Instrument (“MLI”) which operated to amend multiple tax treaties without the need to separately negotiate each bilateral tax treaties between the countries. Some of the BEPS 1.0 measures were also implemented through changes in the domestic tax laws.

On the aspect of “Tax challenges arising from Digitalisation”, i.e. Action Plan 1, BEPS 1.0 failed to achieve any consensus. Thus, the second phase of the BEPS Project (BEPS 2.0) titled “Two- Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” (“Two-Pillar Solution”) was formulated with the aim to end tax avoidance.1 Initially over 135 jurisdiction joined the Statement on Two Pillar Solution to address the tax challenges from digitalisation of the economy.2 This Two- Pillar solution is set to reform the international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate and generate profits in today’s digitalised and globalised world economy.

The Two-Pillar Solution, as the name suggests, consists of two parts:

Pillar One – Under Pillar One, the mechanism of allocating taxing right on share of profits from a business transaction to a country where the end customers are located, or where the goods and services are consumed (market jurisdiction), has been devised. This Pillar also uproots the century old principle of allocation of taxing rights on business income to a jurisdiction if and where the Permanent Establishment is constituted. Traditionally, a permanent establishment is constituted only by virtue of physical presence in a jurisdiction for a specified period. Pillar One also provides mechanism for simplifying taxation of baseline marketing and distribution activities. As per the latest Economic Impact Assessment published by OECD in January 2023, the estimated annual global revenue gains for all the jurisdictions taken together will be of USD 21-36 bn (2021) or USD 12-25 bn per year on average over the period 2017-2021.

Pillar Two – It primarily tackles the harmful race to the bottom on corporate taxes, by ensuring that the MNE groups pay a minimum corporate tax of 15% in each jurisdiction in which they operate as per Global Anti-Base Erosion Rules (“GloBE”). This tax up to the effective rate of 15% could be levied by the resident jurisdiction itself, else the ultimate parent company jurisdictions would have the right to tax such income while the parent entity bears the tax costs. Pillar Two also contains a Treaty based right [Subject to tax Rule (“STTR”)] to developing countries to recover additional tax @ 9% on specified cross-border intra-group payments, including interest, royalty etc. between group companies, if such payments are not already taxed at or above the said rate. As per the latest Economic Impact Assessment published by OECD in January 2023, estimated gains for tax collection for all the jurisdictions taken together will be of USD 175 bn to USD 261 bn, with a central estimate of USD 220 bn. Previous estimate was of USD 150bn.

II. Brief operation of Pillar Two rules

As stated above, Pillar Two broadly contains two parts – STTR and GloBE. These parts are elaborated as under:


STTR aims to restore the taxing rights to developing countries which might have been ceded during treaty negotiations, in respect of payments which has higher potential of eroding the tax base of a country, i.e. Interest, royalty etc., if the resident country is not taxing these payment above the specified rate.

India and other developing countries have been advocating for STTR being implemented as part of Pillar Two since it strengthens the tax base of the developing countries and its application is not circumscribed by very high turnover thresholds.

The broad features of STTR are as follows:

  1. STTR is a treaty-based provision. The amendment to bilateral treaties would be made through a Multilateral Instruments (“STTR MLI”). As per our preliminary understanding of the STTR provisions, this STTR MLI could be materially different from the MLI under BEPS 1.0, since the required amendment to treaty is already stipulated and there is no option for jurisdictions to accept to certain clause and make reservations with reference to another. Final position will be clear very soon since the STTR MLI shall be open for signature from 02nd October 2023. The BEPS Project members can elect to implement STTR either by signing the MLI or by amending the bilateral treaties to include STTR when requested by developing jurisdiction members.
  2. STTR is an additional tax, over and above the existing tax under the bilateral agreement, to be applied on “Covered income”, if the covered payments are taxed at a rate below 9% in the residence jurisdiction or is allowed a preferential adjustment, i.e. an exemption or

    deduction of such income. The additional tax shall be limited to the difference between 9% and the rate at which the “Covered income” are taxed in the residence jurisdiction, further reduced by the tax already recovered in the source state as per the tax treaty between the countries.

