In recent years, the Union has adopted landmark measures to reinforce the fight against aggressive tax planning within the internal market. The anti-tax avoidance directives have laid down rules against the erosion of tax bases in the internal market and the shifting of profits out of the internal market. Those rules converted into Union law the recommendations made by the Organisation for Economic Cooperation and Development (OECD) in the context of the initiative against base erosion and profit shifting (BEPS) to ensure that profits of multinational enterprises (MNEs) are taxed where the economic activities generating those profits are performed and where value is created.
(2)
In a continued effort to put an end to tax practices of MNEs that allow them to shift profits to jurisdictions where they are subject to no or very low taxation, the OECD has further developed a set of international tax rules to ensure that MNEs pay a fair share of tax wherever they operate. That major reform aims to put a floor on competition over corporate income tax rates through the establishment of a global minimum level of taxation. By removing a substantial part of the advantages of shifting profits to jurisdictions with no or very low taxation, the global minimum tax reform will level the playing field for businesses worldwide and allow jurisdictions to better protect their tax bases.
(3)
That political objective has been translated into the Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (‘OECD Model Rules’) approved on 14 December 2021 by the OECD/G20 Inclusive Framework on BEPS to which Member States have committed. In its report to the European Council on tax issues approved by the Council on 7 December 2021, the Council reiterated its firm support of the global minimum tax reform and committed to a swift implementation of that reform by means of Union law. In that context, it is essential that Member States effectively implement their commitment to achieve a global minimum level of taxation.
(4)
In a Union of closely integrated economies, it is crucial that the global minimum tax reform be implemented in a sufficiently coherent and coordinated fashion. Considering the scale, detail and technicalities of those new international tax rules, only a common Union framework would prevent a fragmentation of the internal market in the implementation of them. Moreover, a common Union framework, designed to be compatible with the fundamental freedoms guaranteed by the Treaty on the Functioning of the European Union, would provide taxpayers with legal certainty when implementing such rules.
(5)
It is necessary to lay down rules in order to establish an efficient and coherent framework for the global minimum level of taxation at Union level. That framework creates a system of two interlocked rules, together referred to also as the ‘GloBE rules’, through which an additional amount of tax (a ‘top-up tax’) should be collected each time that the effective tax rate of an MNE in a given jurisdiction is below 15 %. In such cases, the jurisdiction should be considered to be low-taxed. Those two interlocked rules are called the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR). Under that system, the parent entity of an MNE located in a Member State should be obliged to apply the IIR to its share of top-up tax relating to any entity of the group that is low-taxed, whether that entity is located within or outside the Union. The UTPR should act as a backstop to the IIR through a reallocation of any residual amount of top-up tax in cases where the entire amount of top-up tax relating to low-taxed entities could not be collected by parent entities through the application of the IIR.
(6)
It is necessary to implement the OECD Model Rules agreed by the Member States in a way that remains as close as possible to the global agreement, in order to ensure that the rules implemented by the Member States pursuant to this Directive are qualified within the meaning of the OECD Model Rules. This Directive closely follows the content and structure of the OECD Model Rules. To ensure compatibility with primary Union law, and in particular with the principle of freedom of establishment, the rules of this Directive should apply to entities resident in a Member State as well as to non-resident entities of a parent entity located in that Member State. This Directive should also apply to large-scale purely domestic groups. In that way, the legal framework would be designed to avoid any risk of discrimination between cross-border and domestic situations. All entities located in a Member State that is low-taxed, including the parent entity that applies the IIR, should be subject to the top-up tax. Equally, constituent entities of the same parent entity that are located in another Member State that is low-taxed should be subject to the top-up tax.
