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BEPS 2.0: a Middle East and Africa Perspective—Part 2

Sept. 8, 2021, 7:01 AM

Part 1 of this two-part-article provided 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 multinational enterprises (MNEs) operating in the Middle East and Africa. The potential application of Pillar 2 to a Middle East jurisdiction was illustrated in an example.

This article (Part 2) will look at the key elements of the proposal that 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 Technical Issues to be Finalized in the Proposals

Some of the key issues that remain to be resolved are discussed below.

Pillar One

The Pillar One Blueprint contains fairly detailed sourcing rules for automated digital services and consumer facing businesses. The revenue sourcing rules are aimed at determining the revenue that should be treated as derived from a particular market jurisdiction. However, there is widespread comment on the rules’ complexity and the consequential burden that may be imposed on businesses.

With the broadening of the in-scope transactions, as contemplated in the Organization for Economic Cooperation and Development (OECD)/G-20 joint statement issued on July 1, 2021, additional work will need to be undertaken to develop the rules to cover all types of transactions so that reliable methods are available to cover all businesses’ specific facts and circumstances. There may be a move from the detailed hierarchy methods contained in the Pillar One Blueprint to overcome further complexities, given the widened scope.

The statement provides for an allocation of 20%–30% of residual profits to market jurisdictions. The African Tax Administration Forum (ATAF) will be seeking a higher percentage of residual profits to be allocated, as it is of the view that an allocation of at least 35% will be more effective in addressing the shifting of profits.

Segmentation was a key open item in the OECD Blueprint. It is not yet clear if segmentation will be required where an MNE meets the threshold on an overall basis and also has one or more business segments that meet the threshold.

There is some uncertainty over the sectors to be excluded from Pillar One. The OECD Blueprint exclusion list includes infrastructure and construction, international airline, and shipping businesses. The OECD/G-20 joint statement made no mention of these exclusions.

Confirmation of the definition of regulated financial services is another issue to be addressed. It is not yet clear whether the exclusion from Pillar One covers only traditional financial activities such as banking or insurance, or other activities like FinTech. Depending on how regulated financial services will be defined, differences in treatment may arise with respect to entities that are not considered regulated but compete with regulated banks providing the same services.

The operation of the marketing and distribution safe harbor, to counter double taxation, also requires further work for MNEs that already have residual profits taxed in market jurisdictions.

The mechanics of the “Amount B” proposal need to be refined, i.e., how the proposal will work alongside other transfer pricing requirements, as well as confirmation of what constitutes baseline distribution activities. The Pillar One Blueprint also acknowledges that “Amount B” may vary by industry or region.

Further work is required in determining the various approaches in determining a fixed return; for example, whether to specify a number for the fixed return but allow for some variations for different regions (e.g. Africa’s return could be different to that of South America). Within a region as well, there are questions as to whether country risk also needs to be considered and this a relevant proposition for Africa.

Pillar Two

The exact minimum tax rate has yet to be determined and could ultimately be negotiated at a higher rate than 15%. The failure to indicate a specific rate in the July 1 statement indicates that further negotiation of the rate will take place.

The materiality threshold, which could be based on the size of MNEs, the value of payments and/or the ratio of covered payments to total expenditure, for the Subject to Tax Rule (STTR), has not been confirmed in the agreement and this is a measure that developing countries are looking forward to being implemented.

The calculation of the tax base will need to be agreed and a global standard reached so that the determination of an effective tax rate is consistent among signatory countries.

There is inconsistency between the Blueprint and the July 1 statement with regard to the basis for the calculation of the substance-based carve out that would exclude an amount from the GloBE tax base. The Blueprint refers to the use of depreciation expenses for tangible assets in the calculation of the carve out whereas the July statement provides for the use of the carrying value.

The rate of the substance-based carve out, which is proposed to be at least 7.5%, is also expected to be heavily debated by jurisdictions that offer tax incentives, such as a patent box regime, for real economic activities. These jurisdictions may seek higher exclusion rates from the minimum tax.

The way that the U.S. foreign profits regime (GILTI) will interact with the global minimum tax rules is still under discussion; though largely a matter for the U.S., changes to Pillar Two may be sought rather than altering GILTI.

Elements of the STTR also require further consideration. Areas for examination include the type of payments or structures to be covered, excluded entities, and the exact minimum rate to trigger the application of the rule.

The July 1 statement suggests that possible exclusion of MNEs in their initial phase of international expansion is being explored. This is an important consideration within Pillar Two proposals, in view of the global recovery that is much needed after the pandemic.

Along with the above key technical areas that remain to be resolved, it is worth noting that for both Pillar One and Pillar Two, tax administrations may need to discuss aspects of the new rules with the OECD or trading/investment partners to understand if there are differences of views to ensure practical and consistent implementation. Tax administrations in less developed countries may require consultations with the OECD as to the specific technical issues that could arise in their jurisdictions.

How can Multinational Enterprises Start Preparing?

Gain an Understanding of Potential Impact at a High Level

As country-by-country reporting is already filed by MNEs with consolidated revenue of 750 million euros ($888.3 million), this report can be used to gain an initial insight into the group impact of the GloBE rules by the calculation of the effective tax rate in each jurisdiction, and to analyze the impact on the parent entity and constituent entities.

The structure of many groups includes principal and regional hub entities to achieve economies of scale and drive efficiencies and create value. The impact of proposals under Pillar One is expected to reallocate profits from the hub locations to market jurisdictions.

At headquarters level, MNEs can start performing some modeling to understand the possible impact or range of impacts under different policy settings on an entity-by-entity basis and combined overall, with a review of the comprehensiveness of their existing transfer pricing documentation (on the assumption this would be relevant).

Some taxpayers may want to engage with their local business associations as a way to inform their respective governments of the implications before decisions are made on rules and timing/method of implementation.

Review Ability to Track Source Revenues

Companies may have to prepare for additional administrative requirements in order to track source revenue appropriately. This will require an understanding of the location of source customers, and the ability to link data from operational systems (i.e., geographical location of customers) to financial systems (say, where to recognize revenues).

The capabilities of existing IT infrastructure and procedures need to be assessed considering the additional requirements.

Internal Controls

The new procedures that will be required to work out the revenues for market jurisdictions will need to comply with internal control requirements and be documented, in view of any potential scrutiny or future tax audit.

Determine which Payments are Affected

As Pillar Two may impact service payments such as royalties, value-based fees, and non-routine services, companies should be aware of where such transactions occur, and proactively review the rates at which they are subject to tax to determine the risk that they may be subject to the STTR. Companies may also need to review whether these arrangements are necessary as part of an arm’s-length arrangement.


The framework for reforms agreed by the 133 members of the Inclusive Framework will have a wide-ranging effect on many MNEs. Amount A is expected to take effect at the start of 2023. The July 1 statement provides for Amount B to be developed on a separate track from Amount A and Pillar Two. Rules for Pillar Two are anticipated to come into force in 2023.

It is important for MNEs to start preparing for the changes by initially gaining a high-level understanding of the impact of the proposed changes on their tax framework and identifying requirements for new procedures, for instance, where data need to be gathered and utilized on a recurring basis.

The release of the implementation plan and details of the resolution of technical issues in October 2021 should provide helpful information for MNEs to further develop their simulation models to improve the analysis and understanding of the impact of the proposals.

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, and Rubeena Dina is Partner, Global Tax Services and Director, GTS Africa.

The authors may be contacted at:;