Executive summary

On 19 September 2024, the Organisation for Economic Co-operation and Development (OECD) held a signing ceremony for the Subject to Tax Rule (STTR) Multilateral Instrument (MLI). The STTR was developed by the members of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) as a component of the Pillar Two global minimum tax rules. The STTR is a treaty-based rule designed to provide for a minimum level of taxation on specified intragroup payments that are taxed below 9% in the payee's jurisdiction.

At the ceremony, nine jurisdictions signed the STTR MLI, and 10 additional jurisdictions expressed their intention to sign once their internal processes are completed.

Detailed discussion

Background

Like the Global Anti-Base Erosion (GloBE) Rules, the STTR is an integral part of Pillar Two. The STTR is a treaty-based rule that applies to specified 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 jurisdiction a limited and conditional taxing right to ensure a minimum level of taxation on covered payments.

The OECD published the model treaty provision for the STTR and its accompanying commentary on 17 July 2023.¹

On 15 September 2023, the Inclusive Framework formally adopted the STTR MLI. And, on 3 October 2023, the OECD released the STTR MLI, an explanatory statement, a summary overview with a roadmap toward signature, and a frequently-asked-questions document.²

On 30 May 2024, the Inclusive Framework cochairs issued a statement indicating that the signing ceremony for the STTR would take place in Paris on 19 September 2024.³

Inclusive Framework jurisdictions can choose to use the STTR MLI to implement the STTR in any of their relevant tax treaties.

Signing ceremony

On 19 September 2024, 57 members of the Inclusive Framework attended the first signing ceremony of the Multilateral Convention to Facilitate the Implementation of the Pillar Two STTR in Paris.

During the signing ceremony, nine jurisdictions signed the STTR MLI: Barbados, Belize, Benin, Cabo Verde, Democratic Republic of the Congo, Indonesia, Romania, San Marino and Turkiye.

In addition, 10 jurisdictions have expressed their intent to sign the STTR MLI as soon as their internal processes are finalized: Belgium, Bulgaria, Costa Rica, Mongolia, Portugal, Senegal, Seychelles, Thailand, Ukraine and Uzbekistan.

STTR MLI process

Similar to the BEPS MLI, when a jurisdiction signs the STTR MLI, it must specify the tax treaties that will be covered (referred to as Covered Tax Agreements or CTAs). For the STTR MLI to be applicable, both parties to a CTA must include the agreement in their notifications with respect to the STTR. If either party chooses not to do so, the STTR will not apply to the agreement.

The STTR MLI does not amend the text, sequencing or numbering of existing provisions in CTAs. Instead, the STTR MLI amends the relevant CTA to include the STTR and other relevant accompanying provisions as Annexes to the CTA. The STTR would not apply if other provisions of the relevant tax treaty already allow the source country to tax the item of covered income at a rate that is equal to or above 9%. However, where an item of income is taxed below 9% under another provision of the relevant tax treaty, the STTR allows a supplementary taxing right to bring the combined rate under the two provisions up to 9%.

The STTR MLI does not allow for reservations, but it includes optional provisions that signatories can elect to apply. These provisions are found in Annex II (Taxes computed on an alternative basis), Annex III (Taxes imposed at the point of distribution), Annex IV (Recognised Pension Fund definition), and Annex V (Circuit-breaker provision).

Annex II introduces additional provisions into a CTA for determining the tax rate when a jurisdiction applies a tax on a basis other than net income. Annex III addresses situations where a jurisdiction imposes tax on profit distribution rather than when the income is earned.

The "Recognised Pension Fund" definition in Annex IV provides a uniform approach to identifying entities excluded from the STTR, applicable when a CTA does not contain such a definition or when a jurisdiction prefers the definition in Annex IV over one already included in the relevant tax treaty. The "Circuit-breaker provision" in Annex V allows for the temporary suspension of the STTR's application if a developing country ceases to meet the defined criteria for a five-year period, with the possibility of reactivation if the jurisdiction later requalifies as a developing country.

Signatories are required to submit notifications to the OECD, which acts as the Depositary of the STTR MLI, detailing their positions on the STTR MLI. These notifications, required for the application of the STTR MLI, must be made at the time of signature or upon depositing the instrument of ratification, acceptance or approval. The OECD is required to maintain publicly available lists of CTAs and the notifications made by parties of the STTR MLI.

Indonesia, Turkiye and Romania have notified the highest number of tax treaties to be covered as CTAs, with 29, 33 and 23 treaties, respectively. Barbados has notified six treaties, Cabo Verde eight, the Democratic Republic of the Congo five, San Marino six, and Belize and Benin have notified two treaties each.

Regarding the application of the optional provisions, the STTR MLI specifies that if one jurisdiction that is party to a CTA makes a notification to include either the "Recognised Pension Fund" definition from Annex IV or the "Circuit-breaker provision" from Annex V, that provision will be included in the CTA and will be used by parties to the CTA for the purposes outlined in the STTR MLI.

Benin, the Democratic Republic of the Congo, Indonesia, Romania and San Marino have chosen to include the "Recognised Pension Fund" definition from Annex IV in their CTAs. Additionally, Barbados, Romania, San Marino and Turkiye have selected the "Circuit-breaker provision" from Annex V for their CTAs.

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 of deposit of the second instrument of ratification, acceptance or approval. Thereafter, for each signatory jurisdiction that deposits its ratification, acceptance or approval, 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 of deposit.

Currently, none of the jurisdictions that have signed the STTR MLI have yet deposited their instruments of ratification with the OECD as Depositary.

Once the STTR MLI enters into force, the STTR provisions will take effect for taxes imposed by a party on or after the first day of a fiscal year that begins at least six calendar months from the latest of the dates on which the STTR MLI enters into force for the parties to the CTA.

Signatories may opt to have the STTR MLI take effect with respect to a CTA 30 days after the Depositary receives the last required notification that a jurisdiction has completed its internal procedures. Romania has chosen this alternative approach, meaning that the STTR MLI will become effective for CTAs with Romania under this alternative timeline.

Implications

The STTR applies to interest, royalties and a defined set of other payments made between connected companies, including intra-group service payments.

The STTR takes priority over the GloBE Rules, so that the application of the STTR does not take into account a qualified Income Inclusion Rule (IIR), a qualified Undertaxed Profits Rule (UTPR) or a Qualified Domestic Minimum Top-up Tax (QDMTT). Additionally, Inclusive Framework member jurisdictions with nominal corporate income tax rates below the 9% STTR rate have committed to implementing the STTR into their bilateral treaties with other member jurisdictions that are developing countries, if and when they are asked to do so.

It is important that businesses monitor the implementation of the STTR through tax treaties or the STTR MLI by relevant jurisdictions. Once this rule becomes part of a relevant tax treaty, businesses should evaluate whether the STTR would apply to their transactions or arrangements.