(7)
While it is necessary to ensure that tax avoidance practices are discouraged, adverse impacts on smaller MNEs in the internal market should be avoided. For that purpose, this Directive should only apply to entities located in the Union that are members of MNE groups or large-scale domestic groups that meet the annual threshold of at least EUR 750 000 000 of consolidated revenue. That threshold would be consistent with the threshold of existing international tax rules such as the country-by-country reporting rules set out in Council Directive 2011/16/EU (3), introduced by Council Directive (EU) 2016/881 (4). Entities within the scope of this Directive are referred to as ‘constituent entities’. Certain entities should be excluded from the scope of this Directive based on their particular purpose and status. Excluded entities should be those that generally do not carry on a trade or business and perform activities in the general interest, such as providing public health care and education or building public infrastructure, and which, for those reasons, might not be subject to tax in the Member State in which they are located. It is therefore necessary to exclude from the scope of this Directive governmental entities, international organisations, pension funds, and non-profit organisations including organisations for purposes such as public health. It should be possible that non-profit organisations also include health care insurers which do not seek or make any profit other than for the benefit of public health care. Investment funds and real estate investment vehicles should also be excluded from the scope of this Directive when they are at the top of the ownership chain, since the income earned by those entities is taxed at the level of their owners.
(8)
The ultimate parent entity of an MNE group or of a large-scale domestic group, where that parent entity directly or indirectly owns a controlling interest in all other constituent entities of the MNE group or large-scale domestic group, stands at the heart of the system. Since the ultimate parent entity is normally required to consolidate the financial accounts of all the entities of the MNE group or large-scale domestic group or, if that is not the case, would be so required under an acceptable financial accounting standard, it holds critical information and would be best placed to ensure that the level of taxation per jurisdiction for the group complies with the agreed minimum tax rate. Where the ultimate parent entity is located in the Union, it should therefore incur the primary obligation under this Directive to apply the IIR to its allocable share of top-up tax relating to all low-taxed constituent entities of the MNE group, whether they are located in or outside the Union. The ultimate parent entity of a large-scale domestic group should apply the IIR to the entire amount of top-up tax in respect of its low-taxed constituent entities.
(9)
In certain circumstances, that obligation to apply the IIR should move down to other constituent entities of the MNE group located in the Union. First, when the ultimate parent entity is an excluded entity or is located in a third-country jurisdiction that has not implemented the OECD Model Rules or equivalent rules and thus does not have a qualified IIR, intermediate parent entities situated below the ultimate parent entity in the ownership chain and located in the Union should be obliged under this Directive to apply the IIR up to their allocable share of the top-up tax. However, where an intermediate parent entity that is required to apply the IIR owns a controlling interest in another intermediate parent entity, the IIR should be applied by the first-mentioned intermediate parent entity.
(10)
Second, regardless of whether the ultimate parent entity is located in a jurisdiction that has a qualified IIR, partially-owned parent entities located in the Union that are more than 20 % owned by interest holders outside the group should be obliged under this Directive to apply the IIR up to their allocable share of the top-up tax. Such partially-owned parent entities should however not apply the IIR when they are wholly-owned by another partially-owned parent entity which is required to apply the IIR. Third, when the ultimate parent entity is an excluded entity or is located in a jurisdiction without a qualified IIR, the constituent entities of the group should apply the UTPR to any residual amount of top-up tax that has not been subject to the IIR in proportion to an allocation formula based on their number of employees and tangible assets. Fourth, where the ultimate parent entity is located in a third-country jurisdiction with a qualified IIR, the constituent entities of the MNE group should apply the UTPR to the constituent entities located in that third-country jurisdiction, in cases where that third-country jurisdiction is low-taxed based on the effective tax rate of all constituent entities in that jurisdiction, including that of the ultimate parent entity.
(11)
In accordance with the policy objectives of the global minimum tax reform regarding fair tax competition amongst jurisdictions, the computation of the effective tax rate should take place at a jurisdictional level. For the purpose of computing the effective tax rate, this Directive should provide for a common set of specific rules for the computation of the tax base, referred to as ‘qualifying income or loss’, and for the taxes paid, referred to as ‘covered taxes’. The starting point should be the financial accounts used for consolidation purposes, which should then be subject to a series of adjustments, including accommodating timing differences, in order to avoid any distortions between jurisdictions. Furthermore, the qualifying income or loss and the covered taxes of certain entities should be allocated to other, relevant entities within the MNE group to ensure neutrality in the tax treatment of qualifying income or loss that might be subject to covered taxes in several jurisdictions, either because of the nature of the entities (for example, flow-through entities, hybrid entities or permanent establishments) or because of the specific tax treatment of the income (for example, dividend payment or controlled foreign company tax regime). As regards covered taxes, this Directive should be interpreted in the light of any further guidance provided by the OECD, which should be taken into account by Member States in order to ensure a uniform identification of the covered taxes of all Member States and third-country jurisdictions.
