The Redesign of the International Tax System gets real - Pillar 2 and Gibraltar

The international taxation system is being gutted and remade before our very eyes.

Since 1999 the international community, through the OECD, has mounted a project to remould the international tax system into a newly coherent whole. Since the 1920s the international tax system has been based on bilateral double taxation treaties originally developed by the League of Nations. this process has led us to the implementation of what is called “Pillar 2” on 1st January 2023 by the EU. Pillar 2 is also known as the Global Minimum Tax Rate (though it doesn't mean that tax rates for all must rise, only for the largest companies).

Gibraltar has been part of that process through its membership of the Inclusive Framework and is now beginning to take the first steps in a staged implementation of Pillar 2.  Nigel Feetham, Minister for Justice, Trade and Industry, announced just before Christmas that Gibraltar will implement a Qualified Domestic Top Up Tax with effect from 1st Jan 2024 which will tax subsidiaries of foreign multinational enterprises with a turnover of in excess of €750m. This move will ensure that Gibraltar resident companies will be taxed in Gibraltar and their income will not be subject to tax elsewhere through the operation of Pillar 2. The Gibraltar tax base will be respected.

This is exactly the economic incentive that the OECD designed into Pillar 2. Jurisdictions will tax that which they would otherwise not tax to ensure their tax base is respected. To not do so would be to allow tax to be taken elsewhere. The Minister estimated tax revenues of £6m per annum would be raised as a result. In a post Covid world, with demands on revenue ever increasing this can only be welcomed given it will not add to the global tax burden of any of the businesses in scope.

We are also aware that the consultation group established last year with regard to the full implementation of Pillar 2 continues to work and we look forward to seeing the result of their efforts in time for implementation for accounting periods beginning after 31st Dec 2024.

For more on Pillar 2 and other international tax matters, please consider taking a listen to the International Tax Bites podcast.