What is the STTR?

The STTR is the second component of Pillar 2 of BEPS 2.0. It was included at the behest of developing countries, which argued that they should be able to “tax back” certain payments in situations where they had ceded source taxing rights under a bilateral double tax treaty but the treaty partner was not taxing the receipt at a minimum rate.

It may only be invoked by countries which the World Bank classifies as low or middle income – a list that includes India, China, Indonesia, South Africa and Argentina.

Eligible countries will be able to use the STTR to request changes to their bilateral treaties where the treaty partner taxes interest, royalties and certain other payments at a nominal rate below 9%. The treaty changes will give the source country the right to withhold tax from in-scope payments made between related parties at a rate equal to the difference between 9% and the tax rate in the receiving country – if that isn’t already permitted by the treaty.

Countries are still to agree which payments other than interest and royalties should be covered by the STTR. Developing countries want the scope to be as wide as possible, covering active income such as technical service fees, whereas developed countries want to keep the rule tightly focused on payments that present the highest BEPS risks.

How much of an impact will the STTR have?

In relation to interest and royalties, we don’t expect the STTR to have a large impact. That’s because there aren’t many bilateral treaties where:

• One party is a developing country,
• The other party taxes interest or royalties below 9%, and
• The treaty limits the source countries taxing rights to below 9%.

The impact will be greater if the rule applies to active income streams that would be treated as business profits for treaty purposes, and therefore subject to source taxation only where there is a permanent establishment.

What's next?

Countries are still negotiating the wording of a model STTR treaty rule, which should resolve the scope questions identified above. The OECD intends to publish that for public consultation in March 2022, and then for the rule to be given effect in bilateral treaties via a multilateral instrument that will be developed by mid-2022.

This is a brisk pace by historical standards, but given the narrow focus of the STTR it feels less challenging to deliver than countries’ plans to bring the GloBE minimum tax rules into effect from early 2023.