More than 140 jurisdictions have now signed up in principle to the global minimum tax framework, representing a ground-breaking plan to update key elements of the international tax system, which is no longer fit for purpose in a global and digitalised economy.
The Pillar 2 Global Anti-Base Erosion (GloBE) rules have been developed by the Organisation for Economic Co-operation and Development (OECD) to provide a common system of taxation that ensures multinational enterprises (MNEs) pay a global minimum tax (GMT) of 15% in each jurisdiction where they operate and generate income.
On 14 March 2022, the OECD published a comprehensive commentary and illustrative examples of what the implementation of the GloBE rules could look like. However, with the rules still evolving keeping track of progress is essential.
Status of implementation in Central and Eastern Europe
EU Directive 2022/2523 sets forth rules for the implementation of a global minimum level of taxation for large multinational groups and large-scale domestic groups operating in the EU (Pillar 2). The Directive should be transposed into national legislation by the end of 2023.
Taxpayers members of a multinational group or a large-scale domestic group located in an EU Member State, with annual revenue exceeding EUR 750 million in the last two of the four fiscal years immediately preceding the reporting year are subject to Pillar 2 obligations.
The Directive provides a mechanism based on three interdependent model rules commonly referred to as the Global anti-Base Erosion (GloBE), according to which a top-up tax should be collected in instances in which the Effective income Tax Rate (ETR) of a multinational group in a specific jurisdiction is below the Minimum Tax Rate (MTR) of 15%.
In Austria, a draft legislation will be published and subsequently sent to Parliament later this year. It is likely that a new law will be enforced, because of the number of rules necessary to transpose the Directive into Austrian legislation. No significant deviations are expected between the local legislation and the provisions of the Directive.
Croatia has yet to implement the EU Directive 2022/2523, as well as any local tax legislation in connection to Pillar 2. A draft legislation is expected to be publish in the following period.
In the Czech Republic large multinational and domestic corporations will be required to pay a minimum income tax of at least 15%. The corresponding draft of the law - the Act on Equalisation Taxes for the Purpose of Ensuring the Minimum Taxation Level of Large Multinational and Domestic Groups - was approved by the Czech Government on 16 August 2023. It is set to take effect from December 31, 2023. The Act is a transpositional legal regulation that incorporates into Czech legislation the Directive. It introduces two new direct taxes into the Czech tax system – the allocated equalisation tax and the Czech equalisation tax.
The allocated equalisation tax will be imposed on parent entities of large companies with annual revenues exceeding 750 million EUR if their overall effective taxation is less than 15%. Based on the proposed rules, an equalisation tax will be determined for the parent entity in relation to each country where the group operates and where the group's effective taxation is lower than 15%.
The Czech equalisation tax is aimed at preserving the primary right of the Czech Republic to tax income derived from sources within its territory. Due to various tax exemptions and similar measures, it might occur that the income of a member entity of a group operating in the Czech Republic is subject to an effective rate lower than 15%. The Czech equalisation tax ensures that these revenues are taxed within the Czech Republic's jurisdiction.
In Hungary no draft domestic legislation was issued at this time, however, the expectation is that Hungarian rules would not differ significantly from the provisions of the Directive. Also, it is more likely than not that Hungary would implement the rules regarding the qualified minimum domestic top-up tax (QMDTT) in order to collect the additional tax revenues at local level.
In Poland, the government has yet to publish a bill containing domestic regulations implementing the Directive. According to press releases, Pillar 2 regulations are to be implemented in Poland only from January 1, 2025. This would mean that in 2024 the Pillar 2 regulations may apply to those companies operating in Poland, but only in the case of implementation of relevant regulations in the parent jurisdictions.
Romania has not formally published a draft legislation concerning the implementation of the Directive into local legislation. The expectation is for the Directive to be implemented by the end of this year with minimum deviations, however, it is possible for the application of some rules, like the Income Inclusion Rule (IIR) and Undertaxed Payments Rule (UTPR) to be postponed.
Considering that some CEE countries, like the Czech Republic, have already implemented the new rules, while in other countries enforcement is imminent, in scope multinational groups should finalise their preparations. The analysis should focus on determining which group entities are within the scope, understanding local requirements, and calculating the ETR in each jurisdiction.
In Slovenia, the Ministry of Finance published in June 2023 proposed local law changes to implement the Directive into domestic legislation. The act must be approved by the government until the end of 2023 with start of use from 2024 onwards. The proposed local law is more or less a direct translation of the Directive, implementing the additional minimum tax, which brings the effective minimal tax rate to 15 % for the relevant multinational corporations.
Which groups will be impacted by the rules
The Pillar 2 GloBE initiative seeks to ensure that MNEs and large groups with consolidated accounting revenue globally of €750m in two of the four previous tax years pay a minimum tax of 15% in each jurisdiction they operate. More broadly, Pillar 2 GloBE will apply to those groups which already have to report under the country-by-country reporting (CbCR) rules and any entities in that group, with some exceptions.
