Pillar 2

Concept: 

The Pillar 2 rules generally apply to MNEs with consolidated group revenues of €750 million or more in at least two of the preceding four fiscal years.   

In essence, Pillar 2 creates a global minimum tax safety net, ensuring that even if an MNE's income is taxed at a low rate in one jurisdiction, other jurisdictions can apply these rules to collect additional tax and bring the overall effective tax rate on that income up to the 15% minimum. This requires complex calculations of effective tax rates on a jurisdictional basis, often differing from traditional financial accounting or local tax calculations 

For a branch of a US company in Singapore, Australia, Timor-Leste, Papua New Guinea, and Japan, the applicable description for Pillar 2 related tax returns, based on the provided options and general tax principles, would be as follows:

(A) A place of business (including a deemed place of business) situated in a jurisdiction and treated as a permanent establishment in accordance with an applicable Tax Treaty in force provided that such jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 of the OECD Model Tax Convention on Income and on Capital

• Singapore: The United States and Singapore have a tax treaty in force. While the search results did not provide the full text of Article 7, tax treaties between developed nations typically include a business profits article similar to Article 7 of the OECD Model, taxing the profits attributable to a permanent establishment on a net basis. Therefore, for a US company's branch constituting a permanent establishment under the treaty, option (A) would likely apply.
• Australia: The United States and Australia have a comprehensive tax treaty in force. Article 7 of the US-Australia tax treaty addresses business profits and the taxation of income attributable to a permanent establishment, aligning with the principles of Article 7 of the OECD Model. Thus, for a US company's branch forming a permanent establishment under this treaty, option (A) would apply.
• Japan: The United States and Japan have a tax treaty in force that includes provisions regarding business profits and permanent establishments consistent with Article 7 of the OECD Model. Income attributable to a permanent establishment in Japan is taxed on a net basis. Accordingly, for a US company's branch recognized as a permanent establishment under the treaty, option (A) would apply.

(B) If there is no applicable Tax Treaty in force, a place of business (including a deemed place of business) in respect of which a jurisdiction taxes under its domestic law the income attributable to such place of business on a net basis similar to the manner in which it taxes its own tax residents

• Timor-Leste: Based on the available information, Timor-Leste does not have a comprehensive income tax treaty in force with the United States. However, Timor-Leste's domestic tax laws provide for the taxation of non-residents on their Timor-Leste-sourced income, including income attributable to a permanent establishment. This taxation is generally on a net basis, similar to how resident companies are taxed on their business profits. Therefore, in the absence of a tax treaty with the US, option (B) would likely apply to a US company's branch in Timor-Leste that constitutes a permanent establishment under Timor-Leste's domestic law.
• Papua New Guinea: While Papua New Guinea has entered into some tax treaties, a comprehensive income tax treaty with the United States was not explicitly confirmed as being in force with an Article 7 equivalent during the search. Papua New Guinea's domestic law taxes non-resident companies with a permanent establishment on their PNG-sourced income. While the foreign contractor withholding tax on gross income is prevalent for certain activities, there are provisions for taxing branch profits on a net basis where these rules don't apply. Furthermore, upcoming tax law changes effective in 2026 explicitly require permanent establishments to file income tax returns and pay tax on a net basis. Assuming for Pillar 2 purposes covering relevant periods, the branch income is subject to taxation on a net basis under domestic law, option (B) could apply if no applicable tax treaty with the US with an Article 7 equivalent is in force. If such a treaty is in force and applies, then (A) would take precedence. Given the complexity and potential application of foreign contractor withholding tax as a final tax, a careful analysis of the specific activities of the branch and the prevailing tax rules for those activities would be necessary to definitively choose between (A) and (B), or potentially consider if the situation falls outside (A), (B), and (C). However, if the branch is taxed on its net income under PNG domestic law in a manner similar to residents, (B) is applicable in the absence of an applicable treaty covered by (A).
• Based on the analysis of the tax situation in Bolivia concerning a US company's branch and the provided options for Pillar 2 related tax returns: The description that would likely be applied is (B). Here's the reasoning: (A) A place of business... in accordance with an applicable Tax Treaty in force... The United States does not have a comprehensive income tax treaty in force with Bolivia. Therefore, this option is not applicable. (B) If there is no applicable Tax Treaty in force, a place of business... in respect of which a jurisdiction taxes under its domestic law the income attributable to such place of business on a net basis similar to the manner in which it taxes its own tax ¹ residents. Bolivia has a corporate income tax system (Impuesto sobre las Utilidades de las Empresas - IUE) and taxes non-resident companies on their Bolivian-source income. A branch or a permanent establishment of a foreign company in Bolivia is subject to this corporate income tax on the net profits derived from its activities in Bolivia. This taxation on a net basis is similar to how resident companies are taxed on their business profits. Since there is no US tax treaty, this option aligns with Bolivia's domestic tax treatment of a foreign company operating through a branch.   
• 1. www.lloc.gov.bh

