The published draft of acts implementing Directive 2022/2523 into the Polish legal system introduces qualifying domestic minimum income tax in Poland. It will apply to entities from groups subject to the global minimum tax.
What is an qualified domestic minimum top-up tax (QDMTT)?
As part of the implementation of the global minimum tax, the Polish legislator assumes that Poland will implement a QDMTT. According to the draft act, ODMTT is to enter into force from the fiscal year, meaning the accounting period with respect to which the ultimate parent entity prepares its consolidated financial statements, beginning after 31 December 2024 (with an option to introduce it starting from the fiscal year beginning after 31 December 2023)
The key aspect of the QDMTT is the collection of the top-up tax, aimed at bringing the effective tax rate (ETR) of the particular group in Poland to 15% at the domestic level. This means that companies from capital groups subject to the global minimum tax will be obliged to calculate, report and pay tax in Poland even if their parent company is also covered by the global minimum tax system.
In practice, if the ETR on business activity in Poland is less than 15% and the substance based income exclusion* is not sufficient, an obligation to pay QDMTT will arise in Poland.
The assumption remains that the Polish QDMTT is to meet the conditions to be treated as QDMTT by other jurisdictions (the so-called QDMTT safe harbor) which mean that the mechanism of collecting top-up tax on the profits of Polish companies will not be applicable in the jurisdiction of the parent company.
Apart from the potential additional burden of having to pay the top-up tax, the new rules will also require companies to collect a large volume of data points and might result in a significant compliance burden. This means that groups subject to the QDMTT will have to monitor changes in the values affected at the calculation of the tax.
To whom the QDMTT applies?
The new regulations will apply to multinational and domestic capital groups with a total annual revenues of at least EUR 750 million in at least two of the four tax years immediately preceding the tax year in question. Provided that the obligatory entry into force of the new regulations would take place in the incoming calendar year, the results for 2021, 2022, 2023 and 2024 will be crucial (if the tax year of a given group corresponds to the calendar year). It is estimated that there are as many as 8,000 companies on the Polish market that may be subject to this minimum top-up tax.
How to calculate QDMTT?
Whether it is determined that a relevant group is subject to the scope of the QDMTT, it is necessary to determine the ETR by dividing the aggregated covered taxes of entities operating in Poland by their income determined in accordance with the rules provided for the draft act.
How is the constituent entity’s income calculated?
As a first step to determine the ETR, it is required to determine the net income earned by the constituent entities in Poland. The starting point for determining income for the purposes of the QDMTT is the accounting result of constituent entities.
As a rule, net income is determined on the basis of the financial standard according to which the constituent entity's financial statements are prepared under the Polish Accounting Act (Polish accounting standard or IAS/IFRS).
As an exception to the principle of applying Polish Accounting Act standards, the transitional provisions ensure the opportunity to make an election whether the QDMTT will be calculated based on the accounting standard applied by the ultimate parent entity for the purposes of preparing its consolidated financial statements. Such a decision will be applied for a period of five tax years but only by December 31, 2029.
The draft act provides the obligation to change accounting standards for taxpayers belonging to the same group (as we understand it: taxpayers of the QDMTT) as a consequence of which all taxpayers in the group will apply one accounting standard. In addition, taxpayers should adjust the duration of their fiscal year to the fiscal year of the ultimate parent entity. If it is impossible, the ultimate parent entity’s standard will be used instead of the local constituent entity’s standard.
The approach used for the purposes of QDMTT is similar to that applicable to the calculation of income in income taxes, where the tax base is calculated starting from the accounting result, then correcting this result for adjustments resulting from different principles of recognizing individual transactions for accounting and tax purposes. However, as the rules provided for by the QDMTT differ from the rules applicable to Polish income tax, it will be necessary to prepare a separate, additional calculation.
