Pilíř 2 iniciativy BEPS 2.0. – efektivní sazba daně

Pillar 2 of BEPS 2.0 - effective tax rate

In this part of the series on the BEPS 2.0 - Pillar 2 initiative, we will look at the calculation of the effective tax rate. One would expect this to be obvious, as you divide the tax by the profit and you're done - not quite, let's take a closer look at the calculation.

In previous articles, we've covered what adjusted covered taxes are and what qualifying income (profit or loss under the GloBE rules) is. We also defined what is considered a constituent entity, or where a permanent establishment or tax transparent entity falls.

The effective tax rate is determined at the jurisdiction level. In other words, the qualifying income of all constituent entities in a jurisdiction (with certain exceptions, such as investment entities as defined in the Pillar 2 rules) are added together and their adjusted covered taxes are added together as well. The ratio of the sum of the taxes and the positive sum of the qualifying income will give us the effective tax rate for the jurisdiction. This calculated rate is compared to the minimum 15% tax rate.

If the calculated rate is less than 15% (we then speak of a top-up tax percentage), an excess profit is calculated, from which the top-up tax for the jurisdiction is then determined. The excess profit is the total qualifying income for the jurisdiction net of the so-called substance-based income exclusion. This exclusion is determined as 5% of the qualifying payroll costs and 5% of the value of the qualifying tangible assets (this is simply the net book value of, particularly land, buildings and equipment, unless held for sale, lease or investment). For a transitional period until 2032, the percentages are higher[1].

The top-up tax is then calculated as the product of the positive amount of the adjusted excess profit and the top-up tax percentage.

Based on the draft local implementations of Pillar 2 available so far, it appears that the states will apply the domestic top-up tax in large numbers, and that the calculation of the domestic top-up tax will be the same (or very similar) to the calculation of the top-up tax presented above. It can then be assumed that individual states will levy a domestic top=up tax and that the top-up tax will not subsequently be levied at the level of the ultimate parent entity.

Mathematically, the calculation of the effective rate and the top-up tax does not look complicated - take two numbers, subtract or divide them and that's it. The problem is where to get the numbers and what is behind the various definitions, e.g. what exactly is the net book value of qualifying tangible assets, how to determine the qualifying payroll costs for employees working at home country and abroad. At EY we have a detailed guidance and a process to help you remember and prepare for the fact that this information and data will need to be prepared for the 2024 return and as in any other tax procedure, the burden of proof is on the taxpayer.

The Ministry of Finance has announced that it will release the first draft of the Czech implementation this week. You can look forward to the continuation of our series on Pillar 2. If you have any questions, please contact the author of this article or the EY tax team with whom you regularly work.

Author:

Karel Hronek
 

[1] For payroll costs, the percentage gradually decreases from 10% for 2023 to 5.8% for 2032 and for tangible assets from 8% for 2023 to 5.4% for 2032. From 2033 onwards, 5% will apply.