  www.lloc.gov.bh
• (C) If a jurisdiction has no corporate income tax system... Bolivia does have a corporate income tax system (IUE). Therefore, this option is not applicable.
• (D) a place of business (or a deemed place of business) that is not already described in paragraphs (A) to (C)... Based on the available information, Option (B) appears to describe the tax treatment of a US company's branch in Bolivia. Therefore, (D), which is a residual category, would not be the primary applicable option.

Thus, for a branch of a US company in Bolivia, the relevant description for Pillar 2 purposes would be that the branch is a place of business that is taxed under Bolivia's domestic law on its net income, in the absence of a tax treaty with the US.

(C) If a jurisdiction has no corporate income tax system, a place of business (including a deemed place of business) situated in that jurisdiction that would be treated as a permanent establishment in accordance with the OECD Model Tax Convention on Income and on Capital provided that such jurisdiction would have had the right to tax the income attributable to it in accordance with Article 7 of that model

This option would generally not apply to any of the listed jurisdictions as Singapore, Australia, Timor-Leste, Papua New Guinea, and Japan all have corporate income tax systems.

(D) a place of business (or a deemed place of business) that is not already described in paragraphs (A) to (C) through which operations are conducted outside the jurisdiction where the Entity is located provided that

As the description for option (D) is incomplete in the user's query, a full assessment of its applicability is not possible. However, based on the analysis of options (A), (B), and (C), the branches in Singapore, Australia, and Japan would likely fall under (A) due to existing tax treaties with the US. The branch in Timor-Leste would likely fall under (B) given the absence of a US tax treaty but the presence of domestic net basis taxation of branch income. The situation in Papua New Guinea is more nuanced due to the interaction of treaty provisions (if applicable and similar to Article 7) and domestic tax rules including the foreign contractor withholding tax, but (A) or (B) would be the primary considerations if the branch's income is subject to net basis taxation.

In summary:

• Singapore: (A)
• Australia: (A)
• Timor-Leste: (B)
• Papua New Guinea: Likely (A) if a US treaty with an Article 7 equivalent is in force and applicable, otherwise (B) if taxed on a net basis under domestic law. The specific tax treatment under domestic law, including the application of foreign contractor withholding tax, needs careful consideration.
• Japan: (A)
• Bolivia: (B) 

Q- why we should review the US treaty with other countries? Pillar 2 is from the US?

A- Here's the breakdown:

1. Is Pillar 2 from the US? No, Pillar 2 is not solely from the United States. Pillar 2 (specifically the Global Anti-Base Erosion or "GloBE" rules) is an international tax framework developed by the OECD/G20 Inclusive Framework on BEPS. This framework involves over 140 countries and jurisdictions working together to address tax challenges arising from the digitalization of the economy. While the US has been a key participant in the development of Pillar 2, it is a multilateral initiative, not a US domestic law imposed globally by the US.

2. Why review US tax treaties with other countries in this case? You need to review the US tax treaties with Singapore, Australia, Timor-Leste, Papua New Guinea, and Japan because Pillar 2 builds upon existing international tax principles and domestic tax laws.

   Here's why the treaties are relevant:

   • Determining Existing Tax Liability: Pillar 2 works by calculating an effective tax rate for a multinational group in each jurisdiction where it operates. This effective tax rate is based on the taxes the group already pays in that jurisdiction compared to its income (calculated under specific Pillar 2 rules, known as GloBE income).
   • Role of Treaties in Determining Existing Tax: For a branch of a US company operating in another country, the amount of corporate income tax it pays in that foreign country is determined by:
     • The foreign country's domestic tax laws regarding non-resident companies and branches.
     • Critically, the tax treaty between the US and that foreign country.
   • Permanent Establishment (PE) and Business Profits: Tax treaties define what constitutes a "permanent establishment" (PE) in a country for a resident of the other country. They also include provisions (like Article 7 of the OECD Model) that determine how the business profits attributable to that PE are calculated and taxed in the foreign country. These treaty rules often override or modify domestic law.
   • Input for Pillar 2 Calculation: The corporate income tax actually paid by the branch in the foreign country, as determined by the interaction of domestic law and the applicable tax treaty, is a primary input into the Pillar 2 effective tax rate calculation for that jurisdiction.
   • Options A, B, C Reference Treaties/PE: As you saw in the original options (A, B, C), the definition of the "place of business" for Pillar 2 purposes explicitly references treatment as a permanent establishment "in accordance with an applicable Tax Treaty in force" (Option A) or based on domestic law taxing income attributable to a place of business "similar to the manner in which it taxes its own tax residents" (Option B), which often aligns with treaty principles.

