Minimum rate of taxation for multinational groups

This landmark agreement will introduce a global corporate tax rate of 15%, which rate will be imposed on large multinational groups that have an annual consolidated revenue of € 750 million or more. This initiative, which  is known as “Pillar II”,  is a proposed legislation drafted by OECD together with G20.  These rules will apply only to large entities, that are located within the European Union that are members of Multinational groups or large-scale domestic groups that meet the aforementioned threshold.  This threshold is consistent with the existing international rules such as the Country-by-Country Reporting Rules.

These rules will apply when either the parent company or a subsidiary are situated in an EU Member State including Malta. The aim of the directive is also to ensure effective taxation in situations where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules.

The proposed text of the directive establishes common measures for the effective minimum rate of tax to apply. The effective rate of taxation will be calculated by dividing the taxes paid by the entities in a particular jurisdiction by their income. It will be calculated on a  jurisdiction by jurisdiction basis. If the effective rate  in a specific country is less than the minimum rate of 15%, the following measures will apply.

• Income Inclusion Rules (“IIR”) – In accordance to IIR, a parent entity of a MNE group or of a large-scaled domestic group computes and pays its allocable share of top-up* tax in respect of low-taxed constituents entities of the group.

and

• UnderTaxed Profit Rules (“UTPR”) – in accordance to the UTPR, a constituent entity of an MNE group has an additional cash tax expense equal to its share of top-up* tax that was not charged under the Income Inclusion Rules in respect of low-taxed constituent entities of the group.

*top-up tax refers to additional amount of tax  should be collected each time that the effective tax rate of an MNE in a given jurisdiction is below 15 %

In accordance with the draft legislation, Member states shall bring into force any laws and regulations to ensure compliance to such directive by 31 December 2023 and applicability will be for fiscal years beginning from 31 December 2023 onwards. In certain specific situations, the UTPR will be applicable for  fiscal years beginning from 31 December 2024.

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