Bloomberg Tax
Sept. 1, 2021, 7:00 AM

BEPS 2.0: a Middle East and Africa Perspective—Part 1

Parwin  Dina
Parwin Dina
Global Tax Services
Varun Chablani
Global Tax Services
Rubeena  Dina
Rubeena Dina
Global Tax Services

Since June 2021, when the G-7 endorsed radical changes to the international tax landscape, followed by the Organization for Economic Cooperation and Development (OECD)/G-20 joint statement on July 1, and agreed on by 133 Inclusive Framework (IF) members, the possibility of the “BEPS 2.0” initiative coming into effect is looking more realistic.

If and when the multilateral solution is implemented, it will create a new taxing right in the market jurisdictions and ensure that each signatory country will apply the minimum tax rate to in-scope multinational enterprises (MNEs).

This is substantially different from the design and implementation of the existing international tax regime. The current international tax system implemented by way of domestic legislation and Double Taxation Avoidance Agreements (DTAAs) has the effect of allocating taxation rights to the state where the payee/beneficial owner is a resident except for a permanent establishment (PE) in the source country. Apart from the fact that this system is not always fair to capital importing countries, it is also susceptible to various kinds of abuse of law and improper use of DTAAs.

Our coverage of BEPS 2.0 is divided into two parts. This article (Part 1) aims to provide an overview and an analysis of Pillar One and Pillar Two, which make up BEPS 2.0, with a focus on the potential impact on MNEs operating in the Middle East and Africa, including an illustration of how Pillar Two could apply to a Middle East jurisdiction.

Part 2, which will be published subsequently to this article, will look at the key elements of the proposal which are still in development and suggest guidance on how MNEs can start preparing for the implementation of BEPS 2.0 based on information currently available.

Key Proposals of Pillar One

The overall agenda of Pillar One is to ensure through “Amount A” that a certain percentage of the profits generated by large MNEs, excluding regulated financial services and extractives, are taxed in the market jurisdictions, even in the absence of a physical presence in these jurisdictions.

The other feature of Pillar One is “Amount B” which is aimed at standardizing the remuneration of related party distributors that perform baseline marketing and distribution activities in a manner that is aligned with the arm’s-length principle.

Amount A

MNEs with an annual global turnover above 20 billion euros ($23.6 billion) (with a proposal for this to be reduced to 10 billion euros after seven years) and profitability above 10% (i.e., profit before tax/revenue) fall within scope of Amount A. The nexus threshold for the allocation of taxing right to a jurisdiction is 1 million euros revenues (250,000 euros for those jurisdictions having an annual gross domestic product (GDP) lower than 40 billion euros).

For in-scope MNEs, between 20% and 30% of residual profits (defined as profits in excess of 10% of revenue), will be allocated to market jurisdictions where the goods or services are used or consumed, using a revenue-based allocation key. Residual income may be spread across several entities throughout an MNE, and in such cases, the interaction between the allocation of Amount A and the existing tax system may result in double counting and double taxation. The Pillar One Blueprint proposes mechanisms to avoid this risk.

Segmentation of industries would be allowed only in exceptional circumstances. Based on the current understanding, segmentation would apply if an MNE does not meet the profitability threshold on a consolidated basis, and a segment of that MNE exceeded both the turnover and profitability thresholds.

Perhaps the most significant aspect of the proposal is the ability of in-scope MNEs to benefit from dispute prevention and resolution mechanisms for avoidance of double taxation under Amount A in a mandatory and binding manner.

Amount B

Amount B provides for a fixed return on distribution and marketing activities, which may vary by industry and/or region and the Pillar One Blueprint stated that such activities would be identified as in-scope based on a narrow range of activities, set by a defined “positive list” and “negative list” of activities. From the OECD/G-20 joint statement it appears that these rules will be simplified, with no further details provided. Amount B applies to all business sectors and does not supersede existing advance pricing agreements/mutual agreement procedure settlements. The focus is on the needs of low-capacity countries.

Key Proposals of Pillar Two

Pillar Two envisages the imposition of a global minimum income tax of at least 15% by the adoption of two interlocking measures under domestic rules—the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR), collectively known as the GloBE rules—and one measure under treaty-based rule, the Subject to Tax Rule (STTR).

GloBE rules are applicable to MNEs that meet the 750-million-euro global turnover threshold as determined under BEPS Action 13 (country-by-country reporting, or CbCR). While the current proposals allow countries to apply the IIR to MNEs headquartered in their jurisdiction whose revenue falls below 750 million euros, it seems that the UTPR would still be limited to MNEs above the 750-million-euro revenue threshold. Although not explicit, the OECD’s July statement suggests that the threshold would apply to the application of the IIR to MNE subgroups (i.e., where a jurisdiction other than the residence of the ultimate parent entity applies the IIR).

