On 20 December 2021, the OECD published the model rules on global minimum taxation ("Pillar Two"), on which around 140 countries have agreed as part of the work of the OECD's Inclusive Framework. By the so-called GloBE rules (Global Anti-Base Erosion), the Inclusive Framework countries want to ensure that the profits of large MNE Groups are effectively taxed at a rate of at least 15%.
The EU has closely followed the development of Pillar Two and issued a draft directive already on 22 December 2021. As soon as the directive is unanimously approved by the EU member states, all of them will in principle be obliged to transpose the directive into domestic law.
Overview of the regulations
Theoretically, all MNE Groups with a consolidated turnover of at least €750 million in at least two of the last four consecutive financial years fall within the scope of the Pillar Two rules.
In a first step, the constituent entities need to be determined. Generally speaking, these are all fully consolidated entities as well as permanent establishments. Once the constituent entities have been determined, their respective GloBE income needs to be calculated on a stand-alone basis. The starting point is the financial result for group reporting purposes, but before any consolidation amendments. The entity's income is subsequently adjusted by numerous items and results in the qualifying income or loss for GloBE purposes.
The next step is to determine the adjusted covered taxes for each constituent entity. In principle, these are all taxes incurred on profit or income. Deferred taxes must also be taken into account, in particular as part of the total deferred tax adjustment amount.
The qualifying income or loss and the adjusted covered taxes of all constituent entities located in a jurisdiction are aggregated on a country-by-country basis to calculate the effective tax rate of this jurisdiction (jurisdictional blending).
If the effective tax rate in a country amounts to less than 15%, a top-up tax will be assessed to reach the 15% minimum taxation which is due by the Ultimate Parent Entity of the MNE group.
Need for action
The OECD has published an extensive commentary to facilitate the application of the complex GloBE rules. Nevertheless, there is still a long way to go before the rules will be implemented and become applicable. For example, there are still discussions on the administrative framework and potential safe harbour rules to reduce complexity for the taxpayers.
We expect that the Pillar Two directive will be agreed on by the EU Member States during the next months. Then, all member states including Germany will have to implement the directive into domestic law. For the taxpayers who have their Ultimate Parent Entity located in Germany, the German implementation law will be decisive to determine the top-up tax.
However, in principle, within the EU, differences in the local implementation should rather be limited. This might be different outside the EU. Moreover, it needs to be seen whether domestic top-up taxes will be implemented in some states.
According to our experience from ongoing Pillar Two projects, the key issue is to identify the required data to conduct the Pillar Two compliance, the sources for the relevant data and a process to collect such data. As this process including the implementation in the local IT systems could take months, taxpayers should start the preparation in time as the entry-in to-force of Pillar Two is envisaged for the year 2024.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
