Explanatory Memorandum to COM(2021)823 - Ensuring a global minimum level of taxation for multinational groups in the Union - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)823 - Ensuring a global minimum level of taxation for multinational groups in the Union. |
|---|---|
| source | COM(2021)823  |
| date | 22-12-2021 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The Council Conclusions of 27 November 2020 confirmed the Council’s continued support of the work at the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) aimed at reaching a global consensus-based solution taking into account the interests of all Member States in order to ensure that all corporations pay their fair share of tax on profits generated by their activities in the EU.
This Directive lays down rules for ensuring minimum level of effective corporate taxation of large multinational groups and large-scale purely domestic groups operating in the Single Market, which are consistent with the agreement reached by the IF on 8 October 2021, and follow closely the OECD Model Rules agreed by the IF and published on 20 December 2021.
As an extension to the 2015 OECD BEPS project, the IF worked on a solution to address the tax challenges arising from the digitalisation of the economy. The discussions focused around two work streams: Pillar 1, which proposes a partial re-allocation of taxing rights towards market jurisdictions and Pillar 2, which proposes to introduce minimum effective taxation for large multinational groups. The two pillars aim to address different, but related issues linked to the increasing globalisation and digitalisation of the economy. The twin policy goals of Pillar 1 and 2 are to deal with remaining BEPS challenges and to put a floor on excessive tax competition between jurisdictions.
Pillar 2 consists of two rules intended for introduction in national domestic tax laws, and a treaty based rule. The two domestic tax rules, the Income Inclusion Rule (IIR) and its backstop, the Under Taxed Payments Rule (UTPR), together known as the Global anti-Base Erosion (GloBE) rules. The Subject to Tax Rule (STTR) is a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments that are subject to tax below a minimum rate. The OECD Model Rules contain provisions in respect of the GloBE Model Rules only.
The detailed implementation plan included in the October 2021 IF statement states that national implementing provisions for the GloBE Model Rules should be operational and applicable from 1 January 2023.
As the European Union with a Single Market is a closely integrated economy, it is important to ensure that the two-Pillar agreement is implemented in a coherent and consistent way across Member States. In order to ensure this level of implementation within the EU and compatibility with EU law, the principal method for implementing Pillar 2 in the EU is by way of a Directive. The Directive implements the GloBE Model Rules only. The STTR is naturally suited to be addressed in bilateral tax treaties. The Directive reflects the global OECD agreement, with some necessary adjustments, to guarantee conformity with EU law.
• Consistency with existing policy provisions in the policy area
This Directive builds on the Communication from the Commission to the European Parliament and the Council “Business Taxation for the 21st Century” presented by the Commission on 18 May 2021 1 .
The implementation of the GloBE Model Rules in the EU could have implications for existing provisions of the Anti-tax Avoidance Directive (ATAD) 2 and specifically for the Controlled Foreign Company (CFC) rules, which could interact with the primary rule of Pillar 2 – the IIR. The Commission has explored how to best accommodate the interaction between the CFC of the ATAD and the IIR, and concluded that it is not necessary to amend the ATAD in this regard. Moreover, it is consistent with the OECD Model Rules to continue the application of the ATAD CFC rule in parallel to the GloBE Model Rules. In practice, ATAD CFC rules will apply first and any additional taxes paid by a parent company under a CFC regime in a given fiscal year will be taken into consideration in the GloBE Model Rules by attributing those to the relevant low-taxed entity for the purpose of computing its jurisdictional effective tax rate.
