Eventually, after a number of failed attempts, the EU has reached agreement on the Minimum Taxation Agreement.
The 27 European Union Member States reached agreement on the 12 December 2022.
The agreement clears the way for the implementation of a minimum level of taxation for the largest companies. These reforms are also known as the Pillar Two or Minimum Taxation Directive.
The Directive has to be transposed into Member States’ national law by the end of 2023.
Broadly, the agreed Directive reflects the global OECD agreement with some adjustments.
The new agreement will apply to any large group of companies whether domestic or international. The rules will apply to such organisations with aggregate revenues of over €750 million a year. As such, it will only apply to the biggest companies around the globe.
It should be noted that it is necessary for either the parent company or a subsidiary of the group to be situated within the EU.
The effective tax rate is established for a location by dividing the taxes paid by the entities in the jurisdiction by their income.
Where this calculation results in a rate of tax below 15% then the group must ‘top-up’ the tax paid such that the overall rate is 15%.
The development means that the EU will be a pioneer around Pillar Two. However, it seems highly likely that other jurisdictions (I.e non-EU) will follow suit.
Further, by the end of this month (Jan 2023), it is expected that the OECD will publish its own guidelines for Pillar Two. Again, these should act as a catalyst for wider adoption of Pillar Two internationally.
In addition, it is expected that they will shed some light on some of the key outstanding issues around how the US rules (such as US GILTI rules) will conform with Pillar Two.
If you have any queries about the EU agreement on Pillar Two, or international tax matters generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
The Irish Finance Bill 2022 provides for changes to:
Both changes are to reflect the OECD’s Pillar Two model rules and the EU’s draft Pillar Two Directive.
Ireland has an attractive R&D tax credit for qualifying expenditure on R&D activities. This includes certain expenditure on plant and machinery and buildings.
The credit is currently 25% of the allowable expenditure.
The mechanics of the regime are that the tax credit can be offset against the claiming company’s current and prior year corporation tax liability. In addition, any excess credit may be:
The OECD Pillar Two model rules and the EU draft Pillar Two Directive introduce the concept of a “qualified refundable tax credit” (QRTC).
Going forward, the R&D tax credit regime in Ireland will need to be consistent with QRTC requirements.
In order to qualify as a QRTC require, the tax credit to be paid as cash (or available as cash equivalents) within four years of the date on which the taxpayer is first entitled to it.
A tax credit that qualifies as a QRTC will be treated as income and not as a reduction in taxes paid. This is important when it comes to calculating the relevant effective rate of tax rate for the purposes of the global minimum corporate tax rate.
The Finance Bill proposals seek to revise the R&D tax credit so that it is consistent with the QRTC criteria. This will include providing that the credit is fully payable in cash or cash equivalents.
The new proposals under the Finance Bill measures provide that the first instalment of the R&D tax credit should be equal to the greater of:
The cap on payable credits linked to the corporation tax/payroll tax payments will no longer apply.
A consequence of the change is that companies that could have obtained the full value of the credit in a current year versus their corporation tax liabilities, will now instead see that benefit spread over three years.
In addition, to ensure alignment with the Pillar Two rules, the R&D credit should be paid within the four-year period. This includes where there is an open investigation by the tax authority.
The Finance Bill also provides for Pillar Two related changes to Ireland’s KDB.
The KDB is a form of patent box regime and provides for a 50% reduction of qualifying income. This results in an effective tax rate of 6.25% for the taxpayer in respect of the qualifying income.
However, the requirements are relatively strict and it is understood that uptake has been limited
The Finance Bill measures provide that the KDB trading expense deduction is reduced from 50% to 20% of qualifying income. This results in a new effective rate of 10% as opposed to the existing 6.25% on qualifying income.
If you have any queries about the Irish Finance Bill 2022, or Irish tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article