In short, while Pillar 2 is a new layer of international tax rules ensuring a minimum tax, the starting point for applying Pillar 2 in any given country is the tax already paid by the MNE group entities (including branches) in that country under the existing domestic laws and applicable tax treaties. Therefore, understanding the tax treaty is essential to correctly determine the tax base and tax paid in each jurisdiction, which then feeds into the Pillar 2 calculations for potential top-up tax.

Q-They are branches of the US company - treated as the US company for tax purposes. Is this correct to review the US and Singapore/Australia/Japan treaty?

A- That's a very important point to clarify, and it highlights the difference between how the US taxes its companies and how foreign countries tax the activities of those companies within their borders.

You are correct that, for US domestic tax purposes, a foreign branch is generally treated as an integral part of the US company (the head office). Its income and expenses are typically reported directly on the US company's tax return.

However, this does not dictate how the foreign country where the branch is located will tax those activities.

Here's why you still need to review the US treaties with Singapore, Australia, and Japan:

1. Foreign Country's Taxing Rights: Foreign countries have their own domestic tax laws that determine when and how they tax non-resident companies operating within their borders. Operating through a branch typically creates a taxable presence under foreign law.
2. The Role of Tax Treaties: Tax treaties between two countries exist precisely to coordinate these taxing rights and prevent double taxation. When a US company operates a branch in a treaty country (like Singapore, Australia, or Japan), the tax treaty provisions will determine:
   • Whether the branch constitutes a permanent establishment (PE) in that foreign country. A PE is usually the threshold for a foreign country to tax the business profits of a company from the other country.
   • How much of the US company's overall profit is attributable to that PE and therefore taxable in the foreign country. This is typically governed by rules similar to Article 7 of the OECD Model, which aims to tax the profits as if the PE were a separate enterprise dealing at arm's length.
3. Pillar 2 Calculation Requires Foreign Tax Paid: As we discussed, Pillar 2 calculates a top-up tax based on the effective tax rate in each jurisdiction. This calculation requires knowing the amount of covered taxes actually paid in that foreign jurisdiction. The amount of corporate income tax paid by the branch in Singapore, Australia, or Japan is determined by the tax laws of that country, as modified by the applicable US tax treaty.
4. Treaty Definition vs. US Domestic Treatment: The foreign country and the tax treaty apply their own rules to determine if a taxable presence exists (PE) and how much income is taxable there, regardless of how the US treats the branch internally for US tax purposes.

Therefore, even though the branch is "treated as the US company" for US tax filing, the tax liability incurred in the foreign country by that branch's activities is determined by the foreign country's laws and the relevant US tax treaty. This foreign tax paid is a critical component of the Pillar 2 effective tax rate calculation for that foreign jurisdiction.

So, yes, reviewing the US treaties with Singapore, Australia, and Japan is absolutely correct and necessary to understand the tax position in those countries, which is the foundation for applying the Pillar 2 rules.

Q- what is the taxation method of the head- office towards its branch? Is it something in general by country or is this specific by the company's policy?

A- The taxation method is primarily determined by the tax laws of the countries involved, specifically:

1. The tax laws of the foreign country where the branch is located.
2. The tax laws of the head office country (where the main company is resident).
3. Any tax treaty between the two countries.

It is not determined by the company's internal policy in terms of how tax is calculated or paid to the government. While a company's internal accounting policies might track the branch's performance separately and have internal charging mechanisms (like allocating head office costs to the branch), these internal methods must align with tax rules, particularly transfer pricing principles and the rules for attributing profits to a permanent establishment, to be accepted by tax authorities.

Here's how it generally works:

• In the Foreign Country (Branch Location): The foreign country will tax the income considered to be derived from activities conducted through the branch within its borders. This taxation is based on the foreign country's domestic tax laws. If a tax treaty exists between the foreign country and the head office country, the treaty's rules (especially regarding Permanent Establishments and the attribution of business profits, like Article 7 of the OECD Model) will often determine if the foreign country has the right to tax and how the taxable income attributable to the branch is calculated. This is generally on a net basis, meaning taxable profits are calculated as income minus allowable expenses related to the branch's activities.

