On 12 December 2022, EU member states finally reached an agreement to implement the minimum taxation component at the EU level, known as OECD Pillar Two. The ambassadors of EU member states decided to advise the Council to adopt the Pillar Two Directive, and a written procedure for the formal adoption was launched after Poland abandoned its veto against the EU summit deal on 15 December 2022. The Committee of Permanent Representatives reached the required unanimous support, despite the fact that on 1 December 2022, the Hungarian permanent representative to the EU reiterated the country’s opposition to Pillar Two.
The provisions of Pillar Two stipulate that the profit of large multinational and domestic groups or companies with a combined annual turnover of at least €750 million will be taxed at a minimum rate of 15%. The new rules are expected to reduce the risk of tax base erosion and profit shifting and ensure that the largest multinational groups pay the agreed global minimum rate of corporate tax.
The EU directive, which corresponds to the OECD concept, has to be transposed into member states’ national law by the end of 2023. This deadline is very challenging given the complexity of the provisions and would result in the EU being a front-runner in applying the G20/OECD global agreement on Pillar Two.
The Czech Ministry of Finance should prepare a draft of legislation to transpose the provisions of the EU directive. From initial comments, it seems very probable that it would be via a new, specific act – which we assume a draft might be available at the end of the first quarter of 2023 to achieve full-scope consultation and standard legislation procedure.
Representatives of large multinational and domestic groups or companies with a total annual turnover of at least EUR 750 million (i.e. currently or foreseeably falling within the scope of Country-by-Country Reporting) should pay special attention to this topic – especially if the effective tax rate (ETR) of their company in one of the countries where it has branches is below 15% on average.
In the context of the Czech Republic, one of the reasons may be the use of investment incentives in the form of tax rebates or the utilisation of significant deductions from the tax base (in particular, the deduction for the support of science and research). However, given the complexity of the rules, it is necessary to consider other parameters of the calculation – which is based on the breakdown of consolidated data and adjustments based on the logic of international accounting standards. In particular, the consideration of economic substance due to the presence of assets and/or payroll costs in the country concerned (substance carve-out). Finally, the group or some of its companies may qualify as exceptions that might not be affected by the new rules (in some countries) – or, alternatively, in a simplified form or after a transitional period.
We will keep you updated on further development.
More information about the agreement is available on the Council of Europe website.