Tax Implications Under the New Tariff Policy:
Analysis of the Impact of Tariffs on BEPS 2.0, GloBE and Covered Tax
Recently, the U.S. government has implemented a series of new tariff policies globally, aiming to adjust trade relations and reduce its trade deficit, creating trade frictions between China and the U.S. As tariffs have become “weaponized” in geopolitical games, how will the international tax system, especially the BEPS 2.0 Pillar Two global minimum tax (GloBE) rules, respond to these changes? How should companies assess and optimize their global tax position?
1. Tariffs Are Not Covered Taxes and Do Not Contribute to the Effective Tax Rate (ETR)
Under Pillar Two rules, “Covered Taxes” refer to the types of taxes included in the calculation of the global minimum tax. These include current and deferred corporate income taxes, subject to certain inclusions or exclusions to ensure fairness and consistency across jurisdictions.
According to the OECD’s Pillar Two Model Rules and Administrative Guidance:
“Only taxes on income or profits, including taxes in lieu of income taxes, qualify as Covered Taxes. Customs duties, excise taxes, VAT, etc., do not qualify.”
— OECD GloBE Model Rules, Article 4
This means: Tariffs are not categorized as Covered Taxes and thus cannot be included in the
denominator of the GloBE Effective Tax Rate (ETR) calculation.
Illustrative Examples:
So, any attempt by a company to “boost” its ETR by incurring higher tariff costs in a given market will be ineffective—in fact, it may lead to a dual burden of low taxation and high operating cost.
2. “Low-Tax Jurisdiction + High Tariffs”: A Double Whammy for Global Businesses
Many multinational enterprises (MNEs) have structured their supply chains around low-cost, low-tax manufacturing hubs (e.g., certain Southeast Asian countries or specific regions in China). However, if exports from these jurisdictions are hit with punitive tariffs in high-demand markets like the U.S., and the manufacturing base is considered a low-tax jurisdiction, the business may face:
- An ETR below the 15% threshold, triggering Top-up Taxes
- Non-creditable tariffs that increase total costs
- A sharp decline in tax efficiency and profit margins
Conclusion:
Tariffs are accelerating a shift from tax optimization to operational compliance.
3. Pillar Two Is Pushing Enterprises to Restructure their Operations and Tax Structures
Under the GloBE framework, more needs to be considered to maintain operational and tax advantages, such as:
- Substantial local presence—personnel, assets, and real activities
- Qualifying Covered Taxes
- Robust compliance and disclosure systems (GloBE reporting readiness)
Tariffs further raise the cost of cross-border flows, reinforcing a “local production + local taxation” model.
Strategic Shift Comparison:
4. Comprehensive planning recommendations under the intersection of policies
- Don’t overestimate the “tax value” of tariffs—they’re a cost, not a Covered Tax.
- Assess your group’s GloBE ETR exposure—identify jurisdictions at risk of Top-up Tax.
- Develop a GloBE data readiness and simulation process—including Covered Tax mapping, ETR calculation, and compliance disclosure.
- Plan holistically—tariffs + Pillar Two + investment structures should be evaluated using a three-dimensional model of tax, customs, and legal implications.
Conclusion:
The global minimum tax system is shifting corporate tax planning from “structural design” to “operational restructuring”. The increase in tariffs cannot be a tool for tax burden optimization but will instead expose potential compliance and tax loopholes for companies. In the BEPS 2.0 era, compliance is the threshold, structure is the foundation, data is the key, and collaboration is the way out.
Why Work with CLA Global TS?
If you are looking to develop a responsive strategy to Pillar Two or gain insights into your group’s GloBE ETR positioning across jurisdictions, feel free to reach out.
We offer GloBE risk diagnostics, structure optimization consulting, and reporting support.
Get in touch today to mitigate potential tax risks!
#SingaporeTax #Tariffs #PillarTwo
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CONTACT US
Contact our Tax Advisory Specialists for a Discussion
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Edwin Leow Co-Advisory Leader Director, Head of Tax edwinleow@sg.cla-ts.com |
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Shaun Zheng Director, Asset Management and Private Wealth Services Tax Lead shaunzheng@sg.cla-ts.com |
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Koy Su Hiang Associate Director, Business & International Tax Lead koysuhiang@sg.cla-ts.com |
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Aaron Zhou Associate Director, Chinese Clients Tax Lead aaronzhou@sg.cla-ts.com |
