A constant trickle of countries has stated plans to implement Pillar 2, but Korea was first.
The member jurisdictions of the Inclusive Framework on BEPS still have months to hash out the most contentious and contentious features of the agreed two-pillar approach to digital sector taxation. Nonetheless, the OECD, which is supporting the negotiations, remains committed to completing pillars one and two by the beginning of 2024.
Some jurisdictions have moved on with national implementation of the accord, particularly the Global anti-Base Erosion (Globe) norms under pillar two, notwithstanding the implementation disputes.
These laws set a minimum effective corporate tax rate of 15% on companies having total consolidated revenue of more than €750 million ($815 million) in at least two of the previous four years. The regulations, which include the income inclusion rule (IIR) and the undertaxed profits rule (UTPR), assist businesses in determining whether they and any group entities are liable for the tax and how much they should pay to meet the minimum rate.
South Korea became the first country in the world to approve national legislation to apply the GloBE standards on December 31, 2022. Next the publishing of full regulations in a presidential order, the law is set to go into force on January 1 of the following year.
The rules primarily adhere to the OECD Model Rules, including the top-up tax computation to bring a liable corporation up to the minimum rate, the IIR and the UTPR, as well as the de minimis exclusion for entities whose turnover and income fall below a particular threshold.
Concerns for taxpayers
According to practitioners, tax executives are being careful about the law's implementation.
"They [customers] are primarily concerned about the vagueness of the OECD Model Rules and the increase in tax compliance expenses," writes Kim Kyu-Dong, partner and co-head of Yulchon's international tax practise.
"Korean MNEs are in the early stages of preparing for pillar two, such as identifying taxpayers (UPE [ultimate parent entity], POPE [partially owned parent entities]), analysing CbCR [country-by-country reports] and consolidated financials, and so on," he says.
Other concerns include whether the GloBE rules will influence the tax breaks that Korean taxpayers now have.
Kim believes the legislation will result in unanticipated anomalies or irregularities with existing law, stating that "for example, the effects of the current R&D and investment credits available for MNEs operating in Korea may be reversed."
Korean firms with large outside interests, particularly those doing business in the United States, have their own concerns.
"Many Korean MNEs have large operations in the United States," Kim explains. "Because tax refunds under the IRA [Inflation Reduction Act] credit regime can be classified as QRTC [qualified refundable tax credits] to be included in GloBE income, they may result in a Korean top-up tax."
Prepare for implementation
Kim urges taxpayers who may be affected by the rules to take important steps to prepare for any impact, such as running top-up tax simulations to identify the jurisdictions that will be affected, upgrading their ERPs to manage their financial and corporate income tax information comprehensively, and discussing alternative incentives with the government.
The OECD Model Rules outline the measures a taxpayer can take to determine whether they are subject to a top-up tax. According to PwC in Korea, this analysis might include hundreds of Korean enterprises.
“We are estimating anywhere between 270 and 300 UPE Korean MNEs that may be subject to the IIR as per the Korean pillar two rules,” says Michael Kim, head of the firm’s outbound tax practice and responsible for its pillar two initiatives, in an email interview. “If we include POPEs, JVs, etc., this number will grow to anywhere between 400 and 500.”
Making a payment
As Michael Kim points out, it is more difficult to identify a number of enterprises that may be liable to Korea's UTPR rule.
“Unfortunately, we cannot predict the number of Korean subsidiaries/PEs that will be impacted as this will depend on whether or not the foreign jurisdictions where the foreign UPE is located will eventually adopt the IIR,” he says.
Michael Kim emphasises the importance for Korean MNEs of determining where their constituent entities (CEs) are based and what their top-up tax liability may be. The Model Rules define CEs as all entities within a group, with any permanent establishment of a group entity being treated as a separate CE.
"From an IIR standpoint, Korean MNEs should pay attention to the grouping of the CEs by jurisdiction and the determination of which CEs should be accountable for submitting and paying top-up taxes," he says.
"Once the Korean government announces the presidential proclamation in the near future, the exact calculating methodology should be thoroughly scrutinised," he says.
Changes to the schedule?
Korea may be unable to apply the guidelines on January 1, 2024, as planned. A number of Korean MNEs are said to be negotiating a postponement with the government.
"Most Korean MNEs are currently waiting for the presidential decree before taking any actions to examine the specific top-up tax effects because we don't know if the laws will be enforced on January 1, 2024," Michael Kim adds.
"The laws may be delayed for another year (effective January 1, 2025) depending on the timeliness of the OECD's publishing of the implementation framework, the Korean presidential decree, and the development of pillar two enactment in other developed nations."
The path to worldwide tax reform has been difficult. This year marks ten years since the G20 group of the world's largest nations tasked the OECD with leading efforts to reform a system that had seen little change in decades. It has been over eight years since the final reports on the first stage of the BEPS project were released. Nobody said it would be easy.
By fLEXI tEAM