Secondly, the transposition of the GloBE Model Rules in the EU should pave the way for agreeing the pending proposal for recasting the Interest and Royalties Directive (IRD) 3 , which has been in the Council since 2011. The aim of the recast Directive was to make the benefits of the Directive (which eliminates withholding tax obstacles to cross-border interest and royalty payments within a group of companies) conditional on the interest being subject to tax in the destination state. Some Member States held the view that the IRD should go further and set a minimum level of tax in the destination state as a condition for benefiting from the absence of withholding tax. The implementation of the GloBE Model Rules in the EU should resolve the issue under discussion for recasting the IRD.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 115 of the Treaty on the Functioning of the European Union (TFEU) is the legal base for legislative initiatives in the field of direct taxation. Although no explicit reference to direct taxation is made, Article 115 refers to directives for the approximation of national laws as those directly affect the establishment or functioning of the internal market. For this condition to be met, it is necessary that proposed EU legislation in the field of direct taxation aims to rectify existing inconsistencies in the functioning of the internal market. In the current scenario, the absence of rules ensuring minimum effective corporate taxation across the Single Market is such existing inconsistency. Article 115 stipulates that legal measures of approximation under that article shall take the legal form of a Directive.
• Subsidiarity (for non-exclusive competence)
This proposal complies with the principle of subsidiarity as set out in Article 5 Treaty on European Union (TEU). The nature of the subject requires a common initiative across the internal market.
This Directive introduces minimum effective taxation primarily for large multinationals’ profits operating in the internal market and beyond. It provides a common framework for implementing the OECD Model Rules into Member States' national laws in a coordinated manner and adjusted for EU law requirements.
Action at EU level is necessary, as it is imperative to ensure a uniform implementation of the OECD Model Rules in the EU. Firstly, the OECD Model Rules are “a common approach”, so it would be important to have one set of uniform rules and a common minimum level of protection in the internal market. In the EU, a market of highly integrated economies, there is a need for common strategic approaches and coordinated action, to improve the functioning of the internal market and maximise the positive impact of minimum effective taxation of business profits. This can only be achieved if legislation is enacted centrally and transposed in a uniform fashion.
Furthermore, as multinational groups are usually present in several EU Member States and the GloBE Model Rules have a cross-border dimension, it is essential that no disparities arise in the operation of the rules, for example, in the method for computing the effective tax rate or the top-up tax liability. Such disparities could create mismatches and distort fair competition in the internal market. It is therefore critical to adopt solutions that function for the internal market as a whole and these can only be achieved at Union level.
An EU initiative would add value, as compared to what a multitude of national implementation methods can attain. Given that the GloBE Model Rules have a strong cross-border dimension, action at EU level would balance divergent interests within the internal market and consider the full picture, to identify common objectives and solutions. Finally, the measures to implement the OECD Model Rules have to be enacted in accordance with primary law and follow a common line across the Union, to provide taxpayers with legal certainty that the new legal framework is compatible with the EU fundamental freedoms, including the freedom of establishment.
• Proportionality
The proposal complies with the principle of proportionality as set out in Article 5 of the TEU.
The OECD Model Rules apply to Multinational Enterprises with a combined group turnover of at least EUR 750 million based on consolidated financial statements. The envisaged measures do not go beyond ensuring minimum effective taxation of such entities operating in the internal market and they are consistent with the OECD Model Rules as well as with EU law requirements. The extension of the Income Inclusion Rule (IIR) to large-scale domestic groups (with a combined group turnover of at least EUR 750 million) is expected to involve a limited number of taxpayers and is limited to the essential minimum for securing EU law compatibility of the rules of the Directive. The Directive does not therefore go beyond what is necessary to achieve its objectives and respects the principle of proportionality.
• Choice of the instrument
The proposal is for a Directive, which is the only available instrument under the legal base of Article 115 TFEU.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
Most Member States are members of the OECD and have participated in detailed technical discussions on Pillar 2 work stream between 2019 and 2021. Moreover, the OECD experts gave regular updates and answered questions from the Council on the project.
The OECD organised public consultations on some elements of the Pillar 2 design in December 2019 and January 2021, culminating with online public conferences for both events. Furthermore, the Commission has debated internally, with some Member States and with OECD experts, in particular, where the Commission has had doubts about certain technical aspects of the proposed solutions.
