Navigating Pillar 2: Netherlands’ FY 2024 Minimum Tax Act Implications

AGN EMEA Taxation Task Force (TTF) Newsletter

A key part of the OECD/G20 BEPS Project is addressing the tax challenges arising from the digitalization of the economy and global tax efficient structures set-up by large multinational enterprises (MNEs). The Global Anti-Base Erosion (GloBE) Rules are an important component of this plan and ensure large MNEs pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. This is also known as “Pillar 2” (hereinafter also shortly referred to as “P2”) and will be relevant for strategic tax structuring of MNEs.

A key part of the OECD/G20 BEPS Project is addressing the tax challenges arising from the digitalization of the economy and global tax efficient structures set-up by large multinational enterprises (MNEs).

The Global Anti-Base Erosion (GloBE) Rules are an important component of this plan and ensure large MNEs pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. This is also known as “Pillar 2” (hereinafter also shortly referred to as “P2”) and will be relevant for strategic tax structuring of MNEs.

The GloBE Rules provide for a (global) coordinated system of taxation that imposes a top-up tax (TT) on profits arising in a jurisdiction whenever the effective tax rate (determined per jurisdiction) is below the minimum rate set at 15%. Currently, more than 140 countries (including the EU countries, Japan and UK) agreed to enact a P2 solution, except for US and China (the two major economies, nevertheless Pillar 2 rules apply to the subsidiaries of US and Chinese MNE groups).

P2 has been implemented in the European Union (EU) by means of EU Directive which is applicable as per 1 January 2024. In line with this EU Directive the Netherlands has introduced the new “Minimum Tax Act 2024”. The EU Directive has been based on the OECD P2 Guidelines in order to safeguard global uniformity.

P2 applies to MNEs with a turnover of at least EUR 750 million (similar to CBCR) and group companies (or permanent establishments) of such groups become subject to the additional compliance obligations of P2.

NOTE: Although the legislation applies as per 2024, companies in scope need to disclose in the 2023 group financial statements on the possible P2 consequences. The Q1 2024 quarterly report needs to quantify the P2 effect (based on an estimated outcome for 2024). P2 also introduces a compliance requirement and the first local P2 return for FY 2024 needs to be filed July 1, 2026 latest. Below we discuss the most important elements of P2.

Is the group in scope of P2 (Constituent Entities, Excluded Entities and Exemptions)

In order to determine the P2 impact, first it should be determined if the group is in scope for P2 purposes. In this respect P2 differentiates between (i) Constituent Entities (CE), (ii) Excluded Entities (EE) and (iii) Exemptions (Initial Phase Relief).

Re i Constituent Entities:

The Constituent Entities (CEs) include all the entities and permanent establishments within a multinational group. The required consolidated turnover of EUR 750 mio consists of all CEs. This turnover threshold needs be met in at least two of the four preceding years. As a result, to a large extent P2 is relevant for MNEs that also fall under the scope of the country-by-country reporting (CbCR) regulations.

Re ii Excluded Entities:

Excluded Entities (EE) are Governmental Entities, International Organisations, Non-profit Organisations, and Pension Funds as well as any Investment Fund or Real Estate Investment Vehicle that is the ultimate parent entity of a multinational Group.

Excluded Entities are not subject to the provisions of Pillar 2, meaning that they are excluded from the global minimum tax of 15%. However, their revenue is still taken into account for purposes of the consolidated revenue test.

Re iii Exemption Initial Phase Relief:

The P2 OECD Model Rules also provide for a so-called “Initial Phase Relief” for a five-year period, which prevents the application of the UTPR in order to ensure that the development of cross-border activities by (initially) purely domestic enterprises that benefit from low taxation in their home jurisdiction is not discouraged. The EU Directive also includes a mandatory exclusion from the IIR in certain domestic settings.

Overview type of levy under Pillar 2

P2 aims to ensure a global minimum effective tax rate of 15% for target large groups with a turnover of at least EUR 750 million. In order to calculate this 15% test, P2 introduces its own method of calculations (based on the commercial accounts).

P2 introduces the following additional types of taxation (in Dutch: “binnenlandse bijheffing”) to achieve the 15% minimum tax. It will be important to source the correct data within a MNE in order to prepare correct calculations.

• The Qualified Domestic Top-up Tax (QDMTT);
• The Income Inclusion Rule (IIR);
• The Under-Taxed Payments Rule (UTPR).

Re 1 The qualified domestic top-up tax (QDMTT):

With the qualified domestic top-up tax (QDMTT), P2 countries levy an additional local tax if group entities in this country are subject to an effective tax rate lower than 15%.