The adjustments include, among others: adjustments for the value of taxes included in the net result; exclusion from the tax result of certain dividends, profits/losses from certain capital transactions, profits/losses from revaluation, tax consequences of transfer of assets as part of restructuring, foreign exchange gains or losses resulting from the use of divergent currencies for accounting and tax purposes, significant fines and penalties and illegal payments or accrued but unpaid pension costs. The accounting result is also subject to adjustment for prior period errors and changes in accounting principles.
How are adjusted covered taxes calculated?
The second element necessary to calculate ETR is to determine adjusted covered taxes. The starting point for the calculation is the determination of covered taxes the sum of which is then subject to numerous adjustments. Covered taxes include: taxes recorded in the financial accounts of a constituent entity with respect to its income or profits or its share of the income or profits of a constituent entity in which it owns an ownership Interest. The covered taxes being the basis for determining the top-up tax also include a deferred tax adjustment.
In opposition to the general rules, covered taxes paid by the owner and allocated to a given constituent entity (e.g. CFC tax / dividend tax) are not included in the calculation of covered taxes for the purposes of the QDMTT.
How to determine the ETR?
The effective tax rate of an MNE group or large domestic group is calculated, provided that there is Net GloBE income in Poland, using the following formula:
The adjusted covered taxes of the constituent entities are the sum of the adjusted covered taxes of all the constituent entities based in Poland. The Net GloBE income or loss of the constituent entities is determined as the difference between the Net GloBE income of the constituent entities and the Net GloBE loss of the constituent entities in Poland. The above means that for the purposes of determining the amount of QDMTT, it will be necessary to take into account the blended financial results achieved by particular constituent entities of the group in Poland.
The starting point for calculating the top-up tax is to multiply the excess profit by the top-up tax percentage. This percentage is determined as the difference between the minimum rate of 15% and the ETR calculated for Poland. Effectively, the key is to collect the top-up tax necessary to bring the ETR to the minimum rate.
However, the draft act provides the possibility of not collecting tax on the part of income covered by substance based income exclusion*. For this reason, the top-up tax percentage is directly applied not to Net GloBE Income but to excess profit. This surplus is defined as the positive difference between the amount of Net GloBE income and the substance based income exclusion*.
Who pays the QDMTT?
As a general rule, the QDMTT is allocated to constituent entities according to the ratio of a given taxpayer's qualified income to the sum of the qualified income of all taxpayers in the jurisdiction. Administrative regulations provide the possibility of designating one of the constituent entities to calculate and pay the tax. In such a case, this constituent entity pays the tax due from all entities in the group. Moreover, the choice also results in joint and several liability of all taxpayers who have entrusted their obligations to this constituent entity.
Taxpayers will be obliged to file tax returns on the amount of tax due by the end of the 18th month following the end of the tax year and to pay the tax resulting from the tax return to the account of the competent tax office within that period. For the first tax year for which the group is obliged to apply the act, these deadlines are extended to 21 months.
QDMTT and accounting
Constituent entities subject to QDMTT will not be obliged to create a liability or a deferred tax asset related to a QDMTT. At the same time, constituent entities will be obliged to disclose information about being subject to QDMTT, as well as information about the amount of due tax for the current year.
How can we help?
Groups subject to the minimum tax will need to understand, assess and analyse the impact of Pillar 2 on their whole organization. It seems necessary to consider in particular what elections to make regarding the options left by the legislator, as these may potentially have a significant impact on the tax result. It is also necessary to assess whether the company has the data and reporting capabilities for the required reporting.
Groups will also need to prepare and train staff and manage stakeholder expectations accordingly.
* Substance-based income exclusion is related to having by an entity payroll and tangible assets . Ultimately, the exclusion will amount to 5% of the value of eligible payroll costs and the carrying value of eligible tangible assets. Initially, however, the exclusion amount will be higher and will systematically decrease over time. For example, for the tax year starting on December 31, 2024, the exclusion for payroll costs will be equal to 9,6% of eligible payroll costs, and the exclusion for tangible assets will be 7,6% of the carrying value of such assets.
Autorzy:
