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The foundation of the international corporate tax framework is set to change from 2023. As part of the reforms introduced under BEPS 2.0, members of the Inclusive Framework (IF) have agreed to a minimum tax of 15% on global profits made by multinational enterprises (MNEs). ). While work has been done to address the tax challenges posed by the so-called digital economy, the impetus is the alleviation of tax competition which has caused a ‘race to the bottom’ on corporate tax rates, which in turn put pressure on tax revenues.
The Global Anti-Base Erosion (GloBE) rules which are part of Pillar II set the framework to ensure the collection of minimum taxation by deploying a locking mechanism comprising the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). The IRR imposes an additional tax on the ultimate parent entity of a low-tax subsidiary, while the UTPR is an adjustment that acts as a safety net in cases where the IIR fails to reach the minimum corporate tax. The rules ensure that the relevant income is subject to at least 15% tax somewhere. For this reason, several jurisdictions choose to reduce or eliminate tax revenue losses by introducing a national supplementary tax, thereby ensuring that in-scope entities residing in their jurisdiction are subject to a minimum corporate tax there.
We provide an overview of how GloBE rules work in the figure below:
Pillar II also includes a subject to tax rule which is an integrated double tax treaty rule to be adopted through a multilateral treaty. This rule is an important compromise for developing countries as it gives a contracting state the right to withhold tax on certain types of related party transactions of a passive nature where the payments are not subject to a tax rate. minimum taxation of 9% in the beneficiary jurisdiction. .
The EU released a proposed Corporate Minimum Tax Directive the day after the OECD published the model rules in December 2021. The draft directive includes the GloBE rules (not the liability rule). tax, as this should fall under bilateral tax treaties) and closely follows the rules of the OECD GloBE model. It extends the scope to national groups to ensure alignment with EU fundamental freedoms. The application of the guideline should broadly align with the OECD commentary.
Multinational enterprises should allocate resources to ensure correct and complete reporting as the Directive inevitably increases their administrative burden to ensure compliance. In order to mitigate these risks, it would be prudent for these multinational companies to undertake a high-level assessment of the applicability of the Directive’s provisions, options and exclusions in order to assess its impact in light of obtaining LEA status. ‘multinational enterprise. It is also helpful to identify potential sources of information collection and resolve any data collection issues. The tax teams and the accounting teams would have to work together because a large part of this information is based on accounting data and principles, particularly in terms of deferred tax.
The EU intends to respect the G20/OECD timetable by proposing transposition of the directive by each Member State by 2024 for the IIR and by 2025 for the RUPT. Given the reluctance of the US Congress to adopt Pillar II and the proposed amendment to align the Global Intangible Low-Taxed Income (GILTI) rules, as well as the uncertainty within ECOFIN over the adoption of Pillar II, this proposed implementation schedule remains unpredictable at best .
As part of the compromise sought between Member States, a waiver has been provided to allow Member States that host twelve or fewer Ultimate Parent Entities (UPEs) the option to defer the application of the GloBE rules for 6 years. Malta is expected to opt for the deferral to allow for a longer transition period, which means that local EPUs will start applying the rules to tax years starting from 31 December 2029. That said, a multinational company will still need to assess the impact of other jurisdictions. UTPR adjustment assigned to Malta. It would be prudent for each multinational company to assess the impact of the said UTPR on its financial and cash position in light of such late application of the rules.
To ensure alignment of its current tax system with evolving international tax rules, the Maltese Finance Minister announced that work is underway to reassess and reformulate the mechanics of the tax system, including a migration from the system current imputation system to a more traditional system. Ongoing discussions are also exploring the coexistence of different permutations of shareholder tax incentives and refunds to ensure that the tax system, while keeping up with the times, remains competitive and sustainable, with positive effects. -limited workout on taxpayers scope.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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