We often hear about EU regulations and legislation, and among the many laws implemented in Europe in recent years, some represent the evolution of previous directives. One of these is the Global Minimum Tax ("GMT"). In an increasingly globalized and digitalized world, new fiscal issues emerge, such as the taxation of the digital economy, to ensure that taxation occurs in the locations where economic activity actually takes place.
Additionally, multinational corporations (and not only) have shifted their activities to countries with lower or even zero corporate taxes in order to maximize profits and access new markets, aiming to avoid corporate income tax, commonly referred to as Corporate Tax. This practice has undoubtedly led to a significant loss of revenue for the home countries of these companies. To create a fairer tax system, the OECD has proposed, through Pillar 2, a global minimum tax rate for corporations, ensuring that multinational companies must pay a minimum tax rate regardless of where they operate.
But before delving into the introduction of the GMT in Europe and its implications, we must start from the beginning of this process of community integration.
Premise
On the subject of minimum taxation, the OECD has evolved by producing a two-pillar strategy to provide a permanent plan for consolidating the global minimum tax. The proposed solution is as follows:
- Pillar 1 is a set of proposals necessary for harmonizing rules regarding the allocation of taxes for multinational companies. The first pillar takes a portion of the residual profits of companies and applies a different tax depending on the jurisdiction where the group's income is generated;
- Pillar 2 establishes a minimum income tax rate for large multinational corporations with a substantial economic footprint. A minimum rate of 15% is applied, contributing to increased tax certainty.
The introduction of Pillar 2
The OECD proposed Pillar 2, complete with Global Anti-Base Erosion (GloBE) rules and initiatives such as the Base Erosion and Profit Shifting (BEPS) project and the Digital Services Tax (DST), as early as 2021. The main goal has always been to curb tax avoidance that occurs globally due to the different tax rates across jurisdictions.
Pillar 2 was officially established in 2023 and will come into effect at the beginning of 2024, as recommended by the OECD.
Its introduction will undoubtedly have an impact on many globally active companies. This process will affect:
- Group tax planning;
- Increased tax rates on cross-border investments and profits in low-tax jurisdictions;
- Decreased foreign direct investments, especially from parent companies;
- Tax complexity;
- A slowdown in economic globalization.
Among the tools of Pillar 2, the GMT is essential, and we will explore it in more detail in the following paragraphs, as anticipated at the beginning of the article.
What is the GMT and what are its rules?
The global agreement was signed by about 130 countries worldwide in October 2021. The agreement was centered around reforming international taxation, introducing a minimum 15% tax for multinational or domestic business groups with annual revenues equal to or greater than 750 million euros.
The European Union introduced the GMT through EU Directive 2022/2523 ("Ensuring a global minimum level of taxation for multinational business groups and large-scale domestic groups in the Union") of the Council on 12/14/2022.
The Directive must be transposed by EU countries starting from January 1, 2024. As of early 2024, the Directive has been adopted by 18 European Union countries (including France), which introduced the Domestic Minimum Tax and the Supplemental Minimum Tax from the fiscal year following December 31, 2023, while the Supplemental Top-up Tax will only be introduced from the fiscal year following December 31, 2024.
In this section, we will explain the different types of tax in relation to the GMT and the general rules governing its application.
Here is a brief description:
- The primary rule, known as the "Qualified Domestic Minimum Top-up Tax" (QDMTT). According to this rule, a minimum tax is imposed and due by all businesses in a multinational or national group subject to low taxation in that country (tax rate below 15%);
- The general rule, or the Supplemental Minimum Tax (Income Inclusion Rule). According to this, the tax is due by the parent companies concerning their subsidiaries that are taxed below 15% in the country where they are located;
- The secondary or backup rule, the Supplemental Top-up Tax (Undertaxed Payment Rule), is due by one or more companies in a multinational group located in a specific country concerning other companies of the same group located in low-tax jurisdictions where the equivalent Supplemental Minimum Tax has not been applied (in full or in part) in other countries.
It is important to note that for the QDMTT payment, there is joint and several liability for all companies located in a given country, and the group is allowed to designate the responsible entity for paying the tax.
Simplified regimes may also apply depending on the circumstances.
The first simplified regime excludes the payment of the first rule, the top-up tax, and is available for companies in multinational or national groups located in a jurisdiction where their aggregate revenues and income are below 10 million euros and 1 million euros, respectively, on average over three years. The second simplified regime applies during the first three years of the regulations, starting from January 1, 2024, and is known as the Transitional Country By Country Reporting Safe Harbor, introduced by the OECD. Under this regime, it is presumed that the supplemental tax is zero in a given jurisdiction when the group's presence is minimal.
Does the GMT apply to all types of companies? The answer is no.
Certain sectors are excluded from its application, specifically companies operating in sectors tied to public administration or directly related to a state's government.
The exclusions include:
- Government entities;
- International organizations;
- Non-profit organizations;
- Pension funds;
- Investment funds or real estate investment vehicles that are expenses of multinational partnerships.
Implications of the introduction of the GMT
The introduction of the GMT into national law will inevitably have consequences, both positive and negative, for companies globally and for public administrations.
Negative implications include
- Increased complexity in compliance, leading to higher control costs;
- More complex management processes for administrative departments;
- Higher costs for managing tax documentation and tax advisory services;
- Increased complexity and costs for tax authorities;
- The need to recruit and train new professionals specialized in the field.
However, it is important to highlight the positive contributions of the global tax reform implemented with the introduction of the GMT.
In fact, its application could enable companies to:
- Allocate resources more efficiently;
- Achieve greater regulatory consistency internationally;
- Smoother implementation of new tax regimes;
- Better alignment between companies and tax authorities;
- Foster organizational innovation within corporate groups.
Conclusion
The global spread of the GMT is ongoing and linear across many countries. Indeed, interest in this new directive and its impact on tax planning is also significant internationally.
As previously mentioned, 18 European countries have introduced the GMT into their legal systems as of the beginning of 2024, and the remaining countries will do so during the year.
GMT is also in effect in Switzerland from January 1, 2024, but for now, it is limited to the QDMTT. In Asia, many countries are in the final stages of implementing the regulation, including Japan, Hong Kong, Indonesia, Malaysia, South Korea, Thailand, Vietnam, and many others. On the other hand, China, India, and the Philippines have publicly announced their intention not to implement it. The UK, in an effort to simplify taxation, introduced Pillar 2 starting in July 2023, specifically an IIR as part of the 2023 Finance Act.
Pillar 2 has been the subject of heated debate in the United States. The Biden administration had introduced a 15% minimum tax for companies, known as the Corporate AMT ("Alternative Minimum Tax"), for fiscal years beginning after December 31, 2022. Today, the debate is considered closed, and the GMT in the US remains an unmet goal. Finally, Mauritius, Qatar, and the United Arab Emirates have approved the introduction of GMT into their respective legislation, although the details are not yet known.
Given the international trajectory of global tax law, it is essential for the management of a corporate group to have a clear strategic direction at the fiscal level and beyond.
Preparation for the implementation of the GMT is necessary, identifying its impact on business activities, the readiness of the involved stakeholders, and producing the right initiatives, even if complex and time-consuming.