BEPS 2.0 - Global Minimum Tax - KPMG Canada

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BEPS 2.0: Global minimum tax

A new international tax paradigm impacting Canadian multinationals
30 August 2023 | 5 min read
A new international tax paradigm impacting Canadian

multinationals
The Base Erosion and Profit Shifting (BEPS) 2.0 initiative is a significant
reform of the international tax system led by the Organisation for
Economic Co-operation and Development (OECD). This initiative
includes a substantial change for large multinational groups with the
“Pillar Two” proposal of a global minimum tax of 15 percent. This is a
new paradigm in global taxation, requiring a proactive approach to
evaluate and prepare for its impacts. Canada is part of a group of 137
countries that intend to introduce Pillar Two as of 2024 and has recently
released draft Pillar Two legislation.
Who’s affected?
Multinational enterprises (MNEs) with annual revenues above 750
million Euros are in scope of Pillar Two rules.
Three key implications for Canadian MNEs

1. A complex set of rules that can increase taxes-payable
and global effective tax rate (ETR):
The Pillar Two rules are applied on a country-by-country basis, meaning
that an MNE that is determined to be in-scope must calculate its ETR in
every jurisdiction in which it operates, based on a detailed and complex
set of rules. For example, higher taxes in one jurisdiction cannot offset
lower taxes in another. If the jurisdictional ETR falls below 15 per cent
(which can happen even for jurisdictions with high headline tax rates or
accounting ETRs above 15 percent), the company must pay a “top-up
tax”.
If top-up tax impacts are expected, consider a review of existing
global structures, value chains, the location of activities, and the
effectiveness of existing tax concession claims.
The Income Inclusion Rule (IIR) acts as the primary taxing rule for Pillar
Two application. Generally, the jurisdiction in which the MNE is
headquartered imposes a tax to collect any shortfall between the global
minimum tax rate and the jurisdictional ETR in the various countries in
which the MNE operates. However, jurisdictions can also choose to
apply a Qualified Domestic Minimum Top-Up Tax (QDMTT), which
supersedes the IIR and allows them to address the shortfall and collect
tax themselves. A third possibility in the case where an MNE’s
headquarter country fails to impose the global minimum tax (through the
IIR or QDMTT) is the collective application of a UTPR (Undertaxed
Profits Rule).
2. New financial statement disclosures and requirements
Recent changes to accounting standards include new pre-regime
disclosures in relation to operations with indicators of a potential
exposure to top-up tax. A closer look at standalone financial statements
will also be essential to ensure the requirements of transitional safe
harbors and/or the Pillar Two complex computations and adjustments
are met. To ease transition to the new regime, new safe harbor rules
apply for the first three years of the new regime. If an MNE passes one
of three tests for a jurisdiction (a de minimis test, a simplified ETR test
and a routine profit test) it will not be required to perform detailed Pillar
Two calculations and will not be subject to a top-up tax in that
jurisdiction.
3. Increased compliance costs and coordination

The calculations of the jurisdictional ETR under these rules (which can
often differ from the accounting computation of ETR) is complex with
potentially hundreds of data points required across multiple countries.
MNEs should work to identify and resolve data gaps early in the process
with the necessary solutioning and automation. Transition and ongoing
compliance costs can be significant even if no top-up tax ultimately
arises. Planning and budgets should factor in multi-stakeholder
complexities and resourcing needs to manage potential system changes
over a multi-year period.
When does Pillar Two take effect?

The Canadian government first announced its intention to implement
Pillar Two, including a QDMTT, in the 2022 Federal Budget. The 2023
Federal Budget confirmed this intention and provided effective dates.
On August 4, 2023 Finance released draft legislation to implement a
proposed Global Minimum Tax Act, which is largely based on the
OECD’s Pillar Two Global Anti-Base Erosion (GloBE) model rules and
other OECD source documents. Under the draft Pillar Two legislation,
Canada would implement the IIR rule and the QDMTT for fiscal years
that begin on or after December 31, 2023. The draft legislation also has
a placeholder for the UTPR, which is expected to take effect one year
later, i.e., for fiscal years beginning on or after December 31, 2024.
Around the world, most of the 137 countries of the OECD Inclusive
Framework are aiming at the implementation of the Pillar Two rules in
2024, with the UTPR taking effect as of 2025. The US is a notable
exception to this relatively global implementation of the Pillar Two rules.
For in-scope MNEs with operations in the US, a top-up tax that is in the
form of an IIR (if an MNE is headquartered outside of the US) or a
UTPR (if the MNE is headquartered in the US) can still apply to the
extent the US jurisdictional ETR falls below 15 percent.
How KPMG can help

Our solution portfolio provides an end-to-end service across the many
disciplines that can help support as you navigate planning,
implementation and compliance.
BEPS 2.0 Modelling Impact analysis

High-level modelling to Review the group
help estimate structure to identify the
numerical outcomes scope of the group for
based on financial data Pillar One and Pillar
and map out the Two purposes. Further
impact on the effective identify required
tax rate (ETR) and market disclosure
cash taxes under statements.
various scenarios.
Data, systems &
Accounting advisory compliance
services Critical understanding
Coordinated approach of data sources,
to address systems systems and
and data related maintenance to
issues, including support
planning based on a implementation and
production of tax
choice of accounting sensitized information
treatments. in standard and
adaptable forms.
Legal entity simplification
Assist with Tax planning
restructuring in cases Identify planning
where the group opportunities to
structure and value manage the impact of
chain are no longer BEPS 2.0 rules and
appropriate. new measures
adopted in relevant
countries.
Insights and resources
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https://kpmg.com/ca/en/home/insights/2023/08/beps-2-0-global-minimum-tax.

BEPS 2.0: Global minimum tax

30 August 2023 | 5 min read

A new international tax paradigm impacting Canadian

Three key implications for Canadian MNEs

3. Increased compliance costs and coordination

When does Pillar Two take effect?

How KPMG can help

BEPS 2.0 Modelling Impact analysis

Insights and resources

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