Multinationals need to be prepared: Romania, through the voice of its Minister of Finance, Adrian Câciu, is starting preparations for the implementation of the Minimum Tax Directive as of January 1, 2023.
What can Romanian companies expect? Miruna Enache, Head of EY Romania’s Transaction Tax Advisory Division, explains in an analysis.
As the administrative and compliance costs for the introduction of the global minimum corporate tax (GloBE) will be minimal, as assured by the Organisation for Economic Co-operation and Development (OECD), where the Government will really have to work will be in adapting the legislation to take into account all specific situations and prepare clear rules to ensure an easy application of the European Directive.
The measure to introduce a global minimum tax was announced as revolutionary by the whole tax world in the middle of last year and provides for the introduction of a minimum tax of 15% on the profits of multinationals and their taxation in the countries where they make profits.
From a technical point of view, the OECD gives assurances that “the GloBE rules have been designed with the aim of minimizing cost and complexity for both tax authorities and taxpayers in the context of the tax policy objectives of Pillar Two”. The Organisation’s arguments include the fact that the new measure uses the thresholds and definitions already known to countries in their country-by-country reporting, the so-called CbCR. i.e. entity-level financial information and existing accounting standards will be used, without adjustments; transactions in a jurisdiction where less than €1 million in profit and €10 million in revenue are earned will be excluded.
The intention is that the ultimate parent entity, the one with the ability to pay the required amount, will pay a tax difference only where appropriate. Moreover, the future implementation framework will include additional administrative guidance on reporting and payment obligations: countries may develop certain rules to help ease compliance burdens for multinational companies.
The OECD is also considering the possibility that not all countries, although most of the world’s countries have signed up to the global minimum tax, may be able to apply the rules at the same time and on the same low-tax income.
To eliminate the risk of over-taxation, under OECD rules, priority rules are applied to ensure that the global minimum tax rules are deactivated in situations where the low-taxed income is already subject to minimum tax elsewhere. In addition, the minimum corporate tax rules ensure that all jurisdictions implementing GLOBE have the same starting point, both in terms of the regime and interpretation. The inclusive framework will also ensure that the rules work effectively in a coordinated way as countries move into the implementation phase.
In addition, countries adopting the OECD rules will not be obliged to introduce additional domestic taxes on their resident taxpayers but may choose to do so. To the extent that a country chooses to implement the qualified domestic minimum tax, such a tax will reduce the amount of additional tax that might otherwise be applicable under the GloBE rules and payable in another jurisdiction.
For example, if an additional tax of €100 is payable in a particular jurisdiction, but that jurisdiction imposes its own minimum qualified domestic tax of €100 as well, then there will be no additional tax payable under the GloBE rules.
With a minimum effective tax rate of 15%, the GloBE rules are expected to generate around $150 billion in additional global tax revenue per year. This includes not only the revenue expected from the application of the rules themselves but also additional corporate tax revenue expected from the reduction in profit shifting as a result of the introduction of the rules. A 15% jurisdictional effective tax rate is a significant step up from the often very low historical rates for foreign source income of multinationals.
The GloBE rules are expected to reduce the pressure felt by governments to provide tax incentives, tax reductions or partial tax eliminations to investors. In addition, it is expected that developing countries will be able to further protect their tax base through the application of a treaty that will allow countries to retain the right of taxation, which they would otherwise have surrendered under a tax treaty, on certain payments made to foreign related parties, which often pose BEPS risks, such as interest and royalties.
But beyond the OECD’s assurances, let’s see what the effects will be for companies around the world and in Romania.
First, the European Union approved in December 2021 a draft directive for BEPS 2.0, which will introduce from 2023 and 2024 respectively common provisions in the Member States on the application of the Income Inclusion Rule and the Under-taxed Payments Rules respectively. This takes into account the specific characteristics of the European Single Market and the definitions and rules that will have to be implemented in each Member State. The European rules will also cover domestic groups with a cumulative turnover of more than €750 million and the parent entity applying the Inclusionary Income Rule will pay the additional tax not only for subsidiaries in third jurisdictions but also for entities resident in the Member States. Member States may choose to implement the additional tax for group entities located in their territory.
Romania will have to adapt its legislation to include these new tax rules, covering also specific situations (such as micro-enterprises, the situation where a group entity located in Romania has to apply the additional minimum tax, even if it is not a holding company, etc.). The preparation of clear rules for the practical application of the new rules is extremely important (just as the implementing rules for all the European legislation implemented in Romania have proved extremely useful).