Furthermore, on 6 November 2019, DG TAXUD organised a meeting of Working Party IV and Member States had the opportunity to debate: objectives and principles for the modernisation of international business taxation, legal aspects and the CJEU case law implications for the possible approaches for the modernisation of international business taxation and specific design options for the modernisation of international business taxation.
As the Pillar 2 Directive will implement an internationally agreed standard for ensuring minimum effective taxation of corporate profits of large multinational groups and the OECD has consulted publicly quite extensively on this subject, considering a very tight timeline for implementation of such standard, the Commission has decided to proceed with this proposal for a Directive without undertaking a public consultation.
• Impact assessment
No impact assessment was carried out for this proposal for the reasons explained below.
On 12 October 2020the OECD Secretariat published an Economic Impact Assessment, which was prepared to support the discussions by the Inclusive Framework around design questions associated with the Pillars 1 and 2 proposals. The Economic Impact Assessment was produced by the OECD Secretariat in consultation with Inclusive Framework members, OECD Working Party No.2, other international organisations, the academic community and other stakeholders.
In this context, the Commission did not produce an own complete impact assessment. However, the Commission Services carried out its own preliminary estimate of the impact of Pillar 2 of the proposed OECD/IF international corporate tax reforms, which was presented in the Council on 25 October 2019.
In essence, the important policy decisions have already been taken by the Inclusive Framework and at the highest political level (G20 Finance Ministers and G20 Heads of States). All EU Member States which are members of the Inclusive Framework 4 have already agreed on the main aspects of Pillar 2 and committed to apply the OECD Model Rules. The EU would have no policy options to choose from as key elements of the framework, such as the scope or tax rates and base, have already been prescribed and agreed on.
In addition, there is an extreme political urgency to go forward with the project – i.e. to apply the OECD Model Rules in the EU already from the beginning of 2023, as agreed by the Inclusive Framework. This means that it is essential to have a swift adaptation and implementation process of the initiative for the EU Member States.
4. BUDGETARY IMPLICATIONS
This proposal for a Directive does not have any budgetary implications for the EU.
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
The Directive aims to provide rules to ensure minimum level of taxation for large multinational enterprises and large-scale domestic groups, in consistent terms with the global agreement reached by the IF of 8 October 2021 and further to the OECD Model Rules agreed by the IF and published on 20 December 2021, in circumstances where a Member State is required to apply the GloBE Model Rules.
Contents
- General architecture of Pillar 2
- Chapter I General Provisions
- Chapter II Application of the Income Inclusion Rule and the Under Taxed Payments Rule
- The Income Inclusion Rule (IIR)
- Domestic Top-Up Tax
- The Undertaxed Payments Rule (UTPR)
- Chapter III Calculation of the Qualifying Income or Loss
- Chapter IV Computation of Adjusted Covered Taxes
- Chapter V Calculation of the Effective Tax Rate and the Top-Up Tax
- Chapter VI Special Rules for Mergers and Acquisitions
- Chapter VII Tax Neutrality and Distribution Regimes
- Chapter VIII Administrative Provisions
- Chapter IX Transitional Rules
- Chapter X Specific application of the IIR to large-scale domestic groups
- Chapter XI Final Provisions
Pillar 2 consists of two rules intended for introduction in national domestic tax laws, and a treaty based rule. The two domestic tax rules, the Income Inclusion Rue (IIR) and its backstop, the Undertaxed Payments Rule (UTPR), are together known as the GloBE Model Rules. The Subject to Tax Rule (STTR) is a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments that are subject to tax below a minimum rate. However since this will be for jurisdictions to implement individually, there will be no EU action in relation to the STTR and this proposal does not concern the STTR.
Pillar 2 applies to groups of multinational enterprises (MNEs) and large-scale domestic groups that have a combined annual group turnover of at least EUR 750 million based on consolidated financial statements. This threshold was decided by the IF in order to ensure consistency with existing international corporate tax policies such as the rules on Country-by-Country Reporting (CbCR). Government entities, international organisations, non-profit organisations, pension funds and investment funds that are Ultimate Parent Entities (UPEs) of an MNE Group are not subject to the GloBE Model Rules.