Under the IIR, the resident state of a parent MNE will have the right to impose a top-up tax in respect of low-taxed income of constituent entities, and when the low-tax income of a constituent entity is not subject to tax under the IIR (e.g. the jurisdiction of the parent is not a signatory to the BEPS 2.0 agreement), the UTPR, which denies deductions or requires an adjustment to top up the tax to the minimum rate, comes into play. Hence jurisdictions of parent companies collect the IIR taxes, and so this is more likely to benefit resident states of parent entities, i.e., the capital exporting countries.

Under the GloBE rules, an effective tax rate (ETR) test is applied to determine if the minimum tax rate is met. This ETR is calculated on a jurisdictional basis using a common definition of covered taxes and a tax base determined by reference to financial accounting income with agreed adjustments. Details are still to be confirmed as part of further work on the proposal.

The treaty-based rule, the STTR, is projected to have priority over the IIR and will allow developing countries, through bilateral treaties, to impose limited source taxation (withholding taxes), within the range of 7.5%–9%, on certain related party payments. In effect it is proposed that the STTR turns off treaty benefits on intra-group payments subject to tax below the minimum nominal rate of tax in the payee country. The STTR will be creditable as a covered tax under the GloBE rules. An illustration of the mechanism under which the STTR operates is provided below.

An important aspect of the GloBE rules is their status as a common approach, which means that should the members of the IF implement the rules, they need to do so in a way which is consistent with the outcomes agreed under Pillar Two. Similarly, if an IF member country does not adopt the GloBE rules, such country will still be required to respect their application by countries which have adopted the rules.

Provision for substance carve out is made under the GloBE rules by a formulary approach based on percentage of tangible assets and payroll costs which would initially be at least at 7.5% for the first five years and would transition to at least 5% afterwards. The carve out is designed to reduce the profit before tax to arrive at the GloBE tax base on which the minimum tax applies.

Rules relating to de minimis exclusion would also be provided. The intention of the GloBE rules is to avoid complexity, and accordingly the implementation framework would also include safe harbors and/or other mechanisms.

Illustration of Potential Application of Pillar Two on MNEs with Operations in the Middle East

Some countries in the Middle East are low tax or have no mainstream corporate tax system, or have a hybrid taxation system which reduces the ETR. It is anticipated that Pillar Two will have a significant impact in the region. The example below shows how Pillar Two could apply to a group with a subsidiary in a no-tax jurisdiction.


X Co, Y Co and Z Co are part of a group whose consolidated revenue exceeds 750 million euros. X Co is the ultimate parent entity and is in country A, which has a statutory tax rate (STR) of 30%. Y Co is a 100% owned subsidiary of X Co and is located in country B, which has no corporate tax. Z Co is a 100% subsidiary of Y Co and is located in country C which has an STR of 25%. For simplicity we assume that the effective tax rates for X Co and Z Co correspond to the statutory tax rates in their respective countries.

The profit before tax (PBT) of Y Co is $50 million. Total expenses of Y Co of $25 million include payroll and tangible assets costs of $20 million. There is an interest payment from Z Co to Y Co of $10 million. A tax treaty following the OECD model applies between countries B and C and grants exemption from withholding tax on interest payments.

We assume that countries A, B and C have implemented Pillar Two proposals which means country A’s domestic tax legislation includes the IIR and the treaty between countries B and C includes the STTR clause.

In this example the minimum tax rate for the IIR and the UTPR is 15% and the minimum tax rate for the STTR is 7.5%. The share of payroll and tangible asset carve out is 10%.

The rule application under Pillar Two means that the STTR would apply first, and in this example, by reference to the nominal tax rate of country B. Since the nominal tax rate of country B is below the minimum tax rate for the STTR, under the current proposal in the OECD Blueprint it is understood that the relevant treaty benefit between country B and C is turned off, with the effect that country C is given the taxing right over the difference between the top-up tax rate of 7.5% and the nominal rate of 0% in country B. Hence, the top-up tax in country C on the $10 million interest payment is calculated as $750,000 and is allocated to country B under the STTR .

The ETR of Y Co in country B with the tax paid under the STTR is calculated as 1.5% (top-up tax of $750,000/PBT of $50 million). As country A has implemented the GloBE rules and hence has incorporated the IIR in its domestic legislation, it will apply the top-up rate which is calculated as the difference between the minimum tax rate of 15% and the ETR of Y Co of 1.5%, i.e.,13.5%.

The top-up rate will be applied to the GloBE tax base of Y Co. As the PBT of Y Co includes payroll and tangible costs, the substance carve out can apply and will be calculated as the carve out rate of 10% of the payroll and tangible costs of $20 million, resulting in a carve out of profit of $2 million. Hence the GloBE tax base is $48 million—the PBT of $50 million less the carve out element of $2 million.

The IIR to be applied by country A will be based on the GloBE tax base of $48 million and the top-up rate of 13.5%. Hence country A gains taxing rights amounting to $6.5 million from country B ($48 million x 13.5%).

