Upcoming Changes to Tax Law – Global Minimum Tax

AGN EMEA Tax Committee Newsletter

Learn about BEPS Pillar 1 and Pillar 2 and start planning now to overcome their challenges!

In early 2019, the Organization for Economic Co-operation and Development (OECD) launched the Base Erosion and Profit Shifting (BEPS) 2.0 project. The project aims to set a minimum baseline for corporate taxation to prevent multinational businesses from shifting profits from higher-tax countries to low-tax nations. Get an understanding of BEPS Pillar 1 and 2 and how the minimum taxation works.

BEPS – Pillar 1

Due to increasing digitalization – companies are operating in countries without being present. 

The result is that, increasingly, profits are not taxed where they are generated. Implementing new tax connecting factors to distribute profits between countries is intended to counteract this development. 

Therefore, the question in this regard is “where” taxation should take place in the future.

BEPS – Pillar 2

A response to harmful tax competition and aggressive tax planning.

As a further result of digitalization, intangible assets are becoming increasingly important, as they can be easily relocated and targeted for tax planning purposes. Introducing an effective minimum taxation counters the resulting risks to tax revenue. 

Therefore, the question in this regard is “how high” taxation should take place in the future.

Efforts were also made at EU level on these issues, and a concrete implementation of the minimum taxation concept took place through the Council Directive (EU) 2022/2523 dated 14 December 2022. Germany is obligated to transpose this EU Directive into national law by 31 December 2023. For this reason, the Federal Minister of Finance published on 20 March 2023 a discussion draft of a national implementing act related to the EU Directive.

How does minimum taxation work?

The minimum tax applies basically to the parent company of a group of companies regardless of its legal form and is added to the domestic income or corporation tax.

The minimum tax rate per country should generally be 15%. The basis for the tax assessment is the result of the commercial financial statements taking into account certain adjustments. From this, the effective tax rate of the group of companies and the tax increase amount based on this can be determined.

Example: A group of companies in a high-tax country, “A”, has a subsidiary in country “B”. The profits of the subsidiary are only subject to an effective tax rate of 7% there. The mechanism of minimum taxation works in a way that the difference between the tax rate in country “B” and the minimum tax rate of 15% – i.e. 8% – must be additionally taxed in country “A”.

The example is simplified and intended to show the basic mechanism of minimum taxation. The rules of the discussion draft on the minimum taxation law published by the German Federal Minister of Finance are quite complex and contain 89 sections mapped on 242 pages.

The provisions shall apply in Germany to all financial years beginning after 31 December 2023. Affected are large companies and large groups of companies with an annual group turnover of at least EUR 750 million.

Brought to you by the AGN EMEA Tax Committee

If you have any questions, please get in touch with Norbert Mevissen.

Norbert Mevissen
Steuerberater
Fachberater für Internationales Steuerrecht
Tax Partner
Schaffer & Partner Audit & Tax and Schaffer & Partner Legal

Web: https://www.schaffer-partner.de
Email: norbert.mevissen@schaffer-partner.de
Phone: (+49 911) 95 99 80