Global Minimum Tax
Minimum Tax Rate
Finance Act 2023 implement the Pillar Two minimum effective tax rate for large groups and companies by transposing the EU Minimum Tax Directive (Council Directive (EU) 2022/2523 of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union) into Irish law.
Pillar Two is one element of an October 2021 agreement by almost 140 countries in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework), with the overall aim to reform the international tax framework as it applies to large corporate groups.
Building on that agreement, the Inclusive Framework published OECD Model Rules to provide the basis for implementation of Pillar Two in national law. The EU Minimum Tax Directive is largely based upon the Model Rules, with some adjustments to take account of the requirements of EU law.
Technical guidance on Pillar Two implementation has continued to issue from the OECD since the Model Rules were published. This has taken the form of a Commentary on the Model Rules, and various pieces of Administrative Guidance which will update the Commentary in due course. Discussions also remain ongoing at the Inclusive Framework on various open issues related to Pillar Two implementation, including ensuring coordination and consistency in the application of the rules across jurisdictions, as well as providing further administrative guidance.
New Rules
Pillar Two consists of a series of interlinked rules, known as the Global Anti-Base Erosion (GloBE) rules, which provide that in-scope businesses will, in general, pay a minimum effective tax rate (ETR) of 15 per cent on their profits in respect of each country in which they operate.
The GloBE rules operate as a top-up tax, with the 15 per cent effective tax rate being achieved when added to corporation tax charged under domestic rules. Pillar Two uses its own tax base, calculated by reference to financial accounting rules subject to certain adjustments.
The new provisions will apply to both multinational and domestic businesses with a global annual turnover of €750 million and above in at least two of the preceding four years. The main Pillar Two charging rules are:
Income Inclusion Rule (IIR)
- The IIR is the primary GloBE rule and requires a parent company to determine whether its subsidiaries (constituent entities) in the group paid at least the minimum effective rate of tax on a jurisdictional basis in each jurisdiction in which those subsidiaries are located. If the effective rate of tax is below the minimum rate, the parent company will pay an additional amount of tax to increase the overall level of taxation in respect of that jurisdiction to the minimum effective rate of 15 per cent.
- The IIR will typically be applied by the ultimate parent entity (UPE) of a group, i.e. by the entity at the top of the ownership chain. However, if the UPE is not required to apply an IIR, for example if the jurisdiction in which that UPE is located does not adopt the GloBE rules, the obligation to apply an IIR moves down the ownership chain. In such circumstances, an Intermediate Parent Entity (IPE) located in a jurisdiction that has adopted the GloBE rules would be required to apply the IIR to its subsidiaries (with priority to IPEs higher up in the ownership chain).
- There is a departure from the standard top-down rule for a Partially Owned Parent Entity (POPE). This is a constituent entity that owns (directly or indirectly) an ownership interest in another constituent entity in the same group, and the right to more than 20 per cent of the POPE’s profits are held by persons that aren’t part of the multinational enterprise (MNE) group. Even if the group UPE or IPE applies an IIR, the POPE is also obliged to apply an IIR in respect of any subsidiary low-taxed entity, with the liability of the UPE/IPE reduced accordingly.
The Pillar Two rules also provide rules for other ownership structures such as joint ventures and multi-parented groups.
Undertaxed Profit Rule (UTPR)
- The UTPR is a secondary GloBE rule, designed to operate as a backstop to the IIR. Where the full amount of top-up tax is not collected under an IIR (for example if a group does not have a parent company in a jurisdiction that has implemented Pillar Two), the liability for the top-up tax falls on the jurisdiction(s) where other constituent entities (group companies) are located. Under the EU Minimum Tax Directive, the UTPR can also apply to undertaxed profits in the jurisdiction of the group UPE itself.
- Liability arising under the UTPR, as the rule will be implemented in Ireland, will operate as an additional top-up tax payment.
- The UTPR comes into effect one year following the IIR, except for certain limited circumstances where it may apply at the same time as the IIR.