A Middle East and Africa Perspective of Pillar One and Pillar Two Proposals

In an impact assessment study of Pillar One and Pillar Two Blueprint proposals at country group level (low-, middle- and high-income countries and investment hubs) carried out by the OECD and presented in February 2020, it was found that all income groups are estimated to see small increases in their corporate revenues. Low- and middle-income countries expect a higher relative increase than high-income countries using GDP weighted averages. The results presented assume a residual profit threshold of either 10% or 20%, and a 20% reallocation of residual profits to market jurisdictions. Pillar Two, based on a minimum rate of 12.5%, was estimated to raise significantly more tax revenue than Pillar One.

Pillar One

Due to the high threshold for Amount A, it is estimated that many MNEs with subsidiaries in Africa will be excluded. According to the OECD, only 80 to 100 of the world’s largest MNEs will be within the scope of Amount A. In an interview, the president of the network of African Experts in International Taxation (REAFI) disclosed that the OECD impact study for Burkina Faso, for instance, shows a potential gain in the range of $1.7 million–$2.8 million under the Pillar One proposal, while the potential gain under Pillar Two is estimated to be in the range of $7.6 million–$11.3 million.

Signatory countries of the July statement have taken the first step to forsaking tax sovereignty in order to embrace multilateral action, by potentially accepting a trade-off, as countries have to give up digital services tax, the equalization levy, and other relevant similar measures to gain tax revenue under Pillar One. A number of such direct tax measures as well as indirect taxes have been implemented across the African continent in response to the challenges of the digital economy. The trade-off has the potential to deliver some benefits for both tax administrators and taxpayers, as unilateral measures have the disadvantages of being hard to apply by tax administrators without international cooperation, as well as potentially creating double taxation without the possibility of obtaining relief.

Whilst the rules of Pillar One are a step in the right direction in starting to address the issue of the current imbalance in the allocation of taxing rights between source and residence countries, the African Tax Administration Forum (ATAF) considers that there is still much more that needs to be done to further redress the imbalance. For instance, ATAF advocates for the reallocation of profits to a market jurisdiction to be based on an MNE’s total profits instead of only residual profits. This proposal would have the added benefit of reducing complexity in determining the allocable profits of in-scope MNEs.

The use of residual profits only may also create disparate treatment between an MNE which has a taxable presence in the market jurisdiction, and as such is subject to taxes on both its routine and residual profits, as compared to an in-scope MNE, which has no taxable nexus and hence under the Amount A proposal will have only part of its residual profit subject to tax in the market jurisdiction.

Finally, with regard to Pillar One, the mandatory and binding dispute resolution mechanism proposed is a cause of concern for developing countries. In the view of ATAF and the African Union it is essential that an elective binding dispute resolution mechanism is made available to all African countries that have limited capacity and no, or low, levels of experience in the application of the mutual agreement procedure (MAP) under their tax treaties.

Pillar Two

Under the common approach of Pillar Two, IF members applying nominal rates below the STTR rate to covered payments would have to agree to incorporate the STTR into their bilateral treaties with developing IF members when requested to do so. Covered payments are interest, royalties, and a defined set of payments for which ATAF would want to see service payments included, as these are high BEPS risk areas for African countries.

Many African and Middle East jurisdictions offer generous tax incentives that contribute to economic growth, such as research and development incentives, accelerated depreciation, tax holidays and other special provisions granted to qualifying investment projects. These tax incentives reduce the effective tax rates of companies, and where these rates are reduced to below the proposed global minimum, other jurisdictions may have taxing rights over the income of these companies. Countries such as Kenya, Nigeria and Botswana have reservations about the imposition of a minimum tax due to the generous tax incentives these countries provide to encourage inbound investment.

Countries with low or no tax systems are also expected to be impacted by Pillar Two to a larger extent than Pillar One. For instance, the United Arab Emirates, which benefits from a limited corporate tax system (only branches of foreign banks and the oil and gas sector are subject to tax) and companies operating in free zones which are offered tax holidays, is likely to see changes in its tax landscape with the introduction of Pillar Two. The question that arises is whether these tax holidays will be repealed and replaced by a corporate tax system, bearing in mind that any tax policy designed should take into account the impact on foreign direct investment in the country.

In a similar manner, it remains to be seen whether the hybrid system of corporate tax and Zakat that operates in Saudi Arabia and Kuwait will be subject to any changes. Zakat is a covered tax under BEPS 2.0 and hence will be utilized in the calculation of effective tax rate. In addition, Kuwait has a National Labor Support Tax of 2.5% on listed companies which is part of the corporate tax regime, and over the coming months MNEs with a large footprint in these countries will need to have some clarity as to how tax administrations plan to adapt to the new international tax landscape.


The framework for reforms agreed by the 133 members of the IF will have a wide-ranging effect on many MNEs. Given the ambitious timeline for implementation, it is important that potentially impacted businesses understand what is coming and prepare for the resulting changes. We will share our thoughts on the planning processes that businesses can undertake in our next article.

The comments in this article are for general information and are not intended as advice. Readers should seek professional advice where relevant.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Parwin Dina is Lead Tax Partner, Global Tax Services; Varun Chablani is Researcher, GTS Africa; Rubeena Dina is Partner, Global Tax Services and Director, GTS Africa.

The authors may be contacted at:;;