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Kuwait Times
15-07-2025
- Business
- Kuwait Times
The engine of fairness: How Pillar Two ensures a global minimum tax
KUWAIT: Kuwait's recent enactment of Law 157/2024, alongside its executive regulations, has set the stage for a new era of corporate taxation. This legislation, which implements the BEPS Pillar Two initiative and the GloBE Model Rules, is built upon a fundamental principle: ensuring that large multinational enterprises (MNEs) pay a minimum 15 percent effective tax rate on their profits, wherever they operate. But how exactly is this minimum tax collected? The GloBE Rules employ a sophisticated, interconnected system of 'Charging Mechanisms' to ensure that any shortfall below the 15 percent minimum is captured. These are primarily the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and a critical addition for countries like Kuwait: the Qualified Domestic Minimum Top-up Tax (QDMTT). Understanding how these rules interact is key to appreciating the global reach and local benefits of Pillar Two. The primary mechanism: The Income Inclusion Rule (IIR) At the heart of the GloBE Rules lies the Income Inclusion Rule (IIR). This is considered the primary enforcement mechanism for the global minimum tax. Imagine an MNE group as a large family business with its head office, the 'Ultimate Parent Entity' or UPE, in one country and numerous branches, ie subsidiaries or 'Constituent Entities', scattered across the globe. The IIR works on a 'top-down' approach: If a subsidiary of this MNE group is located in a country where its effective tax rate (ETR) on its GloBE Income falls below the 15 percent minimum, the IIR allows the parent company, which is typically the Ultimate Parent Entity or an Intermediate Parent Entity, to apply a 'top-up tax.' This means the parent company in its home country will be liable to pay the difference needed to bring that subsidiary's effective tax rate up to 15 percent. For example, if a Kuwaiti MNE group has a subsidiary in a country where the local tax rate results in an ETR of only 10 percent, the IIR would mean that the Kuwaiti parent company would need to pay an additional 5 percent top-up tax on that subsidiary's income, of course adjusted for specific GloBE rules, including the Substance-Based Income Exclusion. The beauty of the IIR is its efficiency and directness. It encourages countries where parent companies are located to implement Pillar Two, as it grants them the first right to collect any top-up tax that arises from their low-taxed subsidiaries worldwide. This ensures that profits are taxed fairly at the group level. The backstop: The Undertaxed Profits Rule (UTPR) While the IIR is the primary rule, the system needs a safety net. This is where the Undertaxed Profits Rule (UTPR) comes into play. The UTPR acts as a 'backstop' mechanism, designed to collect any remaining top-up tax that was not fully captured under the IIR. Why would the IIR not capture everything? This could happen if, for instance, the Ultimate Parent Entity (UPE) of an MNE group is located in a country that has not implemented a Qualified IIR, or the UPE is in a low-tax jurisdiction itself, meaning there is no higher-tier entity to apply the IIR. In such scenarios, the UTPR allows other countries where the MNE group operates, and that have implemented the UTPR, to collect the top-up tax. How does it do this? The UTPR typically operates by denying deductions for expenses or making equivalent adjustments to the taxable income of Constituent Entities within their jurisdiction. This effectively increases the tax liability of the MNE's entities in that country, ensuring that the undertaxed profits are subjected to the minimum 15 percent rate. The amount of top-up tax allocated under the UTPR to a particular country is typically based on a formula, often linked to the MNE's tangible assets and number of employees in that jurisdiction. This ties the tax collection to the real economic substance present in the country. The UTPR ensures that even if the IIR is not fully effective, the undertaxed profits of large MNEs will not entirely escape the global minimum tax. Kuwait's strategic advantage: The Qualified Domestic Minimum Top-up Tax (QDMTT) op-up Tax (QDMTT) Now, let's turn to a critical component that empowers Kuwait to directly benefit from Pillar Two — the Qualified Domestic Minimum Top-up Tax (QDMTT). This rule is a powerful tool that gives countries like Kuwait the first right to tax any shortfall in their own jurisdiction. Let's think of it this way: When an MNE's entities in Kuwait have an effective tax rate below 15 percent, a top-up tax arises. Without a QDMTT, this top-up tax would generally be collected by a foreign parent company under the IIR or by other foreign entities under the UTPR. This would mean Kuwait effectively loses out on potential tax revenue generated by economic activity within its own borders. By implementing a QDMTT, as Kuwait has done with law 157/2024, our nation ensures that: •Any top-up tax calculated on the low-taxed profits of MNE entities within Kuwait is paid directly to the Kuwaiti tax authorities. •This payment extinguishes, or reduces, the liability for that same top-up tax under the IIR or UTPR in other countries. In essence, the QDMTT takes precedence. This is a strategic move that secures Kuwait's share of the global minimum tax. It prevents revenue from flowing out to other jurisdictions that might otherwise collect the top-up tax. It reinforces Kuwait's fiscal sovereignty and contributes directly to the national budget, funding public services and development projects right here at home. The interplay: How IIR, UTPR and QDMTT Work Together The rules are designed to work in a specific order to avoid double taxation and ensure the top-up tax is collected efficiently: first: If a country, like Kuwait, has implemented a QDMTT, this rule is applied first. Any top-up tax due on the profits of MNE entities in Kuwait, because their ETR is below 15 percent, is collected by Kuwait. This prioritizes the taxing rights of the jurisdiction where the low-taxed profits arise. second (top-down): If, after the application of any QDMTT, there is still a top-up tax amount outstanding for a low-taxed entity, e.g., if the host