  3. STTR applies to “Covered income” paid by Connected persons (intra-group). Two entities are considered as connected persons if –
    1. One possesses directly or indirectly more than 50% beneficial interest in the other
    2. In the case of a company, one company has direct or indirect holding of more than 50% of aggregate vote and value of the company’ share or of the beneficial equity interest in the other company
    3. When the entities or companies are under common holding of more than 50% of the beneficial interest (in case of company, more than 50% of aggregate vote and value of company’s share or of beneficial interest in the company)
  4. “Covered income” means the following:
    1. Interest
    2. Royalties
    3. Consideration for use of, or the right to use, distribution rights in respect of a product or service
    4. Insurance and re-insurance premiums
    5. Fees to provide financial guarantee or other financing fees
    6. Rent or any other payment for the use of, or the right to use, industrial, commercial, or scientific equipment
    7. Income received in consideration for the provision of services
  5. Threshold for applicability: The aggregate amount of “Covered Income” from one jurisdiction to another in a fiscal year should exceed Euro 1 million, for application of STTR. This threshold is reduced to Euro 250,000 if the GDP of the contracting states is less than Euro 40 billion.
  6. Non-applicability: STTR does not apply where the recipient is an individual, a non-profit organisation, Government or its political sub-division, international organisations, investment funds fulfilling certain conditions etc.
  7. Mark-up threshold: Except in the case of interest and royalties, the STTR shall apply to Covered Income, only if the recipient party has earned a mark-up of 8.5%, i.e. where the amount of Covered Income exceeds the costs incurred in earning that income plus a mark-up of 8.5%. (India has recorded its reservation on the mark-up percentage which it considers too high and it finds the guardrails ineffective).

With reference to STTR application, the payer jurisdiction might not gain any taxing right if the residence jurisdiction taxes the income at the minimum rate required under the STTR.

2. GloBE Rules

GloBE Rules stands for Global Anti-Base Erosion Rules. GloBE Rules provides for a coordinated system of taxation intended to ensure that large MNE groups pay a minimum level of tax on the income arising in each jurisdiction where they operate.3 The GloBE Rules signifies a global effort to end the race to the bottom. The minimum tax rate benchmark considered under the GloBE Rules currently stands at 15%. Some important aspects of GloBE Rules are discussed hereunder:

a) Applicability

GloBE Rules are intended to apply only to large MNE groups. Those MNE groups which have annual turnover of Euro 750 million or more in the Consolidated Financial Statements (“CFS”) of the Ultimate Parent Entity (“UPE”) in at least two out of four Fiscal Years immediately preceding the tested Fiscal Year. The MNE groups which shall satisfy the conditions for applicability of GloBE Rules, are referred hereinafter as “in-scope MNEs”.

b) Mode of Implementation of GloBE Rules

GloBE Rules shall be implemented through amendments in the domestic laws of the implementing jurisdictions.

c) Qualified Domestic Minimum Top-up Tax

GloBE Rule requires that each jurisdiction shall apply an effective tax rate (“ETR”) of 15%. If a jurisdiction hosting constituent entity of an in-scope MNE group does not apply the ETR of 15%, the jurisdiction where the parent jurisdiction is located, shall have the right to recover tax to the extent of shortfall in the ETR. This additional tax is called as “Top-up Tax”.

In essence, the taxing rights otherwise held by the low-tax jurisdiction (where ETR is less than 15%) is vested on the parent entity jurisdiction, though for the limited purposes. In order to obviate such ceding of tax rights, the low-tax jurisdictions are provided with an option to apply a domestic tax in line with the GloBE Rules, to ensure a minimum ETR of 15%. This domestic tax is called Qualified Domestic Minimum Top-up Tax (“QDMTT”). Where the QDMTT satisfies the minimum tax requirements consistent with the GloBE Rules, no Top-up Tax shall arise. This is achieved by two means –


  • QDMTT is allowed as a deduction against Top-up tax required under GloBE Rules. However, under this approach, the MNE group shall carry out both QDMTT and GloBE calculations to claim the credit.