The IIR works by imposing a top-up tax on a parent entity in respect of the low-taxed income of group entities (which are referred to as constituent entities). The IIR applies on a top-down basis, which means that it is applied by the entity that is at, or near, the top of the ownership chain in the MNE Group, which is normally the UPE. However, in case where the UPE does not apply the IIR, one or more intermediate parent entities (IPE) will have to apply the IIR to their low-taxed constituent entities. The IIR is subject to a split-ownership rule for shareholdings below 80%. This means IIR will be applied by a partially-owned parent entity (POPE) to its controlled subsidiaries of a sub-set of the MNE Group in priority to the UPE when such POPE is owned by more than 20% by shareholders outside of the MNE group. In case there are several POPEs in an MNE group, the IIR will be applied by the POPE closest in the chain of ownership to the low-taxed constituent entity.
The UTPR acts as a backstop to the IIR and applies in situations where there is no qualifying IIR in the jurisdiction of the UPE or where a low level of taxation arises in the jurisdiction of the UPE. The UTPR works by allocating top-up tax to a jurisdiction to the extent the low-tax income of a constituent entity is not subject to tax under an IIR. The UTPR allocates top-up tax to jurisdictions based on a two-factor formula – carrying value of tangible assets in the jurisdiction and number of employees in the jurisdiction. While the global agreement endeavours the IIR to be operational from 1 January 2023, the UPTR is required to be implemented one year later.
The GloBE Model Rules operate by imposing the top-up tax on a jurisdictional basis utilising an Effective Tax Rate (ETR) test. If the ETR of an MNE group’s constituent entities computed together as one in a jurisdiction falls below the minimum tax rate of 15%, then top-up tax is due in respect of each of the constituent entities in this jurisdiction, in order to bring the ETR of that jurisdiction up to the minimum rate. The ETR for a period is computed by dividing corporate and equivalent taxes attributable to that period for that jurisdiction (known as adjusted covered taxes) by the adjusted income of that MNE Group for this jurisdiction. The ETR test is both a trigger for the application of the Pillar 2 rules and also a measure of how much additional tax is due by the MNE Group.
The GloBE Model Rules also provide for a substance carve-out based on a formula, which aims to reduce the impact of Pillar 2 on MNE groups in a jurisdiction, where they are carrying out real economic activities.
Implementation in the EU – design options and other choices
The Directive implements the GloBE Model Rules in the EU based on the OECD Model Rules and taking into account specifics of EU law and the Single Market. As the Directive implements an internationally agreed standard for ensuring minimum effective taxation for large multinational groups, only limited options and choices were available in the design of the Directive.
While the Directive, in general, closely follows the OECD Model Rules, it extends its scope to large-scale purely domestic groups, in order to ensure compliance with the fundamental freedoms. In addition, the Directive makes use of an option offered in the Commentary to the Model Rules whereby the Member State of a constituent entity applying the IIR, which is usually the jurisdiction of the UPE, is required to ensure effective taxation at the minimum agreed level not only of foreign subsidiaries but also of all constituent entities resident in that Member State and permanent establishments (PEs) of the MNE group established in that Member State. The OECD Model Rules provide that the jurisdiction which applies the IIR takes into account the ETR of only foreign constituent entities.
Chapter I of the Directive deals with general provisions, namely the subject matter, scope, definitions, and location of a constituent entity.
The scope of the Directive is defined by reference to constituent entities located in the Union that are part of MNE groups or large-scale domestic groups (consisting of Constituent Entities as members) with a consolidated group revenue of at least EUR 750 million in at least two of the four preceding years. For various policy reasons, such as to preserve the tax neutrality principle and in line with the OECD Model Rules, the following entities are excluded from the scope of the Directive: governmental entities, international organisations, non-profit organisations, pension funds and, provided that they are at the top of the group structure, investment entities and real estate investment vehicles. Entities that are owned at least 95% by excluded entities are also excluded from the scope of the Directive.
