Global minimum tax

In fall 2021, the members of the Organization for Economic Cooperation and Development (OECD) agreed on a global reform of corporate taxation which, from the participating countries’ perspective, is a step towards greater tax fairness. This reform includes a new regulation on the allocation of rights of taxation (Pillar One) and a global minimum taxation regulation (Pillar Two). 

This second pillar (“minimum taxation”) is currently in the legislative implementation phase. Following the adoption of the Minimum Taxation Directive by the EU Council on December 15, 2022 (publication in the Official Journal of the EU on December 22, 2022 - OJ L 328 of December 28, 2022 - Directive 2022/2523), the BMF’s discussion draft of the Minimum Tax Act (MinStG) of March 17, 2023, which is to apply to all financial years beginning after December 30, 2023, is now available. 

About global minimum tax 

In fall 2021, the members of the Organization for Economic Cooperation and Development (OECD) agreed on a global reform of corporate taxation which, from the participating countries’ perspective, is a step towards greater tax fairness. This reform includes a new regulation on the allocation of rights of taxation (Pillar One) and a global minimum taxation regulation (Pillar Two). 

This second pillar (“minimum taxation”) is currently in the legislative implementation phase. Following the adoption of the Minimum Taxation Directive by the EU Council on December 15, 2022 (publication in the Official Journal of the EU on December 22, 2022 - OJ L 328 of December 28, 2022 - Directive 2022/2523), the BMF’s discussion draft of the Minimum Tax Act (MinStG) of March 17, 2023, which is to apply to all financial years beginning after December 30, 2023, is now available. 

Pillar Two: minimum tax rate of 15 percent

The OECD published model rules for global minimum taxation (“Pillar Two”) on December 20, 2021. The EU Council’s Minimum Taxation Directive was published on December 22, 2022, and on March 21, 2023, the Federal Ministry of Finance presented its discussion draft of a minimum taxation law. 

As part of their consultations with the OECD, the countries have agreed that if the minimum taxation rules are introduced, they will implement them in such a way that the content of the respective national law corresponds to the OECD minimum taxation rules (GloBE Model Rules) for Pillar II. This OECD conformity is so important for the implementation into national law because double or multiple taxation through the new minimum taxation can only be avoided in multinational groups if the laws are identical. Against this backdrop, the further OECD work on Pillar II should be given particular attention. On December 15, 2022, regulations for so-called safe harbors were published by the OECD’s “Inclusive Framework”. 

In addition to the OECD – GloBE Model Rules on Pillar II, a detailed, 228 pages commentary was added on March 14, 2022. Both the OECD commentary and the publication on “Safe Harbors” were taken into account in the BMF’s discussion draft of March 21, 2023 and – where appropriate – already included in the proposals for the statutory regulation. 

The OECD has made the corresponding PDFs available for download: Tax Challenges Arising from the Digitalization of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two); the EU Minimum Taxation Directive for download and the download of the German discussion draft under BMF. 

Generally, all larger multinational companies with a consolidated minimum turnover of EUR 750 million p.a. are to be subject to the minimum tax rate. The minimum tax rate is 15 %. 

The minimum taxation rules (GloBE rules or Pillar Two for short) apply at various levels in order to ensure minimum taxation of a multinational and national group of companies per jurisdiction. 

This requires close cooperation between tax, finance, controlling and IT, new processes need to be created, existing processes need to be reviewed and further developed, new data may need to be made available automatically and processed in a “tool”. It is also important to train staff on the new minimum taxation regulations, which – due to the link with accounting – will also be necessary if the function of preparing the minimum tax report and the tax returns for minimum taxation are to be outsourced to a consultant. 

In addition to understanding the complex content of the regulations, mapping and complying with the Pillar Two Rules requires reliable and high-quality (group) data, stringent internal company processes and coordinated global coordination within the group of companies and the various jurisdictions. Consequently, the tax compliance management system also goes “global” with the new regulations. 

