Pillar 2: A global minimum tax rate

Drastic tax changes and increasing compliance obligations are to be expected from 2024 onwards. The cause is international, European and Dutch legislation due to the so-called OECD Pillar 2 project. This introduces a global minimum tax rate of 15% for companies with global turnover exceeding EUR 750 million.

Pillar 2 results from an initiative by the Organisation for Economic Cooperation and Development (OECD) and G20 countries to introduce a global minimum tax rate of 15% for multinationals with consolidated global turnover exceeding EUR 750 million. The aim of Pillar 2 is to reduce tax competition between countries, limit tax avoidance and create a more level playing field for internationally operating companies. Pillar 2 is part of a trend to introduce legislation aimed at countering tax avoidance and artificial structures and increasing tax transparency. Pillar 2 is a follow-up to the OECD's Base Erosion and Profit Shifting (BEPS) project that has resulted in fundamental changes to international legal and tax structures of multinational enterprises.

It is advisable for globally active enterprises and their General Counsels (GC) to identify the impact on financial and global compliance obligations as soon as possible, identify whether adjustments need to be made to the group structure and monitor future international Pillar 2 developments.

It is advisable for globally active enterprises and their General Counsels (GC) to identify the impact on financial and global compliance obligations as soon as possible, identify whether adjustments need to be made to the group structure and monitor future international Pillar 2 developments.

Act minimum tax 2024
Within the European Union, each member state is required to adopt legislation implementing the Pillar 2 directive from 2024. In the Netherlands, Pillar 2 will be implemented under the Act minimum tax 2024 . As a result, many new tax technical terms and concepts will apply and additional tax disclosures and returns will have to be made on behalf of the taxpayer. This will increase the potential liability of directors.

Some aspects of Act minimum tax 2024 are detailed below.

Income inclusion rule
Under the Income Inclusion Rule (IIR), the so-called ultimate parent entity is taxed up to 15% to the extent that there are profits in other group entities in the structure that are insufficiently subject to tax. The top-up tax takes place when the effective tax burden at consolidated level is less than 15% per jurisdiction.

Qualifying domestic top-up tax
The Netherlands has chosen to introduce the Qualifying Domestic Minimum Top-up Tax (QDMTT). Under the QDMTT, Netherlands domiciled low-taxed group entities with no ultimate parent entity are taxed in the Netherlands at an effective rate of 15%. The QDMTT prevents that the jurisdiction of the ultimate parent entity is the only jurisdiction which levies a minimum tax.

Undertaxed payments rule
Under the Undertaxed Payments Rule (UTPR), group entities domiciled in the Netherlands are taxed when the (foreign) ultimate parent entity is not taxed with an IIR and to the extent that there is no top-up tax of up to 15% under the QDMTT in the Netherlands and other jurisdictions. Through the UTPR, the (remaining) top-up tax of up to 15% is levied on other group entities subject to a UTPR. The top-up tax is levied in proportion to the number of employees (expressed in full-time equivalents) and tangible assets of these other group entities. When implementing the UTPR, the Netherlands opted for a top-up tax instead of a deduction limitation for efficiency reasons.

Tax compliance
Under the minimum profit tax, two new returns must be filed annually; a tax return and a top-up tax information return.

The top-up tax information return can be filed by one designated local entity and includes, among other things, identification of group entities, information on group structure, certain legal choices and, in some cases, information on the effective tax burden. For the first financial year, there is a filing deadline of 18 months for the top-up tax information return and 20 months for the tax return. The preparation of the 2023 financial statements may require disclosures on the impact of Pillar 2.

The first elements of the Act minimum tax 2024 are expected to take effect for financial years starting on or after 31 December 2023. In general, the terms of the first tax returns will be year 2024.

Conclusion
The global implementation of Pillar 2 and the increased compliance pressure demands the GC to assess the background of a new and complex tax topic. Consequently, the GC would most likely be more involved with taxes and tax policy as a result of Pillar 2.

This article was published earlier in GCN's General Counsel NL Newsletter September 2023.