  • If QDMTT introduced by a jurisdiction meets the standards specified under the QDMTT Safe Harbour conditions, the GloBE calculations need not be undertaken for such jurisdiction. One of the conditions mentioned in the QDMTT Safe Harbour is that the QDMTT computations should be same as computations required under GloBE Rules, except where GloBE framework requires QDMTT to depart from GloBE Rules.

d) GloBE Rules – broad implementation steps (not comprehensive)

GloBE Rules require complex calculations with multiple adjustments to ascertain the additional tax payable in respect of a low-tax jurisdiction. As stated above, the underlying requirement is to ensure ETR of 15% in each jurisdiction where the in-scope MNE group is operating. In this backdrop, the broad steps under GloBE Rules, applicable to in-scope MNEs are discussed as under:

Step 1: Apply CbCR Safe Harbour

The GloBE Rule provides for a Safe Harbour based on certain thresholds computed with the amounts reported in CbCR and the financial statements, subject to certain adjustments, to bring the CbCR data at par with GloBE principles. These thresholds shall be applied on a jurisdictional basis. On satisfying the CbCR Safe Harbour conditions, the Top-Up Tax for a given jurisdiction shall be deemed as Nil. The intent is to allow certain low-risk jurisdictions some extra time to undertake complete GloBE calculations.

Since the top up tax for the jurisdiction satisfying the CbCR Safe Harbour would be zero, GloBE calculations need not be undertaken in respect of jurisdictions satisfying the CbCR Safe Harbour.

Step 2: Calculation of GloBE Income (“Income”)

Broadly, GloBE Income is calculated by making certain specified adjustments to Financial Accounting Net Income or Loss at each Constituent entity level. The starting point for calculating GloBE income or loss, is the bottom-line net income or loss of the Group Entity before making any consolidation adjustments that would eliminate income or expense attributable to intra-group transactions. As expressly stated in the model rules, elimination of income and expenses from intra- group transactions that occur in the accounting consolidation process are not taken into account in the computation of a Constituent Entity’s Financial Accounting Net Income or Loss (Rule 3.1.2). Few exceptions for inclusion or exclusion of intra group transactions such as dividend and intra group financing arrangements have been included in the model rules. Alternatively, the rules also provide for MNE to elect elimination of intra – group transactions within the same judication (Rule 3.2.8).

Step 3: Check for De-Minimis Exclusions

GloBE Rules provides for top-up tax in respect of some jurisdictions to be considered as zero if the Average GloBE Revenue and Average GloBE Income in such jurisdiction for a tested year is below the specified threshold. This benefit applies for in the year in which the threshold is met. Therefore, the De-minimis threshold shall be checked on a yearly basis. 

Step 4: Calculation of Covered Taxes (“Tax”)

Covered Taxes for the purposes of GloBE Rules shall be computed by making specified adjustments to current tax expense of a constituent entity, as recorded in the financial accounts of a constituent entity.

Step 5: Calculation of Effective Tax Rate (ETR) = Tax / Income

ETR is the proportion of Covered Tax to the GloBE Income. The ETR is computed on a jurisdictional basis.

Step 6: Calculation of Top-up Tax % = 15% – ETR

Top-up tax percentage is the shortfall in the ETR to the benchmark rate of 15%, which is the minimum tax required.

Step 7: Calculation of Excess Profits

The Top-up tax is required to be computed on the profits in the jurisdiction. Under the GloBE Rules, the top-up tax is required to be computed after excluding certain nominal return on the payroll costs and average tangible assets. This exclusion of return on payroll cost and tangible asset is called as Substance Based Income Exclusion (“SBIE”). The rationale for this exclusion is that, in the jurisdictions where the MNEs has business substance with the presence of personnel and tangible assets, the Top-up Tax shall apply only on Excess profits. The nominal rate for 5% is prescribed for SBIE under the GloBE Rules. However, for the initial period of around 10 years from the implementation of GloBE Rules, a higher rate has been provided as a transitional measure.

Step 8: Top-up Tax = Excess Profits * Top up Tax % – QDMTT

Top-up Tax is derived by applying Top-up tax percentage to the Excess profits. QDMTT being creditable against Top-up Tax, this amount needs to be reduced.

Step 9: Allocation of Top-up tax

The Top-up tax is allocated to the parent jurisdictions as per the Income Inclusion Rule (“IIR”). The IIR requires the allocation of tax to ultimate parent jurisdictions in proportion of its ownership in the low-tax constituent entity. A top-down approach is generally followed for IIR application i.e if UPE does not collect the IIR then the step-down parent jurisdiction will be allowed to collect the same.

The Undertaxed Profits Rule (“UTPR”) is a back- stop for IIR. It applies in the form of additional cash tax expenses in jurisdiction where UTPR is in operation, if IIR could not applied on the profits.

e) Applicability of GloBE Rules

The Pillar Two is likely to be effective in 2024, whereas the UTPR is likely to be effective from 2025.

f) STTR creditability

The STTR related documents released by OECD states that STTR is creditable against tax due under GloBE4. However, the mechanism and operation of such credit is not provided in detail by OECD.

III. Opportunities and Challenges

The Pillar Two implementation across the globe, presents multifarious opportunities, while not devoid of challenges, for various stakeholders. An attempt has been made to throw some light on the opportunities and challenges for the stakeholders:

1. Tax Department

a) Opportunities

For the tax department or the Governments in general, Pillar Two brings in immense opportunities to generate tax revenue, by aligning themselves with the Global consensus on minimum tax. The GloBE Rules and STTR, expands the taxing rights where the parent entities are housed in a jurisdiction. As stated above, Pillar Two is likely to raise over USD 200 Billion in terms of additional tax revenue. The tax department of respective jurisdiction either individually or on aggregate level will also be able to review undue tax advantages obtained by MNEs paying effectively nil or very small amount of taxes by arranging their affairs resulting in base erosion.

At India level, the tax department may get an opportunity to collect the IIR if the UPE is located at India. At the same time, in the case of UPE or other parent jurisdiction of the subsidiary companies located in India does not collect the IIR, India will also get the opportunity to collect the taxes under UTPR route. As regards the enactment and implementation of QDMTT, India may not get substantial additional taxes since the benchmark tax rate are generally above 15%.

b) Challenges

The foremost challenge for low-taxed jurisdictions is to retain the investments made by MNEs, which primarily might have been made for availing attractive tax rates.

Another important challenge lies in the complexity of the GloBE Rules and the attached difficulty in administering or application of the same. Tax departments in some developing jurisdictions might not have sufficient trained personnel to apply GloBE Rules effectively. In some cases, it needs to be evaluated whether assistance could be sought from Tax Inspectors Without Borders – a OECD/UNDP partnership.

Another aspect that needs to be considered is that with Pillar Two allocating top-up tax to even to non-UPE jurisdictions, the tax department should focus on all the in-scope MNE group which is having any presence in its jurisdiction, irrespective of whether the Ultimate parent entity is in its jurisdiction or not. Therefore, the administration for collection of UTPR seems to the most complex exercise for any tax department.

Further, the tax departments now need to process additional data with GloBE return also being filed on a jurisdiction-by-jurisdiction basis, in addition to CbCR which the in-scope MNEs would be filing.

With reference to India- it might not be a low-tax constituent entity since the lowest corporate tax rate exceeds 15%. However, one still needs to test the GloBE Income of an entity, since the income is subject to certain exclusions and income, and then calculate the ETR. Thus, a QDMTT at India level might have limited application. However, the Indian tax department might apply full-fledged GloBE Rules to MNEs have UPE in India and in respect of entities where the Indian companies hold ownership interest. Considering the availability of intellectual talent with Indian tax department, India is expected to implement and administer the Pillar II with the highest level of efficiency.

