Global minimum tax rate

finally, a fairer approach to tax?

Global minimum tax rate

Large, globally active digital corporations make huge profits every year, but they often pay no or very little tax on these profits. The long-awaited solution is now here: the 15% global minimum corporate tax rate adopted on 1 July 2021. The following article gives an initial insight into the upcoming reforms of international tax law. 

One of the main reasons for this tax-related injustice is the international tax law framework, which is almost 100 years old: it is not tailored to the modern global digital industry. As a result, online giants often only make a ‘profit’ in a few countries because the sale of goods or services is not carried out via an Austrian (subsidiary) company, for example, but via a Luxembourg company, who provides them to the end customer. Often, there is merely a logistics centre in Austria, but these logistics services are not sufficient to establish a tax nexus with Austria. Thus, although sales are made in Austria and, most likely, profits are also made from Austrian customers, tax is not incurred in Austria – precisely because of the missing nexus. This is unfair (according to many) because these companies use local infrastructure, especially roads, to make a profit in the country. 

In addition to the lack of a nexus, internationally active groups can reduce any national tax bases through expenditure: tax is paid on income but this is relatively negligible due to the low base. The tax base is usually reduced by high royalty payments, e.g. paid by an Austrian subsidiary to a sister company that owns the rights. 

If properly structured, (i) these royalty payments are recognised as business expenses in Austria, (ii) no withholding tax is levied on these royalty payments in Austria, and (iii) to put it simply, these royalty payments are tax-free or low-taxed for the (ultimate) recipient. This is unfair because these options are not available to a domestic company, meaning that these domestic companies are taxed much higher, comparatively. 

On 1 July 2021, 131 (out of 139) OECD/ G20 countries agreed on a 2-pillar solution. Pillar one looks at establishing a nexus to a country through revenue generation. Pillar two is ensuring a global minimum corporate tax rate of (as things stand) 15%. The two pillars are not to be considered in isolation: they interact with each other (see below in the article). 

Not all of the 139 countries of the ‘Inclusive Network on BEPS’ (BEPS stands for Base Erosion Profit Shifting) have joined the declaration for the time being: for example, in Europe, Hungary, Ireland and Estonia are missing from the list of participating countries. It remains to be seen whether these states will bow to political pressure. The details of the regulations are still rather vague, which is why only an initial rough overview can be provided here. 

Pillar one 

Under pillar one, multinational enterprises (MNEs) are to pay taxes where they operate. The MNEs covered are groups with a global annual turnover of more than 20 billion euros and a profitability of more than ten percent. A nexus to a country will exist if the MNE generates annual revenue of at least one million euros within a market jurisdiction. 

This revenue threshold is EUR 250,000 for states with a GDP of less than 40 billion euros. The basic idea is that between 20% to 30% of the profit above the 10% profitability threshold is allocated to the market states as a tax base, under a set revenue-based distribution key. 

Pillar two 

The main goal of the second pillar is the implementation of a ‘single tax principle’: this means that corporate profits should be taxed at least once at the minimum tax rate. However, if the state with the primary right of taxation does not tax these corporate profits at the minimum tax rate, this right of taxation should fall to the other states involved. Systematically, this is to be implemented as follows: on the one hand, ‘Global Anti-Base Erosion Rules’ (GloBE) will be implemented at the local level. 

These consist of: (i) the Income Inclusion Rule (IIR) and (ii) the Undertaxed Payment Rule (UTPR). 

The IIR regime provides for a ‘top-up tax’, which affects a parent company via its income from subsidiaries taxed at low levels. The UTPR will provide for the prohibition of deduction (at source) of expenses to the extent that the low-taxed income is not taxed under the IIR. 

The GloBE rules will apply to MNEs with an annual turnover of more than EUR 750 million. However, individual participating states may also apply the IIR rule to MNEs resident in their state if they have annual turnover of less than EUR 750 million. 

At the level of double taxation treaties, the ‘Subject to Tax Rule’ (STTR) is intended to implement withholding taxation on certain payments between associated enterprises if these payments are taxed below the minimum corporate tax rate. Taxes paid under the STTR are to be credited against the taxes under the GloBE.

If the plans currently provided by the OECD countries are adhered to, these laws are to be adopted at national level in 2022 and enter into force in 2023. At present, any remaining ambiguities are to be eliminated via the detailed implementation plan in October 2021. 

At this point, it is important to wait and see what the exact content of the regulations encompasses: only time will tell whether the goal of creating a fairer taxation system will be achieved. In any case, companies can gain a competitive edge in their local country by means of instruments other than just (income) tax advantages, such as time-limited exemptions from social security contributions, relief from other ancillary wage contributions or the promotion of certain industries through public subsidies. 

In any event, we will keep you informed about further developments. 


AUTHOR:

Mag. Daniel Kocab, LL.M.,Attorney-at-Law at LANSKY, GANZGER + partner

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