Before implementing a QDMTT, countries should first carry out a comprehensive analysis of the legal, economic and political implications derived from its introduction as well as elaborating a clear plan to adjust the investment incentives policy to provide certainty to current and future investors.
Andrea Laura Riccardi Sacchi[1]
The views expressed in this article belong to the author and do not necessarily reflect the position of the institutions to which the author is affiliated.
The English acronym “QDMTT” (for “Qualified Domestic Minimum Top-up Tax”) has gained more and more attention since its timid – and for the general public out of government negotiations, also, unforeseen – appearance in the text of the so-called GloBE Model Rules or Global Anti- Base Erosion Model Rules in December 2021. These model rules developed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF)[1] – a forum established in 2016 at the OECD, comprising more than 140 jurisdictions – are intended to materialise a Global Minimum Tax (GMT).
The reader probably is aware that this GMT seeks to ensure that large MNE Groups[2] pay at least 15% income tax on their profits. To this end, the IF developed model rules which are intended to be transposed into the domestic legislative frameworks of member jurisdictions. The transposition of these rules aims to establish a global mechanism whereby, when the income earned by entities of an MNE Group located in a given jurisdiction shows an effective tax rate lower than 15%, a top-up tax (up to 15%) should be determined in that jurisdiction for that group. According to the model rules, the tax thus determined will be “captured” by another jurisdiction or others in which the MNE Group operates via the application of two rules, namely, the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), in that order. In general, under these two rules, the tax would mostly be captured by the jurisdiction of the ultimate parent entity or headquarters of the MNE Group, while the UTPR, although a backstop rule (it would operate when the IIR does not) and of residual application, would be of particular relevance to the effectiveness of the mechanism, in particular by ensuring that the top-up tax that originates precisely in the headquarters jurisdiction of covered MNE Groups is captured.[3]
The dynamics described would operate provided that the jurisdiction in which the top-up tax originates has not implemented a QDMTT. Now, what is a QDMTT? how does it arise? and how is it articulated under the GMT mechanism?
I. What is a QDMTT and how does it arise and how is it articulated under the GMT?
We said that, in addition to the GloBE rules themselves – these are, the IIR and the UTPR -, under the GMT we find the QDMTT. This is another catching rule of a jurisdictional top-up tax, which will operate precisely in the jurisdiction where such tax originates, provided that this jurisdiction has adopted this type of domestic taxation. Thus the QDMTT is presented as a minimum tax to be provided for by the national legislation of the jurisdiction with undertaxed income, to be determined and administered according to the GloBE Model Rules, and which must collect the jurisdictional top-up tax arising therein.[4] So it is said that the QDMTT “reinforces a jurisdiction’s primary right of taxation over its own income”.[5] In fact, the QDMTT, which was not part of the original package under the GMT, arises as a response to criticism raised by less developed jurisdictions around a GMT design that clearly prioritized – and despite some changes, in our view, it still does – the perspective of developed countries and net exporters of capital and collection via the IIR – rule that would operate in the jurisdictions of the headquarters of covered MNE Groups. Having said this, is the QDMTT really a “concession” to less developed countries and net importers of capital?
II. Is the QDMTT a “concession” to less developed countries and net importers of capital?
Far from being a concession, in our view it is an imposed measure. Based on a debatable argument (immediate increase in collection), the QDMTT was a last-minute inclusion in the design of the GMT to add support from these jurisdictions (remember that the effectiveness of the GMT, by design, only makes sense if its implementation is global). First, it can be said that if is a “concession”, it is at least “relative”. Indeed, any jurisdiction, making use of its sovereign power, may at any time take action to resolve the low taxation of income earned by entities located in its territory, either by introducing an income tax (if the jurisdiction does not have one), or by modifying the essential elements of the income tax in force therein, including the tax incentives policy. In addition, jurisdictions could increase taxation if they so wish, without the levels of complexity that implementing a QDMTT entails for both tax authorities and taxpayers. However, it is also true that the QDMTT, by reflecting the GloBE Model Rules would allow to impose domestically, the level of taxation necessary to minimize or even completely neutralize (under the so-called QDMTT Safe Harbour[6]) the amount of tax that would otherwise be collected via the IIR or UTPR. Secondly, and as we see below, the GMT mechanism comes hand with hand with the need to redesign the tax incentives policy in a way which does not benefit less developed jurisdictions, at least in the short term. We say that, on the contrary, the QDMTT is an imposed measure because the GMT was designed to cause a domino effect; the logic under the GMT (to the extent that the entities of an MNE Group within a jurisdiction are effectively taxed below the 15%, the taxing rights being resigned therein will likely be excercised by another jurisdiction) would lead the low-tax jurisdiction to raise the effective level of taxation for such group. One of the alternatives to raise such taxation is to implement a QDMTT.