(12)
The effective tax rate of an MNE group in each jurisdiction where it carries out activities or of a large-scale domestic group should be compared to the agreed minimum tax rate of 15 % in order to determine whether the MNE group or large-scale domestic group should be liable to pay a top-up tax and consequently should apply the IIR or the UTPR. The minimum tax rate of 15 % agreed by the OECD/G20 Inclusive Framework on BEPS reflects a balance amongst corporate tax rates worldwide. In cases where the effective tax rate of an MNE group falls below the minimum tax rate in a given jurisdiction, the top-up tax should be allocated to the entities in the MNE group that are liable to pay that tax in accordance with the application of the IIR and the UTPR, in order to comply with the globally agreed minimum effective rate of 15 %. In cases where the effective tax rate of a large-scale domestic group falls below the minimum tax rate, the ultimate parent entity of the large-scale domestic group should apply the IIR in respect of its low-taxed constituent entities, in order to ensure that such group is liable to pay tax at an effective minimum tax rate of 15 %.
(13)
In order to allow Member States to benefit from the top-up tax revenues collected on the low-taxed constituent entities located in their territory, Member States should be able to elect to apply a qualified domestic top-up tax system. Member States should notify the Commission when they elect to apply a qualified domestic top-up tax, with the objective of providing tax authorities of other Member States and third-country jurisdictions, as well as MNE groups, with sufficient certainty as regards the applicability of the qualified domestic top-up tax to low-taxed constituent entities in that Member State. Constituent entities of an MNE group that are located in a Member State which has elected to implement such a system in its own domestic tax system should pay the top-up tax to that Member State. Such system should ensure that the minimum effective taxation of the qualifying income or loss of the constituent entities is computed in the same way as the top-up tax is computed in accordance with this Directive.
(14)
To ensure a proportionate approach, this Directive should take into consideration certain specific situations in which BEPS risks are reduced. Therefore, this Directive should include a substance-based income exclusion based on the costs associated with employees and the value of tangible assets in a given jurisdiction. That exclusion would resolve, to a certain extent, situations where an MNE group or a large-scale domestic group carries out economic activities which require material presence in a low-taxed jurisdiction, as in such case BEPS practices would be unlikely to flourish. The specific case of MNE groups that are at the initial phase of their international activity should also be considered, in order not to discourage the development of cross-border activities by MNE groups that benefit from low taxation in their domestic jurisdiction in which they predominantly operate. Therefore, the low-taxed domestic activities of such MNE groups should be excluded from the application of the rules for a transitional period of five years, provided that the MNE group does not have constituent entities in more than six jurisdictions. In order to ensure equal treatment for large-scale domestic groups, the income from the activities of such groups should also be excluded for a transitional period of five years.
(15)
In addition, in order to address the particular situation of Member States in which very few groups are headquartered and which accommodate such a low number of constituent entities as to make it disproportionate to immediately require the application of the IIR and UTPR by the tax administrations of those Member States, and given the status of a common approach of the GloBE rules, it would be adequate to enable those Member States to elect not to apply the IIR and the UTPR for a limited period of time. Member States making such election should notify the Commission by the deadline for transposition of this Directive.
(16)
Member States that elect not to apply the IIR and the UTPR temporarily should transpose this Directive in such a way as to ensure the proper functioning of the system of global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union. This concerns in particular the obligation of domestic constituent entities in those Member States to provide information to constituent entities in other Member States and third-country jurisdictions, so that other Member States and third-country jurisdictions are able to apply the UTPR. The administrative burden for the tax administrations of the Member States which have made that election should be limited to the greatest possible extent, while preserving the effective application of this Directive throughout the Union. Therefore, those Member States should also have the possibility of entering into a discussion with the Commission, seeking its guidance and assistance with a view to a common understanding on the practical arrangements concerning the transposition of this Directive into national law.
(17)
Due to the highly volatile nature and long economic cycle of the shipping sector, it is traditionally subject to alternative or supplementary taxation regimes in Member States. To avoid undermining that policy rationale and to allow Member States to continue applying a specific tax treatment to the shipping sector in line with international practice and State aid rules, shipping income should be excluded from the system.
