The Gibraltar government announced in the Budget on 20 July 2021 that its corporate tax rate will increase from 10% to 12.5% in preparation for the expected adoption of a global minimum tax. The new rate is effective from 1 August 2021. This means that where a financial period straddles 31 July 2021, the 12.5% rate will be applied to those months in that financial period from August 2021 onwards.
Gibraltar was among the 130 countries and territories in the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) that endorsed, on 1 July, the OECD-led twin-pillar plan relating to the taxation of the digital economy, the allocation of taxing rights between nations and the harmonisation of a minimum global corporate tax rate of at least 15%. The plan proposes that implementing laws for the minimum tax should be adopted in 2022, for the tax to take effect in 2023.
Chief Minister Fabian Picardo told parliament in his Budget Address 2021: “Whilst I understand this will present challenges to this jurisdiction and its model of taxation, I do not believe it is in Gibraltar’s interest to be the outlier that would not sign up to this framework and would seek to resist it … This means that if the new global agenda prospers, when we are required by the OECD to move to 15% the increase will be less significant,” he said.
Underlining his support for the OECD initiative, he added: “Gibraltar’s future is as a leading, innovating, value-added jurisdiction on the right side of the global transparency and accountability spectrum, not on the opaque side.”
The OECD Inclusive Framework secured agreement – but not unanimous consensus – for key aspects of its two-pillar package, which aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits. Only 6 of its 140 participating nations have yet to sign up.
Pillar One is intended to ensure a fairer distribution of profits by re-allocating some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
It would apply to the largest MNEs, including digital companies, with a global turnover over €20 billion and profitability above 10%. The agreement excludes “Extractives and Regulated Financial Services” from the scope. Subject to successful implementation and a seven-year review, the threshold would be reduced to €10 billion.
For in-scope MNEs, a new ‘special purpose nexus’ rule would apply in a jurisdiction to the extent the entity derives at least €1 million in revenue from the jurisdiction. This threshold is lowered to €250,000 for smaller jurisdictions with GDP lower than €40 billion.
The reallocation of an in-scope company’s profits to market jurisdictions would apply to “between 20-30% of residual profit defined as profit in excess of 10% of revenue”. Under the agreement, the new allocation rules would be coordinated with “the removal of all Digital Service Taxes and other relevant similar measures on all companies.”
Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate income tax rate of at least 15% for MNEs with global revenue of €750 million or more. Under the agreement, global anti-base erosion (GloBE) rules would enable nations to impose ‘top-up tax’ on a parent entity in respect of income incurred by a subsidiary in a low-tax jurisdiction (‘income inclusion’ rule) or to deny associated deductions (‘undertaxed payments’ rule).
A carve-out from the GloBE rules would “exclude an amount of income that is at least 5% (in the transition period of five years, at least 7.5%) of the carrying value of tangible assets and payroll”.
According to the Inclusive Framework, the signing nations intend that the global minimum tax would have only “a limited impact on MNEs carrying out real economic activities with substance”. The agreement contemplates continued discussions on the “direct link between the global minimum effective tax rate and the carve-outs”.
“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD Secretary-General Mathias Cormann said. “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”
Participants in the negotiation have set a timeline for conclusion of the negotiations, which includes an October 2021 deadline for finalising the remaining technical work on the two-pillar approach, as well as a plan for effective implementation in 2023.