BEPS 2.0: A Philippine perspective

Maria Margarita D. Mallari-Acaban and Michelle C. Arias

More than a year since the OECD/G20 Inclusive Framework proposed the two-pillar approach, we have heard much about BEPS 2.0 from a global standpoint. In this article, we now look at the Philippine perspective, what MNEs in the Philippines should start considering and what’s at stake once it is implemented.


BEPS 1.0 started back in 2015 when the Organization for Economic Cooperation and Development (OECD) and the G20 countries led the first ever global initiative to address base erosion and profit shifting (BEPS) practices. Essentially, these referred to aggressive tax planning strategies that tend to exploit gaps and mismatches in the tax rules of various countries. Some Multinational Entities (MNEs) would often choose to locate in lower tax jurisdictions and treat their profits as sourced from that country instead of the jurisdiction where the activity creating those profits takes place (profit-shifting) or reduce tax bases through certain deductions (base erosion). While not illegal per se, BEPS practices were viewed as unfair since they allowed international companies to reduce their effective tax rate and gain competitive advantage over local competitors.

The rise of the digital economy in recent years created another gap in prevailing tax rules as MNEs took advantage of online platforms to enter foreign markets without having to establish a physical presence. Some of the early responders began imposing a “Digital Services Tax” on the revenue of MNEs engaged in online economic activity. However, this approach was viewed as ineffective not only because the additional tax cost will likely be passed on to the consumers, but also because it could lead to double taxation and other trade-related issues due to inconsistent tax treatment.


To effectively address the increasing tax challenges and complexities arising from the digitalization of the economy, the OECD introduced BEPS 2.0.

A two-pillar approach was proposed under this reform package to help ensure that MNEs pay their fair share of taxes wherever they operate in the world:

(1) Pillar 1 on new nexus and profit allocation rules aims to reallocate a certain portion of taxable profits of MNEs with more than €20 billion in global revenue and profitability above 10% to market jurisdictions.

(2) Pillar 2 has two components: the Global Anti-Base Erosion (‘GloBE’) Rules, which seek to ensure that MNEs pay a 15% minimum tax and the Subject To Tax Rule (STTR), which seeks to limit the treaty benefits on certain related-party payments.


Pillar 1 proposes a new taxation system to capture and reallocate 25% of excess profits of MNEs to the various jurisdictions where the goods and services are actually sold and consumed. Ultimately, it will give a taxing right to these market jurisdictions to facilitate re-allocation.

Realistically, however, Pillar 1 may take longer to implement given the complexity of the issues at the MNE Group level as well as the removal of the Digital Services Taxes (DST) from some jurisdictions.  Hurdling these issues is necessary before Pillar 1 can take effect. 

Pillar 2, on the other hand, is more likely to take off earlier as some jurisdictions are already looking at legislation to implement the minimum tax. Given this, it is imperative to understand the concept of global minimum tax and how it stands to affect MNEs headquartered or operating in the Philippines.


To start off, Pillar 2 does not require any country to increase corporate income tax rates. Instead, it envisions imposing an additional tax (top-up tax) to bring the total Effective Tax Rate (ETR) for MNEs in that particular jurisdiction to 15%.

The GloBE rules are intended to cover only MNE groups with consolidated annual revenue of more than €750 million. Moreover, government entities, international organizations, non-profit organizations, pension funds or investment funds that are ultimate parent entities of an MNE group or any holding vehicles used by such entities, organizations or funds are exempt.

Now, the mechanism for the 15% minimum tax is quite tricky as Pillar 2 talks about three kinds of top-up taxes (Qualifying Domestic Minimum Top-up Tax, Income Inclusion Rule and Undertaxed Payments Rule) imposed either at Subsidiary or Parent level.

In applying these top-up taxes, Pillar 2 contemplates a hierarchical approach where the taxing right is primarily exercised at the subsidiary level of an MNE, followed by parent level and then finally by another subsidiary within the group (in case any residual amount of the top-up tax remains unpaid).


As MNEs continue to do business and invest in the Philippines and overseas, much thought should now be given on how they should approach the future with the GloBE rules in mind. Some initial considerations and action items for the MNEs are:

• Review of the group structure to determine (1) whether one is likely to fall within the scope of the GloBE rules under the €750-million consolidated revenue test, (2) which are in-scope entities where the top-up taxes may be applied and (3) which are excluded entities.

• Run initial simulations on GloBE Income and ETR of each in-Scope entity. For this purpose, the group should consider subsidiaries in the Philippines (and elsewhere) enjoying income tax holidays and special income tax rates in the ETR calculation.

• Conduct a resource assessment across functions such as Tax, Treasury, Internal Audit and IT to determine if any capability is lacking and consequently tap the necessary internal or external resources to ensure the group’s overall preparedness.

• Consider any potential accounting, legal, transactional issues and other complications resulting from potential application of different top-up taxes.

It is also important to note that even in cases where the GloBE ETR of a group is more than 15%, it is not necessarily compliance-free. There could still be compliance and calculation requirements to be made especially if the jurisdictions involved have local GloBE legislation in place.


Admittedly, developing countries like the Philippines stand to gain tax revenue if and when they implement local top-up tax rules. However, this must be weighed against possible foreign investment flight and other adverse effects on investment promotion efforts. In such a case, the government will have to revisit our investment packages to maintain our competitive advantage.

The other practical consideration is the resources needed to manage the complexity of the implementation framework and address possible challenges at every stage. Without a tried and tested framework, the top-up tax may not translate to real tax collections and instead end up as disputed assessment cases in the tax courts.






The Philippines has yet to adopt its own legislation to implement Pillar 2. For now, it appears that it is not yet at the top of the government’s tax agenda. From an MNE perspective, however, the top-up tax could always find its way into the group — with or without a local top-up tax as yet. Accordingly, there is clear value in preparation and early Pillar 2 impact assessment. Without it, MNEs may not have sufficient time and resources for potential restructuring and other planning opportunities to address associated risks.


This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Maria Margarita D. Mallari-Acaban is a lawyer and tax principal and Michelle C. Arias is a tax senior director of SGV & Co.

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