Since P2 taxation is levied on a jurisdictional level, the results of all consolidated group entities located in a particular country are aggregated to determine the ETR in that country (‘jurisdictional blending’). This means that an entity with a stand-alone ETR of less than 15% is not subject to P2 top-up tax (QDMTT) if its results can be blended with other consolidated group entities located in the same country and such blending leads to a jurisdictional ETR for that country of at least 15%.

Although the highest statutory tax rate in the Netherlands is 25.8% (2024) the P2 ETR can become lower than the required minimum ETR of 15% in case the taxable income reported in the CIT return is (much) lower than the income reported in the financial statements.

In the Netherlands this can be for instance be the case as a result of [i] the innovation box (favorable IP regime whereby part of the IP profit is exempt), [ii] application of the tonnage regime (specific taxation rules for shipping companies whereby taxable income is lower than the financial income), [iii] deduction of a liquidation loss (deduction of loss for tax purposes), [iv] tax exemption of the profit from the waiver of a debt while it is considered financial income etc.

As a result of such type of specific circumstances a Dutch entity may not meet the 15% ETR requirement and thus would become subject to QDMTT in order to increase the P2 ETR to 15% and needs to report this by filing a ‘GloBE International Return.

Re 2 The Income Inclusion rule (IIR):

The Income Inclusion Rule (IIR) means an additional tax that will be imposed on the Ultimate Parent Entity (UPE) of the group in case a foreign subsidiary of the group is effectively taxed at a rate lower than 15%. This top-up tax in the country of the parent company ensures that group enterprises cannot have an effective tax rate under 15% in any jurisdiction they operate.

If the UPE did not implement P2 (for instance US, China), the IIR could be relevant for the lower tier holding company.

Re 3 The Under-Taxed Profits Rule (UTPR):

Further, if the UPE did not implement P2 (for instance US, China), the Under-Taxed Profit (UTPR) acts as a back-up. This rule allocates the right to impose a top-up tax to the different jurisdictions in which subsidiaries are located and that have implemented P2. This is done in accordance with two indicators, namely [i] the number of employees (expressed in full-time equivalents) and
[ii] the number of tangible assets of the group in those jurisdictions.

The Netherlands:

The Dutch legislator has acknowledged that it may be undesirable to apply the undertaxed profit rule (UTPR) to UPEs (Ultimate Parent Entities) in States that have not yet implemented a qualifying domestic top-up tax (QDMTT) or income inclusion rule (IRR), for instance US and China.

This UTPR SH specifies that Dutch group companies do not need to add a top-up tax for undertaxed profits (UTPR) of UPE’s in non-P 2 countries, when the statutory tax rate in the UPE country is at least 20% (for 2024 and 2025).

On February 5, 2024 the Dutch State Secretary of Finance answered questions in Dutch Parliament in relation to this temporary UTPR exemption. In one of the answers the State Secretary mentions that the temporary exemption does not apply to UTPR in relation to low-taxed participations of the UPE located in a country with a statutory rate of less than 20% (i.e. sister companies of the NL entity).

Safe Harbours and temporary relief UTPR the Netherlands

In order to lower the compliance burden for companies that operate in high-tax and low-risk jurisdictions, during the first years after the introduction of P2 safe harbours (SH) and a penalty relief framework exist. This framework (published by the OECD on December 15, 2022) also applies to the Minimum Tax Act 2024 in the Netherlands.

In practice the various SH will be very important in order to avoid any TT (QDMTT/IIR/UTPR) and simplify the nearby GloBe compliance. However, note that until the 2024/2025/2026 numbers are final, it remains to a certain extent uncertain if the SH can be applied for a certain year (based on the available interim or draft numbers the application of the SH can only be predicted).

If it would appear that the SH cannot be applied based on the final numbers afterall, the full GloBE calculations will need to be made. Therefore, even in case it is expected that SH can be applied, we recommend to be eventually prepared for a potential full GloBE calculation (the collection of required information for this purpose will be important, we refer to paragraph 3).

The SH framework includes:

• The transitional safe harbour (in practice relevant until 2026);
• The permanent safe harbour (also important after 2026);
• The transitional penalty relief regime;
• Furthermore, the OECD is working on a QDMTT safe harbour that would provide compliance simplifications for MNEs operating in jurisdictions that have adopted a QDMTT (like the Netherlands).

Calculation P2 ETR

The calculation of the effective tax rate (ETR) or Globe effective tax rate (GETR) for P2 purposes needs to be performed on a jurisdictional level. Both the income and the taxes are based on what is reported in the financial reports. However, for both the qualifying GloBE income and the qualifying covered taxes, certain corrections need to be made.