• In the Head Office Country (e.g., the US): The head office country (like the US) typically taxes its resident companies on their worldwide income. This means the income and expenses of the foreign branch are generally included in the head office company's overall taxable income calculation in the head office country. To avoid double taxation (where the income is taxed both in the foreign country and the head office country), the head office country usually provides relief. The most common method in the US is the Foreign Tax Credit, which allows the US company to credit the income taxes paid to the foreign country against its US tax liability on that foreign source income, up to certain limits. Some countries might use an exemption method for branch profits, but worldwide inclusion with a foreign tax credit is standard in the US.  

In summary:

The fundamental method of how a head office's country taxes its foreign branch income (e.g., worldwide inclusion with foreign tax credit) is a general rule set by the domestic tax laws of the head office country. The determination of the specific amount of taxable income and tax paid in the foreign country, which is then relevant for the head office country's tax calculation and for Pillar 2, is governed by the foreign country's domestic laws and any applicable tax treaty, following principles for attributing profits to a permanent establishment (like Article 7, taxing on a net basis).

Company policy dictates internal management and accounting, but the actual tax methods applied are mandated by national and international tax rules.

Q-Please determine the taxation method of each branch (foreign tax credit or branch exemption).

A- Based on US tax law, the taxation method applied by the US head office towards its foreign branches in Singapore, Australia, Timor-Leste, Papua New Guinea, and Japan is the Foreign Tax Credit method.

Here's why:

1. Worldwide Taxation: The United States taxes its domestic corporations on their worldwide income, which includes the income generated by their foreign branches.
2. Branch as Part of the Entity: A foreign branch is not treated as a separate legal entity for US tax purposes; it is considered an extension of the US head office.
3. Foreign Tax Credit for Double Taxation Relief: To prevent the same income from being taxed twice (once in the foreign country and once in the US), the US provides a foreign tax credit for income taxes paid by the branch to the foreign country. This credit can offset the US tax liability on that foreign source income, subject to various limitations.  

The alternative method, branch exemption, where the foreign branch's income would be exempted from US tax entirely, is generally not the method used by the US for branches. Exemption-like treatment in the US is typically associated with the participation exemption system (for dividends from qualified foreign subsidiaries) rather than the income earned directly by a foreign branch of a US company.

Therefore, for the branches in all the listed countries, the US head office will include the branch's income in its US taxable income and will likely claim a foreign tax credit for the income taxes paid by the branch in each of those respective jurisdictions.

Q- What is branch exemption?

A-Branch exemption is a method used by a country's tax system to relieve double taxation on the income earned by a foreign branch of a domestic company. ¹

Under a branch exemption system:

1. The income generated by the foreign branch is exempted from corporate income tax in the head office country (the country where the main company is resident).
2. The foreign country where the branch is located will still tax the branch's income based on its domestic laws and any applicable tax treaty.
3. Since the income is not taxed in the head office country, there is no need for the head office company to claim a foreign tax credit for the taxes paid in the foreign country on that branch income.

Essentially, the head office country treats the income derived through the foreign branch as if it were income earned in the foreign country and subject only to tax there.

Key differences from the Foreign Tax Credit method (used by the US for branches):

• Taxation of Foreign Income: Under exemption, foreign branch income is not included in the head office country's taxable base. Under the credit method, foreign branch income is included, and a credit is given for foreign taxes paid.
• Treatment of Losses: Typically, under a branch exemption system, losses incurred by the foreign branch cannot be used to offset the taxable profits of the head office in the head office country. Under the credit method, foreign branch losses can often be currently deducted against domestic income.
• Repatriation: Under exemption, profits remitted from the branch to the head office are generally not subject to further tax in the head office country. Under the credit method, the income was already subject to tax (with a credit) when earned, so remittances generally don't trigger a new tax event (though other rules like branch profits tax in some systems can apply).

Some countries use the branch exemption system as their primary method for relieving double taxation on foreign branch income, often influenced by tax treaties or a policy choice to not tax foreign business income if it has been subject to tax elsewhere. As previously noted, the US generally uses the foreign tax credit method for foreign branch income.

Reference:

https://pro.bloombergtax.com/insights/international-tax/foreign-tax-credit-2/#:~:text=Subject%20to%20various%20limitations%2C%20the,to%20offset%20U.S.%20tax%20that

Subject to various limitations, the amount of tax paid to foreign countries and U.S. possessions on foreign-source income is designed to offset U.S. tax that would be paid on the same income.

https://www.irs.gov/taxtopics/tc856#:~:text=The%20foreign%20tax%20credit%20intends,the%20United%20States%20and%20the

https://mooreks.co.uk/insights/branch-profits-exemption/