On 3 October 2023, the OECD Inclusive Framework announced the conclusion of negotiations on a multilateral instrument (MLI) to implement the Pillar Two Subject to Tax Rule (STTR). The text of the STTR MLI, along with an explanatory statement, high-level summary (‘at a glance’), and frequently asked questions can be found on the OECD website. As of 2 October 2023, the MLI is open for signature by all states without reservations. The STTR allows countries to increase taxes on certain cross-border payments (not including dividends) among associated entities under a bilateral tax treaty where the nominal rate in the recipient country is below 9% (adjusted for tax base reductions such as tax exemptions and tax credits). Further details and mechanics of the rule as per the model treaty text and accompanying commentary released 17 July 2023 are discussed in more detail in the previous PwC alert.
The takeaway: The STTR MLI is much narrower in scope than its UN predecessor (UN STTR), which applies in less clearly defined circumstances and leaves much of the content of the provision to be negotiated bilaterally. As a result, parallel STTR universes may emerge. In some cases, the STTR MLI will be implemented and applied by a
subset of IF jurisdictions and for a subset of their double tax treaties (currently more than 70 developing IF jurisdictions are entitled to request inclusion of the STTR in their treaties, but it is not clear which countries these are). In other cases, developing countries may seek to implement the UN STTR in a subset of their double tax
treaties, but this will require bilateral negotiation and agreement in all cases. Question five of the OECD’s FAQs discusses the interplay between the IF’s Pillar Two STTR and the UN STTR. It will be important to monitor the decisions of developed and developing countries as they may significantly influence after-tax returns of intra-group international investments.