OECD releases ‘Subject to Tax Rule’ Multilateral Instrument

On 3 October 2023, the Organisation for Economic Cooperation and Development (OECD) released the new Multilateral Instrument (MLI) to facilitate the implementation of the Pillar Two ‘Subject to Tax Rule’ (STTR). The STTR will enable developing countries to tax certain intra-group payments where these payments are subject to a nominal corporate income tax rate below nine percent. It allows source jurisdictions to impose a tax where they otherwise would be unable to do so under the provisions of tax treaties.

Implementation will be through modifications to bilateral tax treaties via the newly released STTR MLI which is now open for signature by jurisdictions interested in signing it.

As explained by the OECD release:

• The OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) concluded negotiations in September 2023 on the Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule, which includes an explanatory statement;
• The Subject to Tax Rule will enable developing countries to tax certain intra-group payments when those payments are subject to a nominal corporate income tax rate below nine percent. The STTR allows source jurisdictions to impose a tax when they otherwise would be unable to do so under the provisions of tax treaties. A recent article from KPMG International provides further background on the STTR;

• The STTR MLI, which was delivered in the Outcome Statement on the two-pillar solution in July 2023, will allow countries to efficiently implement the STTR into existing bilateral tax treaties; and
• More than 70 developing Inclusive Framework members are entitled to request inclusion of the STTR in their treaties with Inclusive Framework members that apply corporate income tax rates below nine percent to covered payments.

For further information please contact:

• Kashif Javed