The STTR only applies to payments between connected parties. The OECD Blueprint follows the definitions of closely related parties in Article 5(8) and 5(9) respectively of the OECD
and UN Model Tax Conventions
In general, this treats parties as connected where one has control over the other and includes cases where one party directly or indirectly holds more than 50% of the beneficial interest in the other or where another person possesses directly or indirectly more than 50% of the beneficial interest in each person.
It’s worth noting that this does not tie in with the related party definition for transfer pricing purposes under many domestic tax regimes.
For instance, Peru in Article 24° of Supreme Decree N° 122 -94 -EF
generally applies a 30% requirement. Similarly, Section 33 of Cyprus’s Income Tax Law
applies a 25% requirement. This is likely to require separate analysis of the related party definitions for domestic transfer pricing requirements and the STTR.
The OECD Blueprint
includes a number of exclusions where the STTR does not apply:
Firstly, it does not apply to payments that form part of the income of a permanent establishment
. This is because the right to tax the income would be attributed to the source state anyway under a double tax treaty.
Secondly, Article 9.2.3 of the OECD Blueprint
excludes low-return payments partly to ease compliance and partly to ensure the STTR is focused on the most material cross-border planning arrangements.
Low-return payments are calculated by reference to the costs incurred by the payee in earning the payment, or can be calculated on a cost-plus basis, and where the margin is no higher than an agreed percentage. The agreed percentage has not yet been determined.
The practical effect of this is that in most cases, where an agreed transfer pricing methodology has been used, the payment may satisfy the requirement to be a low-return payment.
Thirdly, Article 9.2.4 of the OECD Blueprint
exempts certain excluded entities from the STTR. It states that investment funds, pension funds, governmental entities (including sovereign wealth funds), international organisations, and non-profit organisations are excluded entities for the purposes of the GloBE Rules and the same treatment would apply for the STTR. The GloBE Rules have other classes of excluded entity
(including investment funds and real estate investment vehicles that are the UPE), however, there is no mention as to whether they will be similarly excluded from the STTR.
Finally, Article 9.2.5 of the OECD Blueprint
includes a materiality threshold. The design of this rule is not yet determined. The Blueprint provides a few possibilities, including:
- Threshold based on the size of the MNE. Where the MNE exceeded a certain size or revenue threshold, the STTR would apply.
- Threshold based on a tiered value of covered payments made to connected persons in other contracting state. Where the value of covered payments made to connected persons in the other contracting jurisdiction exceeded a fixed amount in a year, the STTR would apply.
- Threshold based on a ratio. The STTR would not apply where the total amount of covered payments made over the course of the payer’s financial year, expressed as a proportion of total expenditures, were below a certain ratio.
Each of these is being looked at by the OECD and Inclusive Framework members.
Interaction with the GloBE Rules
The STTR applies in priority to the GloBE Rules, and STTR tax would be a covered tax
for the purpose of calculating the effective tax rate under the GloBE Rules.
An MNE Group consists of 3 companies, the UPE and two wholly owned subsidiaries, Company 1 and Company 2.
Company 1 pays interest of 100 million to Company 2. Company 2 has other non-taxable income of 100 million.
Company 2 is resident in a jurisdiction that has a corporate income tax rate of 25% but exempts 80% of the interest receipt from tax.
Company 2 is subject to tax on the interest at an adjusted nominal rate of (20% * 25%) 5%.
As this is below the 9% STTR rate, Company 1 can withhold additional tax at a 4% rate (ie 4 million).
When calculating the impact of the GloBE Rules
on Company 2, covered taxes
are the 4 million withheld tax, and domestic tax on the income (5% * 100 million) 5 million. This totals 9 million. GloBE Income
would be 200 million and the GloBE ETR
is therefore 4.5%. The top-up tax percentage is 10.5% which leads to top-up tax of 21 Million.