Pillars 1 and 2 of the OECD international tax reform

Pillar 1

The first pillar of the OECD agreement aims to improve profit distribution, i.e. to reallocate some profits of multinational companies to the countries where their consumers are located. For companies with a consolidated annual turnover of more than EUR 20 billion, 25% of profits in excess of 10% of that turnover will be distributed to the countries in which their goods and services are used and consumed. It should be noted that only those countries in which the companies concerned have a turnover of more than EUR 1 million will benefit from this measure. In order to favour the less wealthy countries, this threshold is reduced to EUR 250,000 if the GDP of the state in question is below EUR 40 billion.

Due to the high revenue threshold and the exclusion of regulated financial services and extractive industries, the first pillar should only apply to around 100 of the world's largest multinational companies.

The OECD has indicated that the implementation of Pillar 1 is likely to be delayed until 2024 at the earliest.

 

Pillar 2

The second pillar focuses on the effective corporate tax paid by multinational enterprises with a consolidated worldwide turnover of at least MEUR 750 per year. These companies are expected to effectively pay at least 15% tax on their profits. The aim is to prevent large multinational companies from shifting their profits to low-tax countries in order to partially escape corporate tax.

The rule is assessed on a jurisdictional basis: to determine the effective tax rate, all taxes paid on the total profit of all group entities in the jurisdiction concerned should be taken into account. If the effective tax rate in a jurisdiction is below 15%, an additional tax will have to be calculated.  

There are two rules for the levying of the top-up tax.

The first is the income inclusion rule (IIR) which allows the state of residence of the ultimate parent of the group to levy the top-up tax. If this ultimate parent entity is an excluded entity or is established in a state without a qualified IIR, intermediate parent entities below the ultimate parent entity, which are located in the EU, should be required to apply the income inclusion rule to the extent of their attributable share of the top-up tax.

Where the IIR is insufficient to levy all or part of the top-up tax, the under-taxed profits rule (UTPR) applies. This is the case, for example, when the ultimate parent entity and any intermediate parent entities are located in a jurisdiction that does not have an income inclusion rule or when it is an excluded entity. The UTPR allows the residual top-up tax to be levied through the constituent entities (i.e. entities that are part of the domestic or multinational group), in the state in which they are located, through the application of specific allocation rules.  

Furthermore, Member States have the possibility to introduce the Qualified Domestic Minimum Top-up Tax (QDMTT) rule. On the basis of this rule, it is the state in which the low taxed entity is established that can levy the top-up tax. This rule allows countries that implement it to tax a larger number of companies, and thus avoid the additional taxes being levied in the states of the parent companies. Based on initial press reports, it is likely that Belgium will consider transposing this rule into domestic law.

Within this second pillar, we can distinguish five steps:

1. Determining whether one falls within the scope of the rules

In principle, multinational groups with an annual worldwide consolidated turnover of at least  MEUR 750 for at least two of the four years preceding the income year in question will be subject to these rules. It should be noted that exceptions have been made for international organizations, non-profit organizations and certain pension or investment funds. Although these entities are excluded from the scope of the Directive, their income must be taken into account in determining whether or not the EUR 750 million threshold is met.

In order to avoid any risk of discrimination between cross-border and domestic situations, Directive 2022/2523 extends the scope to purely domestic groups with a turnover of more than MEUR 750.

2. Determine the result of each group entity

The result must be determined for each entity of the group (including permanent establishments). This is done on the basis of the accounting data as they appear in the consolidated financial statements prepared in accordance with a permissible or approved financial accounting standard, with certain adjustments made.

3. Determine the total taxes involved

The taxes concerned are based on the accounting concepts of current and deferred taxes. The same accounting data are used as for incomes and, in the same way, certain adjustments are necessary.

It is important for each Member State to ensure which tax incentives have an effect on the effective tax rate. In Belgium, the question will arise, for example, for the deduction for innovation income.

4. Calculating the effective tax rate

The effective tax rate, calculated per year and per jurisdiction, is calculated by dividing the amount obtained in step 3 by the amount obtained in step 2. For this purpose, all relevant taxes and income of all entities in the jurisdiction in question should be added together. The formula can be summarized as follows:

Where the effective tax rate is less than 15%, a top-up tax must be calculated for each entity until the minimum tax rate of 15% is reached.

5. Calculating the top-up tax deduction

The top-up tax percentage for a jurisdiction is calculated according to the following formula:

This percentage should then be multiplied by the excess profit, which is the result of the jurisdiction as obtained in step 2, from which 'substance-related profits' should be deducted. The importance of this exclusion depends on the amount of payroll and tangible fixed assets that the entities hold in the jurisdiction in question. The greater the substance in a country, the smaller the additional levy.

In addition, Directive 2022/2523 provides that the top-up tax due in respect of constituent entities located in a jurisdiction is zero for a tax year if both of the following conditions are cumulatively met in that same tax year:

1. The average eligible turnover of all constituent entities located in that jurisdiction is less than EUR 10 million; and
2. The average allowable profit or loss of all constituent entities of this jurisdiction is a loss or profit of less than MEUR 1.

The average is calculated on the basis of the qualifying revenue and the average qualifying income or loss for the fiscal year and the 2 previous years. 

It is important to note that the procedural rules regarding the levy of this tax are not yet clearly defined.

 

Conclusion

This EU Directive requires EU Member States to introduce a regime that guarantees a minimum level of worldwide taxation for multinationals. This directive must be transposed by the Member States by 31 December 2023 at the latest.

Multinational groups based in Europe and subject to country-by-country reporting (CbCr) must take steps to determine whether they fall within the scope of the directive, how they will collect and process the required information, what the impact will be in each jurisdiction in which they operate, whether exemptions are available, which entity will be qualified as an 'ultimate parent entity' or an 'intermediate parent entity' and where the top-up tax(s) will ultimately be payable.

At Belgian level, the draft texts for the transposition of these rules are not yet known. We will keep you informed once the texts are published, but this does not prevent you from acting now and analyzing the impact of the global minimum tax on your company.

Finally, it is worth mentioning that pending the implementation of the Directive, Belgium has recently introduced a kind of minimum tax of 15%, limiting the deduction of deferred taxes to 40% (previously 70%) of the result exceeding EUR 1 million. As a result, profits exceeding EUR 1 million will still be subject to an effective tax rate of 15% (60% of the remaining taxable income multiplied by the legal corporate tax rate of 25%).