(18)
In order to achieve a balance between the objectives of the global minimum tax reform and the administrative burden for tax administrations and taxpayers, this Directive should provide for a de minimis exclusion for MNE groups or large-scale domestic groups that have an average revenue of less than EUR 10 000 000 and an average qualifying income or loss of less than EUR 1 000 000 in a jurisdiction. Such MNE groups or large-scale domestic groups should not pay a top-up tax even if their effective tax rate is below the minimum tax rate in that jurisdiction.
(19)
The application of the rules of this Directive to MNE groups and large-scale domestic groups that fall within its scope for the first time could give rise to distortions resulting from the existence of tax attributes, including losses from prior fiscal years, or from timing differences, and require transitional rules to eliminate such distortions. A gradual decrease of the rates for the payroll and the tangible assets carve-outs over ten years should also apply to allow a smooth transition to the new tax system.
(20)
Considering that MNE groups and large-scale domestic groups should pay tax at a minimum level in a given jurisdiction and for a given fiscal year, a top-up tax should exclusively aim to ensure that the profits of such groups be subject to tax at a minimum effective tax rate in a given fiscal year. For that reason, the rules on a top-up tax should not operate as a tax levied directly on the income of an entity but instead should apply to the excess profit in accordance with a standardised base and specific tax computation mechanics in order to identify low-taxed income within the groups concerned and impose a top-up tax that would bring a group’s effective tax rate on that income up to the agreed minimum level of tax. The design of the IIR and UTPR as top-up taxes, however, does not prevent a jurisdiction from applying those rules under a corporate income tax system in its domestic law.
(21)
As a result of the political agreement reached at international level, the distribution tax systems taken into account by the GloBE rules should be those in force on or before 1 July 2021, the date of the first statement of the OECD/G20 Inclusive Framework on BEPS entitled “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy”, which agreed the special treatment of eligible distribution tax systems. This should not prevent changes to a jurisdiction’s distribution tax system that are in line with its existing design.
(22)
For an efficient application of the system, it is crucial that procedures are coordinated at a group level. It will be necessary to operate a system ensuring the unobstructed flow of information within the MNE group and towards tax administrations where constituent entities are located. The primary responsibility of filing the top-up tax information return should lie with the constituent entity itself. A waiver of such responsibility should however apply where the MNE group has designated another entity to file the top-up tax information return. It could be either a local entity, or an entity from another jurisdiction that has a competent authority agreement in place with the Member State of the constituent entity. Information filed as part of the top-up tax information return should allow the tax administrations where the constituent entities are located to evaluate the correctness of a constituent entity’s liability for the top-up tax or the qualified domestic top-up tax, as the case may be, by application of domestic procedures, including for filing of domestic tax returns. Further guidance to be developed in the OECD’s GloBE Implementation Framework will be a useful source of illustration and interpretation in that respect, and Member States might choose to incorporate such guidance into domestic law. Considering the compliance adjustments that the implementation of this Directive requires, groups that fall within the scope of this Directive for the first time should be granted a period of 18 months to comply with the information requirements.
(23)
Considering the benefits of transparency in the field of tax, it is encouraging that a significant amount of information will be filed with the tax authorities in all participating jurisdictions. MNE groups within the scope of this Directive should be obliged to provide comprehensive and detailed information on their profits and effective tax rate in every jurisdiction where they have constituent entities. Such extensive reporting could be expected to increase transparency.
(24)
In implementing this Directive, Member States should use the OECD Model Rules and the explanations and examples in the Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two) released by the OECD/G20 Inclusive Framework on BEPS, as well as the GloBE Implementation Framework, including its safe harbour rules, as a source of illustration or interpretation in order to ensure consistency in application across Member States to the extent that those sources are consistent with this Directive and Union law. Such safe harbour rules should be of relevance as regards MNE groups as well as large-scale domestic groups.
(25)
The effectiveness and fairness of the global minimum tax reform heavily relies on its worldwide implementation. In order to ensure a proper enforcement of the rules under this Directive, Member States should apply adequate penalties, in particular towards entities that do not comply with their obligations to file a top-up tax information return and pay their share of top-up tax. When determining those penalties, Member States should take particular account of the need to address the risk that an MNE group does not declare the information necessary for applying the UTPR. To address that risk, Member States should lay down dissuasive penalties.