The calculation of P2 ETR (GETR) consists of dividing the “adjusted covered taxes” by “qualifying GloBE income”. P2 ETR (GETR) of a jurisdiction is calculated as follows:

[adjusted covered taxes]
—————————
[qualifying GloBE income]

The GETR can be different than the normal ETR for tax accounting purposes. The reason is that qualifying GloBE income could be different in a different way than the income reported in the financial statements (since various adjustments need to be made in order to determine the qualifying GloBE income by the qualifying covered taxes).

NOTE: Both P2 and domestic tax rules use financial accounts as a starting point, but in general the P2 adjustments to the financial accounting results are less compared to the domestic tax rules. Therefore, the treatment in the financial accounts (as determined by the relevant Accounting Standard) is more frequently followed under the P2 rules. Note that the financial statements can be based on different rules (US GAAP, IFRS or local GAAP) so a certain flexibility exists.

Impact on financial statements

FY 2023:

MNEs need to consider disclosure requirements on the expected impact of P2 in the 2023 annual financial reporting under both US GAAP and IFRS.

For IFRS purposes, the amendments to IAS 12 introduced targeted disclosure requirements that apply for annual periods beginning on or after January 1, 2023. For reporting periods during which P2 is enacted or substantively enacted but not in effect yet (FY2023), the guidance requires a disclosure of the IAS 12 exception, which prohibits deferred tax accounting for P2 as well as the expected quantitative and qualitative impact of the P2 exposure including a range, or a statement that such information is not known or estimable.

For US GAAP purposes, SEC registrants should evaluate whether P2 presents a material uncertainty that management expects could significantly impact the company’s future operations and overall financial position.

Important: reporting of all deferred tax assets as per FYE 2023:

In order to anticipate full P2 GloBe calculations in later years, it is important to report all available deferred tax assets in the commercial numbers as per FYE 2023 (and double check on local level). If such assets would be reported in a later year, this could have a negative effect on the P2 ETR (i.e. reporting an asset reduces the ETR in a later year).

FY 2024 and onward:

As the rules are now in effect in many jurisdictions as of January 1, 2024, there are additional disclosure considerations for 2024 financial reporting, including the requirement to disclose the amount of current tax expense for any top-up tax (starting Q1 2024 in case of quarterly reporting).

Note that whether or not a SH can be applied is in the first instance based on an estimate of the numbers (for instance in order to determine the Q1 2024 quarterly reporting which is based on 2023 and Q1 2024 numbers). At the end of the year the final numbers are ready and only than it will be clear if the application of the SH is justified or if a full Globe P2 calculation is required (for instance if as a result of prior year adjustments the SH does not apply anymore).

Filing Pillar 2 returns

Multinational corporations will need to file additional P2 returns (even in case of the application of a SH and/or if no TT is due based on Globe rules) and thus will experience an increase in their compliance and reporting responsibilities across different jurisdictions they operate in.

Under the Pillar 2 Model Rules, the EU introduced a standardized ‘GloBE International Return’ (GIR). The group entity will have a period of 15 months (or 18 months in the first year when the rules come into effect) after the end of a book year to complete and submit the GIR to the local tax authorities. However, certain specific cases may qualify for exemptions regarding the completion and filing of this return.

The P2 declaration shall contain at least the following information:

• General information about the group, like the group name, fiscal year, identification of the filing entity and some general accounting information.
• The corporate structure, like the details of the ultimate parent entity, group entities and excluded entities, including changes to the corporate structure during the reported fiscal year.
• The P2 effective tax rate, including the calculation of the specific effective tax rate and the applicability of safe harbours and/or deferred tax adjustments;
• Entity information, including general information about the globe income and covered taxes;
• The top-up tax allocation and attribution. This process involves three main topics: [i] identifying the low-tax country, [ii] applying the income inclusion rule and [iii] calculating the top-up tax amount for the country.

Timing: The Netherlands introduced QDMTT and IIR for 2024 and UTPR as from 2025. The Dutch group entity will have a period of 15 months (or 18 months in the first year when the rules come into effect). The first NL GIR needs to be filed July 1, 2026 latest (in the situation that the book year equals the calendar year).

Members of the Taxation Task Force and AGN tax correspondents are available
to answer your questions!

If you have any questions regarding tax issues in The Netherlands, please get in touch with Jeroen in ‘t Hout.

Jeroen in ‘t Hout
Tax Partner, International tax
Daamen & van Sluis

Email: JintHout@daasluis.nl
Mobile: +31 (0) 6 317 81 910