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Will Pillar Two impact the Gaming Industry?

The Pillar 2 Model Rules, also referred to as the ‘Global Anti-Base Erosion’ or ‘GloBE’ Rules, were released in December 2021 as part of the Two Pillar Solution for addressing the tax challenges arising from the globalisation and digitalisation of the economy that was agreed by 137 Members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The GloBE Rules are designed to ensure that large multinational enterprise groups (MNE Groups) with consolidated revenue of over €750 million pay a minimum level of tax up to 15% on the income arising in each jurisdiction where they operate in. The GloBE Rules create a more level playing field in international tax aimed at reducing the risk of base erosion and profit shifting and ensure that MNE Groups within scope pay a minimum rate of corporate tax.

In scope MNE Groups are required to calculate their income and taxes on that income on a jurisdictional basis and determine their effective tax rate (ETR). In cases where the ETR is below 15%, the MNE Group would be required to pay a top-up tax for the difference between their effective tax rate in each low tax jurisdiction and the 15% minimum tax rate.

This top-up tax is collected through the imposition of either:

· an Income Inclusion Rule (IIR) which imposes top-up tax on a parent entity in respect of the low-taxed income of a constituent entity; or

· an Undertaxed Payments Rule (UTPR) which denies tax deductions or requires an equivalent adjustment in a subsidiary jurisdiction in order to produce an equivalent incremental increase on the taxes paid by the MNE Group.

In this regard, MNE Groups operating within the gaming industry would also need to determine the applicability of the GloBE Rules and may use the following 5-step approach to determine liability under the same Rules.

  • Step 1: Identify whether the MNE Group falls within scope and the location of each Constituent Entity within the group;
  • Step 2: Determine the income of each Constituent Entity;
  • Step 3: Determine the taxes attributable Income of Constituent Entity;
  • Step 4: Calculate the Effective Tax Rate of all Constituent Entities located in the same jurisdiction and determine resulting Top-up Tax;
  • Step 5: Impose top-up tax under the IIR or UTPR.

The Rules should be transposed into domestic law of all Member States by 31 December 2023, with the IIR effective on or after 31 Dember 2023 and the UTPR effective on or after 31 December 2024. The Rules also allow for delayed adoption up to 31 December 2029 by those Member States in which no more than 12 ultimate parent entities of in-scope MNE Groups are based.

Malta is currently in the process of implementing such Rules and the specifics of adoption are still to be announced, however gaining a thorough understanding of the implications of these developments will help businesses be prepared for what is to come.

Markita Falzon

Direct Tax Leader

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