The STTR allows a source state that has ceded taxing rights on certain mobile intragroup payments, notably interest, royalties and a defined set of other payments, under the normal allocation rules of a DTT, to reclaim taxing rights where the intragroup payment is taxed at an (adjusted) nominal rate of less than 9%. These other payments also include payments for the rendering of services that constitute business income in the hands of the recipient, which is – according to the general allocation rules – only taxable in the jurisdiction of the recipient (unless business is carried on through a PE).
Members of the OECD/BEPS Inclusive Framework (IF) that apply (adjusted) nominal tax rates below 9% to these payments have committed implementing the STTR into their DTTs with developing IF members when requested to do so. More than 70 developing IF members are entitled to request inclusion of the STTR in their DTTs.
The STTR would be implemented as annexes to CTAs and would apply before the Pillar Two “GloBE rules” which are currently being implemented in EU member states and several other jurisdictions. Any additional tax levied in the paying jurisdiction on the basis of additional taxing rights obtained under the STTR, constitutes tax for purposes of computing the effective tax rate under the GloBE rules. The regular GloBE rules for allocating taxes are to be observed.
General STTR provisions
We refer to our tax flash of 18 July 2023 which presented the general STTR provisions. Annex I to the Convention includes the general STTR provisions and is added to all CTAs. It deals notably with:
- The type of covered payments;
- How to test the 9% (adjusted nominal) tax rate;
- Exclusions and materiality thresholds to reduce the compliance burden; and
- Double taxation relief.
Special STTR provisions
In line with prior OECD publications, rules in Annex II and III take into account the specificities of tax systems which levy tax on a basis other than net income or at the time of a distribution of profits rather than of earning the income.
Payments made to certain entities, such as recognized pension funds, are excluded from the scope of the STTR. Annex IV contains a specific definition of a recognized pension fund for this purpose.
Annex V includes an optional “circuit-breaker” clause which would result in the STTR no longer applying to a CTA if a contracting jurisdiction becomes a “high-income economy” according to a World Bank classification after 1 July 2020 and remains so for five consecutive years. For the commitment to implement the STTR as mentioned above, a jurisdiction is classified as “developing” if it is not a “high-income economy” according to this measure.
These Annexes will only be included in a CTA if a specific notification has been made.
When can the STTR be applied with respect to a specific DTT?
The Convention is open to signature by all jurisdictions as of 2 October 2023. Once the domestic procedures are completed by jurisdictions that signed the Convention, a ratification instrument must be deposited by the ratifiying jurisdiction with the OECD. The Convention enters into force on the first day of the month following the expiry of a 3-month period after deposit of the second ratification instrument and, for jurisdictions subsequently ratifying the Convention, the first day of the month following the expiry of a 3-month period after deposit of their respective ratification.
The general STTR provisions would be effective in a given CTA context as from the first day of a fiscal year beginning on or after a period 6 months from the date of entry into force of the Convention in respect of the latest CTA party that ratified the Convention. So, in general and subject to options to slightly shorten the period of entry into effect, both contracting jurisdictions should have deposited their ratification instrument in the first quarter of a given calendar year in order for the STTR to possibly apply for fiscal years starting on 1 January of the following calendar year. For companies with a fiscal year equal to the calendar year, this also means that the first impact of the Convention is expected as of 1 January 2025.
The special STTR provisions (Annexes II to V to the Convention) would enter into effect at the same time as the general STTR provisions.
We will keep you informed of further developments. In case of any question, please contact an author of this tax newsletter or your trusted Loyens & Loeff adviser.