Following Jersey's intention to implement the OECD proposals for a 15% global minimum tax rate (known as "Pillar 2") in May 2024, draft legislation has now been lodged introducing a new standalone Multinational Corporate Income Tax (MCIT) to sit alongside Jersey's existing corporate income tax regime, together with an Income Inclusion Rule (IIR)."
The draft legislation is expected to be debated in early October, with a view to the new rules coming into effect on 1 January 2025.
Recap - what is Pillar 2?
Pillar 2 is an OECD initiative that ensures that multinational
enterprises with a consolidated annual turnover of at least
€750 million (MNEs) pay a minimum blended
"effective tax rate" (ETR) of 15% on
their worldwide profits, no matter where those profits arise.
This 15% minimum rate is achieved through jurisdictions enacting
the OECD's Global Anti-Base Erosion (GloBE)
Rules. These rules allocate taxing rights amongst certain
jurisdictions that are relevant to the MNE group.
How is Jersey implementing Pillar 2?
The new MCIT
A fundamental international tax concept is that the jurisdiction
in which profits arise has primary taxing rights over those
profits. Under the GloBE Rules, where the ETR in the jurisdiction
where the profits arise is less than 15% the MNE group is required
to pay a "top-up tax" to bring the jurisdictional ETR up
to the 15% rate. This is known as a Qualified Domestic Minimum
Top-up Tax (QDMTT).
Jersey has opted to introduce the new MCIT instead of a QDMTT. The
MCIT will effectively implement Jersey's domestic top up tax in
respect of constituent entities of in-scope MNEs which are either
tax resident in Jersey or have a permanent establishment in
Jersey.
The MCIT will sit alongside Jersey's existing 0/10 corporate
tax income system. The consequence being that the general rate of
corporate tax for companies outside of scope will remain at 0%
(with certain companies and income streams being subject to a 10%
or 20%¹ rate) while Jersey tax-resident companies and Jersey
permanent establishments of in-scope MNEs will be subject to an
effective tax rate of 15% on their taxable profits under the MCIT.
The MCIT will not be charged on top of the 10% or 20% rates, and
does not apply to low-taxed income outside of Jersey. However, it
is designed to ensure that the ETR in Jersey is 15%, and the income
that is taxed under MCIT is calculated using GloBE
principles.
A notable feature of the MCIT is that it includes a tax credit for
foreign taxes levied on a non-Jersey parent company (further up the
chain of ownership) under certain "controlled foreign
company" or "CFC" regimes that tax the parent
company on the underlying low-taxed blended profits of its
subsidiaries.² The CFC regime must have a threshold for low
tax that is less than 15%. The CFC tax credit available under MCIT
is subject to an overall cap of 7.5% of the MNE group's net
Jersey income that is taxable under MCIT for the fiscal year.
This means that, in some cases, Jersey is ceding its primary taxing
rights on Jersey profits to other jurisdictions that have CFC
regimes with a low tax threshold of less than 15%. The US's
Global Intangible Low-Taxed Income (GILTI) regime
is one such CFC regime.
The IIR
Under IIR, where the jurisdiction in which the profits arise does not have a QDMTT and the ETR on those profits is less than 15%, secondary taxing rights over those profits are allocated to the jurisdiction of the entity that holds the ultimate control over the MNE group (and is not itself under the control of another entity). This is known as the Ultimate Parent Entity (UPE) of the MNE group.
However, if the UPE is located in a jurisdiction that has not
implemented an IIR in line with the GloBE Rules (such as the US,
which has not yet implemented Pillar 2), then the IIR top-up tax is
levied on the next highest level intermediate parent entity (IPE)
entity in the ownership chain that is located in a jurisdiction has
implemented an IIR in line with the GloBE Rules.
Jersey's IIR will therefore apply where a Jersey resident
company is the UPE of an MNE group, or is the IPE of an MNE group
where the UPE is subject to tax in a non-Pillar 2 jurisdiction.
Under Taxed Profits Rule (UTPR)
Jersey is not adopting a UTPR.
UTPR is another feature of Pillar 2, and is a back-up to the IIR.
Under a UTPR, residual taxing rights are allocated to other
jurisdictions implementing Pillar 2. Where an MNE group has an ETR
below 15% in a jurisdiction that has not adopted a QDMTT, and the
IIR cannot be applied to the low-tax profits in that jurisdiction
(e.g. because the UPE is located in a non-IIR jurisdiction) the
top-up tax is collected by all jurisdictions that have implemented
a UTPR (there is a mechanism that allocates the profits).
Commentary
The MCIT is an interesting development. QDMTT does not take into account foreign taxes levied on a parent company (further up the chain of ownership) under CFC regimes, including the US's GILTI.
As the MCIT seeks to give credit for certain CFC and GILTI taxes levied by jurisdictions that have not adopted an IIR (albeit a credit that is capped at 7.5% of the group's MCIT net GloBE Jersey income for the fiscal year), Jersey could benefit MNE groups that are headquartered in jurisdictions that have adopted their own CFC tax regimes, rather than Pillar 2.
Conclusion
It is important to bear in mind that the MCIT and IIR will only
apply to those in scope MNEs. All other businesses that are below
the €750 million threshold will see no impact and will remain
under Jersey's existing 0/10 corporate income tax regime. There
are also exclusions for investment funds, real estate investment
vehicles and certain holdings entities.
Larger structures should now be analysing whether they are in scope
and seeking to understand the impact for their respective
operations. Do get in touch with your Walkers' CI Regulatory
and Risk Advisory team should you wish to discuss.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.