In connection with the location of a constituent entity, including a PE, the Directive deems that a constituent entity, other than a PE or flow-through entity, is located in the jurisdiction where it is considered as resident for tax purposes. Where the location of such constituent entity cannot be ascertained based on this rule, then it is deemed to be located in the jurisdiction where it was created. The Directive also determines the location of a constituent entity that is a PE, and includes tie-breaker clauses for specific situations.
Chapter II sets out the rules for the application of the IIR and the UTPR by Member States.
Under the rules of the Directive, the IIR applies in the following situations:
UPE in the EU
If the UPE is located in the EU, it will be subject to the top-up tax in respect of its low-taxed constituent entities in the same and other EU Member States as well as in third country jurisdictions.
IPE/POPE in the EU with UPE outside the EU;
If there is no UPE in the EU, the low-taxed constituent entities of the MNE group in the EU would effectively be taken into account by the third-country UPE of the Group if it applies the IIR. However, if there is at least one POPE or one IPE (if the jurisdiction where the UPE is located does not apply an IIR) in the EU, then the IPE/POPE will be subject to the top-up tax in respect of their low-taxed directly or indirectly owned constituent entities in the EU and third country jurisdictions.
POPE in the EU with UPE in the EU
Although a UPE located in the EU is normally charged the top-up tax in respect of its low- taxed constituent entities (see 1) above), there is also a possibility that the primary taxing right lies with the Member State of a POPE. In these cases, one has to follow a ‘bottom-up’ method in identifying the POPE that is liable to tax. One will have to start from the lowest-tier wholly-owned constituent entities and move up to the first POPE, which will be liable to top-up tax under the IIR in respect of its low-taxed constituent entities. The other POPEs up to the UPE will also be subject to the IIR but with a right to receive a credit for top-up tax due by another POPE lower in the chain.
The Directive determines how much of a constituent entity’s top-up tax a Parent Entity is entitled to collect through the IIR. This allocable share is, in general, based on the proportion of the parent entity’s interest in the income of the low-taxed constituent entity.
Furthermore, in the case of large-scale domestic groups, the ultimate parent entity located in a Member State is subject to the IIR top-up tax in respect of its low-taxed constituent entities.
In order to preserve sovereignty of Member States, the Directive provides that a Member State can opt to apply the top-up tax domestically to constituent entities located in its territory (Domestic Top-up Tax). This election allows that the top-up tax is charged and collected in a jurisdiction in which low-level of taxation occurred, instead of collecting all the additional tax at the level of the UPE. When this election is exercised, the parent entity applying the IIR will be obliged to give credit for the qualified domestic top-up tax when calculating the top-up tax in respect of the relevant jurisdiction.
The Directive provides that in circumstances where the UPE is located outside the EU in a jurisdiction that does not apply a qualifying IIR, all its constituent entities in jurisdictions with an appropriate UTPR framework will be subject to the UTPR. In this circumstance, constituent entities of such an MNE group that are located in a Member State will be apportioned, and will have to pay in their Member State, a share of the top-up tax linked to the low-taxed subsidiaries of the MNE group.
The Directive provides that the UTPR will also apply to situations where the jurisdiction of the UPE operates a qualifying IIR but the UPE, together with its subsidiaries located in that same jurisdiction, are low-taxed. The top-up tax corresponding to the low-taxed UPE and its domestic subsidiaries will be charged through the UTPR to all the eligible entities across the MNE Group, including to entities that are located in a Member State. This should only happen when the UPE is located outside the EU because an EU-located UPE either applies the IIR principles to itself and to its domestic subsidiaries or acknowledges that top-up was locally charged via the Domestic Top-up tax. Therefore, there should be no top-up tax allocated under the UTPR when the UPE is located in the EU.
In line with the OECD Model Rules, the calculation and allocation of the UTPR top-up tax in the Directive is based on two factors: number of employees and carrying value of tangible assets.
