Traditional tax rules, which have been in place for over a century, face challenges due to base erosion and profit shifting (BEPS). These practices have led to significant tax avoidance by multinational enterprises (MNEs), prompting policymakers to develop new frameworks to ensure fair taxation. These practices have led to significant tax avoidance by multinational enterprises (MNEs), prompting policymakers to develop new frameworks to ensure fair taxation.
In response to these challenges, the OECD and G20 countries launched the BEPS project in 2013 to address tax avoidance through a comprehensive action plan consisting of 15 actions. These actions were designed to introduce coherence in domestic tax rules, reinforce substance requirements, and improve transparency. By 2015, the BEPS package was consolidated and presented to G20 leaders, marking the first major overhaul of international tax rules in nearly a century.
In 2023, the OECD/G20’s Inclusive Framework released a series of documents addressing the tax challenges of a digital economy, dubbed BEPS 2.0. One of these was the STTR, a key component under Pillar Two that primarily targets cross-border payments between related parties, which are often structured to minimize the overall tax burden on multinationals.
Purpose and scope: The STTR allows jurisdictions to "tax back" where other jurisdictions have not exercised their primary taxing rights or where payments are subject to low or no levels of taxation. It is designed to ensure a minimum level of taxation on certain cross-border payments, particularly those subject to tax rates below 9% in the payee’s jurisdiction.
Design and function: The STTR is a treaty-based rule applicable to specific intra-group payments that are taxed at low nominal rates in the payee’s state. It restores the taxing rights to the source state when the income is taxed below 9% in the residence state.
These payments include:
However, the STTR is subject to exclusions, such as when the payment recipient is:
Priority and coordination: The STTR takes precedence over the Global Anti-Base Erosion (GloBE) Rules, ensuring that the source country has a limited and conditional taxing right before the GloBE Rules are applied. This helps prevent double non-taxation and ensures a minimum tax level.
Implementation and impact: Inclusive Framework member jurisdictions with nominal corporate income tax rates below 9% have committed to incorporating the STTR into their bilateral treaties with developing countries. This commitment aims to support developing countries in securing a fair share of tax revenues from multinational enterprises.
The STTR represents a pivotal shift in international taxation aimed at ensuring fair taxation of multinationals and addressing the challenges posed by base erosion and profit shifting.
In part two of this series, we will delve deeper into the specific impacts of the STTR on Egypt, examining both the opportunities and challenges it presents for the country's tax system and business environment. We will also explore how MNEs can navigate these global developments and adjust their strategies to comply with the new regulations.
