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#tax2025: The implementation of the global minimum tax in the EU EU Commission publishes draft directive on Pillar 2
9 March 2022 Minimum tax on corporate profits aims to create a level playing field The EU Commission has presented a draft directive for the implementation of the globally agreed minimum tax in the EU at the end of 2021. It is based on a global consensus among around 140 countries on a global minimum tax for corporate profits of 15 percent (“top-up tax”). It is intended to create a “level playing field” for the taxation of corporate profits and to reallocate the resulting tax revenue more appropriately among countries. BDI calls for simplifying transitional provisions to limit high implementation costs The implementation of the global minimum tax will be a major burden not only on businesses, but also on tax administrations. It is therefore essential to further simplify the regulations and limit the scope of application in order to ensure that the proposals are practicable for companies and tax authorities alike. The effective implementation by 2023 is ambitious and not realistic. Businesses urgently need EUwide simplifying transitional provisions. Otherwise, a postponement of the initial application to 2024 is necessary. The application of sanctions should be completely waived for a transitional period. BDI urges to create an overall concept for the taxation of corporate profits A minimum tax in the EU should be introduced within the overall concept of the OECD/G20 states (“two-pillar solution”) and it should be linked to a certain reallocation of tax revenue across countries. Additional digital taxes must be waived and existing anti-abuse rules should be adapted. Concerning the implementation, it has to be ensured that future adjustments to the globally agreed rules will be incorporated in the EU directive. If the minimum tax is not introduced in all other key industrialized countries as well, the EU and Germany should also refrain from doing so or, if necessary, immediately remove regulations that have already been introduced.
BDI | Tax and Financial Policy | www.bdi.eu
#tax2025: The implementation of the global minimum tax in the EU
Minimum tax as a European common approach A European minimum tax is intended to prevent companies from shifting their profits to low-tax countries while deducting their costs in high-tax countries like Germany. It is based on a worldwide level of effective minimum taxation of 15 percent for corporate profits which obliges the parent company to calculate the effective tax burden for its subsidiaries in each and every country separately. It is calculated based on the company’s profit according to financial accounting under commercial law (IFRS or German commercial code – HGB). If the effective tax rate on profits of a subsidiary in a country is below 15 percent, the parent company is taxed subsequently (“top-up tax”). In addition, the deduction of certain types of payments would be denied if they have not been subject to a minimum level of taxation abroad. For businesses, a worldwide uniform design of the global minimum tax is crucial in order to avoid double taxation and disputes among different jurisdictions. The EU draft directive should therefore be closely aligned with international rules.
Implementation of the minimum tax on corporate profits The minimum tax on corporate profits in the EU stems from the two-pillar agreement reached by the OECD/G20 countries in 2021. While Pillar 1 aims to ensure a fairer distribution of corporate tax revenue among countries around the globe, Pillar 2 aspires to introduce an international effective minimum tax level on corporate profits. The latter seeks to achieve a minimum level of effective taxation on business profits at a rate of 15 percent in their country of domicile. Implementation in the EU is based on the following measures:
Subsequent taxation through an “additional tax” in the companies’ country of domicile: ▪
Globally operating businesses with total annual revenues of at least 750 million euros and which are not taxed at an average rate of at least 15 percent in a country will be subject to an additional tax (“top-up tax”). Contrary to the OECD Model Rules, the EU draft directive extends the scope to large-scale purely domestic groups and provides for effective taxation of not only foreign subsidiaries, but also domestic subsidiaries of a group. 1
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Businesses are required to pay a top-up tax in the country of the parent company to bring its tax rate up to the global minimum level of taxation of 15 percent (“top-up tax” according to the “Income Inclusion Rule”). In addition, the deduction of business expenses of multinational enterprises with only subsidiaries in the EU is denied until the minimum tax rate of 15 percent is achieved (“Undertaxed Profit Rule”).
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The determination of corporate profits is based on existing accounting standards (IFRS or German commercial code – HGB) with some adjustments. In addition to the existing determination of profits, companies must submit a separate GloBE tax and information return, which contains far-reaching business data on individual companies, units and countries.
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According to the European Commission, this is intended to avoid discrimination between cross-border and domestic situations ensuring compliance with the EU fundamental freedoms. 2
#tax2025: The implementation of the global minimum tax in the EU
BDI evaluation BDI supports the global minimum tax under certain conditions in order to ensure a level playing field for the taxation of corporate profits. This can prevent potential excessive tax avoidance by companies through tax planning and profit shifting to low-tax countries. However, a uniform and worldwide implementation of the regulations is important. Disadvantages for German and European industry must be avoided. With regard to implementation, prompt legal certainty, clear rules, similar burdens in other countries and the avoidance of double taxation are decisive for businesses.
