Author: Aija Lasmane, Sorainen Tax partner

What is Global Minimum Tax?

On October 8, 2021 an agreement between OECD countries was reached on two work directions regarding business income taxation, of which:

  • the first pillar relates to new profit-sharing rules, which aim to redistribute the surplus profits of large international groups to jurisdictions where consumers or users are located, regardless of whether the group companies are physically located in those jurisdictions. The first pillar is still under discussion;
  • the second pillar envisages the introduction of a Global Minimum Tax for large international business groups.

Both pillars aim to address different but related issues related to the ever-increasing globalization and digitization of the economy. The dual objectives of Pillar One and Pillar Two policies are to address base erosion/profit shifting and to provide a basis for preventing excessive tax competition between jurisdictions.

On December 15, 2022, the Council of the EU approved a directive on determining the Global Minimum Tax level for international business groups in the EU (the Directive).

The Directive introduces international business tax reforms at the EU level in accordance with Pillar Two, setting the conditions for the introduction and application of the Global Minimum Tax in EU countries, mainly for the profits of large international groups operating in the internal market and beyond.

Pillar Two is a revolutionary tax system that will apply uniformly worldwide. It is designed to ensure that multinational enterprises pay a minimum tax of 15 % on the local income arising in each jurisdiction where they operate.

Who is affected?

Global Minimum Taxation affects multinational groups with a minimum turnover of EUR 750 million. According to OECD estimates, this means that around 8.000 enterprises worldwide are be subject to this tax. The intention of Pillar Two is to ensure that the income of enterprises arising in the countries in which they operate is taxed at an effective rate of at least 15 % through the levying of a “top-up tax”.

The rules on Global Minimum Tax are highly complex and it is already apparent that the corresponding tax compliance/accounting effort – as well as the time needed for this – will be immense. A comprehensive “Top-up Tax Information Return” must be filed for each company and permanent establishment to be included, and significant penalties may be imposed for a late or omitted submission. For the companies affected by this, the question now arises as to what potential impact the national implementation of Pillar Two rules will have on their internal processes and how future compliance can be ensured.

Top-up tax can be levied

  • either at the level of the so-called “Ultimate Parent Entity”, i.e. the parent company of the group, or
  • in the country of the companies that are effectively low-taxed (so-called Domestic Top-Up Tax).

Baltic countries elected not to apply the Top-up tax for the Ultimate Parent Entities located in the Baltic countries for six consecutive fiscal years beginning from 31 December, 2023 until January 1, 2030 in accordance with Article 50 of the Directive (exemption available for the Member States in which no more than twelve ultimate parent entities of groups within the scope of this Directive are located).

However, the exemption for the Ultimate Parent Entities does not release the Baltic subsidiaries of qualifying multinational groups to calculate Global Minimum Tax (except if they qualify for De minimis exclusion). For the local subsidiaries De minimis exclusion according to Article 30 of the Directive is available for the fiscal year, if:

(a) the average qualifying revenue of all constituent entities located in the jurisdiction is less than EUR 10,000,000; and

(b) the average qualifying income or loss of all constituent entities in such jurisdiction is a loss or is less than EUR 1,000,000.

Domestic top-up taxes in Baltic countries

Currently, we are monitoring if and how the domestic top-up taxes will be introduced in the Baltic countries.

The issue is not so urgent in Latvia and Estonia, which have eligible distribution tax systems. According to Article 40 of the Directive, a filing constituent entity may make an election for itself or with respect to another constituent entity that is subject to an eligible distribution tax system to include the amount determined as a deemed distribution tax and postpone the tax payment up to four years.

Lithuania has not introduced the domestic top-up tax yet. In some cases, this could potentially result in additional calculated tax at the level of the Ultimate Parent Entity. The probability is quite high because the nominal corporate income tax rate in Lithuania is 15%, and several tax incentives can decrease the effective tax rate significantly below 15%. Nevertheless, the Law transposing the Directive will enter into force in Lithuania from 1 July this year, which at this stage, in parallel to the postponement of the above-mentioned provisions until 2030, specifies the obligation for entities affected to report data on the annual results. However, given that Lithuanian entities are likely to be adversely affected by the Global Minimum Tax, the market expects that the Government will consider and suggest proposals on how to substitute existing corporate income tax exemptions effectively for such entities.

Thanks to the Sorainen business partnering model with the WTS Global network of tax advisors, we are familiar with international group tax structures and have established one of the most innovative tax advisory concepts on the market. We also apply this special expertise when advising on Pillar Two.

Read the full article here.