Globe Model of Pillar 2 and its Implementation in Panama

March 16, 2023

Although the Global Minimum Tax is not mandatory for all countries that signed the OECD and G20 Inclusive Framework declaration on BEPS, this tax would be in force as of 2024, for which Panama and other countries should review their current tax regulations and evaluate their tax incentives. 

1. BEPS Plan and Pillars 1 and 2

These Pillars arose in 2019 to respond to the issues of the 15 BEPS Action Plans to address tax avoidance and profit shifting, established between 2013 and 2015. This plan was beneficial, promoting progress in implementing anti-abuse measures on double taxation shifting, dispute resolution mechanisms, transfer pricing and uncertainties regarding the digitization of the economy. 

2. Pillar 1: Digitalization of the Economy

It is intended to ensure a fairer distribution of profits and taxation rights among countries regarding the largest MNEs (multinational enterprises), which are the main winners of globalization. 

3. Pillar 2: Global Minimum Tax

It has as a key element a limit to tax competition in the corporate tax framework through the approval of a global minimum tax on corporations at a rate of 15% for all MNEs with annual revenues above € 750 million (Globe Model).

In addition, it proposes the protection of the right of developing countries to tax certain payments eroding the tax base (such as interest and royalties) when failing to be taxed at a minimum rate of 9% through a ” clause of subjection to taxation ” (CST).

4. Effects on Other Countries around the World

The implementation of the Global Minimum Tax is already confirmed in the European Union, Canada, Japan, and other G7 and G20 countries, which have reaffirmed their commitment to implement it between this year and the next.  

On the other hand, the US has, since 2017, its own Global Minimum Tax called “Global Intangible Low-Tax Income” (GILTI), which imposes that foreign earnings pay a stipulated minimum rate of 10.5%. Conversely, the IRS recently confirmed its commitment to align its current scheme and increase the GILTI rate to 15%. 

5. Implementation in Panama

Panama should have the necessary action plans for this new tax context, as well as evaluate its tax incentives3. In the application of the Globe Model, a jurisdiction that exempts a subsidiary covered by this Model will lose taxing power, given that such income will be taxed in the jurisdiction of the Parent Company until it reaches the effective rate of 15%.  

Although the Globe Model does not have an absolute scope, given that domestic economic groups or subsidiaries of multinationals with consolidated revenues of less than € 750 million are out of scope, those reaching the threshold will be affected either in Panama or the countries subscribing to it. 

Source: 16/03/23