Dear Clients and Friends,
There have been significant developments in the international taxation domain in recent years. These
changes will impact the way multinationals are taxed and also impact a multinational’s effective tax
rate, worldwide. Some of these developments have been captured through the Base Erosion and Profit
Shifting (BEPS) initiative, which is discussed below.
Overview of BEPS action plan and Pillar 1 & Pillar 2
BEPS 1.0
When it comes to international taxation, there are many working pieces with differing legislations in
each country along with bilateral tax treaties amongst the various countries around the world. As a
result, there have been widely used techniques that are exploited worldwide in order to evade/
minimize the taxes amongst many multinational corporations throughout the world. Many of these
strategies exploit any mismatches in the tax rules to artificially shift profits to low or no-tax jurisdictions
even if there is little to no economic activity in that jurisdiction
To provide an illustration, the above diagram provides an example whereby A Co. (Country A) lends
money to C Co. (a related company in Country C) through a branch located in Country B. Country C
permits C Co. to claim a deduction for the interest payment. Meanwhile, Country A exempts or excludes
the interest payment from taxation on the grounds that it is attributable to a foreign branch. The interest
income is not, however, taxed in Country B because A Co does not have a sufficient presence in Country
B, resulting in double non-taxation.
As a result of these types of situations, the BEPS project was launched in 2015 by The Organization of
Economic Cooperation and Development (OECD). The OECD has issued 15 action plans under this project.
This was a collaborative effort of over 135 countries/jurisdictions to tackle the tax avoidance issue,
improve the coherence of international tax rules, and to ensure a more transparent international tax
environment. The BEPS project has also provided a mechanism to amend certain tax treaties, in order to
plug the loopholes by way of a multilateral instrument (MLI). Canada has also entered into an MLI which
has been in effect since December 1, 2019. This allows it to amend its tax treaties with different
countries
BEPS 2.0
Subsequent to BEPS 1.0, the OECD has come up with another set of action plans which is
referred as “BEPS 2.0”. The purpose of BEPS 2.0 is to reduce the effective tax rate (ETR)
differential across jurisdictions, reducing the scope for tax-induced distortions resulting from
investment decisions.
In BEPS 2.0, the OECD has provided 2 key measures, called the “Pillars”, which consist of:
Pillar 1: The purpose is to reallocate certain amounts of taxable income to jurisdictions wherein
consumers or users are located, subject to prescribed rules. The focus is on changing the
jurisdiction where taxes are paid by multinationals. Pillar 1 rules are applicable on
multinationals having a global turnover above €20 Billion, profitability above 10%, and in
jurisdictions that a multinational derives at least €1 Million in revenue from.
As per the OCED’s recent update, in July 2023, Pillar 1 is expected to be in force in the year
2025.
Pillar 2: Provides for a global minimum tax of 15% for large corporations that have a turnover of
over €750 Million. The OECD has issued a complex set of rules (called GloBE rules) for these
calculations. These GloBE rules are expected to take effect in the year 2024.
The Canadian government has been bracing itself for these changes and they have released the
draft Global Minimum Tax Act Legislation, in August 2023, for consultation. Also, the
government has indicated its intention in adopting a Digital Service Tax which would be in effect
in the year 2024.
The information provided in this publication is a brief overview of the BEPS action plans. Any
multinational corporation that is affected by the above changes should plan for the above.
If you would like additional details, including applicability to your situation, please feel free to
contact us at 647-969-7382 or at info@clearhouse.ca.