Tax News, June 2023

In the June edition of EY tax news, we summarize the next steps in the implementation of the second pillar of the BEPS 2 project , i.e. more specifically about the introduction of global minimum tax. We already reported on this in the March 2022 issue.

In addition, we are informing you about the implementation of rules linked to the carbon border adjustment mechanism (»CBAM«). We already reported on the agreement on CBAM in the April 2022 edition.

Introduction of Global Minimum Tax - Base Erosion and Profit Shifting (BEPS) 2.0

We would like to inform you about the upcoming changes in the field of international corporate taxation. On 15 December 2022, the EU member states adopted the Directive on minimum tax, which member states are expected to transpose into their national legislations by 31 December 2023. We expect that future Slovenian legislation will closely follow the Directive, which is aligned with the OECD model rules. The new legislation is expected to be based on the rules of the second pillar of BEPS measures, which introduce a minimum effective tax rate of 15% for multinational companies with annual consolidated revenues of at least EUR 750 million.

The new concept of minimum taxation is expected to consist of two interrelated rules through which an additional amount of tax, referred to as a "top-up tax", will be calculated in cases where the effective tax rate applicable to the income of a multinational company in a given jurisdiction is lower than 15%. In such cases, the jurisdiction will be considered as being undertaxed. The two mentioned rules are:

• The Income Inclusion Rule will determine the payment of the so-called top-up tax in relation to the undertaxed subsidiary at the level of the ultimate parent entity or intermediate parent entity. The rule is expected to apply in the EU member states for fiscal years beginning on or after 31 December 2023.

• The Undertaxed Profit Rule will allocate the top-up tax to the ultimate parent entity and subsidiary companies based on the ratio of tangible assets and the number of employees, namely in cases where the ultimate parent entity does not pay the top-up tax in relation to the undertaxed subsidiaries through the application of the aforementioned Income Inclusion Rule. This rule is expected to apply for fiscal years beginning on or after 31 December 2024 (i.e. one year later than the income inclusion rule).

Importers, are you ready for CBAM?

On 10 May 2023, the European Union adopted the regulations on Emissions Trading System (“EU ETS”) and the Carbon Border Adjustment Mechanism (“CBAM”). Subsequently, on 14 June 2023, the EU Commission also published draft implementing regulation, which will eventually lay down the rules regarding reporting obligations for the purposes of CBAM during the transitional period.

As reported in previous editions of our tax news, the implementation of CBAM and reform of the ETS system may be viewed as key enablers for helping Europe to reach its goal i.e. to reduce emissions for 55% by 2030 (from 1990 levels). They are also part of the broader strategy of the European Green deal to achieve climate neutrality.

The adopted regulation covers a broader scope of products than initially proposed, namely:

• Cement, aluminous cement, cement clinkers, etc.

• Fertilizers (e.g., ammonia, nitric acid, sulphonitric acids)

• Agglomerated iron ores and concentrates

• Comprehensive coverage of iron and steel products (except some ferro-alloys, scrap etc.)

• The iron and steel products include downstream products, such as screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles

• Aluminium structures and parts of structures

• Certain aluminium reservoirs, tanks, vats, containers

• Stranded wire, cables, plaited bands and the like, made of aluminium, not electrically insulated

• Other articles of aluminium

• Kaolin and other kaolinic clays, calcined

• Hydrogen

• Electrical energy

The transition period will start on 1 October 2023 and will last until 2025. Gradually, importers of products in scope of CBAM regulation, will need to comply with the following new compliance requirements:

Phase 1 (reporting): Transitional period from 1 October 2023 until 31st December 2024 covering the CBAM Reports only. Importers will need to submit quarterly reports on imports of goods subject to CBAM and embedded emissions.

Phase 2 (reporting + obtaining authorization): Transitional period augmented with the Authorization of CBAM Declarants and Registration of Operators and Installations from 3rd Countries as from 31 December 2024 until 31st December 2025. Importers of products subject to CBAM will need to apply for a CBAM authorization, allowing them to import.

Phase 3 (reporting + payment): Definitive period from 1st quarter 2026 onwards, whereby importers will need submit annual declaration of embedded emissions on imported goods and surrender corresponding number (value) of CBAM certificates).

Due to the wide-ranging impact of CBAM on companies across Europe as well as in other parts of the World it is essential that all importers understand CBAM scope and assess implications for their company. Considering the above timeline, we recommend companies to take the following steps as soon as possible:

• Identify whether / which imported products are in scope of CBAM.

• Identify / appoint CBAM responsible person / department within the company.

• Asses financial impact of CBAM based on the current supply chain.

• Consider the currently supply chain structures and rethinking of whether any changes are needed to reduce the (financial) burden of CBAM.