October 4, 2023

New Multilateral Tax Treaty Implements the Subject to Tax Rule

Holland & Knight Alert
Eugenio Grageda

More than 135 jurisdictions since October 2021 have joined a groundbreaking plan to address certain tax challenges of the new digital and global economy. The plan consists of a Two-Pillar Solution to update key rules of the international tax system.

Pillar Two of the Two-Pillar Solution includes the implementation of a global minimum tax, as well as a new subject to tax rule (STTR).

The 15 percent global minimum tax is now a reality in all 27 European Union (EU) member states and extends to countries beyond the EU such as the United Kingdom, Switzerland, Japan, Korea and Singapore. Many multinational organizations will be confronted with Pillar Two global minimum tax rules starting in January 2024.

On Oct. 3, 2023, the Organization for Economic Cooperation and Development (OECD) published the Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule (STTR MLI) as part of the concluded negotiations in September 2023 between the OECD/G20 Inclusive Framework.

The STTR MLI can swiftly implement the Pillar Two STTR in existing bilateral tax treaties without the need for bilateral negotiations.

The STTR enables source jurisdictions to recover some or all of their taxing powers on certain payments from certain legal entities to their "connected persons" if they are subject to a tax rate below 9 percent in the resident's jurisdiction.

The Global Anti-Base Erosion Model Rules (GloBE) and the STTR are key components of Pillar Two and ensures multinational enterprises pay a minimum level of tax on the income arising in each of the jurisdictions in which they operate. More specifically, the STTR is a treaty-based rule that has the potential to protect the right of developing countries to tax certain intragroup payments where these are subject to a nominal corporate income tax that is below the minimum rate. The new multilateral instrument may be an efficient tool that countries such as Mexico could use to implement the STTR in their existing bilateral tax treaties.

The STTR MLI is open for signature for Mexico to adopt it. Holland & Knight attorneys will provide a more thorough analysis of the STTR MLI and its implications to companies in Mexico with international operations. Should you have any immediate inquiry regarding the foregoing, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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