EU institutions on the last step to implement a minimum tax rate

The upcoming plenary session of the European Parliament will vote on new regulations on the minimum global tax rate for multinational corporations. The regulations are expected to take effect from 2023.

Reform’s purpose

The planned reform is intended to prevent multinational corporations from paying taxes in the place where profits are earned but transfer profits to places whose jurisdictions allow them to benefit from preferential taxation.

The principles and rate of minimum taxation are to apply to multinational enterprises (MNEs) and large national groups, provided that in at least two out of the last four consecutive tax years they have consolidated annual revenues of at least EUR 750 million and have a parent company or subsidiary established in an EU member state.

The rules will be regulated by the European Council Directive on ensuring the minimum global level of taxation.

Under the draft directive, entities subject to the minimum taxation rules will be required to provide information on their profits and tax rate to the tax authorities of each jurisdiction in which they have constituent units. It will be verified that the effective tax rate is not lower than the minimum rate set by the directive and then the obligation to compensate the tax will be updated, in principle by the ultimate parent company, but member states also have the possibility to operate a system of national compensatory tax – which will assume the obligation to compensate by the constituent entities of MNE groups established on the territory of that member state.

Proposed rates

Initially, the minimum tax rate and the effective tax rate threshold per was proposed at 15%.  Currently, the Committee on Economics and Monetary Policy is proposing an amendment to the draft directive that provides for a higher threshold of 21% minimum rate.

The draft directive stipulates that its provisions must be implemented by member states by the 31st of December 2022 and the minimum taxation rules will apply from the 1st of January 2023.

The next plenary session of the parliament on the draft is tentatively scheduled for the 6th of June 2022.