Colombo Port City tax holidays rendered ineffective by global minimum tax rules

THE global minimum corporate tax rate was one of the reasons cited by both governments of Ranil Wickremesinghe and NPF to impose the tax of 15% on digital service income and others.

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At the outset, it must be stated that both governments appear to have mismanaged or misrepresented the concept of the global minimum corporate tax.

The 15% global minimum corporate tax is an initiative taken by the Inclusive Framework of the Organisation for Economic Cooperation and Development (OECD), agreed upon by over 140 countries in 2021, and effective from 2024. It aims to ensure that large multinational companies (MNCs)— with consolidated annual revenue of at least EUR 750 millionpay a minimum level of tax regardless of where they operate or reside.

A MNC is a business entity that operates and controls its supply of goods or services in more than one country through subsidiaries, branches, or affiliates, while typically maintaining a central headquarter in its home country, as Ultimate Parent Entity (UTP).

Under this frame work of global minimum tax, if an MNC’s subsidiary pays less than the 15% effective tax rate in one country, other jurisdictions where the MNC operates can apply a top-up to enrich them further by charging taxes from such MNCs in the name of GloBE rules under “Pillar Two” in contrast to hitherto applying recognised “Residency” and “Source” taxation principles.

GloBe rule under “Pillar Two” and how it differs from international taxation principles

Source Rule means that a country taxes income based on where it is earned. For an example, a Sri Lankan resident derives rental income from a building in the UK and UK taxes his rental income as it was generated therefrom regardless of his residence.

Residency rule means that a country taxes its residents on their local and worldwide income on the basis that they are residents of that particular country, regardless of where the income is earned.