Where did the minimum tax come from?
The need for a minimum tax came from the fact that taxpayers, especially large multinational companies, have specialized in reporting small incomes to avoid taxation. In particular, it is very popular to move profits out of the country where the company operates – for example, to famous tax havens.
With such actions, multinational companies easily demonstrate the powerful costs of doing business. They reduce the amount of income tax to be paid. In reality, however, they are close to zero, since the whole operation consists of the company “paying” another entity that belongs to the same group. However, the income that this company earns is not taxed so heavily because the company operates in a tax haven.
The introduction of a minimum tax is intended as a solution to curb such activities. Work on sealing the tax system in this way began as early as 2013 with the BEPS (Base Erosion and Profit Shifting) initiative. However, it took eight years to outline the final form of the agreement and to get signatories.
Pillar II Directive
Council Directive (EU) 2022/2523 of December 14, 2022, also known as the Pillar II Directive, is a document that regulates the introduction of a global minimum tax within the European Union. The provisions of the directive (which implements the BEPS initiative) have gained the approval of 140 countries. The aim of introducing the new rules is to counter two negative phenomena: tax competition and illegal tax optimization.
Poland has had a minimum tax since the beginning of 2024, which covers domestic capital groups. However, work on introducing a global version is quite advanced, with the project expected to be approved in the third quarter of this year.
Global minimum tax – who will be affected?
The new tax will apply to all large capital groups – that is, those with an annual turnover (worldwide) of 750 million euros or more in at least two of the last four fiscal years. It is worth noting that the minimum tax is to apply to all subsidiaries and tax establishments, assuming that the group meets the criteria for inclusion in the minimum tax.
Important!
The global minimum tax will cover both international groups and domestic groups (in which all entities are based in one country).
All entities that will be subject to the new tax will have to meet a number of new obligations. These include collecting and providing information on the basis of which it will be possible to verify whether the group should be subject to the minimum tax. In addition, taxpayers will face the need to analyze all available credits, exemptions and exclusions, as well as determine which entities (belonging to groups) will be required to pay the tax. All this will heavily involve the companies’ legal departments for weeks to come.
Global minimum tax – the main assumptions
The Pillar II directive calls for effective taxation of groups at 15%. What’s more, even if the group’s effective tax rate (ETR) in the selected country turns out to be lower than the set threshold, the group will pay a compensatory tax – all to bring the effective taxation to no less than 15%.
The directive provides for the use of two mechanisms to implement its provisions.
- Income Inclusion Rule (IIR) – is a rule for the inclusion of income in taxation. Its application means that the parent company in the group will be subject to a compensatory tax. The benchmark in this case will be the low-taxed income of the rest of the group’s entities (which still qualify for the minimum tax).
- Undertaxed Payments Rule (UTPR) – the Undertaxed Payments Rule is applicable in cases where the IIR mechanism cannot be applied. An example of such a situation could be taxation in a country that has not yet introduced global minimum tax legislation (now, for example, in Poland, where we can expect new legislation in January 2025).
One of the main goals of a global minimum tax is to equalize conditions across countries from a tax perspective. The introduction of the tax is intended to ensure that taxpayers do not make investment decisions based primarily on how much tax they would have to pay in a given jurisdiction. The equalization of tax rates will make it equally profitable to do business from an income tax perspective in all of the 140 countries that have decided to adopt the directive.
One of the most significant tenets of the global minimum tax is the allocation of the “surplus.” Groups that operate in jurisdictions where the tax rate is less than 15% will pay a compensatory tax to the treasury of the state where the company’s headquarters are located.
Important!
ABCDE Solutions has an annual turnover of more than €750 million. It is headquartered in Poland, but several of its subsidiaries operate in Qatar, where CIT is 10%. This means that on income earned in the country, the company will pay 10% tax in Qatar and the remaining 5% in Poland. In this way, the Polish treasury will benefit, and the ABCDE Solutions group will be taxed in the same way as all other capital groups in the EU.
Who will avoid the global minimum tax?
Each new regulation and tax brings with it a number of exceptions, exemptions and reliefs. In this case, those excluded from the equalization tax will be government entities, international non-profit organizations, and pension funds.
Among the new regulations, we will also find mention of a special exception. It will apply to entities that carry out actual activities in tax havens, and are not merely a smokescreen for the practice of moving income out of the country where the company is headquartered.
Controversy over global minimum tax
Such a major change as the introduction of a minimum tax could not go unnoticed. Of particular excitement is the fact that the global minimum tax covers groups that reach a certain turnover ceiling, which does not necessarily mean high revenues. What’s more, companies that record losses will also pay the tax, as it is based not on income, but on revenue. For this reason, there are voices saying that the global minimum tax should not be called a CIT (Corporate Income Tax), since this one directly refers to income.
