The challenges posed by the European Directive on minimum taxation for enterprises

España - 
Patxi Arrasate, partner of Garrigues Tax Department

Enterprises are facing one of the most important new tax developments in the last years due to the Directive which establishes a global minimum tax of 15% for large groups operating in the EU. Besides its effects on the tax burden, the Directive (which is expected to be transpose in Spain in the next months) will require the affected groups to perform an exercise of identification and analysis of data which, due to the difficulty entailed, should be initiated as soon as possible.

On December 23, 2022, Council Directive (EU) 2022/2523 was approved, establishing a global minimum tax for large groups of companies with a presence in the European Union (EU). This minimum tax will amount to 15% of the profit of business groups with annual income of 750 million euros or more, if their ultimate parent entity, intermediate parent entity or subsidiaries reside in any EU Member State.

The Member States must transpose the Directive in 2023 in order for it to apply starting on January 1, 2024. Spain already began this process in March and expects to complete it in the upcoming months. According to the Directive, the groups must file the first global minimum tax return (in general) before June 30, 2026.

The Directive is framed in a broader initiative sponsored by the OECD, known as Pillar 2, which will apply in all OECD inclusive framework countries. The application of both measures will mean that the groups of companies with billings that exceed the amount indicated and with a presence in the EU or in OECD inclusive framework countries, will have to bear a minimum tax of 15% on their profits in all the countries where they operate. 

The Directive and Pilar 2 share objectives and methodology. The global minimum tax follows a “top-down” approach since, as a general rule, it will be charge to the group’s ultimate parent entity.

Thus, the primary rule (the income inclusion rule) establishes that these parent entities must pay the tax relating to all the jurisdictions where the group operates, where it does not achieve the minimum level of taxation of 15%. That is why we are referring to a global minimum taxation. 

There is also a secondary rule (the undertaxed profit rule) which ensures the collection of this tax by the intermediate parent entity of the group where the primary rule does not apply (for example, because the parent entity’s jurisdiction is outside the scope of application of the Directive and of Pillar 2).

In addition, it envisages that the states can adopt domestic taxes (qualified domestic top-up taxes) to ensure a minimum taxation of 15% in the jurisdictions where the group companies operate, which shall be deducted from the group's global taxation. These domestic taxes will mean that the minimum tax will be collected in the jurisdictions of the operating subsidiaries that generate the group's profits, rather than in that of their parent entity, which is why the large majority of the countries included in the initiate will presumably elect to establish these local taxes. 

Major challenges for enterprises

The new Directive represents a challenge for the affected groups at several levels.

First, obviously these groups may have to bear more taxation for their operations in countries with nominal corporate income tax rates below 15% or that provide tax incentives which reduce their effective rates to below that threshold. In this regard, some enterprises are already working on the impact analysis to identify the jurisdictions where there are currently tax deficiencies and estimate the increase in taxation which could result from the application of this new provision.

Secondly, the calculations of the minimum taxation envisaged in the Directive and Pillar 2 are highly complex and will require enterprises to perform an arduous exercise of identification, compilation and analysis of data. It is highly recommendable for the affected groups to begin listing the information they will need and preparing protocols or methods which facilitate extracting it from their systems sufficiently in advance of the filing date of the first tax return. It is positive that the OECD has published a report envisaging three-year transitional "safe harbor" rules, which will greatly simplify the calculations where certain ratios are met, rules that we hope will be included in the national regulations of the States.

Moreover, the Directive establishes a five-year exclusion period for exclusively national groups, or which are in the initial stages of their international expansion.

Not only are the calculations complex but so are the new rules’ fit within the legal framework of the different countries. The Directive and Pillar 2 adopt a technical approach, detailing the methodology to be followed very precisely but mainly using accounting or economic, rather than legal, concepts and terms. That means that the transposition into the legislation of the States generates doubts, for example, regarding the legal nature of the tax as complementary to or separate from corporate income tax, its compatibility with the tax treaties or, in the specific case of Spain, its fit within the provincial tax frameworks. Nor have we lost sight of the impact of these new rules on taxpayers that are subject to certain special tax rules (collective investment undertakings, maritime transport, special tax zones). All of this will be a source of controversy in the future if the laws transposing the Directive are not sufficiently detailed.

In short, we are facing one of the most important new developments in relation to global corporate taxation in the last years. It is therefore advisable – and many business groups are already doing so – to start advancing in the analysis of the impact of the measure, in order to start adapting to the new rules and assessing their effect on the enterprise’s income statement and internal processes.