The EU Member States have reached an agreement to implement Pillar 2 to ensure a global minimum taxation for large groups.
Political support is confirmed now that Pillar 2 has been enshrined legislatively in an EU Directive which was adopted unanimously by all EU Member States.
The Directive should be implemented into member states’ national law by the end of 2023, to enter into effect in 2024 (i.e. applicable for accounting periods ending after 31 December 2023).
What is it about?
The GloBE rules will apply to MNEs that meet the EUR 750 million revenue threshold in at least two of the four fiscal years immediately preceding the tested fiscal year.
Pillar 2 covers the Model rules to allow for a minimum effective tax rate (on a jurisdictional basis) at 15% through two interlocking local rules, i.e. the GloBE rules:
Income inclusion rule (IIR): the ultimate parent entity of the MNE group (or an intermediary holding company e.g. in the case of a joint venture) shall pay a top-up tax in its residence country triggered by low-tax subsidiaries. If the state where the ultimate parent entity is located has not implemented the GloBE rules, the burden shifts to the lower parent entity.
Undertaxed payment rule (UTPR): deductions or adjustments for the low-taxed income of low-taxed affiliates may be denied locally when the latter is not subject to the IIR. This rule is not applicable to investment entities.
If the jurisdictional ETR is below 15%, top-up tax will in principle be due on the Net GloBE Income of that jurisdiction. To determine the amount of top-up tax, among other things, the substance-based income exclusion, the de minimis profit exclusion and a potential domestic top-up tax must be taken into account.
In the coming weeks, additional details are expected, for example, on the application of safe harbour rules and the GloBE income tax return.
Why is it important (for me)?
It could have a material financial impact, for example, if you have presence in countries with a low tax rate, patent box regimes, (pre-regime) tax losses, …
There will be significant additional tax compliance requirements. Even if no top-up tax is due, the implementation of the GloBE rules may bring specific compliance challenges.
What action should I consider?
Assess the organisational readiness, including technology requirements, to deal with the significant additional compliance burden.
Understand the potential cash tax impact of the new legislation and items to be tracked during the interim period.