All you need to know about the new global minimum taxation
On 1 July 2021, the representatives of around 130 OECD countries and on 10 July 2021 the finance ministers of the twenty leading industrialised countries (G20) agreed on a historic tax reform for large corporations after lengthy negotiations. The final approval of the heads of state of the G20 countries is expected to take place at the end of October 2021 after the last substantive issues have been clarified. The reform is to come into force in 2023.
Two Pillar Conzept
The global agreement on international tax reform is intended to ensure that multinational companies with a turnover of EUR 20 billion or more and a profit of at least 10% pay more taxes in those countries in which they operate. The agreement is based on a “two pillar” approach developed by the OECD in 2020.
The measures of the first pillar aim at a redistribution of taxation rights of the individual states. The adjustments are intended to take account of the development of new business models that allow companies to generate revenue even without a physical presence in a territory. The focus is particularly on
- highly automated, digital services
- provided by large multinational corporations
- to a large number of customers or users.
As a result, part of the global residual profit of the multinational group of companies, which is currently taxed (tending to be low) at the level of the ”central entrepreneur”, should in future be allocated to the respective market or user states for taxation.
According to the cornerstones of the tax reform, there should be a redistribution of 20 % to 30 % of all profits of a multinational enterprise that exceed the profit threshold of 10 % of turnover.
The measures of the second pillar (Pillar Two) aim at introducing a global minimum taxation. Large multinational corporations are to be subject to a group-wide minimum taxation of 15%, irrespective of the countries in which they carry out their business activities. All companies and permanent establishments that are to be included in the scope of consolidation of a large group according to recognised accounting standards are to be covered by the concept of minimum taxation. Among others, investment and pension assets as well as international organisations and non-profit organisations are excluded from the scope of application of the global minimum taxation.
The following concepts are currently available for the implementation of minimum taxation:
The “GloBE Rules“: The GloBE rules aim to raise the taxation of low-taxed subsidiaries or permanent establishments within large, multinational corporations to at least a specified minimum level:
- „Income Inclusion Rule““Income Inclusion Rule – IIR”: foreign, low-taxed income of subsidiaries or permanent establishments is to be taxed at the minimum tax rate of 15% at the group level by attributing the income of the low-taxed subsidiary to the parent company and raising it to the minimum taxation level. The concept essentially corresponds to the already known CFC or attribution taxation regimes (in Austria comparable to the existing regulation of § 10a CITA)
- „Switch-over rule – SOR“:In the respective double taxation agreement, it is to be ensured that the credit method is applied to low-taxed profits of foreign permanent establishments using the minimum tax rate instead of the exemption method. (Via the MLI, a SOR has already been introduced for certain constellations, for example in the DTA Austria/Poland).
- „Undertaxed Payment Rule – UPR“:Essentially, it provides for a prohibition of deduction for cross-border payments that are not sufficiently taxed at the level of the recipient belonging to the group. The UPR is intended to be a subordinate catch-all mechanism. (in Austria comparable to the existing regulation of § 12 para 1 no 10 CITA).
The „Subject to tax rule“ is not listed under the GloBE rules, as its application is not to be limited to large multinational groups: The withholding tax rights of the state from which a tax-deductible payment flows are to be adjusted (upwards) to the minimum taxation level, provided that the payments are not taxed or are taxed at a low level in the state of residence of the payee. In particular, deductible interest and royalty payments as well as rental payments and guarantee fees are to be included in the material scope of application of the subject to tax rule.
Goals of global minimum taxation
Both the representatives of the 130 or so OECD countries currently supporting the tax reform and the finance ministers of the G20 countries hope that the introduction of a global minimum tax will above all reduce the differences in tax rates between the individual countries, prevent the shifting of profits to non-taxing or low-taxing countries and curb tax competition between countries.
According to OECD estimates, the introduction of a global minimum tax of 15% is expected to generate between USD 150 billion and USD 200 billion in additional tax revenues annually.
Initial estimates suggest that the introduction of a global minimum tax would affect around 100 companies worldwide, led by the major US tech giants Apple, Facebook, Google, Microsoft and Amazon.
However, the actual work on the exact implementation of the tax reform is still pending, as so far only cornerstones have been agreed at the global level. Numerous questions remain unanswered; in particular, it remains completely unclear on which tax base the minimum tax is to be levied.
Moreover, the plans for a global minimum taxation are not approved by all states. In particular, states such as Estonia, Hungary and Ireland, which want to boost their attractiveness as business locations by means of comparatively low income taxation, apparently see the introduction of a global minimum tax as an attack on their national sovereignty. It therefore remains to be seen how the final implementation of the global minimum tax will turn out.