5 minute read 9 Dec 2021

Global agreement on historic corporate tax deal introducing a global minimum tax of 15 percent.

The Global Minimum Tax: could it impact my organization?

Authors
Peter Moreau

EY Belgium International Tax Leader

Passionate to deliver and solve. Family man and father of 2 boys. Love the outdoors.

Max Van den Bergh

EY Belgium International Tax and Transaction Services Executive Director

Passionate tax advisor. Team player. Running and golfing. Love the outdoors.

5 minute read 9 Dec 2021

Global agreement on historic corporate tax deal introducing a global minimum tax of 15 percent.

In brief

  • A new framework for international corporate tax rules, BEPS 2.0, has been developed by the OECD.
  • Belgian multinationals will be impacted as this new framework puts a floor on corporate income tax competition by introducing a global minimum corporate tax rate of 15%.

G20: World leaders agree to historic corporate tax deal.”
“Leaders of the world's 20 major economies have approved a global agreement that will see the profits of large businesses taxed at least 15%
.”

You have likely come across these headlines end of October. But what do they mean? And how will the OECD impose and implement such a global minimum taxation? How will this be calculated? And who will receive this tax money? Tax professionals around the world are wondering if their organization will be subject to these new rules and how to assess them.

From BEPS 1.0…

After the financial crisis (2008-2009) and multiple international cases of tax evasion and aggressive tax planning, the OECD (Organisation for Economic Co-operation and Development) decided to take measures against the erosion of the tax base and shifting of profits. This resulted in various recommendations and EU-driven tax reforms, the so-called BEPS (Base Erosion and Profit Shifting) Action Plans. Many of these measures already found their way into European and Belgian tax legislation.

However, the OECD and G20 determined that there are remaining gaps and that current international tax rules still allow large multinationals to earn significant income in a country without paying (a minimum level of) corporate income tax in that or any other country. In particular, the digitalization of traditional business models and the emergence of many new business models challenged the rules for taxing international business income. In this respect, the BEPS Action Plans did not implement measures which directly or indirectly forced countries to increase their statutory tax rate to a certain minimum standard. While international tax planning changed with BEPS 1.0, the competition of countries on the applicable statutory tax rate had not.

… to BEPS 2.0

The OECD and G20 continued to work on these challenges and now, more than 130 countries, representing more than 90 percent of global gross domestic product (GDP), developed a new framework for international corporate tax rules, also referred to as BEPS 2.0.

The framework is far-reaching and will affect multinational enterprises across industries, irrespective of their level of engagement in the digital economy, including Belgian multinational enterprises or Belgian companies of foreign multinational enterprises. Belgian small and medium sized enterprises will however not be impacted by these proposed rules. The new framework is comprised of Pillar One and Pillar Two.

 

What is this all about?

Pillar One aims to ensure a fairer distribution of profits and taxing rights of the largest multinational enterprises among countries. It intends to reallocate (a part of) the profit of these enterprises to the jurisdictions where sales arise irrespective of the physical presence in those jurisdictions. Currently, the proposed rules remain vague, and it is still not clear if and how Pillar One will be implemented.

Pillar Two may have a more far-reaching impact to Belgian multinationals. It puts a floor on corporate income tax competition through the introduction of a global minimum corporate tax rate of 15 percent. These minimum taxation rules would apply to all multinational enterprises with an annual revenue over 750 million euros.

The rules are rather complex. They basically allow the country where the ultimate parent company is located (in Belgium in case of a Belgium multinational) to directly tax this parent company on income that is generated in a foreign country to the extent that this foreign income was taxed at an effective tax rate lower than 15 percent. Moreover, the rules are designed in such way that if the country where the ultimate parent company is located, does not implement these rules, or when intercompany payments are made to the ultimate parent company that are subject to a low level of tax (at the level of the ultimate parent company), countries where the MNE is active in, can claim this so-called top-up tax. In addition, rules will also be implemented to subject certain payments to a withholding tax if the beneficiary of the payment is not subject to minimum level of tax. These rules are likely to trigger changes in local country rules and rates, especially in those the countries that may lose tax income or business.

Tax incentives provided to encourage economic activity, such as the Belgian innovation deduction, may (partly) be accommodated through a carve-out rule. However, it is expected that these rules will put significant pressure on these types of incentive regimes and hence companies benefitting from tax incentives in general should closely monitor the impact of these new rules.

The importance of financial accounts

For purposes of determining the effective tax rate, the financial statements and accounts of the  companies within the MNE group will play a crucial role. Therefore, the way a transaction or arrangement is accounted for, may have an important impact on the calculation of the effective tax rate and thus, if additional taxes may be imposed. The calculation and monitoring of the minimum tax for a multinational is likely to lead to important and complex assessments and annual addition compliance and reporting.

Timeline

The timeline of these new global minimum taxation rules is extremely ambitious. The OECD and the EU are working hard to have these rules in place by 2023, giving taxpayers limited time to prepare.

What can I do to prepare?

It goes without saying that these proposals are a significant switch from current international taxation standards and will change the fundamental elements of the longstanding global framework for taxing international businesses. They will undoubtedly create an additional burden for taxpayers and additional layers of calculations, compliance, and reporting.

Corporate taxpayers should prepare themselves for these new rules and understand the potential impact to their organization’s tax liability. A proper understanding of these new rules is key. In order to assess how these rules will impact your organization, it is best practice to run an impact assessment in parallel. Such assessment will definitely add value when preparing for these new rules and will force the thinking about future restructurings and investments that possibly may have an impact on the global tax cost. In addition, finance and tax departments throughout the organization should already pro-actively assess if the required financial, accounting and tax data can be gathered in a structured and efficient way or if new protocols need to be put in place.

Our EY international tax teams are ready to guide you through these new rules and assessment.

Register for our global webcast and visit our Belgian webcast page for an exclusive BEPS 2.0 webcast coming up in January.

 

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Summary

Multinational companies with a global turnover exceeding 750 million euro will become subject to the global minimum tax. The introduction of such tax will change the fundamentals of international tax and companies should prepare themselves for these new rules. They should understand the potential impact on their organization as these new rules may have an impact on their global tax cost and investment strategies and locations.

About this article

Authors
Peter Moreau

EY Belgium International Tax Leader

Passionate to deliver and solve. Family man and father of 2 boys. Love the outdoors.

Max Van den Bergh

EY Belgium International Tax and Transaction Services Executive Director

Passionate tax advisor. Team player. Running and golfing. Love the outdoors.