Andorra – 10% (Article 41 of Legislative decree of 5-6-2019 publishing the revised text of Law 95/2010, of 29 December, on corporate tax)

Anguilla – 0% (No Corporate Income Tax System)

Bahamas – 0% (No Corporate Income Tax System)

Barbados – 5.5% (Section 43 of the Income Tax Act (as amended)

Bermuda – 0% (No corporate income tax system)

Bosnia and Herzegovina – 10% (Article 36 ofthe Law on Profit Tax)

BVI – 0% (No corporate income tax system)

Bulgaria – 10% (Article 20 of the Income Tax Law)

Cayman Islands  – 0% (No corporate income tax system)

Cyprus – 12.5% (Schedule 2 of the Income Tax Law)

Gibraltar – 12.5% (Section 6 of the Rates of Tax Rules, 1989)

Guernsey – 0% (Schedule 5 of the The Income Tax (Guernsey) Law, 1975 )

Hungary – 9% (Section 19 of LXXXI of 1996, law on corporate tax and dividend tax)

Ireland – 12.5% (Section 21 of the  Taxes Consolidation Act, 1997 )

Isle of Man – 0% (Income Tax (Corporate Taxpayers) Act 2006)

Jersey – 0% (Section 1 of the Income Tax (Jersey) Law 1961)

Kosovo – 10% (Article 7 of the Law on Corporate Income Tax)

Kyrgyzstan – 10% (Article 240 of the State Tax Code)

Liechtenstein – 12.5% (Article 61 of the Law on State and Municipal Taxes)

Macau – 12% (Schedule to the Complementary Income Tax Law)

Marshall Islands – 0% (No corporate income tax system)

Moldova – 12% (Article 15 of the Fiscal Code)

Montenegro – 9% (Article 28 of the Law on Corporate Income Tax)

North Macedonia  – 10% (Article 2 of the Profit Tax Law)

Palau – 0% (No corporate income tax system)

Paraguay – 10% (Article 21 of Law No. 6,380/19 on the Modernization and Simplification of the National Tax System)

Qatar – 10% (Article 9 of the Income Tax Law)

Timor-Leste – 10% (Schedule 6 of the Taxes and Duties Act)

Turkmenistan – 8% (Article 172 of the Uniform Law of Turkmenistan on Taxes)

Turks and Caicos Islands – 0% (No corporate income tax system)

Vanuatu – 0% (No corporate income tax system)

These jurisdictions are clearly at risk of top-up tax where MNE group subsidiaries are located there as the effective rate (other things being equal) will be less than 15%.

Of course, this will not always be the case. There could be for instance, large deferred tax liabilities created in some cases that would increase the deferred tax expense and increase the ETR. Or there could be a high withholding tax rate on dividends that pushes the ETR up.

Article 4.3.2 (e) of the OECD Model Rules requires withholding tax on dividends to be allocated to the distributing company. Ireland, for instance, has a 25% withholding tax on dividends (subject to treaties and international agreements such as the EU Parent-Subsidiary Directive).

But in general, these jurisdictions are key targets for the global minimum tax. Some, eg Ireland and Jersey have stated they may introduce a qualifying domestic minimum tax to retain tax revenues within their jurisdiction. 

However, just because a jurisdiction does not have a statutory corporate tax rate below 15% does not mean that there would be no Pillar Two top-up tax.

In some cases, the statutory rate could be significantly higher, yet the GloBE effective tax rate would be below 15%. 

Jurisdictions marked as blue on the Global Map of Corporate Tax Rates have rates between 15%-25% and are most likely to risk having effective rates for Pillar Two purposes reduced significantly enough to result in a top-up tax requirement. 

How can Pillar Two ETRs Differ Significantly From Statutory Rates?

Even ignoring the Pillar Two Rules, the effective tax rate of an MNE (tax payable/profits) will be significantly different to the headline statutory rate.

This is a result of the separate rules for calculating taxable profits as opposed to financial profits. Once, you bring the Pillar Two GloBE Rules into play there is yet another subset of tax rules used to calculate not only GloBE income, but also covered taxes, and to allocate these to entities in an MNE group. 

Therefore, any significant variances between the Pillar Two Rules and the rules for determining the financial accounts would lead to an adjusted effective rate.

Nevertheless, in this article we look at some of the key areas that can drive effective tax rates up or down including:

 – CFC Pushdown;

 – Withholding Tax;

 – Participation Regimes;

 – Tax Credits/Incentives;

 – Deferred Tax Recasting; and

 – Permanent Establishments. 

CFC Pushdown

Article 4.3.2(c) of the OECD Model Rules, provides that tax included in the accounts of a company that arises from a Controlled Foreign Company (CFC) Regime are allocated to the CFC Company.