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New global minimum Tax and Taxation rules for companies from 2023 – Seminario BMKE por Arfan Naseem

On May 17th 2022, Arfan Naseem gave a presentation at the Law Firm on a highly topical subject, «New Global minimum Tax and taxation rules“. The future of international taxation is going through very important times with the projects led by the OECD. In the following a short summary:

The OECD and G-20 members have created an inclusive Framework on base erosion and profit shifting (BEPS), in which 141 countries participate and find an agreement on 01.07.2021.

The inclusive Framework is a short but fundamental part of the BEPS project, which includes 15 actions with big changes in the international tax system.

The inclusive Framework is divided into Pillar One and Pillar Two.

I. Pillar ONE

Market-states should get a right to tax also for companies and permanent establishments, without residence in their country.

This is a big change compared to the previous rule of Art. 6, 7 I Model-Tax-Convention (OECD), where the market-state has no right to tax.

The right to tax for the market-states is limited for one part of the profit, which amounts to around 25% of profit of the group. This amount is call Amount A. Amount A can be taxed with the national tax-rate of a market-state.

Affected by Pillar ONE are Groups with more than 20 bn. EUR annual income and more than 10 % profitability

II. Pillar TWO

Pillar Two includes Global Anti-Base Erosion Model Rules (GloBE). The heart of Pillar TWO is a minimum corporate Tax of 15%. To convert the minimum tax there are especially two mechanisms.

  1. Income Inclusion Rule (IIR) – Top-UP-Tax

The Top-Up-Tax can be charged by the country, in which the parent company has her administrative centre, when a country, in which the subsidiary company has her administrative centre, charges it with less than 15 % corporate tax. The top up tax amounts the difference between 15 % and the tax rate paid by the subsidiary company.

  1. Undertaxed Payment Rule (UTPR)

The Market-states get a right to tax, if neither the state with the subsidiary company nor the state with the parent company take at least 15 % tax.

There are Free-Amount to reduce the tax value. The Free-Amount depends on the quantity of goods and personal shifts in a country with low taxes. There are no Free-Amounts by immaterial shifting.

Affected by Pillar TWO are groups with more than 750 Mio EUR annual income in at least two of the last four years.

Although The Inclusive Framework on BEPS affects just big companies, the 15 other actions in BEPS affect companies of all sizes. The big changes will bring a chance for fair taxation but also challenges for the companies.