On 22 December 2021, the European Commission released a proposal for a Council Directive to ensure a minimum effective tax rate for the global activities of large multinational groups (and large domestic groups). The proposal is the first step in the implementation of the recent OECD/G20 global tax reform agreement, by setting out the principles that will serve to apply consistently across the EU a 15% minimum effective tax rate. It will be followed by a second proposal (about the reallocation of taxable profits of the largest multinational companies). It replaces the EU plans for a digital tax. A stakeholder consultation on this first proposal is open until 7 March 6 April 2022. Members interested in the issue are encouraged to send us their comments on this proposal until 18 February 4 March 2022.
Background: The Global Tax Reform Agreement
The OECD/G20 Global Tax Reform Agreement – endorsed by 137 countries (including all EU countries) is based on two pillars:
- Pillar one foresees a reallocation of profits of multinational companies (for taxing purposes) from a number of sectors, with a consolidated global turnover of at least €20 billion and a pre-tax profit margin above 10% based on the concept of end market jurisdictions where goods or services are used or consumed.
- Pillar two foresees an effective minimum tax rate of 15% for Multinational Enterprise (MNE) groups that have an annual consolidated revenue of at least €750 million.
The Directive proposed by the Commission on 22 December 2021 aims to implement the Pillar two agreement. A second Commission proposal is expected in 2022 to implement Pillar one (reallocation of profits of multinational companies). These two Directives will replace the project to introduce an EU digital tax (and will require certain Member States to phase-out their domestic digital taxes), as per the OECD/G20 Global Tax Reform Agreement.
The Commission proposal for a Minimum Corporate Taxation
- Scope: The proposed Directive would apply to both enterprises that are part of a Multinational Enterprises (MNE) group and to large domestic enterprises, including the financial sector, with combined financial revenues of more than €750 million a year, and with either a parent company or a subsidiary situated in an EU Member State. The proposed Directive therefore differs slightly from the international agreement, as it includes in the scope large domestic companies (and not only multinationals). This was required to ensure compatibility with the EU freedom of establishment principle and to avoid discrimination by the EU Member States between an entity that is part of a group with cross-border activities and a group with purely domestic activities.
- Minimum effective tax rate: The Directive states that the minimum tax rate is 15% (Art. 3(12)). Any jurisdiction that does not apply this minimum is considered as a “low tax jurisdiction” (Art. 3(29)) subject to specific rules under the Directive for the application of a top-up tax (see below).
- Calculation of the effective tax rate: The minimum effective tax rate is established per jurisdiction by dividing taxes paid by the entities (see Chapter IV of the proposal) in the jurisdiction by their income.
- Effective application of the minimum rate: If the effective minimum tax rate for the entities in a particular jurisdiction is below the 15% minimum, then the Pillar two rules are triggered and the ultimate parent entity of the group must pay an “Income Inclusion Rule” (IIR) top-up tax to bring its effective rate up to 15% (for itself if low-taxed and for its constituent entities which are low taxed wherever they are located). The IIR top-up tax is required to be applied at the parent company level (or the intermediate parent company in the EU, if the ultimate parent company is outside the EU and does not apply a similar rule) – where it is established/considered as resident for tax purposes.
- Domestic top-up tax (Art. 10): To preserve national tax sovereignty, EU Member States can choose individually to apply the top-up tax domestically to constituent entities located in their territory. As a result, the top-up tax will be allocated to and collected in the low-tax jurisdiction, instead of collecting the additional tax at the level of the ultimate parent entity of the group. When an EU Member State elects this option, the amount of top-up tax due from the ultimate parent entity shall be reduced (up to zero) by the amount of top-up tax due from the constituent entities.
- The Undertaxed Payment Rule (UTPR): The Directive includes a backstop rule (the UTPR – Art. 11-13). The Directive provides that the UTPR is applicable when the ultimate parent entity is located outside the EU in a jurisdiction that has not implemented the IIR. In addition, the Directive provides that the UTPR is also applicable when the ultimate parent entity is located in a jurisdiction outside the EU that has implemented the IIR, but the ultimate parent entity (together with the other constituent entities in that jurisdiction) is low-taxed. Based on the UTPR, the top-up tax corresponding to the jurisdiction of the ultimate parent entity is allocated to all entities that have implemented the UTPR, including those located in a Member State. The UTPR, however, is not applicable when the ultimate parent entity is located in a Member State, because an ultimate parent entity located in a Member State, has to apply the IIR.
- Exceptions are provided for:
- minimal revenue or income (Art. 29 – i.e. when a group or large scale domestic company has an average revenue of less than EUR 10.000.000 and an average qualifying income of less than EUR 1.000.000 or a loss in a jurisdiction)
- income associated with minimum percentages obtained on fixed assets and payroll (Art. 27): companies will be able to exclude from the top-up tax an amount of income that is at least 5% of the value of tangible assets and 5% of payroll.
- Specific rules are foreseen to apply the Directive in cases of corporate restructuring, group mergers/demergers, joint ventures, etc. (Chapter VI of the proposal).
Stakeholder consultation on the proposed Directive
A stakeholder consultation on this first proposal is open until 7 March 6 April 2022. Members interested in the issue are encouraged to send us their comments on this proposal until 18 February 4 March 2022. Based on the input received, we will evaluate the need for Independent Retail Europe to reply to the consultation (and how).
Next steps
The proposed Directive need to be endorsed by the Council (at unanimity), after consultation of the European Parliament (whose opinion is not binding, as with all tax matters). If adopted on time, the Directive must be implemented by the Member States by 31 December 2022. Member States will then have to apply the provisions of the Directive as of 1 January 2023. The provisions regarding the UTPR, however, will come into effect as of 1 January 2024.
In addition, the European Commission will complement this proposal with a new proposal to be released in 2022, concerning Pillar one of the international agreement (concerning the reallocation of profits of very large multinational companies – see above), and for which part of the extra-revenues generated should become a new resource to fund the EU budget (to contribute to the pay back of the EU recovery fund).
