After long debates, Member States have finally achieved unanimity for passing the directive proposal
In October 2021, the OECD reached an historic agreement to introduce significant changes in the international tax arena aimed at updating it to the current environment. This agreement was based on two pillars: Pillar One focuses on the taxation of large, highly profitable corporate groups (with a turnover exceeding €20 billion and 10%, respectively) in their market jurisdictions, and Pillar Two seeks to ensure a 15% effective tax rate for corporate groups whose turnover exceeds €750 million.
The following months showed, for various reasons, that further developments have been achieved regarding the minimum global taxation addressed by Pillar Two. However, one of the main problems posed for its implementation was the unwillingness of several EU Member States, also based on different reasons. This made it impossible to reach the unanimity required for passing the Directive proposed by the European Commission in December 2021.
However, after being eliminated from the ECOFIN’s agenda, on the night of December 12, 2022, at the closing stages of the Czech Presidency, Member States agreed upon the Proposal.
Next, legislative procedures within the Union will be addressed, which will be followed by the approval of the domestic regulations of each Member State. This requires significant developments for the coming dates not only because in 2022 several proposals have been published (only one will be approved, and according to the request of the Presidency it seems that it will be the text of November 25, 2022), but also because national legislators face the complex task of incorporating this regulation into their domestic legal systems. All of this within a very strict time frame owing to the commitment agreed in the OECD: the rules must be approved in 2023 and be in force by 2024.
For the taxpayers affected, the uncertainty regarding Pillar Two’s effective implementation comes to an end, being 2023 a key year for preparing and adapting their systems to the new regulations. However, according to the schedule, the first returns should be submitted in the first half of 2026.
Although any detailed analysis must be reserved for the final version of the regulations, we include below a summary of the main elements of this minimum global taxation system:
- Corporate groups whose turnover is at least €750 million during at least two of the last four tax periods are affected. The regulations include certain exclusions and caveats.
- Although the OECD agreement only affects cross border situations, the EU fundamental freedoms demand that domestic groups are also included.
- The purpose is to guarantee that these groups are subject to 15% effective taxation in each of the jurisdictions where they operate. To this end, there are two mechanisms:
- Principal one: for jurisdictions where the group does not reach this 15%, any remaining tax due will be levied at the level of any company of the group that hold shares in the subsidiaries or establishments located in those undertaxed jurisdictions. This is the Income Inclusion Rule (IIR), which must be in effect by 2024.
- Defensive one: if there are no group companies through which those taxes can be collected, this task will be assigned to the rest of the companies of the group, based on the number of workers and the value of their tangible assets. This is the Under-Taxed Profits Rule (UTPR), whose entry into force is postponed to 2025.
- The calculation of the Effective Tax Rate (ETR) requires calculating the amount of taxes paid and the corresponding benefit in each of the jurisdictions involved. Following an approach similar to the Spanish corporate income tax, it is based on the certain adjustments made to the profit and loss account. However, the existence of significant differences in the type and requirements for these adjustments, as compared to those applicable for internal purposes, should be highlighted (for example, double tax relief systems).
- The regulations are particularly complex, in terms of general rules as well as regarding special regimes.