Chapter III contains rules for the determination of ‘qualifying income’, i.e. the adjusted income that will be taken into account for computing the effective tax rate. In order to compute this income, we start with the financial accounting net income or loss of the constituent entity for the fiscal year, as determined for the purpose of preparing consolidated financial statements. Then adjustments are made to this income or loss as defined in Article 15.
In line with the OECD Model Rules, the Directive excludes international shipping income and partly ancillary international shipping income from the application of the GloBE Model Rules. This exclusion follows the principle whereby in national tax systems, income from shipping is often taxed pursuant to a separate set of rules from those of the mainstream corporate tax system.
This Chapter also includes rules specific to constituent entities that are a PE or a flow-through entity. In these cases, special rules are needed in order to avoid double counting or no counting of the income attributable to these entities. These special rules will also limit tax avoidance opportunities.
Chapter IV defines covered taxes and outlines the rules for the calculation of ‘adjusted covered taxes’ of a constituent entity for a fiscal year. The prime principle in allocating covered taxes is to assign them to the jurisdiction where underlying profits subject to these taxes were earned.
To ensure this principle, the Directive also provides special rules in respect of cross-border taxes or income streams in the case of a PE, transparent entity, controlled foreign company, a hybrid entity, or taxes on dividends.
Chapter V contains rules for the calculation of the effective tax rate of an MNE group in a jurisdiction for a fiscal year. The effective rate is computed by dividing the adjusted covered taxes of the group by the adjusted income earned by the group, in a specific jurisdiction for the fiscal year.
In line with the global agreement, the Directive sets the minimum effective tax rate for the purposes of the GloBE Model Rules at 15%.
Chapter V also deals with the calculation and allocation of the top-up tax. Firstly, the top-up tax percentage is computed for a jurisdiction as a difference between the minimum effective tax rate of 15% and the ETR of the jurisdiction. This top-up tax percentage is then multiplied by the income for the GloBE purposes of that jurisdiction for the year in question.
The substance-based income exclusion (if any) is also deducted from this amount to arrive at the jurisdictional top-up tax. In line with the GloBE Model Rules, the Directive provides for a substance-based income exclusion based on payroll costs and tangible assets. The filing entity of an MNE group can elect not to apply the substance-based income exclusion for a jurisdiction.
Finally, the top-up tax for each constituent entity in a jurisdiction is obtained by apportioning the jurisdictional top-up tax among constituent entities in that jurisdiction based on the income for the GloBE purposes of each constituent entity in that jurisdiction.
The Directive provides that when, as a result of an adjustment made to covered taxes or qualifying income or loss to a prior fiscal year, there is an additional top-up tax to be collected, such top-up tax should be treated as additional top-up tax for the fiscal year under review.
In order to reduce compliance burdens in low risk situations, an exclusion applies to minimal amounts of profit: the de minimis income exclusion. This is when profits of the MNE group’s constituent entities in a jurisdiction are below EUR 1 million and revenues below EUR 10 million. In such circumstances and provided that the election of the de minimis income exclusion is taken, the top-up tax of the constituent entities in this jurisdiction is deemed to be zero for GloBE purposes.
This chapter contains special rules in respect of mergers, acquisitions, joint ventures, and multi-parented MNE groups. It provides for the application of a consolidated revenue threshold to group members in a merger or demerger situation. When a constituent entity is acquired or sold by an MNE group within the scope of the rules, such a constituent entity should be treated as part of both groups during the year, with certain adjustments to the values of the attributes used for the operation of the GloBE Model Rules (covered taxes, eligible payroll, eligible tangible assets, GloBE deferred tax assets). There are rules for the recognition of a gain or loss, and carrying values in a transfer of assets and liabilities, including reorganisations. There is a special provision to include joint ventures, which would otherwise not be included in the definition of an MNE group for the GloBE purposes. Finally, there is a specific rule for multi-parented MNE groups in a way that group entities are treated as part of a single MNE group.
Chapter VII contains rules in respect of tax neutrality regimes and distribution tax systems.
