International. Tax. Reform. These are words that conceal the vastness, complexity, and significant financial and administrative impacts on multinational companies at a global level. However, it is hard to shake the impression that this reform – in all its complexity and importance – has arrived quietly, somewhat under the radar. For comparison, let us recall how much media attention was given to the introduction of an additional corporate tax at the end of 2022. Probably very few entrepreneurs in Croatia who had the opportunity to engage with the mentioned tax were unaware of its effects on their own business. Can the same be said for the introduction of the global minimum corporate tax, which is the result of a historic agreement among nearly 140 countries on international tax reform dating back to 2021?
Two Pillars
Based on the aforementioned agreement among OECD countries and the G20 group to combat base erosion and profit shifting (BEPS), international tax reform includes two pillars: the first (Pillar I) encompasses a new system that allocates the right to tax the largest multinational companies to the jurisdictions where profits are generated, while the second pillar (Pillar II), which is the subject of this article, establishes a global minimum corporate tax rate to limit the opportunities for base erosion and profit shifting by multinational companies. Consequently, the European Commission presented a directive proposal at the end of 2021 aimed at implementing the second pillar.
A year later, at the end of 2022, EU member states reached an agreement to implement the second pillar of international tax reform at the Union level by adopting the relevant directive of the Council of the European Union. Member states were required to transpose the directive into national law by the end of 2023, which they all did. Thus, the European Union became a leader in the application of the global agreement of the G20 and OECD on the second pillar, which is expected to ensure that the largest multinational companies with total annual revenues of at least €750 million pay a global minimum corporate tax rate of 15%.
According to OECD estimates from early 2023, the financial impact of introducing the global minimum corporate tax on state budgets was around $220 billion, which is approximately nine percent of global annual corporate tax revenues. At the beginning of this year, the OECD revised these estimates to between $150 and $195 billion, which is between 6.5 and eight percent of global corporate tax revenues. It is estimated that low taxation of profits will decrease by about 80% over the next ten years as a result of the introduction of the global minimum tax, due to the elimination of the possibility for multinational companies to shift profits to low-tax jurisdictions.
These estimates demonstrate the extensive expected macroeconomic impact of the second pillar of international tax reform and how much additional corporate tax multinational companies will need to pay. The question is whether multinational companies at all necessary levels are aware of this and whether they are prepared for all the steps required by the newly introduced tax. Apparently, multinational companies, government bodies, and their advisors are still facing many updates to OECD guidelines, new requirements, and implications arising from the introduction of the global minimum tax, and there are still many unresolved issues.
Who Are (Not) the Taxpayers
Let us take Croatia as an example, where the Law on the Global Minimum Corporate Tax came into effect on December 31, 2023. Who exactly in Croatia should care about the global minimum corporate tax? The taxpayers under the Law are multinational groups of companies and large domestic groups that generate consolidated revenues exceeding €750 million in at least two of the previous four years. The Law provides exemptions from application for government bodies, international and non-profit organizations, pension funds, and investment funds that are ultimate parent entities or real estate investment entities that are ultimate parent entities. Consequently, all Croatian companies that are part of groups meeting the above criteria and for which no exemption is provided will have to adjust their financial reporting by calculating and reporting their effective tax rate.
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When and How Much is Paid
The additional corporate tax will be paid if the effective tax rate of the multinational group of companies in the jurisdiction is below 15%. The calculation of the effective tax rate is prescribed by the Law and is exceptionally complex as it is based on the ratio of so-called covered taxes of all constituent entities in the jurisdiction and their net qualifying income, for which definitions and calculation rules are also prescribed by the Law.
The Law in Croatia introduces all three rules defined by the European directive for the payment of additional tax obligations, specifically the rule on profit inclusion, qualified domestic additional tax, and the secondary rule on low-taxed profits. According to the primary rule on profit inclusion, the additional tax for the parent company of the multinational group of companies or large domestic group – for each related entity regardless of where it is located in the world – is paid in the country where the parent company is headquartered. In other words, if the parent company of the multinational group is in Croatia, that company will be obliged to report and pay additional corporate tax in Croatia for all its related companies globally. Therefore, this rule is exceptionally important for large domestic groups that will be affected.