However, the domino effect would be achieved to the extent that implementation, in all its elements (including the UTPR), shows an expansionary trend at a global level. So, we may ask, how global is the GMT today? Before answering this question, it is imperative to know whether the GMT is mandatory for IF member jurisdictions.
III. Are GloBE rules (including the QDMTT) mandatory?
No, GloBE rules (including the QDMTT) are NOT mandatory, but are what is known as a “common approach”. This means that it has been agreed that (i) the rules are optional for IF members, but that (ii) if they decide to implement these rules, they must implement and administer them in a manner consistent with the expected outcomes under the GMT, in light of the GloBE Model Rules and its Commentary; and, in any case, (iii) they cannot object to their application by other jurisdictions, this is, they accept the application of GloBE rules by other members of the IF, including the rule order for capturing the top-up tax and the application of any agreed Safe Harbour regime[7]. This “agreement” is worth clarifying has the status of a political commitment (there is no international law instrument that has been signed by IF members) which, as we see below, the United States has already abandoned.
It should be noted that, since the GloBE rules are not mandatory, the IF member jurisdiction that decides NOT to implement the GloBE rules will NOT be listed by the OECD as a non-cooperative jurisdiction. Having said that, how global is the GMT today?
IV. How global is the GMT and, therefore, how necessary is it to implement a QDMTT?
We said that a QDMTT is one of the possible reactions that a jurisdiction can take in response to other jurisdictions’ adoption of IIR/UTPR rules. But it is even more important to bear in mind that a QDMTT only makes sense as part of a mechanism which is intended to be global. In this sense, intention should not be confused with reality. So, we may ask: how real is the GMT? Are there jurisdictions that have already adopted IIR/UTPR rules? Yes, there are jurisdictions that have implemented GloBE rules (IIR/UTPR). But does this justify the implementation of a QDMTT? The answer to this question is not so clear. This is because we are far from a global implementation and, therefore, it is relevant to weigh other elements. First, it should be noted that not all MNE Groups are currently taxed in some other jurisdiction.
The implementation of the IIR/UTPR has taken place mainly in Europe and some countries in Oceania and Asia. In Europe we find: the members of the European Union that have had to transpose both rules according to the Council Directive 2022/2523 (except for Slovakia, Estonia, Latvia, Lithuania and Malta, which have chosen to delay their implementation[8]); Liechtenstein; North Macedonia; Norway (not UTPR), Switzerland (UTPR not in force); the United Kingdom, as well as some overseas territories (Gibraltar) and Crown dependencies (Guernsey, Isle of Man and Jersey)[9]; and Turkey. In Oceania and Asia, we find: Australia, Indonesia, Malaysia (no UTPR), New Zealand, Republic of Korea, Singapore (no UTPR), Thailand (no UTPR), and Vietnam (no UTPR).[10]
Therefore, considering that there are about 200 jurisdictions in the world, it is not true that the implementation of the GMT is global. Moreover, world powers like the US, China and India have not implemented it. Not only is it not a globally implemented measure, but a measure that has been showing some instability and slowdown in its implementation, even in those jurisdictions that have already introduced an IIR/UTPR. Let see then what this scenario responds to.
V. Where do the instability and the slowdown in the implementation of the GMT come from?
The instability and slowdown with respect to the materialisation of the GMT as a global mechanism would result from three main factors, namely: (i) the questioning of the OECD’s leadership in the field of global tax governance; (ii) the questioning of the political and economic convenience as well as the legality of the European Directive; and (iii) the questioning of the non-adoption of the GloBE rules by the United States.
On the questioning of the OECD’s leadership. In the so-called “Global South”, a discontent was forged that originated from a feeling of imbalance regarding global tax governance (because of the way standards are set and the substantive measures adopted). This discontent finally materialised in December 2022, in a resolution of the United Nations Assembly (Resolution 77/244), initiating a process referred to as “strengthening international fiscal cooperation to make it fully inclusive and more effective”, a process during which the UN Secretary-General himself acknowledged that the current system of governance is not inclusive. At present, UN member jurisdictions are engaged in the elaboration of a United Nations Framework Convention on International Cooperation in Tax Matters. Although the real implications of the process are still to be seen, there is undoubtedly certain weakening of the OECD and its working forums as international standard-setters.
