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24 July 20234 minute read

A practical summary of the Pillar 2 Subject to Tax Rule

As part of its new Pillar 2 guidance, published on July 17, 2023, the Organisation for Economic Co-operation and Development (OECD) has released additional details related to the Subject to Tax Rule (STTR) of the Pillar 2 rules.

This latest guidance allows companies to assess which payments between related parties may be subject to this additional tax.

Introduction and scope of application of the STTR

The STTR is part of the OECD’s larger Pillar 2 rollout, but it should be regarded as separate from the GloBE rules.  The STTR allows developing countries included in the Inclusive Framework (IF) to levy up to 9 percent tax on certain payments to companies that (i) are resident in IF jurisdictions and (ii) whose income is subject to a tax below 9 percent. The STTR is implemented by means of either an additional article to an existing bilateral tax treaty and/or through a multilateral instrument.

The OECD has formatted the STTR in the same manner as a standard tax treaty article, meaning that jurisdictions in the IF can adopt it within their bilateral tax treaties. Further, the OECD will provide for a multilateral instrument ready for signing by October 2, 2023. 

As part of the Pillar 2 negotiations, the jurisdictions in the IF that are within the scope of the STTR (ie, developing countries and jurisdictions with effective tax rates below 9 percent) have committed to adopt the STTR. As a result, STTR application does not apply to all payments within scope of the STTR but is limited to a number of bilateral situations between developing countries and below-9-percent effective tax rate jurisdictions within the IF.

Ordering rule in the context of the GloBE rules (QDMTT, IIR, and UTPR)

Firstly, the STTR is not limited to large multinationals with consolidated revenues in excess of EUR750 million but applies to all payments that meet the criteria of the STTR.

A tax levied under application of the STTR qualifies as a Covered Tax for the purposes of the GloBE rules. Despite the fact that the STTR is not part of the GloBE rules, one could argue that, from an ordering-rule perspective, the STTR precedes the QDMTT, Income Inclusion Rule (IIR), and Under Taxed Payment Rule (UTPR). The justification for this treatment is the OECD’s aim to support the developing countries that have conceded taxing rights as part of their tax treaty arrangements and that have less sophisticated tax enforcement infrastructures.

In summary

The STTR applies to certain mobile payments between related parties, most notably interest and royalty payments, but it also includes insurance payments; payments for the use of distribution rights for products or services; financial (guarantee) fees; payments for the use of industrial, commercial, or scientific equipment; and (importantly) income in relation to services.

The STTR rules exclude certain payments, with the exception of interest and royalty payments, that are made to a recipient that earns a markup of 8.5 percent or less on its income, as the OECD deems the profit shifting risk in those situations limited.

Further, a materiality threshold for aggregate payments from a source jurisdiction should be put in place based on total payments of (i) EUR1 million for economies with a GDP over EUR40 billion and (ii) EUR250,000 for economies with a GDP over EUR40 billion.

The STTR levied by a developing country source state is capped at the delta between 9 percent and the adjusted nominal rate within the recipient’s jurisdiction. The nominal or statutory tax rate in a jurisdiction with respect to the income in relation to the payment should be adjusted for any permanent reduction, exemptions, and exclusions. The STTR rules provide ample detail to assess the required adjustments to the nominal or statutory tax rate in the jurisdiction of the recipient of the payment.


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