Legislative process completed before the end of 2023
The implementation of global minimum taxation (Pillar Two) has taken another important step forward shortly before the end of the year. On 15 December 2023, the Federal Council approved the law implementing Council Directive (EU) 2022/2523 to ensure global minimum taxation and other accompanying measures. The law was then promulgated in the Federal Law Gazette on 27 December 2023. Germany thus fulfils the requirements of the EU directive, which obliges the member states to implement it by 31 December 2023.
Global minimum tax in a two-pillar model
Since the Organisation for Economic Co-operation and Development (OECD) and the G20 countries presented their action plan in 2015, the international community has taken numerous measures to combat base erosion and profit shifting (BEPS). The latest important step is to address the special tax challenges of the digital economy. In mid-2021, agreement was reached on a so-called two-pillar model, with global minimum taxation representing the second pillar (Pillar Two) of this model. The first pillar (Pillar One) includes the expansion and redistribution of taxing rights between resident and market states and is still the subject of discussions at a political level.
The regulations published by the Inclusive Framework on BEPS essentially contain so-called GloBE (Global Anti-Base Erosion) measures, which are intended to ensure that large multinational corporate groups pay a minimum level of tax on their respective profits in all countries in which they operate. The GloBE rules include an Income Inclusion Rule (referred to in German law as "Primärergänzungssteuer"), which is to be applied as a matter of priority and has a similar effect to add-back taxation, and an Undertaxed Profits Rule ("Sekundärergänzungssteuer"), which is to be applied downstream. Minimum taxation is ensured by levying a top-up tax on profits in countries where the effective tax rate is below the minimum rate. The effective minimum tax rate is set at 15%.
Data collection and data analysis as key challenges
The minimum tax applies to groups of companies with a consolidated turnover of more than €750 million. The companies concerned must apply the provisions on the primary supplementary tax for the first time for financial years beginning after 30 December 2023 (i.e. regularly financial year 2024); the secondary supplementary tax will apply for the first time one year later. Determining the effective tax rate per country poses considerable challenges for companies, as numerous specific calculation rules are provided for when determining both the adjusted covered taxes and the minimum taxable income (GloBE income). Several hundred data points are required to comply with these rules; for large groups of companies with many foreign subsidiaries, the number of data points can be well into four figures. Data that is not yet collected in some cases - or at least is stored in different places in a group of companies and in different IT systems that are often not fully integrated.
A project to implement Pillar Two in a company therefore primarily means recording, defining and, in some cases, reorganising processes for data procurement and data analysis. These processes take time, especially in more complex or decentralised corporate groups. In order to gain this time and still be able to fulfil the legal requirements from 2024, the need for simplification regulations - at least in the transition phase of the introduction - was articulated by practitioners at an early stage. The OECD, the European Union and the German legislator have at least partially complied with this request.
Transitional arrangements for the first three years
During a transitional period of three years, companies can recognise the tax increase amount for a country as zero if one of three tests is met for the country in question. These are
- the simplified materiality test,
- the simplified effective tax rate test and
- the substance test.
For these three tests, companies can use data from the so-called country-by-country report, which they prepare annually and submit to the competent tax authority. The transitional regulations are therefore also referred to as the CbCR safe harbour.
The simplified materiality test is fulfilled if the CbCR for the respective country shows less than € 10 million in sales and less than € 1 million in profit or loss before taxes.
The simplified effective tax rate test is met if the simplified recognised tax expense (income tax expense according to the consolidated financial statements) in relation to profit or loss before taxes (according to CbCR) corresponds to at least the transitional tax rate. This amounts to 15% in 2023 and 2024, 16% in 2025 and 17% in 2026.
The substance test is met if the profit or loss before tax (in accordance with CbCR) is equal to or less than the substance-based allowance. The substance-based allowance is the sum of 5% of labour costs and 5% of tangible assets.
Further simplifications without a time limit
In addition to these temporary simplifications, both the OECD guidelines and the German Minimum Tax Act provide for permanent simplifications. These have significant systematic parallels to the temporary safe harbours, but are based on simplified GloBE calculations instead of CbCR data. These simplified calculation specifications still have to be published by the Inclusive Framework in separate administrative guidelines and will probably become part of the national implementation via a statutory order. Section 80 of the Minimum Tax Act (MinStG) already provides for such a simplification upon application for immaterial business units. A business unit is always immaterial if it is not included in the consolidated financial statements due to materiality considerations.
Country-by-country report is significantly upgraded
The introduction of the simplification and transitional regulations will significantly enhance the value of the country-by-country report. Until now, it has merely been a tax report format that is distributed to the tax authorities of the countries concerned and serves as a starting point for a risk assessment when auditing transfer pricing and other tax aspects of a corporate group. Through the implementation of Pillar Two, the CbCR data is directly linked to material tax consequences, in particular the question of whether the tax increase amount for a country may be set to zero in a simplified manner. It is therefore also to be expected that the basis of data determination for CbCR will become the focus of future tax audits.
From the 2025 financial year, there will also be a publication obligation within the EU for the income tax information report, which also contains key data from CbCR and is therefore also referred to as a "public country-by-country report".