Over recent years, the emphasis in international tax law has increasingly shifted towards intensifying efforts to combat the strategies of tax avoidance and the shifting of profits by multinational corporations. Corporations deploy strategies to diminish their tax liabilities and reallocate profits from countries with high tax rates to those with minimal or zero taxation, a practice formally recognised as BEPS (Base Erosion and Profit Shifting). To combat such practices, the Organisation for Economic Co-operation and Development (OECD) initiated a wide-ranging international initiative that includes a variety of measures.
In response to the financial crisis in 2008 and 2009, the OECD developed the BEPS Action Plan. BEPS aims to ensure that corporations contribute an equitable amount of taxes, regardless of their operational locations or corporate headquarters. Following collaborative efforts from G20 countries, the OECD, and a broad inclusion of developing countries and international institutions like the European Union, the OECD website published fifteen actions in October 2015.
These measures address the challenges of aligning international rules, tax avoidance, and digitalisation, including Country-by-Country Reporting (CbCR). This requires multinational enterprise groups with consolidated revenues of €750 million or more to report annually, targeting the taxation of profits at their generation source. Following the initial project, the OECD has shifted its attention to the next project stage, BEPS 2.0.
BEPS 2.0
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BEPS 2.0 enhances the original initiative, striving to update and unify tax rules, aiming to tax profits at economic activities and value-creation locations.
BEPS 2.0 Two-Pillar Solution
The foundation of BEPS 2.0 is built upon two key pillars.
BEPS 2.0 Pillar One:
The Pillar One aims to reallocate a portion of the total profits from multinational enterprises to where sales occur, regardless of the company’s physical presence. This represents a significant shift from the traditional tax system that relies on physical location. Its successful implementation will require all stakeholders’ collaboration, transparency, and adaptability.
BEPS 2.0 Pillar Two:
The Pillar Two focuses on implementing a global minimum tax (GMT) rate to prevent base erosion and profit shifting. Consequently, its objective is to guarantee that multinational corporations contribute a baseline amount of tax, regardless of where they operate. It sets a minimum effective taxation rate of 15% for enterprise groups with revenues exceeding €750 million, aiming to prevent countries from competing by lowering tax rates to attract multinational companies.
The framework of Pillar Two encompasses two closely linked domestic measures, known collectively as the Global Anti-Base Erosion Rules (GloBE Rules). These include the Income Inclusion Rule (IIR), which applies additional tax to a parent entity for the low-taxed income of its subsidiary, and the Undertaxed Profits Rule (UTPR), which prevents deductions or demands a comparable adjustment for the income of an entity taxed at a low rate and not covered under IIR.
Additionally, it incorporates a treaty-based regulation, the Subject to Tax Rule (STTR), allowing countries of origin to impose limited taxation on specific payments among related entities that fall below a specified minimum tax rate.
BEPS and Legislation
Slovenia and other EU countries adopted laws and directives to implement these measures. The initiative against base erosion and profit shifting has transformed into EU law and national legislation.
EU Council Directive
A milestone for European legislation under BEPS 2.0’s second pillar came with adopting the Council Directive (EU) 2022/2523 on December 14, 2022, ensuring a global minimum level of taxation for multinational enterprise groups (MNEs) and large-scale domestic groups within the European Union. The Directive provides a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the Union. It follows the Model Rules on the Pillar Two Global Minimum Tax (GloBE) agreed upon by the G20/OECD Inclusive Framework on BEPS.
The reform aims to limit competition on corporate income tax rates by establishing a global minimum tax level. Therefore, it significantly reduces the advantages of shifting profits to low or zero-tax areas, levelling the playing field for businesses worldwide and enabling better protection of tax bases.
Five main points of Council Directive (EU) 2022/2523:
Global Minimum Tax (GMT) Rate:
The directive establishes a global minimum effective tax rate of 15% for multinational enterprise groups (MNEs) and large-scale domestic groups operating within the European Union. The objective is to establish a global minimum tax level.
Integration into Domestic Legislation:
Member States must incorporate these rules into their domestic legislation by December 31, 2023.
OECD GloBE Model Rules:
The directive integrates the OECD’s Global Anti-Base Erosion (GloBE) Model Rules into the secondary legislation of the EU.
Limiting Tax Competition:
The reform aims to limit competition on corporate income tax rates by creating a level playing field globally.
Profit Shifting Control:
The directive safeguards tax revenues by mitigating benefits from relocating profits to low-tax areas. This reform enhances tax equity and curtails the depletion of tax incomes.
The directive came into force on December 23, 2022, requiring member states to implement corresponding legislation by the end of 2023. The Income Inclusion Rule (IIR) will be applicable in EU Member States for fiscal years starting on or after December 31, 2023, and The Undertaxed Profit Rule (UTPR) will apply for fiscal years beginning on or after December 31, 2024.
In Slovenia, the Minimum Tax Act (MTA), passed on 13 December 2023, integrated the principal provisions of the directive into Slovenian legislation. Most member states have already implemented the required legislative changes, with others expected to follow soon.
How Can We Assist?
It is crucial to evaluate new legislative changes and the necessity for data gathering to ensure timely compliance with reporting obligations.
CRMT has provided comprehensive software solutions for Financial Consolidation and Close for years. Our partners’ pre-designed expert solutions can help you by automating data collection, analysis, computations, and reporting, offering the vital support companies need to adjust to new regulations. Tailored to meet the demands of new legislation and BEPS 2.0 Pillar Two guidelines, including GMT, our solutions facilitate calculations, reporting, Country-by-Country Reporting (CbCR), strategic planning, and efficiency management in compliance with OECD standards.
With workflows designed explicitly for aligning finance and taxes, we guarantee seamless integration of new tax regulations at local and group-wide consolidation levels.
Turn the latest regulations into a competitive advantage for your business – schedule a call and discover our tailored solutions today!
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