B Law & Tax
14 February 2024

Tax Advisor: The challenge of the global minimum tax: a detailed analysis and future perspectives

Major corporations will face a significant fiscal challenge with the introduction of the new global minimum tax, which will be incorporated into the Spanish legal framework through specific legislation currently in draft phase.

This tax aims to ensure a minimum global level of taxation for multinational enterprises and large national groups.

It is based on Directive (EU) 2022/2523 of the Council, derived from the OECD initiative known as “Pillar 2”, which seeks to establish a minimum global tax rate of 15% for large multinational companies in all jurisdictions where they operate. Although implementation varies among countries, the key aspects of this measure can be summarized into five main points.

What will be the impact of the global minimum tax?

The regulation will have repercussions on Spanish companies that are part of multinational or exclusively national conglomerates, provided their annual revenues reach or exceed €750 million for at least two of the last four years. Specifically, Spanish entities acting as (i) ultimate parent companies, (ii) intermediate parent companies, or (iii) subsidiaries of groups exceeding the mentioned income threshold will be affected.

When will it come into effect?

It is estimated that the tax will come into forc, 2024, and will accrue at the end of each tax period, coinciding with the financial year of the group’s ultimate parent company.

How is the global minimum tax determined?

Initially, the effective rate of the entire group of Spanish companies is calculated. This percentage is obtained by dividing the adjusted covered taxes by the allowable profits and losses. The latter are calculated based on the profit and loss account of the consolidated financial statements, with adjustments to eliminate incomes or expenses typically excluded from the taxable base of Corporate Income Tax.

On the other hand, the adjusted covered taxes are based on the Corporate Income Tax recorded expense, with applied corrections. In this regard, deferred assets and liabilities taxes are recalculated at 15%, while the expense or income deferred related to the application or generation of deductions is excluded from the effective rate calculation.

If the effective rate is higher than 15%, no supplementary tax will be generated. If it is lower, the supplementary tax will be the difference between 15% and the effective rate. This tax is applied to allowable profits and losses, adjusted for incomes linked to economic substance, calculated based on payroll costs and tangible assets (where higher costs and assets in Spain imply a lower supplementary tax).

Who is responsible for paying the global minimum tax?

The Spanish tax, part of an international framework, aims to ensure all business groups are subject to a minimum tax rate of 15% in all countries where they operate. This system includes three types of taxes:

– A national supplementary tax applicable to all entities resident in a country, with each country having the option to adopt it, although Spain considers it in its draft legislation.

A primary supplementary tax, falling on ultimate or intermediate parent companies, responsible for paying the tax on behalf of their subsidiaries not meeting the minimum 15% taxation in their home countries. If these countries have implemented a national supplementary tax, parent companies will not have to bear this primary tax.

A secondary supplementary tax affecting subsidiaries of a group whose parent company resides in a country that has not adopted a supplementary tax. This rule can pose complications by taxing incomes generated in jurisdictions opting not to adhere to the initiative.

Transition to the new provisions:

The draft law replicates transitional schemes established by the Directive and the OECD:

– A system of “transitional safe harbors” is envisaged for the first three years. If a group meets certain criteria, it will not be required to pay the supplementary tax in that jurisdiction during that period.

– There are three main “tests”: the minimum test, the simplified effective rate test, and the substance test. These tests will determine if the group should pay the supplementary tax in a jurisdiction.

The secondary supplementary tax will start to apply from January 1, 2025, but during that year, it will not be payable if the group’s ultimate parent company has been subject to a minimum nominal rate of 20% in Corporate Income Tax.

– An exemption is granted to exclusively national groups and those in the initial phase of international expansion for five periods.

– A special rule is established for deferred taxes that were recorded at the start of the first period of application of the new regulations.

These aspects underscore the importance of evaluating the impact of the new regulations as soon as possible and of preparing information, monitoring, and control systems. Undoubtedly, the new global minimum tax represents a significant change in the taxation of large groups and will require a considerable investment in resources and efforts.

B Law & Tax International Tax & Legal Advisors.

https://blaw.es

“In B LAW&TAX we specialize in international tax advisory services for both companies and individuals. If you would like to obtain further information, we would be delighted to assist you at 917817194 or at  [email protected]