The Recovery Package in the context of tax changes
Following the Government announcement on the Recovery Package, the related amendment to the tax regulations was published. Below we summarise a selection of the most important changes in this area.
The OECD kept its promise and issued a Statement on 8 October 2021 involving a draft implementation plan of the two-pillar solution to address the tax challenges arising from the digitalisation and globalisation of the economy. An information brochure including answers to frequently asked questions was issued along with the Statement. The global convention was subsequently endorsed by the G20 representatives during their summit.
Compared to the Statement from July we informed you about in our article, some of the terms and instruments the two-pillar solution will operate with have been clarified and an implementation plan for individual segments of the solution has been determined. According to this ambitious plan, the two-pillar solution should be actively used already in 2023.
Let us note that pillar one should ensure a fairer distribution of profits and taxation rights among individual countries with respect to the rule determining the taxable presence of an entity in relation to the use/consumption of goods or services the entity sells in the given country. The rule should affect approximately a hundred of the largest multinational enterprises (MNEs), i.e. enterprises with global turnover above EUR 20 billion and profitability above 10% with the turnover threshold set temporarily for a trial period of seven years.
The companies falling within the capacity of pillar one are supposed to allocate a part of their profit to jurisdictions of use/consumption using a distribution key. In the statement from October, the OECD also announced that all jurisdictions (136 countries currently) that decided to accept the two-pillar solution should refrain from any form of digital service taxation until the moment of the final implementation of the rules arising from pillar one. In case that a country has already implemented its supranational regulations for digital service taxation, these regulations will have to be lifted.
The rules arising from pillar one should be implemented using a Multilateral Convention (MLC). A draft wording of the MLC should be available at the beginning of 2022 along with the model plan of rule implementation in the national legislation of participating countries. The MLC is supposed to be signed in 2022 with an expected effect from 2023. It should be noted that the MLC will replace applicable bilateral double taxation treaties within the scope of pillar one. It can be expected that the EU will agree on a common solution for the implementation of the new rules. The EU should announce further steps in this area following the OECD statement.
It is also expected that simplification rules for allocation of income arising from marketing and distribution activities in individual countries (presented as Amount B) will be introduced within pillar one. A draft of these simplification rules should be available by the end of 2022.
In the statement from October, the OECD published some more details on the so-called minimum rate. Whereas in the statement from July the OECD announced that a minimum rate of at least 15% was needed for a specific application of the Global anti-Base Erosion Rules (GloBe) (mainly of the main and additional rule – Income Inclusion Rule “IIR” and Undertaxed Payment Rule “UTPR”), it is clear from the Statement from October that the threshold of 15% will be binding. A binding minimum rate was also determined for the Subject to Tax Rule (STTR) in the source country amounting to 9%. As a reminder, the STTR will be applicable as a tax paid based on the GloBe rules having a status of a common approach. The GloBe rules will govern multinational enterprises with turnover above EUR 750 million (the same limit as for the CbC reporting).
The model GloBe rules determining the scope and mechanism of the measures should be prepared by the end of November 2021. The draft of a sample treaty article based on which the STTR should be implemented in the double taxation treaties should also be ready by the end of November 2021. The draft should be accompanied by a commentary explaining its purpose. A multilateral instrument should then be developed by mid-2022 to facilitate the rapid implementation of the STTR under bilateral double taxation treaties. By the end of 2022 at the latest, an implementation framework will be developed to facilitate the coordinated implementation of the GloBE rules. Similarly, to pillar one, the successful operation of the rules under pillar two is expected already in early 2023.
Now, the question is how the EU, which was preparing to introduce its own proposal for digital economy taxation as part of its New Tax Policy Framework in the course of October, will respond to the OECD’s October statement. We will keep you informed of further development.
The statement and the information brochure are available on the website of the OECD.
Seminars, webcasts, business breakfasts and other events organized by Deloitte.