On 15th December the EU Council formally adopted the directive on ensuring a global minimum level of taxation for multinational groups in the Union introducing a minimum - 15% CIT. The tax is expected to enter into force as of December 31st, 2023.
Although Poland and Hungary were initially blocking the proposal, both countries eventually agreed to adopt this regulation. Nevertheless, Hungary abstained from the final vote whereas Sweden raised objections to one of the provisions of the Directive. The Directive will enter into force the day after its publication in the Official Journal of the European Union. Member States should transpose the Directive into national law by December 31, 2023.
The new regulations shall apply to international and domestic capital groups whose total annual turnover is at least EUR 750 million and whose effective tax rate (ETR) is lower than 15%. The tax will not apply, e.g. to non-governmental organizations, international organizations, pension funds, and some real estate funds.
A similar mechanism is being developed at the OECD level. Regardless of international regulations, some countries have already started public consultations on the implementation of an analogous solution to national law (see Switzerland, Australia, and Canada), while the United Kingdom and South Korea have already prepared drafts of their own regulations.
The purpose of the regulation is to combat aggressive tax optimization leading to the erosion of the tax base and the transfer of the companies’ profits to countries with the lowest taxation. As a consequence, the Directive provides for a preferential solution for entities with substance, like assets and personnel, in the form of an income exemption calculated based on costs related to employees and the value of tangible fixed assets in a given jurisdiction.
The application of the minimum tax will require the calculation of the ETR for each jurisdiction where the covered entity is located. If it turns out that the ETR in any of the jurisdictions is lower than 15%, one of the following mechanisms shall apply, depending on the circumstances:
1) Income Inclusion Rule (IIR)
Under this mechanism, the top-up tax is paid in the country of the ultimate parent entity or the country of the intermediate parent company. The top-up tax is calculated by summing up the differences between the minimum CIT rate and the ETR for each jurisdiction where the effective tax rate is lower than 15%.
2) Undertax payment rule (UTPR)
The principle of under-taxed payments applies when the jurisdiction of the seat of the ultimate parent company, or any other parent company, has not implemented minimum tax provisions. Thus, it is a complementary method to the principle of IIR. According to the UTPR, the top-up tax should be paid in the country of residence of the group subsidiary.
The draft Directive provides that the IIR mechanism will apply from December 31, 2023, and the UTPR a year later.
The regulations have been designed in such a way to enforce taxation at the minimum rate of 15% also in relation to companies from an international group located in a country that has not implemented minimum tax regulations.
The difficulty in verifying whether a given group/entity will be subject to the above provisions may be the calculation of the ETR for each jurisdiction. The rules for calculating the effective tax rate contain many exceptions and provide for the need to allocate qualified income to each entity in the group. As a result, it is likely that e the income reported for ETR purposes will differ from the income reported for national CIT purposes or accounting standards.
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