 2. Taxpayers

a) Opportunities

We need to look at BEPS 1.0 (consisting of 15 action points) and BEPS 2.0 (Pillar I & II) holistically. The tax payer had in the recent past and will have in the future an opportunity to reaffirm or rearrange the affairs of the MNE in the way it can be logically substantiated. Substance over form seems to be the only answer to complex transactions and structures. Aggressive tax planning will be scrutinized in greater detail. Additionally, the codified law to address the tax evasion provisions will provide support to the tax payer to substantiate its structure more objectively and thus avoids subjectivity in interpretation by the tax department.

b) Challenges

Some of the challenges that a taxpayer may face are enumerated below:

  • The applicability of STTR is not restricted to MNE groups to whom GloBE Rules apply. Thus, it can apply to all MNEs having presence in developing countries making cross-border payments above the threshold limits (Euro 1 million). The MNE groups are therefore required to consider doing a STTR impact assessment to ascertain potential additional tax costs that might arise.
  • For the in-scope MNEs under GloBE Rules, the complexity of GloBE Rules and its implementation at global scale will be a herculean challenge. The collection of data required in respect of each constituent entities might consume time and resources. MNEs shall also therefore undertake a full-fledged impact assessment of GloBE Rules on its constituent entities, in line with the global developments.
  • The in-scope MNEs need to align their accounting systems to cater to the data requirements under the GloBE Rules. It is important that this integration exercise is undertaken before the beginning of the year when GloBE Rules come into effect.
  • Since the CbCR data will be a primary document to avail Safe Harbour, the accountability for the data contained therein certainly would increase manifold.
  • For any multinational company including Indian UPE need to ensure that the jurisdictional ETR is above 15% and pay the taxes in the Low Tax Jurisdiction (LTJ) as per QDMTT or at UPE jurisdiction under IIR or UTPR. The global tax and transfer pricing department need to improve their capabilities to ensure proper compliance of Pillar II.

3. Tax professionals

a) Opportunities

The Pillar Two implementation presents immense professional opportunities for tax professionals. Some of the them are discussed below:

  • The Pillar Two implementation opens significant global opportunities for tax professionals, since the legal framework under Pillar II would be applied almost uniformly across the global. With tax professionals across the world reading and interpreting same taxation related language, the professional opportunities truly should become borderless.
  • The Pillar II bringing into effect a new legal framework, it can provide an early- starter benefit to professionals who wishes to advice on this subject.
  • In addition to tax advice, the professional can also advice on the system design for their client to extract inputs for Pillar II application.
  • With Pillar II requiring the MNEs to file a separate GloBE Return, the compliance related work opportunity is also enhanced. Going forward, support during assessments/audits by the tax department seems imminent.

b) Challenges

There are certain challenges that a tax professional might face with reference to Pillar Two implementations. On overcoming these challenges, the professional opportunities mentioned above would manifest more prominently:

  • The complexity of the subject requires the professionals to invest high amount of time to improvise their capabilities.
  • Another major challenge for a tax professional is to understand and grasp the accounting concepts and terminology dealt with under Pillar Two.
  • GloBE rules also have an interplay with CFC rules. This needs to be understood and implemented properly to avoid double payment of taxes.

IV. Conclusion

With Pillar Two of the BEPS 2.0 likely to be operational in less than six months, the world is all set to witness a paradigm shift in the international tax regime. As may be seen, the Pillar Two components, viz. STTR and GloBE Rules are both complex and exhaustive. They have their own share of uncertainties attached to them in terms of interpretation and its administration.

The challenges attached to Pillar II currently outweigh the opportunities for the professionals and the tax departments. The primary challenge is of data collection for GloBE Rules application. Taxpayers might have to spend substantial time & resources integrating their accounting / ERP systems for suitable data extractions.

The Council of the European Union (EU) unanimously adopted the EU Minimum Tax Directive in December 2022. As per the said directives, it ensures that the GloBE Rules are implemented in a coordinated manner throughout the EU from 2024. Few other developed economies such as Japan, South Korea, UK have either adopted the domestic legislation or in the process of the adopting the legislation. India is yet to legislate the model rules for implementation of GloBE rules. Additionally, as already stated in the article, STTR MLI will be available for signature from 2nd October 2023.

Change seems to be the only constant for the developments in international tax challenges and opportunities. Let’s prepare and update ourselves in the interesting times ahead!

“A person should be courageous and honest in worshipping the truth, without being concerned about receiving worldly benefits.”

– Lala Lajpat Rai

  1. https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.htm
  2. https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf
  3. OECD (2021), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD Publishing, Paris, https://doi.org/10.1787/782bac33-en.
  4. https://www.oecd.org/tax/beps/pillar-two-subject-to-tax-rule-in-a-nutshell.pdf


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