On the questioning of the political and economic convenience, as well as the legality of the European Directive. The association representing European tax advisers (CFE Tax Advisers Europe) has referred to a stalled global implementation of the GMT, the ineffectiveness of the measure as a global solution, the loss of competitiveness of the European Union derived from the implementation of the GMT and a disproportionate administrative and compliance burden that would not compensate any increase in tax revenue, and has requested the pause of the IIR and the UTPR. On the other hand, the Court of Justice of the European Union, at the request of the Belgian Constitutional Court, will analyse the validity of the UTPR, which has been criticised not only under European law but also under international law (reader, please recall the relevance of the UTPR for the effectiveness of the IMG mechanism!). This is, in Europe the implementation of the GMT has been put under the magnifying glass.
On the questioning of the non-adoption of the GloBE rules by the United States. Notwithstanding the changes in the US government, and despite having participated in the design of the GMT – a measure clearly driven by France and Germany and inspired by the US reform of December 2018 – it could be argued that the United States never intended to implement the GMT nor, more importantly, accepted that the implementation by other jursidictions would impact it. It is not the first time that the OECD has promoted a measure inspired by a previous action of the United States, and the United States ends up not joining the international standard (think of FATCA and the CRS standard on exchange of financial information). And gentlemen, we are talking about the United States. Thus, the IF introduced the so-called UTPR Safe Harbour[11], a transitional measure which protects low taxation originating in the United States as the headquarters of a large part of covered MNE Groups. And more recently, in view of the imminent expiration of the UTPR Safe Harbour, and the threat of retaliatory measures, the G7[12] has reached the so-called “side-by-side” agreement, which excludes all worldwide income earned by US-based groups from the application of IIR and UTPR rules. The United States does not only claim to have a robust tax regime but that these measures, in particular the UTPR, are discriminatory, extraterritorial and violate the sovereignty of the United States. But, are not these last arguments the same arguments in respect to the GMT used by many jurisdictions and, in particular, the Global South? For the time being, the IF is discussing whether it will approve the G7 agreement and integrate it into the design of the GTM, with a decision expected to be taken by December this year. For now, the picture is extremely uncertain.
There is further questioning to the GMT. We can mention the compatibility of the IIR and the UTPR with more than 3,000 double tax conventions in force, as well as the risk of litigation to the States – since the GloBE rules do not admit exceptions – under international investment treaties with no tax measures carve-out, and other types of fiscal stabilization clauses, many of them present in less developed jurisdictions.
But this is not all, let us introduce an additional element which also adds to the instability of the current GMT design: the G7 side-by-side agreement would also imply changes in the treatment of “substance-based non-refundable tax credits”. But what are these? We referred earlier to the fact that the GMT raises the need to redesign the tax incentives policy.
VI. What are the implications of the GMT for the foreign investment policy, including tax incentives?
The GMT undoubtedly has an impact on the foreign investment and tax incentives policies. This is because the GMT not only sets a floor to tax competition between States but also gives a different treatment according to the incentive in question. First, with some nuances (for the more technical reader, we refer mainly to the Substance-based Income Exclusion), it should be noted that the mechanism does not safeguard low taxation resulting from the existence of legitimate tax incentives, even those validated under Action 5 of the (anti) BEPS Action Plan or structural tax elements such as the principle of source taxation. In addition, tax incentives will not be affected in the same way, and less developed countries may find themselves in a disadvantaged position. This is because the various incentives receive a differential treatment, more or less favourable, under the calculation of the top-up tax. Although analysing the treatment of each incentive goes beyond the scope of this work, in very general terms, it should be noted that income-based incentives, used mostly by less developed countries, will be the most heavily affected. Meanwhile, cost-based incentives, which are the ones that developed countries seem to use most, will be the most protected by the Substance-based Income Exclusion and specifically the so-called “qualified refundable tax credits”[13] are among the least affected. However, these last are rarely preferred among the less developed countries, where fiscal space is limited. Now how does all this impact the investment strategy of MNE Groups?
VII. Is the implementation of a QDMTT neutral for a covered MNE Group?
We said earlier that NOT all the MNE Groups potentially included under the GMT are, to date, paying the GMT in some jurisdiction. Therefore, an jurisdiction X that implements a QDMTT may in fact generate an additional tax burden. This would clearly not be neutral to the group.
