On 20 December 2021, the OECD released detailed rules, the so-called Global Anti-Base Erosion (“GloBE”) rules under BEPS 2.0 - the Pillar Two Model ("Pillar Two Model”), to assist in the implementation of a global minimum 15% tax rate to Multinational Enterprises (“MNEs”) applicable as from 2023. Shortly following the OECD release, the European Commission has made public on 22 December 2021 a legislative proposal for a draft directive in view of the implementation of the GloBE rules (the “Draft Directive”).
The Pillar Two Model provides OECD-countries a precise template for taking forward solutions to address the tax challenges arising from digitalization and globalization of the economy such as the introduction of a global minimum tax rate for MNEs with revenue above EUR 750 million. Such global minimum corporate tax is expected to generate around USD 150 billion in additional annual global tax revenues.
For the most part, the GloBE rules expand on the contents of an OCED statement agreed in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS ("OECD/G20 Inclusive Framework”). Following this, the European Commission initiated the design of local rules in line with the EU legal framework. Nonetheless, it is expected that the OECD will release its commentary relating to the GloBE rules in early 2022 and will also address the co-existence with the US Global Intangible Low-Taxed Income rules. Consequently, it is very likely that further adjustments will be made to the current version of the Draft Directive.
The GloBE rules
The GloBE rules are a set of interlocking rules: an income inclusion rule (“IIR”) that allows the tax authorities of the parent entities to impose a top-up tax on low-taxed income of affiliated entities, and the undertaxed payments rule (“UTPR”) that denies deductions or requires an equivalent adjustment for payments to low-tax affiliated entities that have not been subject to tax under an IIR.
Implementation of the GloBE rules under the Draft Directive
Scope of application
The Draft Directive applies to “constituent entities” located in the EU that are members of MNE groups or large-scale domestic groups that meet the annual threshold of at least EUR 750 million of consolidated revenue in at least two of the last four consecutive fiscal years.
In line with the OECD/G20 Inclusive Framework, the following entities are excluded from the scope of the Draft Directive: Government entities, international organizations, non-profit organizations, pension funds, investment entities and real estate investment vehicles that are the ultimate parent companies of a group, and entities that are owned at least 95% by excluded entities.
Furthermore, the Draft Directive provides for a de minimis exclusion for MNE groups or large-scale domestic groups that have average revenues of less than EUR 10 million and an average qualifying income or loss of less than EUR 1 million in a given jurisdiction. Such MNE groups or large-scale domestic groups should not pay a top-up tax even if their effective tax rate is below the minimum tax rate applicable in that jurisdiction.
Key differences between the GloBE rules and the Draft Directive
Although the Draft Directive mainly follows the GloBE rules, some differences appear to guarantee conformity of the proposed text with EU primary law (e.g., the fundamental freedom of establishment). The key substantive differences are as follows:
- Application of the IIR to large-scale domestic groups: the Draft Directive broadens the scope of the GloBE rules and the application of the IIR to purely domestic groups established in a Member State if they reach the EUR 750 million threshold.
- Domestic top-up tax: Member States can opt to apply the top-up tax domestically to constituent entities located in their territory. This election allows the top-up tax to 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 a Member State chooses to elect this option, the amount of top-up tax due by the ultimate parent entity shall be reduced (up to zero) by the amount of top-up tax due by the constituent entities.
- UTPR: The Draft 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 Draft 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 applies by definition the IIR principles.
- Assessment framework: the Draft Directive includes an additional Chapter, which outlines conditions that third-country regimes should meet to be considered equivalent to the qualified IIR in the meaning of the Draft Directive.
- Filing obligations: The Draft Directive foresees tax filing obligations for constituent entities located in a Member State. Such entities need to file a ‘top-up tax information report’ comprising of the information points mentioned under the Draft Directive. More importantly, the Draft Directive requires Member States to levy minimum penalties applicable against the violation of such reporting obligations amounting to at least 5% of the constituent entity’s turnover.
Next steps and timing
Member states will need to unanimously approve the text of the Draft Directive and adopt the directive in the Council of the EU. The EU Council Presidency currently targets for an agreement within the next 6 months.
Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with the Draft Directive by 31 December 2022. Provisions under the Draft Directive shall be applicable from 1 January 2023 with the exception of the UTPR, which shall apply as of 1 January 2024.