What tax system will be put in place and how will it work?
The rules involve a system of top-up taxes paid at the parent company level if profits elsewhere within the group have been taxed below the minimum rate of 15% set. Any top-up tax not collected under an income inclusion rule (IIR) will be charged to other group entities under an undertaxed payments rule (UTPR).
In addition, a subject-to-tax rule (STTR) will allow countries to charge a top-up withholding tax on certain types of outbound payments. The rules also enable governments to introduce a qualified domestic minimum top-up tax (QDMTT) to ensure that any top-up tax due on profits is collected in the country where it is generated. In terms of calculating tax due, groups may qualify for proposed safe harbour rules whereby simplified calculations will be acceptable in the initial reporting period.
When do groups need to comply?
While the first set of Pillar 2 GloBE reporting is expected in June 2026, groups must conduct an initial reporting obligation assessment based on 2023 year-end calculations. For International Accounting Standards (IAS) reporting groups, the IAS Board proposes disclosures relating to Pillar 2 GloBE that could be required for the 2023 financial statements. The disclosures require ETR to be calculated and disclosed for each jurisdiction on both a Pillar 2 GloBE and a basic financial statements basis.
In terms of individual jurisdiction timetables and approach, EU Member States are obliged to transpose the directive into their national law by 31 December 2023 and are expected to follow the OECD’s implementation and reporting timeframes. The UK has announced a similar implementation and reporting timeframe. However, some countries have yet to announce implementation dates or their exact approach.
Does Pillar 2 GloBE offer any benefits?
Despite the initial complexity and increased compliance burden, the Pillar 2 GloBE rules are designed to ensure that all countries benefit from a fair share of tax, which is closely linked to the need for MNEs to improve the sustainability of business models. The ability to show more transparency on tax paid per jurisdiction is a key corporate sustainability reporting (CSR) benefit. Equally, any resulting organisational or operational decisions that encourage a local presence benefit communities and give economic security.
From an internal perspective, Pillar 2 GloBE can also catalyse CFOs to encourage boards to invest in upscaling and enhancing current systems to automate and streamline tax collection and compliance across the group.
What are the main challenges?
As jurisdictions begin to implement the rules, understanding the compliance and fiscal impact on current arrangements is challenging, as are implementation timescales.
As more clarification emerges from the OECD and more jurisdictions implement local laws, Heads of Tax will be under pressure to assess the impact of the new rules. With financial reporting based on 2023 year-end information, timeframes are tight, giving MNEs little time to agree on new disclosures, conduct calculations and review appropriately. In addition:
While safe harbour transitional rules offer a simplified approach for the first three years, full GloBE calculations are very complex and require data which is not readily available. Inaccurate or incomplete data is a further challenge for both simplified and full data requirements.
Groups need to assess where full calculations are required or whether simplified calculations for 2024-2026 will be acceptable.
GloBE rules impact many other parts of the organisation, including any necessary organisational restructuring, transfer pricing methodologies and increased compliance pressure on the audit function.
First, assess whether you are within scope of the rules. For those groups that breach the €750m threshold, a high-level impact assessment should be undertaken to determine where top-up tax is due and whether you are eligible for the safe harbour transitional rules. Next:
Identify data sources and collection mechanisms and procedures;
Determine whether computations will be carried out at the local or group level, taking into account how different jurisdictions implement the rules;
Identify whether there are benefits to applying for any of the GloBE elections;
Review transfer pricing methodology and adjustments;
Consider whether excess tax is being suffered and restructure if appropriate.
A process that includes identifying risks and benefits to existing functions will be key to future-proofing business operations.
Why an international approach is essential
Dealing with GloBE requires an international approach that joins the dots between how parent entities and subsidiaries are impacted based on revenue and location. As an internationally integrated partnership operating in over 90 countries and territories around the world, the ability to draw on the expertise of more than 44,000 professionals enables us to collaborate closely with impacted clients.
Having been consulted as part of the development of GloBE rules at the OECD level, and with extensive CbC reporting knowledge, our global team of experts can:
assist in calculating the potential top-up tax due under existing arrangements;
review your CbC reporting processes and controls;
assess Pillar 2 readiness and identify gaps;
assess safe harbour eligibility;
highlight key risk areas and potential Pillar 2 impact and summarise proposals and prioritisation;
design roadmap and implementation plans for Pillar 2 compliance and optimisation is appropriate.
Mazars is already supporting clients on their Pillar 2 GloBE journey with our Pillar 2 tool to support data point calculations and help track Pillar 2 GloBE country-by-country progress.
Learn more from our upcoming Pillar 2 online event
After a long time in development by OECD and member countries, the global 15% minimum tax (Pillar 2 GloBE), is close to implementation in some jurisdictions which will require adjustments from all affected groups. Our upcoming webinar will focus on the key issues and upcoming requirements in the light of the July further Administrative Guidance on Pillar 2 from the OECD and other new...