The 27 European Union Member States have started their efforts to implement the EU’s minimum tax rules by the end of this calendar year. The way in which Member States choose to implement will significantly affect tax positions and reporting obligations of businesses with EU activities. It is therefore crucial for businesses to timely anticipate these choices and plan ahead.
This article sets out five important attention points for businesses with respect to each relevant Member State:
- Know what kind of minimum tax the Member State introduces.
- Verify how the Member State applies the Undertaxed Profit Rule (UTPR).
- Confirm whether its legislation aligns with international guidance.
- Determine when the Member State will begin applying the new taxes.
- Evaluate how its tax incentive regimes are impacted and reshaped.
Pillar Two adoption by the EU
Nearly all Member States were part of the international negotiations in the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework that resulted in the agreement on the model 15% minimum tax rules at the end of 2021. The EU adopted its Pillar Two directive at the end of last year and Member States are obliged to implement the rules by 31 December 2023.
The adoption of the directive means that minimum tax rules have become part of EU law. There are some differences and additions in the EU rules compared to the internationally agreed model rules, such as a mandatory application for large domestic groups. Another important choice made by the EU is that the application of the rules has been postponed to 2024, which is one year later than the international agreement. This delay has subsequently been followed by many non-EU jurisdictions; it seems unlikely that jurisdictions will apply the rules in 2023 and some jurisdictions may even delay their implementation beyond 2024.
Finally, all Member States have committed to implementation by adopting the EU rules. The international agreement contained no such obligation as it only obliged jurisdictions to adhere to the rules if they decided to introduce a minimum tax. Jurisdictions are also committed to accepting the application of the rules by others if they themselves do not adopt them.
Know what kind of minimum tax the Member State is introducing
Member States can opt to apply a domestic top-up tax based on the rules. This election allows the top-up tax to be charged and collected by the Member State where the lowest level of taxation occurs. The amount of domestic top-up tax computed by another Member State is to be reduced by the amount of domestic top-up tax in the Member State where the profits arose. The domestic top-up tax therefore allows the low-tax Member State to tax its own low-taxed profits so that other jurisdictions do not levy a top-up tax over its profits.
The domestic top-up tax is not the only option available for Member States if they do not want other jurisdictions taxing their low-taxed profits. Member States could also choose to increase their tax rates, change their corporate tax rules, or introduce another form of minimum tax. The choice for implementation can have significant implications and may even result in tax consequences outside the Member State. For example, the method of implementation may affect another jurisdiction’s taxation of profits arising in the Member State under a Controlled Foreign Company regime. The introduction of domestic top-up taxes by Member States will also create additional filing obligations in these jurisdictions. This all points to a need for businesses to assess how each Member State’s minimum tax may affect their tax position and compliance obligations.