Additionaly, even if an MNE Group is already paying the GMT for low-taxed income in X, for example via the application of the IIR in the jurisdiction of its ultimate parent entiy, this does not mean that the QDMTT is completely neutral to the group. Indeed, at equal tax burden and inequality in other elements weighted at the time of investing, the investment strategy in X may no longer be appropriate and therefore the investor may decide to restructure its operations, leaving, totally or partially, jurisdiction X. This is particularly risky in the short term for service companies, with no fixed assets or exploitation of natural resources that would affect operational mobility. Ultimately, the implementation of a QDMTT affects country competitiveness, and the jurisdiction that decides to implement it cannot ignore this implication. However, can anything be done to offset the loss of competitiveness resulting from the implementation of a QDMTT? In this context, the following two questions must be raised:
VIII. Can the application of a QDMTT be conditional on the implementation of the IIR/UTPR in other jurisdictions?
That is, can the QDMTT be applied only when there is a real risk that the jurisdictional top-up tax will be captured in another or other jurisdictions? The answer is a resounding NO.[14] This would mean losing the categorization of “qualified” under the mechanism. That is, domestic taxation would lose the “Q” in its denomination. However, such non-qualified domestic taxation will, in any event, be considered for the purpose of determining the level of effective taxation in the jurisdiction that implements it. While such treatment may avoid resigning tax revenues to third jurisdictions, it does not take advantage of the Substance-based Income Exclusion.
IX. Is it possible to compensate taxpayers affected by the QDMTT?
In other words, can a benefit be granted to compensate for the QDMTT payment? The answer is another resounding NO. This would also mean losing the categorization of “qualified”. Indeed, none of the catching rules (IIR, UTPR, QDMTT) admit that the jurisdiction implementing them grant any kind of benefit related to those rules. The logic is that the top-up tax being collected, via an IIR, UTPR and/or QDMTT is not reimbursed, either directly or indirectly, to the MNE Goup.
In short, under the implementation of a QDMTT, the room for manoeuvre is quite limited. We then conclude with one last question,
X. Is this the time to implement a QDMTT?
Under the current international situation, we simply understand that the answer is: NO, this is not the time. Furthermore, we do not conceive implementing a QDMTT without first carrying out a comprehensive analysis of the legal, economic and political implications derived from its introduction as well as elaborating a clear plan to adjust the investment incentives policy to provide certainty to investors, current and future.
[1] Strictly speaking the text of the GloBE Model Rules (available on the OECD website only in English, French and German) does not refer to the acronym but to Qualified Domestic Minimum Top-Up Tax, in provisions 4.2.2. (concepts not included in “covered taxes”) , 5.2.3. (calculation of “Jurisdictional Top-Up Tax”) , 10.1.1. (definition of “Net Taxes Expense” and of, precisely, “qualified minimum domestic top-up tax”) and 10.2.4. (definition of “Flow-Through Entity” and “Tax Transaprent Entity”). It is the Commentary to the GloBE Model Rules (including the multiple administrative guides that have been incorporated into the text of the Commentary) which delves into the determination and administration of a QDMTT and introduces variations, some optional, others mandatory, with respect to the GloBE rules themselves (IIR/UTPR).
[2] Covered MNE Groups are those that have annual revenue of EUR 750 millon or more (according to Consolidated Financial Statetements) in at least two of the four preceding years.
[3] This is so, since it is the jurisdiction of the ultimate parent entity of the EMN Group no IIR will apply.
[4] Under a Safe Harbour, a top-up tax is deemed to be zero. A QDMTT qualifying for the so-called QDMTT Safe Harbour (also introduced via the Commentary) ensures that there is no residual jurisdictional top-up tax to be captured via the IIR/UTPR.
[5] OECD (2023), Minimum Tax Implementation Handbook (Pillar Two), OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris, https://www.oecd.org/tax/beps/minimum-tax-implementation-handbook-pillar-two.pdf.
[6] See footnote 5.
[7] See footnote 5.
[8] Art 50. of the Directive provides that Member States that declare that no more than twelve ultimate parent entities of groups within the scope of the Directive are located in their territory may notify the Commission of their intention not to apply the IIR and the UTPR for six consecutive fiscal years beginning from 31 December 2023.
[9] None of these territiories nor dependencies have implemented a UTPR.
[10] Except for the Republic of Korea, these jurisdictions have also implemented a (Q)DMTT (the review as “qualified” is pending in some cases). In the rest of the globe we find a few countries that have implemented a (Q)DMTT. This is the case for Kenya, Mauritius (although not regulated), Bermuda and, in Latin America and the Caribbean, Bahamas, Barbados, Curaçao (which has also implemented an IIR), and Brazil.
[11] According to this, the top-up tax for the headquarters jurisdiction of an EMN Group – which would eventually be captured via a UTPR – is considered zero when that jurisdiction has at least a 20% statutory corporate income tax rate (including subnational taxes).
[12] Members of the G7 are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. In addition, the European Union is a de facto member by having political representation.
[13] According to the GloBE Model Rules, a “qualified refundable tax credit” is one that has to be paid in cash or available as cash equivalents within four years from the date on which the conditions for receiving the credit under the law of the country granting the credit are met.
[14] It is true that Barbados implemented a conditional DMTT which was admitted as “qualified”, i.e., as a QDMTT, but only because such conditioning have operated only for the first year of implementation (2024).