Anita Lin
Deputy of Head Tax, Partner, KPMG in Taiwan
Aaron Yeh
ASPAC Taiwan Practice - Indonesia Region Leader, Partner, KPMG in Taiwan
Phoebe Huang
Tax, Manager, KPMG in Taiwan
Introduction
The Organization for Economic Co-operation and Development (OECD) introduced the Base Erosion and Profit Shifting (BEPS) 2.0 framework in response to the financial crisis of 2008 and subsequent international tax scandals. These events raised concerns globally about the issue of base erosion and profit shifting. BEPS refers to the practice of multinational corporations exploiting differences in national tax systems and international tax regulations to shift profits, aiming to minimize group tax burdens, which results in the erosion of tax bases and significantly affects national revenues and tax fairness.
Under basic tax management principles, international tax planning and reducing group-wide tax burdens are common objectives for businesses. However, BEPS introduces a new concept: that companies should pay taxes where they consume, create value, and use resources. Furthermore, as many countries face fiscal pressures, they seek to secure more revenue that should belong to them. With the rise of social media disclosures, many countries have started re-evaluating the international tax arrangements of domestic companies. This led to the emergence of the BEPS framework.
In response to requests from the G20, the OECD published the BEPS report in February 2013 and subsequently released a set of 15 action plans in July of the same year, receiving support from leaders at the G20 summit. However, with the globalization of trade and the rise of the digital economy, international tax challenges have evolved. To prevent multinational companies from taking advantage of tax disparities across jurisdictions and to address BEPS issues arising from the digital economy, the OECD formed a working group in 2017 to launch the BEPS 2.0 tax reform framework.
On July 1, 2021, members of the OECD/G20 Inclusive Framework reached an initial agreement on two key pillars. On October 8, 2021, the core rules of these two pillars were supported by over 135 members (out of a total of 141 members), signaling the dawn of a new era in international taxation.
The first pillar drastically departs from international tax norms of the past century, shifting away from the requirement that a country’s taxing rights are based on a company having substantial operations in that jurisdiction. Under the first pillar, no determination of a permanent establishment is required. Instead, profits are allocated to market countries based on a formula. If a market country meets certain income thresholds, the portion of service income exceeding a 10% profit margin earned by a regional center will be taxed by the jurisdiction of the consumer.
The second pillar establishes a global minimum tax rate. Multinational corporations that meet specific thresholds are required to ensure that their effective tax rate across all jurisdictions meets or exceeds 15%. If the rate is below the minimum threshold, a top-up tax will be imposed on the group entities in that jurisdiction. This provision aims to curb harmful tax competition among tax jurisdictions.
The second pillar’s global minimum tax system, its impact on tax incentives, and its implementation progress in the Asia-Pacific region will be discussed in subsequent sections.
1. Second Pillar – Global Minimum Tax System: Concept and Principles
The second pillar consists of the Global Anti-Base Erosion (GloBE) Rules and the Subject to Tax Rule (STTR). The GloBE rules comprise the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR).
(1) Threshold for Application
To avoid a race to the bottom in corporate income tax rates and to reduce incentives for providing ineffective tax incentives, the OECD's GloBE rules apply to multinational corporate groups with consolidated annual revenues exceeding €750 million (approximately NT$25 billion). These groups must ensure that their tax burden in each tax jurisdiction where they operate meets the global minimum rate of 15%. The OECD’s Model Rules, published on December 20, 2021, include a four-year testing period, meaning that if a group’s revenue exceeds the €750 million threshold in two of the four preceding years, it must apply the GloBE rules regardless of the group’s revenue in the current year.
The rules also exclude certain entities such as government bodies, international organizations, non-profits, investment funds, and pension funds to ensure that the focus is on large multinational enterprises that contribute to BEPS issues.
(2) Effective Tax Rate and Calculation of Top-Up Tax
Under the GloBE rules, the effective tax rate (ETR) is calculated for each group entity based on the jurisdiction in which its operations are located. If the ETR is below the 15% threshold, the group will be required to pay top-up taxes.
For example, if a Taiwanese multinational group has three subsidiaries in Vietnam, the effective tax rate for Vietnam will be calculated by combining the adjusted covered taxes for the three subsidiaries and dividing them by the adjusted GloBE income. If the effective tax rate is found to be 12%, a top-up tax will be levied on the 3% shortfall to reach the 15% minimum rate.
