On 8 October 2021, under the auspices of the OECD/G20, 137 countries (including Slovakia), have finally agreed to introduce a global minimum tax. The two-pillar framework is designed to address the tax problems arising from the digitalization of the economy. The new mechanism will primarily affect tech giants, which benefit from different tax regimes in the countries. The international tax system is expected to take effect in 2023, so the model rules for corporate taxation and profit redistribution must be transposed into national law over the next year.
Long-standing international efforts to ensure fair taxation conditions for large companies have been met in the form of the published "Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitization of the Economy”. Multinational enterprises must be prepared for a significant change - their tax obligation will be tied to the countries where they sell their goods and services. Taxes will be reallocated where companies have their customers, regardless of their physical presence in the countries.
The key aspects of the agreement of the members of the OECD/G20 Inclusive Framework are covered by two pillars, including a detailed implementation plan of particular measures. According to OECD estimates, the first part of the reform measures will allow a redistribution of EUR 108 billion of profits per year to the market countries, while the introduction of a global minimum tax could bring additional revenues of EUR 131 billion for governments. A part of the overall agreement is the removal of the Digital Services Tax applied by some countries at the local level.
Pillar 1: Reallocation of profits
- "Amount A" - new taxing right
- "Amount B" - baseline marketing and distribution services
The Pillar One contains a new nexus rule which allows profit allocation to a jurisdiction where value is created via user participation. The standard taxation model of corporate profits in the country in which they have their formal seat will now be applied in a fair way to real places of business activities and profits generation (also known as market jurisdiction). Only the largest and most profitable businesses with more than EUR 20 billion in revenues and a profit margin above 10% (profit before tax/revenues) will fall within "Amount A". In that case, they would then redistribute 25% of the group's profits above the 10% threshold to the relevant jurisdictions. The "Amount A" will be apportioned among the market countries based on the proportion of revenues from sales generated by the group in that country to the group's total revenue. Companies in the extractives sector and financial services companies will be excluded from the policy after several discussions.
"Amount B" aims to all multinational companies that perform routine marketing and distribution services in a market jurisdiction. The calculation of "Amount B" will be consistent with the arm´s length principle for such activities. More detailed information will be published at the end of 2022.
Pillar 2: Global Minimum Tax
- Income Inclusion Rule (IIR)
- Undertaxed Payments Rule (UTPR)
- Subject to Tax Rule (STTR)
The Pillar Two introduces a global minimum tax rate in order to discourage multinational companies from shifting their profits to low-tax countries. After years of negotiations, it was set a final tax rate at 15% for each jurisdiction in which the company operates. The new minimum tax rate will apply to companies with revenues exceeding EUR 750 million, excluding government entities, investment and pension funds and non-profit organizations.
The Pillar Two focuses on a series of three rules against Global Anti-Base Erosion ("GloBE"):
a) Income Inclusion Rule “IIR” – covers foreign income of branches to a minimum tax in the parent jurisdiction. The rule would allow a country hosting the headquarter of a multinational level to levy a top-up tax on the undertaxed profits of a foreign affiliate in a low-tax country.
b) Undertaxed Payments Rule "UTPR" – the jurisdiction of the payer denies tax deductions or make an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IRR.
c) Subject to Tax Rule “STTR” - the treaty-based rule will allow market jurisdiction to impose tax on certain related party payments taxed below a minimum taxation rate (on interest, royalties and others).
There are still a number of open key technical issues to assess the effects of international reform. We will keep you informed about further developments.
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