The introduction of the global minimum tax in Romania

Origin of the project

The project on the global minimum tax, also known as Pillar Two, was initiated by the Organization for Economic Cooperation and Development (OECD) as a follow-up to the Base Erosion and Profit Shifting initiative (BEPS), which aimed to ensure the taxation of multinational groups in countries where they carry out value-adding and profit-generating activities.

In October 2021, more than 135 jurisdictions, covering over 90% of global Gross Domestic Product (GDP), have joined the OECD project. EU countries are among the first to adopt the new rules through Directive (EU) 2022/2523, which must be implemented until 31 December 2023.

The purpose of Pillar Two

The main objective of the new legislation is to stop tax competition between countries and to limit the shifting of profits to low-tax jurisdictions.

Groups in scope of Pillar Two which register an effective tax rate of less than 15% in countries where they operate, will be required to pay a top-up tax to cover the difference.

General application and computation rules

The draft law transposes the provisions of Directive (EU) 2022/2523 into Romanian law.

The minimum tax will apply from 1 January 2024 to groups with an annual income of at least €750m. Nevertheless, certain entities are exempted from Pillar Two rules such as governmental entities, international organisations, pension funds, and non-profit organisations, etc.

The calculation of the effective tax rate will be performed on an aggregated basis for all entities the group holds in Romania. The effective tax rate will be calculated as the ratio between adjusted covered taxes of Romanian constituent entities and the qualified net profit of those entities. If the effective tax rate is less than 15% for a financial year, the group is liable to pay a top-up tax.

The legislation determines which will be the entities that will pay the top-up tax for the group’s undertaxed entities, including for Romanian entities.

The Income Inclusion Rule(IIR) requires the parent entity of the group to calculate and pay its allocable share of additional tax for entities that are taxed at a reduced rate.

If IIR cannot be applied, based on the Undertaxed Profit Rule (UTPR), another group company is subject to the tax registered as an additional expense, equal to the part of the top-up tax not imposed under the IIR at the parent company level.

Romania has exercised its right to apply the qualified domestic top-up tax (QMDTT) introduced in the new legislation, whereby any potential tax differences relating to constituent entities in Romania will be collected locally and not in the parent entity jurisdiction by means of IIR.

For 2024, the top-up tax information return and payment will be performed no later than 18 months after the last day of the reporting fiscal year.

Safe harbours and simplification rules

Groups preparing and submitting Country-by-Country Reports (CbCR) may benefit, under certain conditions, from a transitional safe harbour regime.

The top-up tax shall be deemed to be zero if, based on the simplified calculation using CbCR information for FY 2023, the Romanian constituent entities meet one of the following conditions:

• Register a total revenue of less than €10m and a profit of less than €1m;
• Register a simplified effective tax rate of 15% or more;
• The profit is less than or equal to the Substance-based Income Exclusion amount, calculated according to the new rules.

Conclusions and recommendations

Companies falling under the scope of Pillar Two should assess the impact from a tax liability perspective. The analysis can start by establishing which Romanian entities are covered by the new rules and by determining the applicability of the safe harbour regime and simplification rules.

The new rules for computing the global minimum tax introduce a significant number of terms and concepts, which should be analysed and assimilated by both companies and tax authorities.

To calculate the top-up tax, groups and Romanian entities will need to collect a large amount of information and understand how to apply the necessary adjustments to determine the indicators. For this reason, communication and exchange of information with the group are essential in the upcoming period.