2. Taxation Principles
Under the global minimum tax system, the imposition of top-up taxes will be guided by the following principles:
(a) Income Inclusion Rule (IIR)
To ensure that multinational groups pay the minimum 15% tax rate in all tax jurisdictions, the IIR requires the parent company’s jurisdiction to impose a top-up tax if the group member operates in a low-tax jurisdiction. This rule applies in a top-down approach, meaning the highest-level parent company will be responsible for paying the top-up tax for subsidiaries in low-tax jurisdictions.
(b) Undertaxed Payments Rule (UTPR)
The UTPR acts as a backup mechanism to the IIR. If the parent company’s jurisdiction does not implement the IIR, and no intermediate parent companies apply it, the group member’s jurisdiction will be responsible for collecting the top-up tax through the UTPR. This can include adjusting tax deductions or reducing tax exemptions to ensure compliance with the global minimum tax rate.
(c) Qualified Domestic Minimum Top-up Tax (QDMTT)
If a tax jurisdiction has implemented a QDMTT, it takes precedence over both the IIR and UTPR mechanisms. The QDMTT ensures that the top-up tax is collected domestically, rather than through the parent company or other group entities in foreign jurisdictions.
3. Impact of Global Minimum Tax on Tax Incentives
According to a 2022 OECD report on tax incentives and the global minimum corporate tax, many countries have historically used tax incentives to attract foreign investment and stimulate economic activity. For example, the number of OECD jurisdictions offering tax incentives for innovation-related income in 2021 was over five times that in 2000.
However, the OECD’s report notes that income-based tax incentives (e.g., Vietnam’s "four tax exemptions and nine reductions") reduce the numerator in the effective tax rate calculation, leading to a lower overall ETR. In contrast, investment-based tax incentives (e.g., accelerated depreciation) have a more favorable impact on the ETR. Therefore, multinational corporations should consider whether tax incentives will remain effective under the global minimum tax, and governments may need to adjust by offering non-tax incentives (such as cash subsidies) or expanding investment-based incentives to continue attracting investment.
4. Progress in Implementing Global Minimum Tax in the Asia-Pacific Region
Many jurisdictions in the Asia-Pacific region are actively working on implementing the second pillar of the global minimum tax, with the timeline for implementation primarily divided into two phases: 2024 and 2025. Countries such as Australia, Japan, South Korea, New Zealand, and Vietnam are set to implement the rules in 2024, while Hong Kong, Malaysia, Singapore, and Thailand are targeting 2025. China, India, Indonesia, and the Philippines have not yet confirmed specific dates but are expected to begin implementation in 2025 or 2026.
In Taiwan, the Ministry of Finance plans to raise the minimum tax rate on large multinational corporate groups that meet the GMT threshold from 12% to 15% starting in 2025, to align with the global minimum tax framework and reduce the likelihood of top-up tax liabilities for domestic members.
Responses of Southeast Asian Countries to the Global Minimum Tax
Southeast Asian nations, including Vietnam, Thailand, and others, have begun revising their tax incentive policies to align with the global minimum tax while maintaining their attractiveness for foreign investments. Countries are increasingly relying on cash subsidies and adjustments to tax policies to mitigate the impact of the global minimum tax on their economies. The following outlines how Taiwan’s businesses are responding to these changes in Southeast Asia.
Vietnam has introduced an investment support fund, offering cash subsidies to qualified entities in high-tech sectors, and those investing in R&D, fixed assets, and social infrastructure, with the aim of minimizing the impact of the global minimum tax.
Thailand has adjusted its tax holiday schemes for BOI-promoted companies, allowing a reduced corporate tax rate of 10% for an extended period, which will help improve the effective tax rate in Thailand and reduce the burden of top-up taxes.
Singapore has introduced the Refundable Investment Credit Scheme (RICS) in its 2024 fiscal budget to attract high-value investments and address the impact of the upcoming global minimum tax regime. RICS provides refundable tax credits that can offset corporate income tax liabilities, with unused credits reimbursed in cash within four years.
Conclusion
Vietnam, Thailand, and Singapore are shifting from direct corporate tax exemptions to cash subsidies and expenditure-based incentives to attract large-scale investments while adapting to the global minimum tax regime. As competition intensifies in the post-BEPS 2.0 era, tax revenues from the regime may be reinvested into incentive programs and administrative improvements to enhance national competitiveness. To aid compliance, the OECD has introduced transitional relief measures, including the Country-by-Country Reporting Safe Harbor, UTPR Safe Harbor, and Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbor, which simplify tax calculations and reduce compliance burdens. Given the growing emphasis on tax fairness and transparency, multinational enterprises should proactively review their global investment structures to mitigate top-up tax liabilities.
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