(26)
It will also be vital that all major trading partners of the Union apply either a qualified IIR or an equivalent set of rules on minimum taxation. As regards the question of whether an IIR implemented by a third-country jurisdiction that adheres to the global agreement is a qualified IIR within the meaning of the global agreement, it is appropriate to refer to the assessment to be carried out at OECD level. Furthermore, and in support of legal certainty and efficiency of the global minimum tax rules, it is important to further delineate the conditions under which the rules implemented in a third-country jurisdiction which will not transpose the rules of the global agreement can be granted equivalence to a qualified IIR. The objective of the assessment of the equivalence is mainly to clarify and delineate the Member State’s application of this Directive, in particular as regards the UTPR. To that end, this Directive should provide for an assessment, prepared by the Commission following the OECD assessment, of the equivalence criteria based on certain specific parameters. The determination of the third-country jurisdictions applying legal frameworks considered to be equivalent to a qualified IIR should directly result from the objective criteria set out in this Directive and should strictly follow the OECD assessment. It is therefore appropriate, in such a specific context, to provide for a delegated act. In particular, the recourse to a delegated act in such a specific context should not be considered to be a precedent for other legislative instruments adopted under the special legislative procedure, given the decision-making process proper to tax matters.
(27)
It is essential to ensure a consistent application of the rules set out in this Directive with respect to any third-country jurisdiction which does not transpose the rules of the global agreement and is not granted equivalence of its domestic rules to a qualified IIR. In that context, it is necessary to develop a common methodology for allocating amounts, which would be treated as covered taxes under the rules of the global agreement, to entities within an MNE group that would be subject to top-up tax in accordance with the rules of this Directive. For that purpose, Member States should use the OECD GloBE Implementation Framework guidance as their reference for the allocation of such covered taxes.
(28)
In order to supplement certain non-essential elements of this Directive, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of determining, following an assessment by the Commission, the jurisdictions with a domestic legal framework which can be considered to be equivalent to a qualified IIR. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making (5).
(29)
With this Directive entering into force in 2022 and the time limit for transposition by the Member States being set at the latest for 31 December 2023, the Union will act in line with the timeline set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy agreed by the OECD/G20 Inclusive Framework on BEPS on 8 October 2021 (the ‘October 2021 statement of the OECD/G20 Inclusive Framework on BEPS’), according to which Pillar Two is to be brought into law in 2022, to be effective in 2023, with the UTPR coming into effect in 2024.
(30)
The rules of this Directive on the application of the UTPR should apply as of 2024 to enable third-country jurisdictions to apply the IIR in the first phase of the implementation of the OECD Model Rules.
(31)
The October 2021 statement of the OECD/G20 Inclusive Framework on BEPS provides for a two-pillar solution. The Detailed Implementation Plan set out in the Annex thereto sets the timelines for the implementation of each pillar. As this Directive has the aim of implementing Pillar Two, while the work on Pillar One awaits accomplishment, it is necessary to ascertain that Pillar One is also implemented. To that end, this Directive includes a provision obliging the Commission to prepare a report assessing the progress achieved at the OECD/G20 Inclusive Framework on BEPS. It is acknowledged that the Commission can, if it deems it appropriate, submit a legislative proposal to address the tax challenges arising from the digitalisation of the economy, for consideration by the Member States.
(32)
The Council should, before the end of each semester starting from 1 July 2022, assess the situation regarding the implementation of Pillar One of the October 2021 statement of the OECD/G20 Inclusive Framework on BEPS.
(33)
Since the objective of this Directive, namely to create a common framework for a global minimum level of taxation within the Union on the basis of the common approach contained in the OECD Model Rules, cannot be sufficiently achieved by each Member State acting alone, because independent action by Member States would further risk fragmenting the internal market and because it is critical to adopt solutions that function for the internal market as a whole, but can rather, by reason of the scale of the global minimum tax reform, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective.
(34)
The European Data Protection Supervisor was consulted in accordance with Article 42(1) of Regulation (EU) 2018/1725 of the European Parliament and of the Council (6) and delivered formal comments on 10 February 2022. The right to protection of personal data pursuant to Article 8 of the EU Charter of Fundamental Rights as well as Regulation 2016/679 of the European Parliament and of the Council (7) applies to the processing of personal data carried out within the framework of this Directive,