European companies must not be put at a competitive disadvantage The discussions at international level (BEPS project of the OECD/G20 states) have their roots in the misuse of tax planning by some large, multinational digital corporations. They have been triggered, among other things, by the revelations about the aggressive tax planning of digital corporations which engaged in profit shifting to countries with low effective tax rates (low-tax jurisdictions). When discussing the minimum tax with regard to competition between European and US companies, one needs to consider that the US already have a minimum tax regime (“GILTI”). However, GILTI allows for high- and low-tax income to be offset worldwide (“global blending”)2. US companies can therefore calculate the minimum tax rate as a global average and thus offset their profits in tax havens with profits in high-tax countries. EU-based companies fall short of this option and must calculate the tax burden for their profits without offsetting and for each country individually. Under global blending US businesses may be excluded from the scope of the regulations, which would have to be included under jurisdictional blending. As a result, European companies face massive distortions of competition vis-à-vis US businesses. To protect fair and effective competition, it must therefore be ensured that the US GILTI regime is only considered equivalent to the Pillar 2 minimum tax regime if it applies jurisdictional blending as well.
Avoid high additional costs for the German economy Considering the initial situation and the fundamental policy objective, German economy is confronted with a disproportionate burden. In the future, companies will not only have to prepare existing national and international balance sheets, but also have to carry out and maintain extensive calculations for the purpose of the minimum tax. Furthermore, the reporting coincides with a period characterized by many compliance obligations – also known as “busy season” among professional circles. Moreover, the EU Commission’s implementation timetable is disproportionate to the complexity associated with the regulations. Many of them are still unclear or not yet sufficiently defined. For example, the OECD is currently working on important questions concerning interpretation and definitions which are not published yet. From a user perspective, the main concern is that the draft directive is missing any measures to avoid double taxation and that unclear definitions create legal uncertainty. It should be ensured that all relevant income taxes in the respective countries are considered when determining the effective tax rate. In the case of partnerships, this also applies to the income tax of the partners concerned.
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It is based on a law introduced in 2017 with the Tax Cuts and Jobs Act (GILTI, Global intangible low-taxed income) which has a similar intention, but does not provide for jurisdictional blending. 3
#tax2025: The implementation of the global minimum tax in the EU
Ensure simplifying transitional provisions In view of the complexity of the regulations, companies need sufficient time to implement the new minimum tax regulations in practice, train their employees and implement the measures in a targeted manner. To date, globally operating groups neither have the necessary data nor a structure for adapting their accounting systems to the highly complex new regulations. German business community therefore strongly advocates for simplifying transitional provisions at European level which should be included in the text of the directive. For example, existing standards such as IFRS reporting could be considered sufficient for GloBE purposes for a transitional period in the first years without further adjustments. Further adjustments to GloBE should only be applied at a later stage for the purpose of a timely and legally sound implementation. Similarly, entities that are not consolidated under IFRS for materiality reasons should be excluded from the scope of the minimum tax. If a significant reduction in complexity cannot be agreed upon, we would like to point out that the companies concerned will not be able to ensure the introduction of the new regulations by 1 January 2023, even with the greatest effort. The application of disproportionate sanctions (five percent of annual turnover) should be completely waived during a transitional period.
Limit the scope of application through exemption rules The comprehensive scope of the draft directive is disproportionate in view of the considerable additional effort. Therefore, it would be appropriate for both tax authorities and companies alike to focus only on cases of real relevance. To this end, so-called “safe harbours” and “carve-outs” – i.e. exceptional cases – were discussed at an early stage at international level. They are currently not adequately reflected in the EU draft directive or in the OECD Model Rules. This includes that profits from countries that are apparently subject to taxation of at least 15 percent should be exempt from the extensive documentation requirements. A simple implementation of such a relief would be the introduction of a “whitelist” for states that are above the minimum tax level, i.e. a “positive list”.
Necessary reform of corporate taxation in Germany In the context of the global “level playing field” for the taxation of corporate profits, a comprehensive reform of corporate taxation in Germany is necessary. A competitive tax environment for businesses is a decisive factor in international location competition. In the course of the agreement on a global minimum tax rate of 15 percent, at least a lowering of the low taxation threshold for the Controlled Foreign Company rules to 15 percent is overdue. In addition, existing anti-abuse regulations in Germany should be abolished or at least improved. This does not only apply to the German Controlled Foreign Company rules, but also the royalty and interest barrier and other anti-abuse regulations.
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#tax2025: The implementation of the global minimum tax in the EU
Summary: EU draft directive on minimum taxation needs improvement ▪ Introduce a minimum tax in the EU within the overall concept of the OECD/G20 states (“two-pillar solution”). ▪ Enable simplifying transitional provisions at least for 2023: Recognition of previous standards without highly complex adjustments. ▪ If no transitional provisions can be achieved: Postpone the initial application uniformly in the EU to 1 January 2024. ▪ Limit the scope of application: Create exceptions (“safe harbours”). ▪ Reduce bureaucracy: Enable de minimis regulation (“carve outs”) and introduce a “whitelist” for states which are clearly above the minimum tax level. ▪ Clarify individual issues: Align EU implementation with global application rules. ▪ Ensure future adjustments: Evaluate the EU directive regularly and align with international developments. ▪ Avoid inappropriate sanctions: Appropriate sanctions independent of the turnover for noncompliance with formal requirements.
Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Editorial Dr Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028 1507 m.wuennemann@bdi.eu David Gajda Senior Manager Tax and Financial Policy T: +49 30 2028 1413 d.gajda@bdi.eu Philipp Gmoser Senior Manager Tax and Financial Policy T: +3227921012 p.gmoser@bdi.eu Document number: D1520
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