Executive summary

The subject to tax rule (STTR) was developed by the members of the Inclusive Framework on BEPS (IF) as an integral part of the consensus solution on Pillar Two. Pillar Two consists of a set of rules that provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of taxation. Pillar Two consists of the Global Anti-Base Erosion rules, which are designed to ensure large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate, and the STTR. The STTR is a treaty-based rule that applies to intragroup payments from source States that are subject to low nominal tax rates in the State of the payee.

The STTR was developed not to revisit the current allocation of taxing rights between source and residence States. Rather it is based on an understanding that where, under a tax treaty, a source State has ceded taxing rights on certain outbound intragroup payments, it should be able to recover some of those rights where the income in question is taxed (if at all) in the State of the payee (i.e. the residence State) at a rate below 9%. Contrived cross-border group structures devised to artificially shift profits out of source countries are a particular concern. By restoring taxing rights to the source State in these cases, the STTR is designed to help developing countries1 – notably those with lower administrative capacities – to protect their tax base.

The STTR applies to interest, royalties, and a defined set of other payments made between connected companies. These are set out in the provision and explained in greater detail below. The rule operates by allowing the source State to apply additional tax, meaning that the tax rate applying in the residence State is recognised in the calculation of the source State’s extra taxing right (if any). Certain entities are excluded from the scope of the rule based, for example, on their characteristics or functions.

Members of the IF that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties and a defined set of other payments have committed to implement the STTR into their bilateral treaties with members of the Inclusive Framework that are developing countries when requested to do so. A multilateral instrument will facilitate the swift and consistent implementation of the STTR in relevant bilateral treaties.

Chapter I of this report contains the STTR provision and its commentary.2 Chapter II contains provisions governing the application of elimination of double taxation provisions in respect of additional tax payable under the STTR.

← 1. For this purpose, developing countries are defined as those with GNI per capita, calculated using the World Bank Atlas method (https://datahelpdesk.worldbank.org/knowledgebase/articles/378832-what-is-the-world-bank-atlas-method), of USD 12 535 or less in 2019 to be regularly updated.

← 2. India wishes to record its reservation on the mark-up percentage which it considers too high and it finds the guardrails ineffective. However, India has no objection to the approval and subsequent publication of this document to enable jurisdictions to join the MLI on STTR/incorporating STTR in their tax treaties.


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