Confirm whether the Member State’s legislation adheres to international guidance
International discussions on the rules are continuing in the Inclusive Framework and among the recent developments are the release of safe harbor rules as well as more detailed guidance. These developments were anticipated in the drafting of the directive and additional safe harbors and more guidance is expected in the coming months and beyond.
Member States will need to consider how to reflect later guidance in their local implementation, especially where the guidance expands or even differs the literal wording of the globally agreed model rules on which the EU rules are based. Keeping an eye on how Member States align their legislation with international developments is key, as deviations may affect the impact on businesses.
Determine when the Member State will begin applying the new taxes
Member States must generally apply the rules from FY 2024. Therefore, the IIR will apply for fiscal years starting on or after 31 December 2023. However, the UTPR generally applies for fiscal years starting on or after 31 December 2024. Member States that have a small number of headquartered groups within the scope of the rules can opt to delay their application of the rules for six consecutive fiscal years.
Member States are generally expected to adhere to the deadlines provided in the directive. However, determining when exactly Member States will apply their domestic top-up taxes is important given potential new additional tax and compliance obligations. Member States could align the domestic top-up tax with the IIR (2024) or delay them a year in alignment with the UTPR (2025). In the case of small Member States, elections for delayed application of the rules should be verified as these elections can potentially shift tax and compliance obligations elsewhere.
Evaluate how the Member States’ tax incentive regimes may be impacted, reshaped and potentially replaced
Many jurisdictions worldwide provide tax incentives such as special investment zones, patent box regimes or R&D credits. The minimum tax rules may impact the value of frequently used tax incentives. This could be the case if the incentive reduces a business’s effective tax rate below 15% in a jurisdiction. In such a case, the effects of the incentive may be reduced or eliminated as the top-up tax effectively taxes the incentive. The potential impacts of the new rules on incentives may vary greatly depending on the design of the incentive.
This reality has resulted in a worldwide reassessment of incentive regimes. Jurisdictions may decide to remove tax incentives altogether, re-examine designs or replace them with non-tax subsidies or incentives. In the EU, the interaction with incentives is particularly topical considering discussions on the EU’s competitiveness and the European Commission’s Green Deal Industrial Plan, which includes the relaxation of state aid rules and the potential introduction of new subsidies and tax incentives. It is therefore key to monitor how the EU and each Member State will respond to the interaction of the new rules with existing and future tax incentives.