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Sarah Graham, associate director of tax at KPMG in the Crown Dependencies, explains why she is feeling optimistic about this new tax
WHILE I appreciate that it is not customary for a tax adviser to describe an increase in taxation as anything other than calamitous, particularly in an international financial centre setting, I hope you, dear reader, will indulge my call for optimism.
Before we dive into the multiple reasons for IFC optimism surrounding the introduction of Pillar 2, here is a quick recap on what the Pillar 2 framework is and why it was introduced.
Combatting multinational tax avoidance
Unveiled by the Organisation for Economic Co-operation and Development in 2021, Pillar 2 is the boldest part of the OECD’s broader initiatives to tackle base erosion and profit-shifting strategies used by multinational groups to minimise their taxes via low-tax jurisdictions.
The Pillar 2 framework contains a comprehensive set of measures to combat tax avoidance by the largest multinational corporations, through the introduction of a minimum effective tax rate of 15%.
This rate will apply to the profits of all multinational groups with global revenues exceeding 750 million euros per annum, thus undermining aggressive tax planning strategies and seeking to ensure a more equitable distribution of tax burdens across jurisdictions.
When considering the particular challenges and opportunities arising from the introduction of Pillar 2 from an IFC perspective, there are two specific facets of the construction of the framework that are fundamental to our understanding.
Neutralising tax as a value proposition
Firstly, all taxes under Pillar 2 are determined on a jurisdictional, rather than an entity, level. Secondly, once a group falls within the scope of Pillar 2, the 15% tax will be paid somewhere, even if not in the jurisdiction in which the profits are reported. If a particular jurisdiction were then to decide not to implement Pillar 2, any taxes that would have been payable there under Pillar 2 principles will be payable somewhere else.
This element of the Pillar 2 framework is designed to neutralise tax as a value proposition. While this may have been intended to undermine the relative desirability of IFCs along with other low-tax jurisdictions, recent analysis by the OECD has raised questions about which jurisdictions might ultimately be most impacted by this feature of the framework.
The OECD’s own analysis from November 2023 highlights that, despite the fact that most academic discourse surrounding international tax policy focuses on the undesirable impact low-tax jurisdictions have on tax competition, traditionally high-tax jurisdictions actually account for the majority of global “undertaxed profits” (ie. profits tax at less than 15%), at an estimated 53.2%.
Jersey’s implementation of Pillar 2 will therefore serve to further debunk any misconception that IFCs are inherently harmful.
Continued alignment with global taxation standards
The benefits to Jersey of implementing the Pillar 2 framework, however, extend far beyond these negative preconceptions the onshore world might assert about IFCs.
The first, and perhaps most obvious, benefit of introducing Pillar 2 to Jersey will be an increase in domestic tax revenues. Taxes that, in accordance with the Pillar 2 framework, would otherwise be paid in another jurisdiction, will now become payable in Jersey.
Jersey’s introduction of Pillar 2 legislation would also be welcomed by in-scope multinational groups preferring to pay the relevant tax in Jersey. In doing so, they would avoid the administrative quagmire that is the process for determining what proportion of Jersey-source profits should be taxed in other jurisdictions.
Introducing the Pillar 2 framework also presents Jersey with an opportunity to reinforce its commitment to international tax transparency and compliance. By continuing to align its tax regime with global standards, Jersey can continue to underline both its credibility and legitimacy in the eyes of the international community. This is particularly crucial in an era where transparency, accountability and certainty are paramount considerations for investors and regulators.
While many have expressed concern that Pillar 2 and the corresponding erosion of tax as a value proposition could present some very significant challenges to IFCs such as Jersey, this would significantly underestimate the value of the wider offering of the best IFCs.
While tax undoubtedly remains for all non-Pillar 2 entities as a value proposition in Jersey – with zero-ten remaining the Island’s default company tax regime – investors do not invest in, nor establish funds in, a jurisdiction based on tax considerations alone.
It would seem fairer to suggest that investors are drawn to Jersey due to the auspicious mix of robust and transparent regulation, a trusted legal system and a stable government – with tax neutrality acting as neither a push nor pull factor. For in-scope entities that would pay tax under Pillar 2 regardless, Jersey will arguably maintain tax neutrality, albeit at a 15% rate rather than 0%.
Reducing the administrative burden
The implementation of the Pillar 2 framework also presents challenges for Jersey’s finance industry. Its introduction is likely to require significant investments in technology and reporting infrastructure to ensure compliance with the new rules.
It is therefore essential to maintaining Jersey’s competitiveness internationally that any additional administrative requirements introduced to give effect to Pillar 2 strictly mirror – as far as possible – those set out in the OECD’s framework rules. This aims to keep the administrative burden on those in-scope Jersey entities to a minimum.
Ultimately, the OECD’s Pillar 2 framework represents a watershed moment for IFCs, ushering in a new era of global transparency, compliance and accountability. While the framework poses challenges for all jurisdictions, it also offers opportunities for growth and innovation.
By embracing the principles of fairness and co-operation, IFCs such as Jersey can reaffirm their position as integral players in the global financial ecosystem, driving sustainable development and prosperity for years to come.
nFor more information on BEPS 2.0 and Pillar Two from an offshore perspective, please email sarahgraham@kpmg.com, peastwood@kpmg.com or rrotherham@kpmg.co.im