In order to avoid unintended outcomes, such as a disproportionate UTPR top-up tax liability in an MNE Group, the Directive provides for special rules for the computation of the income of the ultimate parent entity, where such an entity is a flow-through or subject to a deductible dividend regime.
In respect of investment entities, there are specific rules for the determination of the ETR, the top-up tax, an election to treat them as tax transparent entities, and an election to apply taxable distribution method.
In relation to distribution tax systems 5 , the Directive provides that, on an annual election by the filing entity with respect to constituent entities which are subject to an eligible distribution tax system, a deemed distribution tax is included in the calculation of the adjusted covered taxes of the relevant constituent entities. This involves maintaining a deemed distribution tax recapture account for each fiscal year for which the election is made. If, in a four-year period, no tax is paid at the minimum rate on such deemed distribution, and the constituent entity has not incurred an allowable loss, then the top-up tax is payable based on the outstanding balance of the recapture account for the year in question.
Chapter VIII contains administrative provisions, including filing obligations.
The Directive obliges a constituent entity of an MNE group located in a Member State to file a top-up tax information return, unless the return is filed by the MNE group in another jurisdiction, with which the Member State has an exchange of information agreement.
The required return may be filed either by the constituent entity or by another designated local entity located in the Member State on its behalf.
If the constituent entity is relieved from filing the return it must nevertheless notify its tax administration of the identity and location of the constituent entity filing the return for the MNE group.
The returns must be filed within 15 months after the end of the fiscal year to which they relate to.
The Directive also lays down penalties for when an MNE group fails to comply with the obligations laid down in the Directive.
Chapter IX contains transitional rules. These rules outline how to determine some aspects of the GloBE Model Rules when a group has to apply them for the first time [in order to reduce the compliance burden]. The Chapter also covers transition rules for the substance-based income exclusion; parameters for carving domestically earned income out of the IIR and UTPR for large-scale domestic groups and MNE groups, respectively, in their initial phase of activity; a transitional relief for filing obligations and portfolio shareholdings.
This Chapter extends the application of the IIR to purely domestic groups located in a Member State if they meet the EUR 750 million threshold. This specific aspect of the EU rules is meant to avoid any risk of discrimination in a Member State between an entity that belongs to a group with cross-border activities and a group with purely domestic activities. These large-scale domestic groups will compute their ETR and, where relevant, be charged any top-up tax due under the IIR.
In order to maintain an equal treatment with regard to MNE groups that are in the first stages of their international activities, this Chapter also grants to large-scale domestic groups a 5-years transitional period during which their low-taxed domestic activities will be excluded from the application of the rules.
The Inclusive Framework members are expected to implement the Model Rules that integrate the agreement on a global minimum level of taxation for MNE groups in the Union by the end of 2022. Subsequently and in due course, the OECD Inclusive Framework is expected to peer review the national transposition rules of the participating members of the Inclusive Framework, in order to determine whether these national rules can be treated as “qualified”; namely, whether they comply with the letter and spirit of the Model Rules.
Moreover, in a separate process, the OECD Inclusive Framework will establish conditions under which the US GILTI regime will co-exist with the GloBE rules, to ensure a level playing field. This follows the expected request from the US to consider their legal framework which is currently in the process of being revised as equivalent to the content of the global agreement and in particular, to the primary rule, ‘Income Inclusion Rule’. The Directive sets out conditions which will enable the Commission to assess the equivalence of third country systems and include the jurisdictions who fulfil the relevant conditions in a list annexed to the Directive. The Commission will also be assigned the function of modifying the annexed list as a result of a subsequent assessment after a third country jurisdiction modifies its legal framework. The amendment of the Annex will have to be carried out in conformity with the rules on delegated acts.
This Chapter also refers to the beginning of the application of the rules of the Directive, which is set for 1 January 2023, with the exception of the UTPR for which the application will be deferred to 1 January 2024.
Fig 1. Flow chart of the operation of the rules in the EU