Relief from global minimum taxation

Global minimum taxation is coming ...

On Dec. 23, 2022, the EU directive implementing global minimum taxation (Pillar 2) came into force. The directive is strongly based on the so-called GloBE (Global Anti-Base Erosion) regulations of the OECD. Its implementation is intended to ensure that international groups with a consolidated turnover of at least €750 million pay a minimum level of tax (15%) on income arising in each of the countries and territories in which they operate. The GloBE rules include an "Income Inclusion Rule" to be applied on a primary basis, which acts similarly to an addition tax, and an "Undertaxed Profits Rule" to be applied on a downstream basis. Minimum taxation is ensured by levying a top-up tax on profits in countries where the specific effective tax rate is lower than the minimum rate.

... but with relief

The EU directive must be implemented in national law by the member states by December 31, 2023. The preparation time for the affected companies is short, because the Income Inclusion Rule is to take effect as early as the 2024 fiscal year (or 2024/2025 if the fiscal year differs), and the Undertaxed Profits Rule one year later. In a recently published study, the International Monetary Fund assumes that the introduction could increase global corporate income tax revenues by 8.1%. In addition to the possible additional tax burden, which is highly dependent on the individual case, the introduction means in particular a high administrative burden for companies, for example to determine the country-specific effective tax rates according to the complex calculations.

The OECD has recognized these difficulties and therefore published its proposals on temporary and permanent relief as well as temporary penalty relief (so-called safe harbors) on December 20,20222. As the EU Directive explicitly allows for such safe harbors, there is a high probability that these will also find their way into national implementation laws, including in Germany.

Temporary facilitations

The OECD proposes temporary relief for the first three fiscal years (i.e., up to and including 2026 or 2026/2027). For this purpose, it uses stock data from the country-by-country report, which must come from so-called qualified consolidated or individual financial statements. Three tests are performed on the basis of this data. If one of these tests is met, the top-up tax for the respective tax jurisdiction is always zero.

• De minimis test: the group reports total local revenues of less than €10 million and local pre-tax profits of less than €1 million in the country-by-country report.
• Effective tax rate test: the Group has a simplified tax rate locally equal to or higher than the reference tax rate (15% for 2023 and 2024, 16% for 2025 and 17% for 2026).
• Routine Profit Test: The local pre-tax profit is equal to or less than the so-called Substance-based Income Exclusion Amount for all reporting units in this tax jurisdiction. This amount is calculated by multiplying payroll by the book value of property, plant and equipment.

The OECD also makes proposals for temporary penalty relief for the first three years. During this period, the competent tax authorities should refrain from imposing sanctions if the Group has taken appropriate measures to implement the global minimum taxation.

Permanent relief

In addition, the OECD is planning permanent relief, for example for reporting units that are not included in the consolidated financial statements due to their size and materiality. These can use simplified calculations based on their country-by-country report to prove that they meet the de minimis test or that their effective tax rate is at least 15%. Groups that have to make special calculations based on local supplementary taxes (Qualified Domestic Minimum Top-Up Tax) are also to benefit from simplifications.

Increasing importance of country-by-country reporting

Whether with or without relief to start with, global minimum taxation remains a formidable challenge for all groups with consolidated annual sales of more than €750 million. The scope and necessary quality of the data that must be generated from (group) accounting and processed for tax purposes place high demands on the systems and the cooperation of various teams within the company as well as with external consultants. At the same time, the country-by-country report is becoming even more important as a result of the simplifications. This report will not only have to be published by the companies in the future; it will also form the basis for the audit of the relief and will thus for the first time have a material significance for the amount of the tax burden of a group of companies.