October 12, 2023
OECD/G20 Inclusive Framework launches Multilateral Convention to implement the Subject to Tax Rule
On 3 October 2023, the OECD announced that the Inclusive Framework on BEPS had concluded negotiations on a Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule. Together with the announcement, the OECD released the STTR MLI, an explanatory statement to the STTR MLI, a summary overview including a roadmap toward signature, and a frequently asked questions document.
Inclusive Framework jurisdictions will be able to use the STTR MLI to implement the STTR in all their relevant tax treaties. Alternatively, Inclusive Framework jurisdictions can implement the STTR in a given tax treaty through bilateral negotiations. The STTR applies to intragroup payments from source jurisdictions (i.e., the jurisdiction in which the income arises) that are subject to tax rates below 9% in the payee's jurisdiction of residence. The STTR allocates to the source country a limited and conditional taxing right to ensure a minimum level of taxation.
The STTR MLI is open for signature by all states and is subject to ratification, acceptance, or approval. No reservations are allowed and parties must make notifications regarding the inclusion of specific annexes in Covered Tax Agreements (CTAs). The STTR MLI will enter into force on the first day of the month following a period of three calendar months beginning on the date of deposit of the second instrument of ratification, acceptance or approval.
The Pillar Two Blueprint,1 which the OECD released in October 2020, included a description of the STTR framework for developing a treaty-based rule targeting the risks posed to source jurisdictions by BEPS structures involving intragroup payments that take advantage of low nominal tax rates in other contracting jurisdictions.
In October 2021, the OECD released a statement reflecting the high-level agreement of member jurisdictions of the OECD/G20 Inclusive Framework on core design elements of Pillars One and Two of the BEPS 2.0 project.2 The agreement included a commitment that Inclusive Framework members that apply nominal corporate income tax rates below 9% to interest, royalties and a defined set of other payments would incorporate the STTR into their bilateral treaties with developing Inclusive Framework members when requested to do so.
On 12 July 2023, the OECD released an outcome statement reflecting the agreement reached by 138 of the 143 Inclusive Framework jurisdictions on the remaining elements of the BEPS 2.0 project, anticipating the release of the STTR Model provision and indicating the STTR MLI would be open for signature from 2 October 2023.3
On 17 July 2023, the OECD released a document containing the model treaty provision of the STTR and its accompanying commentary.4
The OECD launched the STTR MLI on 3 October 2023 and released the STTR MLI, an explanatory statement to the STTR MLI, a summary overview including a roadmap toward signature, and a frequently asked questions document.
The Inclusive Framework adopted the STTR MLI on 15 September 2023; it is open for signature as of 2 October 2023. Inclusive Framework jurisdictions can use the STTR MLI to implement the STTR in all their relevant tax treaties or can implement the STTR in a given tax treaty through bilateral negotiations.
Inclusive Framework jurisdictions that apply nominal corporate income tax rates below the STTR minimum rate of 9% to items of covered income have committed to implement the STTR in their bilateral tax treaties when requested to do so by Inclusive Framework jurisdictions identified as developing for this purpose. The 2021 October Statement indicated that for this purpose, developing countries are defined as those with a Gross National Income (GNI) per capita, calculated using the World Bank Atlas method, of US$12,535 or less in 2019. However, the Inclusive Framework has now agreed that this will include countries that meet this requirement in any of 2019, 2020, 2021 or 2022.
According to the OECD, more than 70 Inclusive Framework members are entitled to request inclusion of the STTR.
The STTR MLI provides definitions and guidelines for the interpretation of terms used in the STTR MLI such as "Covered Tax Agreement," "Contracting Jurisdiction" and "Signatory." Parties to the STTR MLI are required to notify the OECD regarding any inclusion of specific annexes in CTAs. These notifications must be made at the time of signature or confirmed upon deposit of the instrument of ratification, acceptance, or approval. A provisional list of expected notifications may also be provided. The STTR MLI does not allow for reservations, which is intended to provide uniform application of its provisions.
The OECD will serve as the Depositary of the STTR MLI and will support governments in the process of its signature and ratification. The OECD has indicated that it is preparing a comprehensive action plan to support the swift and co-ordinated implementation of Pillar Two, with additional support and technical assistance to enhance capacity for implementation by developing countries.
The STTR MLI will enter into force on the first day of the month following the expiration of a three-month period from the date of deposit of the second instrument of ratification, acceptance, or approval. As of that date, the two signatory jurisdictions that have deposited their instruments will be bound by the MLI. Thereafter, for each signatory jurisdiction that ratifies, accepts, or approves, the STTR MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date that the signatory deposits its instrument of ratification, acceptance or approval. As of this date, the jurisdiction will be bound by the STTR MLI and its CTAs will be modified from the applicable date of the entry into effect.
The STTR MLI will generally enter into effect with respect to a CTA on or after the first day of the fiscal year, commencing six months from the latest date on which the STTR enters into force for each of the contracting jurisdictions to the CTA.
The STTR MLI's authentic texts will be equally valid in both English and French and will be deposited with the OECD. Moreover, jurisdictions will have the option to translate and authenticate the annexes in languages other than English and French if they wish to include them in their CTAs.
The STTR MLI applies to CTAs that are existing bilateral tax treaties and are explicitly identified by each of the parties to those tax treaties. It operates to directly amend those treaties to implement the STTR and other relevant accompanying provisions as annexes to those treaties. The operational provisions of the STTR MLI are included in the form of five different annexes. Annex I outlines the mechanics of the STTR and mirrors the STTR model treaty provision released in July 2023.
Annex II (taxes computed on an alternative basis) is an addition to the STTR that must be used by a party to the STTR MLI to notify the OECD regarding whether it applies a tax that is calculated other than on a net income basis. Similarly, Annex III (taxes imposed at the point of distribution) is an addition to the STTR that must be used by a party to notify the OECD regarding whether, instead of imposing corporate income tax on items of covered income when that income is earned, it imposes tax at the point of profit distribution; the party must also provide the name of the tax and legal references.
Annex IV and Annex V are optional. Parties may choose to include Annex IV (recognized pension fund) for applying STTR exclusions. Likewise, parties may choose to include Annex V (circuit-breaker provision), which suspends the STTR when a developing country becomes a developed country or vice versa. Unlike the BEPS MLI, Annex IV and Annex V do not require a matching exercise. This means that if one of the jurisdictions makes a notification of the inclusion of any of these annexes, this choice will apply to a CTA for both jurisdictions.
Inclusive Framework jurisdictions that have nominal corporate tax rates below 9% have committed to implementing the STTR through tax-treaty amendments when asked to do so by a developing country that is an Inclusive Framework jurisdiction.
Companies should evaluate the potential implications of the STTR for their businesses and monitor STTR developments in relevant jurisdictions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP (Netherlands)
Ernst & Young LLP (United States)
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 See EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.
2 See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021.
3 See EY Global Tax Alert, OECD releases outcome statement on progress on Pillars One and Two of BEPS 2.0 project, dated 12 July 2023.
4 See EY Global Tax Alert, OECD/G20 Inclusive Framework releases Subject to Tax Rule model treaty provision and commentary, dated 25 July 2023.