Pillar Two emerged as an initiative of the Organisation for Economic Co-operation and Development (OECD) to prevent tax base erosion by multinational corporate groups with annual revenue above EUR 750 million (hereinafter, MNE groups). At the same time, it operates as a regulatory model that redefines the rules of competition between large economies and those still in development, as is the case of El Salvador. The way the global market works has changed; however, not every economy has changed with it.
I- Why pillar two changes the value of tax incentives?
It is precisely in this coexistence of economic scenarios that the inevitable question arises: how attractive will a tax incentive remain when the projected “saving” risks being neutralised?
The answer lies in the GloBE Rules under Pillar Two, which impose a 15% global minimum tax calculated on consolidated accounting profit rather than on local taxable income, thereby redefining the real effect of tax benefits.
But can Pillar Two affect an MNE group operating in a country that has not yet implemented it into domestic law?
II- The three GloBE mechanisms: QDMTT, IIR and UTPR
The GloBE determination rests on three mechanisms that set the order of the assessment and collection process:
- Qualified Domestic Minimum Top-Up Tax (QDMTT): this should be the first option, particularly for developing economies, because it allows the low- or no-tax jurisdiction itself to collect the top-up tax.
- Income Inclusion Rule (IIR): usually the second option, as it applies where the low- or no-tax country has not enacted a QDMTT; in that case, the parent company’s jurisdiction collects the tax.
- Undertaxed Profits Rule (UTPR): the last option, since if none of the jurisdictions involved has a QDMTT or an IIR, another jurisdiction in which the MNE group operates may collect the top-up tax.
Therefore, the fact that El Salvador has not adopted any of the OECD mechanisms for Pillar Two does not mean that MNE groups with operations in the country are exempt from the tax impact this new trend may generate.
III- Tax incentives currently available in El Salvador
In recent years, the model adopted to promote economic growth in the country has brought a broad set of laws granting tax benefits to MNE groups that establish operations in our jurisdiction, among them: the Industrial and Marketing Free Zones Law, the International Services Law, the Digital Assets Law and the Law on Tax Incentives for the Promotion of Renewable Energy in Electricity Generation.
Under all of these laws, El Salvador bears the cost of the benefit granted directly. But does the MNE group genuinely receive that benefit? Or is it no more than an illusion?
The global implementation of Pillar Two is a new challenge for MNE groups: analysing the nominal tax rate of each jurisdiction (income tax, VAT, among others) or the tax benefits in force is no longer enough; they must now also compute the GloBE outcome and factor Pillar Two into their decisions.
IV- SBIE: where the tax saving is in fact preserved
For an MNE group, this might suggest that the saving obtained is illusory because the tax simply shifts to another jurisdiction; that effect, however, is not absolute. The GloBE rules provide for the Substance-Based Income Exclusion (SBIE), which excludes from the top-up tax a set percentage of profit linked to tangible assets and local payroll. Operations in El Salvador that have real infrastructure and staff therefore retain part of their benefit.
V- What companies and the Salvadoran State should assess?
For a growing economy, the scenario may turn into a competition for revenue, since a local reduction no longer means a reduction in the total tax payable. This raises the need to assess instruments such as domestic QDMTT or the restructuring of incentives into Qualified Refundable Tax Credits (QRTC).
The challenge is no longer to find the jurisdiction where you pay the least, but the one where it is possible to create the most value.