New international taxation rules– Two-Pillar Solution

Issues⚫ Increase in the number of companies doing business without permanent establishment (PE) in the marketcountry➢ Under the current principles of international taxation, only if there is a PE such as a branch office ofa foreign company taxation on the income generated from the business at the PE is possible andthe problem that taxation is not possible in the market country has become evident.
⚫ A trend to attract foreign companies with low corporate tax rate and preferential tax system➢ Continued corporate tax cuts have weakened the corporate tax revenue base of each country.
➢ In terms of the tax system, fair competition conditions among companies have been impaired.

⚫ The discussions were held at the “OECD/G20 Inclusive Framework on BEPS” (currently about 140
countries/regions participate in) and an agreement on a two-pillar solution was reached on October
8, 2021.
⚫ The Outcome Statement was released on July 12, 2023, following intense technical negotiations bydelegates (approved by 138 Inclusive Framework members).
Present Status⚫ Pillar 1 (Allocation of new taxing rights to market countries): The text of the Multilateral Convention(MLC) has been published.
⚫ Pillar 2 (Global Minimum Tax): Japan has already completed the legislative process on the Income
Inclusionn Rule (IIR) in the 2023 FY tax reform. The legislation of remaining parts will be completed
in or after 2024 FY tax reform.
1OECD BEPS Project Pillar One：Rules on Allocation of New Taxing Rights to Market Jurisdictions＜Market Jurisdiction＞

Tax
Authority

Revenue

Tax

MNE(Multinationalenterprises)➢ Amount A, equivalent to 25% of an MNE's profit
in excess of 10% of the MNE's revenue, isallocated to market jurisdictions.
MarketJurisdictions

Entire Revenue of an MNE

Service<Home Jurisdiction >➢ In-scope companies are large
andhighlyprofitable MNEs (Multinational enterprises) with
global turnover above 20 billion euros andprofitability (profit margin) above 10%(approx. 100 companies across the world could
be in scope.).

ResidualProfit

RoutineProfit : 10％of Revenue

AmountA

Routine Profit

Expensesetc.

Residual Profit(excess of routine)

Allocate to market
jurisdictions inaccordance withturnover regardless ofwhether a physicalpresence exists

25% ofResidualProfit2

OECD BEPS Project Pillar One：
Rules on Allocation of New Taxing Rights to Market Jurisdictions➢ Enables reallocation of taxing rights to “market” jurisdictions:✓Tackles the challenges of “No taxation without Permanent Establishment (PE)”➡ Possibility for emerging economies, with growing markets, to expand their tax base.

➢Removes Digital Services Tax (DST) and its similar measures:✓DST is not regarded as corporate income taxation, thus no elimination of double taxation.

➡ Enhances stability and certainty in the international tax system.

3OECD BEPS Project Pillar Two： Global Minimum Tax≪Country A (ordinary tax rate)≫
Income Inclusion Rule (IIR)

Taxation until subsidiaries’
effective tax rates reach theminimum tax rate (15%)

Parentcompany

Tax authority
in country A
Undertaxed Profits Rule (UTPR)

Related companies in the same group

Related companies in the same group

An effective tax
rate of less than
15%Related company
such as parent company

An effective
tax rate ofless than
15%

Taxation until the company in Japan’s
effective tax rate reaches the minimumtax rate (15%)
Related companies in the same group

Tax authority
in country AAn effective
tax rate ofless than
15%

Subsidiaries

Taxation until parent’s effective tax
rate reaches the minimum tax rate(15%)

Subsidiaries

Tax authority
in country A
Qualified Domestic Minimum
Top-up Tax (QDMTT)≪Country B (low-tax jurisdiction) ≫Tax authority injurisdiction X* When QDMTT is implemented in Japan, IIR and UTPR will not be applied.
.
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OECD BEPS Project Pillar Two： Global Minimum Tax➢ Restricts the effects of tax incentives for large MNEs:✓(tax incentives’) “fiscal cost can be high, reducing opportunities for much-needed public spending on
infrastructure, public services or social support, or requiring higher taxes on other activities” (PCT,2015).

➡ Ensure a level playing field and put a floor under tax competition.
Time to reconsider the costs of tax incentives to attract MNEs.

➢ Curbs the “race to the bottom” in corporate taxation:✓Pillar 2 will ensure the effective tax rate (ETR) of 15% worldwide for the in-scope MNEs.

➡ The revenue base is expected to be more stabilized worldwide.

➢ Qualified Domestic Minimum Top-up Tax (QDMTT) as a game-changer:✓Enables jurisdictions to protect themselves from the minimum top-up tax of otherjurisdictions.

➡ Optimal strategy for each jurisdiction would be to introduce QDMTT so that it canprotect its tax revenues from IIR and UTPR of other jurisdictions.
5Asia Pacific Tax Hub

Asia Pacific Tax Hub➢Regional Framework to promote domestic resource mobilization andinternational tax cooperation.
➢Launched in May 2021 during the 54th Annual Meeting of the ADB.
➢All the ADB members are included.
➢Consists of three (3) building blocks:✓ International Tax Cooperation (ITC)： The Global Forum on Transparency, Exchange ofInformation for Tax Purposes, The Inclusive Framework on BEPS.

✓Medium-Term Revenue Strategy (MTRS)✓Digitalization of tax administration.

➢ Japan is supporting ADB’s projects through the DRMTF (Domestic
Resource Mobilization Trust Fund).
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Indo-Pacific Economic Framework (IPEF)

Indo-Pacific Economic Framework (IPEF)➢Launched in May 2022 in Tokyo, by issuance of the Leaders’ Statement, joined by 14
countries:✓Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia,New Zealand, Philippines, Singapore, Thailand, the United States, Viet Nam➢ Consists of four (4) pillars: i) Trade, ii) Supply Chains, iii) Clean Economy, iv) FairEconomy➢ Scoping completed in September 2022 by the Ministerial Statement, it includes:✓ enhance transparency and exchange of information for tax purposes between tax
competent authorities pursuant to existing international agreements and standards✓

support global and regional efforts to improve tax administration and domestic
resource mobilization through technical assistance, capacity building, and more efficienttax administrative practices✓support the ongoing work of the OECD/G20 Inclusive Framework on Base Erosion andProfit Shifting's Two Pillar Solution to Address the Tax Challenges Arising from theDigitalisation of the Economy, as applicable➢ Aims to implement and accelerate progress on tax initiatives consistent withinternational agreements and standards
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