BEPS 2.0 – a global minimum tax, as another variation on the reorganization of the international tax system to level the playing field.
The Organisation for Economic Co-operation and Development (OECD), comprising 38 countries, along with the G20, a group of 19 countries along with the European Union, have made decisions aimed at equalizing the budgetary opportunities of countries in terms of generating revenues from taxing the largest giants of international business.
The BEPS package (Base Erosion and Profit Shifting), presented by the OECD and G20 in 2013, was the first step towards a new international tax system reform. The goal was to limit aggressive tax optimization mainly used in cross-border transactions. In November 2021, a total of 137 countries and jurisdictions (including all European Union countries) joined the directional declaration developed by the OECD and G20 regarding the so-called BEPS 2.0. Subsequently, in December 2021, the European Commission published a draft directive outlining the implementation of the BEPS 2.0 principles. These are additional steps in achieving the aforementioned goal, presenting the concept of introducing a package of changes in the tax systems of participating countries, divided into Pillar I and Pillar II. The first of these (Pillar I) is based on the concept of taxing the largest companies in the digital industry. Pillar II is a concept aimed at ensuring a fair and market-adjusted distribution of profits generated by the largest capital groups to the budgets of participating countries.
Given that the entry into force of the provisions defined by the directive is planned for all European Union countries as early as 2024, solutions under Pillar II are particularly important in terms of the components of the state budget in the very near future.
The goal of a global minimum tax is to eliminate tax competition between countries and level the playing field for state budget revenues to a 15% taxation level for capital group companies. However, we are talking about the so-called effective tax rate in a given jurisdiction, calculated taking into account possible exemptions and reliefs. The rules are to apply to members of capital groups whose annual consolidated revenues exceed 750 million euros. This is not a random threshold. The same threshold establishes the obligation to report Country-by-Country (CbC reporting), which equips tax administrations with tools to assess transfer pricing risk.
Top-up tax is the right to impose an additional tax by countries where entities from the capital group are headquartered. It concerns the additional taxation of the income of the entity concentrating the group’s profits in a country where the effective tax rate is less than 15%. The first in line with the right to impose such an additional obligation will be the country of residence of the so-called ultimate parent entity, the main company for the capital group. If it does not exercise this right, the next in line will be all other countries where the remaining entities of the capital group are headquartered. By remaining entities, we mean those that are neither the ultimate parent entity nor the entity concentrating the majority of profits in the group. According to the proposed regulations, the distribution should be fair, based on the proportion of the use of employees and the initial value of fixed assets used to generate profits by entities in those countries.
Substance carve-out is the possibility of excluding income from the global minimum tax regime. The exclusion will apply to income generated using economic substance, as defined by the regulations. The criteria will be indicators based on the use of fixed assets and the amount of salaries. Therefore, assets and employees, two pillars generating income, which in an expanded form will help capital group companies reduce the risk of being subject to a new tax obligation. This is a plus on the one hand. However, for entities generating the highest profits in the capital group (ultimate parent entity), but not based on the involvement of a large number of employees and assets, this idea of global legislation will turn out to be a driver for the compulsory reorganization of the entire capital group. The choice of the country of residence for the entity concentrating the highest profits in the capital group will no longer be based on the criterion of a low effective tax rate.
The OECD has published a model of a global equalization tax declaration. The form consists of dozens of detailed pages of information allowing an assessment of the risk of the capital group and the entities forming it. It is also the basis for assessing the correctness of regulations on obligations arising from the new tax within the group if it applies to them. Given the scale of administrative and reporting obligations imposed on taxpayers under new regulations, so-called transitional safe harbour rules have been provided to help navigate the new reality at the outset.
The discussed regulations are based on a directive. By its nature, a directive is only a set of general principles that member states are obliged to implement into their legal systems. The details are already discretionary. What does this mean for Polish companies and the Polish budget?
In the long run, certainly greater interest in the use of R&D relief, IP Box, or finally, activities in a special economic zone. The only option currently planned to exclude income from the international minimum taxation regime is substance carve-out. Therefore, incentives and exemptions from corporate income tax will take on new significance. Currently, not all eligible entities are taking advantage of them, mainly due to the fact that it often involves a significant investment of time and resources to set up the tax position of the company. A defence file for a Polish company to secure itself in the event of a potential tax authority audit often requires coordination with the company overseeing the group. Often, capital groups opt out of such solutions. Generating a stream of costs in the form of interest payments, purchasing licenses involving regular payments from a Polish company, or finally, purchasing intangible services from the group is a faster way to current income reduction, and consequently a lower tax obligation of the entity.
It should also be remembered that negotiations are still ongoing regarding the first pillar (Pillar I), the main goal of which is to tax digital activities. Among other things, a change in the definition of permanent establishment, which would lead to the obligation to pay tax by entities/branches whose activity in a given country does not have only a physical character but is manifested, for example, by the number of users using virtual goods.
All of this is expected by the OECD, in the long run, to increase corporate income tax revenues to the budgets of member states by over $200 billion annually. In the context of the new regime, capital groups will be forced to reorganize. The new regulations will force increased interaction between the tax administrations of individual countries. Therefore, we can expect a revolution in the global tax system. The question is only whether we will actually be able to effectively implement the planned mechanisms as expected by experts. Work on the reform is still ongoing, so to answer this question, we must be patient.
Dziękujemy za zapis do newslettera!
Na Twój adres e-mail wysłaliśmy link potwierdzający.
Spróbuj jeszcze raz.