The Pillar Two concept is based on three interlinked technical elements 

Income Inclusion Rule (“IIR”) (in the BMF's discussion draft “Primary Supplementary Tax”): According to this income inclusion rule, the effective taxation of the respective low-taxed subsidiary’s/permanent establishment’s foreign income is generally raised to the minimum tax level at the ultimate parent company (“UPE”) / in the case of a permanent establishment at the parent company. This is done via a so-called top-up tax. However, countries are entitled to levy a qualified domestic minimum top-up tax (so-called “QDMTT”) in relation to companies domiciled in their tax jurisdiction, which means that the minimum taxation level can already be achieved for this jurisdiction by means of a national supplementary tax. The EU Minimum Taxation Directive and the German discussion draft already contain such a national supplementary tax. Such a national qualified supplementary tax replaces taxation at the higher levels of the corporate group. 

Undertaxed Profit Rule (“UTPR”) (in the BMF’s discussion draft “secondary supplementary tax”: If no top-up tax is levied under the IIR (primary supplementary tax), a secondary tax is levied on a subsidiary basis on all companies in the group according to a distribution key based on the number of employees and tangible assets. 

Switch-over clause: In cases of income tax treaties with exemption clauses for low-taxed profits of foreign permanent establishments, the parent companies’ countries of residence are thus permitted to access the foreign permanent establishment’s tax assets in order to bring the tax burden up to the minimum tax level in accordance with the IIR. 

What is exempt from minimum taxation? 

Investment assets, pension assets, welfare funds, international organizations, non-profit organizations and group companies (but only with their own profits) that are not taxed themselves as a tax-neutral regime, but where the tax is levied on the shareholders, are to be exempt from minimum taxation. In terms of specific sectors, income from international shipping and remuneration on additional core capital at banks and certain insurance income are not subject to minimum taxation. 

At the heart of the minimum taxation is a complex determination of GloBE income and the so-called “recorded taxes” as calculation basis for the effective tax rate and any top-up tax for each jurisdiction or each member of the group (so-called “constituent entity”). A standardized template will be developed for the declaration to be submitted and the so-called “minimum tax report”. The OECD published an initial version on December 20, 2022. The deadline for submitting the declaration is 15 months after the end of the fiscal year (18 months for the first-time filing of the declaration). 

Which countries participate in the global minimum tax scheme 

According to the explanatory memorandum in the BMF's discussion draft of March 21, 2023, 138 countries have agreed on the regulations in the course of OECD efforts. Considering that a total of 195 countries are currently recognized by the United Nations, this reflects a new world order of international corporate taxation. 

Global minimum tax: advantages and disadvantages 

States in which the regulation applies generate additional revenue to the extent tax revenue is allocated to them through the primary or secondary supplementary tax regulations or the national supplementary tax (“QDMTT”). According to the Munich-based research institute ifo Institut, the global minimum tax will generate between EUR 1.6 and 6.2 billion in additional tax revenue for the Federal Republic of Germany. The regulations could therefore be a gain for competitiveness, particularly for the German SME sector, as low-tax countries are expected to raise their tax levels (“QDMTT”) which is going to reduce the differences in tax levels. According to the explanatory memorandum to the discussion draft, the BMF assumes additional revenue in the low single-digit billion range (in euros) based on an initial rough estimate. 

On the other hand, the compliance effort for corporate groups will be significantly increased and the concrete implementation of the complex rules is expected to cause problems and raise questions that will increase legal uncertainty, at least in the initial phase of the new regulations’ application. 

General information on Pillar One: New regulation on taxation rights 

The first pillar (“Pillar One”) applies to multinational companies with an annual turnover of more than EUR 20 billion and a return on sales of more than 10 %. The new system of allocating taxation rights is detached from the physical nexus of a traditional permanent establishment and is based solely upon turnover with end consumers and users above a turnover threshold of one million euros (250,000 euros for smaller countries). As a result, this should lead to a higher right of taxation for the market states, by attributing to these states a portion of the global profit and allocating it to them according to a turnover key that has not yet been finalized. 

Companies often generate the majority of their turnover and profit margins in emerging countries. These countries should also benefit from the new regulation of taxation rights by receiving more tax revenue: The turnover generated in the market countries shall also be taxed in the respective country, so that taxation no longer takes place in the companies’ home countries or tax havens.