country did not have a QDMTT, or if the QDMTT did not fully cover the top-up amount due to slight rule differences, the IIR comes into play. The parent entity higher up in the ownership chain, if it is located in an IIR-implementing jurisdiction, will be liable to pay the remaining top-up tax. This process continues down the ownership chain until the top-up tax is fully covered. Last (Backstop): Only if the IIR has not fully captured all the outstanding top-up tax, for instance, if no IIR-implementing jurisdiction is found in the ownership chain for a particular low-taxed entity, does the UTPR act as the final backstop. The remaining top-up tax is then allocated among UTPR-implementing jurisdictions based on a formula involving employees and tangible assets, and collected through mechanisms like denial of deductions. This hierarchy ensures that the top-up tax is collected once and by the appropriate jurisdiction, prioritizing the country where the actual economic activity generating the undertaxed profits occurs. Why Kuwait's approach is prudent Kuwait's decision to enact a QDMTT reflects a comprehensive understanding of the Pillar Two mechanics. It is not merely about complying with global standards, but about optimizing national revenue collection in a new global tax environment. By ensuring that any top-up tax generated in Kuwait is paid to Kuwait, the government safeguards its tax base and maximizes the benefits from this international tax reform. For multinational companies operating in Kuwait, this means a clear understanding of these mechanisms is paramount. Compliance will require detailed calculations of GloBE Income and Adjusted Covered Taxes on a jurisdictional basis, and a precise application of these charging rules. GloBE Income or Loss and Adjusted Covered Taxes are the subject matter of our coming articles, so stay tuned! Hence, the IIR, UTPR and especially Kuwait's QDMTT form a robust system designed to enforce the global minimum tax. These mechanisms ensure that large MNEs contribute their fair share, ultimately fostering a more equitable global economy and securing vital resources for national development in countries like Kuwait. NOTE: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company
Miami Herald
29-06-2025
- Business
- Miami Herald
G-7 agrees to exclude U.S. companies from 15% minimum tax
June 29 (UPI) -- Group of Seven nations agreed to exempt U.S. companies from a 15% minimum corporate tax rate, the countries said in a joint statement. The nonbinding deal was announced Saturday but still requires approval from the 38-member Organization for Economic Co-operation and Development that established the 2021 agreement on taxing companies. G-7 nations are part of the OECED. U.S. Treasury Secretary Scott Bessent had proposed a "side-by-side solution" for American-headquartered companies that would be exempt from the Income Inclusion Rule and Undertaxed Profits Rule "in recognition of the existing U.S. minimum tax rules to which they are subject." The massive spending bill now being considered in Congress originally included a "revenge tax" that would have imposed a levy of up to 20% on investments from countries that taxed U.S. companies. "I have asked the Senate and House to remove the Section 899 protective measure from consideration in the One, Big, Beautiful Bill," Bessent wrote in a multi-post thread on X on Thursday. The House has approved the massive legislation and the Senate is considering it. "It is an honorable compromise as it spares us from the automatic retaliations of Section 899 of the Big, Beautiful Bill," Italian Finance Minister Giancarlo Giorgetti told local media. "We are not claiming victory, but we obtained some concessions as the U.S. pledged to engage in OECD negotiations on fair taxation," an unnamed French official told Politico Europe. The official called the "revenge tax" a potentially "huge burden for French companies." Trump has criticized this provision because he said it would limit sovereignty and send U.S. tax revenues to other countries. "The Trump administration remains vigilant against all discriminatory and extraterritorial foreign taxes applied against Americans," Bessent wrote Thursday. Trump has imposed a July 9 deadline for U.S. trading partners to lower taxes on foreign goods, threatening high duties on the worst offenders, including 50% on goods from the 27 European Union members. In April, a baseline tariff was imposed on most U.S. trading partners, with higher rates on certain companies and products. In 2021, nearly 140 countries agreed to tax multinational companies at the 15% minimum, regardless of where they were headquartered. In late April, the European Union, Britain, Japan and Canada agreed to exempt the United States from the 15% minimum tax on companies. "Delivery of a side-by-side system will facilitate further progress to stabilize the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all countries," the joint statement read. The agreement, according to the statement, would ensure that any substantial risks identified "with respect to the level playing field, or risks of base erosion and profit shifting, are addressed to preserve the common policy objectives of the side-by-side system." The G-7 includes Britain, France, Germany, Italy in Europe, as well as Canada, Japan and U.S. Before 2014, the group was known as the G-8 until Russia was expelled after annexing the Crimea region of Ukraine. The chairs of the House and Senate committees responsible for tax policy cheered the agreement. "We applaud President Trump and his team for protecting the interests of American workers and businesses after years of congressional Republicans sounding the alarm on the Biden Administration's unilateral global tax surrender under Pillar 2," Idaho Sen. Mike Crapo, chair of the Senate Finance Committee, and Missouri Rep. Jason Smith, chair of the House Ways and Means Committee, said in a press release. The agreement also, however, has its critics. "The U.S. is trying to exempt itself by arm-twisting others, which would make the tax deal entirely useless," Markus Meinzer, director of policy at the Tax Justice Network, told Politico Europe. "A ship with a U.S.-sized hole in its hull won't float." Copyright 2025 UPI News Corporation. All Rights Reserved.