Qualified Domestic Top-up Tax (QDTT)
- Alongside the IIR and the UTPR, the OECD Model Rules and EU Minimum Tax Directive provide the option of introducing a QDTT. This will allow implementing jurisdictions to preserve their primary right of taxation over profits arising in their jurisdiction.
- The QDTT is designed to ensure collection of the top-up tax from in-scope entities located in the jurisdiction and is fully creditable against any IIR or UTPR liability. It allows jurisdictions to collect any top-up tax due from domestic entities before an IIR or UTPR rule in another jurisdiction would apply to collect it, or may, in certain circumstances, result in the IIR or UTPR not applying in respect of domestic entities where QDTT Safe Harbour status applies.
- Ireland is introducing a QDTT as part of the legislation implementing Pillar Two.
- The QDTT has been designed with a view to obtaining Safe Harbour status under peer review.
Substance-Based Income Exclusion
The rules for computation of the 15 per cent effective tax rate include a “substance-based income exclusion” (SBIE). The SBIE excludes a certain amount of income from the scope of the Pillar Two top-up tax, calculated by reference to payroll costs and tangible assets in the jurisdiction. The SBIE starts with a 10 per cent carve-out for payroll costs and 8 per cent carve-out for tangible assets. The percentages then reduce annually over ten years, before settling at 5 per cent for each category.
Safe Harbours
Pillar Two includes transitional and permanent safe harbour provisions, which aim to ease the administrative burden on in-scope groups, particularly in the initial period of the application of the Pillar Two rules.
- The Transitional Country-by-Country Reporting Safe Harbour operates through the use of simplified jurisdictional revenue and income information contained in an MNE’s qualified Country- by-Country Report, and jurisdictional tax information contained in an MNE’s qualified financial statements. During the three-year transitional period, the top-up tax in a jurisdiction for a fiscal year shall be deemed to be zero and detailed GloBE calculations will not be required, where the group can meet one of three tests based on those data sources: de minimis (low revenues and low profits); simplified ETR; or routine profits (profits less than the SBIE amount).
- The Transitional UTPR Safe Harbour allows relief from the application of a UTPR to the jurisdiction of a UPE, where that jurisdiction has a statutory corporate tax rate of at least 20 per cent, for fiscal years which are no more than 12 months in duration that begin on or before 31 December 2025 and end before 31 December 2026 (referred to as the transition period).
- A QDTT Safe Harbour, which allows MNE groups to recognise that Pillar Two top-up taxes have been accounted for in respect of entities in a jurisdiction that has implemented a QDTT, and therefore to exclude those group entities when undertaking group top-up tax computations in another jurisdiction under an IIR or UTPR rule, other than in cases where the Switch-Off mechanism applies.
Administration of Pillar Two in Ireland
Pillar Two will be administered on a self-assessment basis, under the care and management of the Revenue Commissioners.
Obligations imposed on those in scope of the GloBE taxes include:
- registration/deregistration with Revenue;
- filing a standardised informational return, termed a Globe Information Return (GIR), in a form as agreed at the Inclusive Framework, with a possibility of centrally filing the GIR in one jurisdiction subject to certain conditions;
- separate but concurrent pay and file obligations, with three separate returns for the IIR, UTPR and QDTT (where relevant); and
- an elective group approach is provided for pay and file for the UTPR and QDTT.
A mechanism to incorporate reference to future iterations of OECD Pillar Two guidance by order of the Minister for Finance is also included.
Finance Act 2023
Finance Act 2023 amends several provisions of the TCA 1997 to ensure that certain administrative aspects of Pillar Two are in line with other taxes, such as corporation tax. This amendment enables the application of the following provisions to the new Pillar Two legislation,
- the general anti-avoidance rule in section 811C;
- application of the provisions in relation to confidentiality of taxpayer information, anonymity of authorised officers,
- repayment of tax, interest on repayments,
- prescribing of forms,
- electronic transmission of returns,
- appeals to the Appeal Commissioners,
- collection and recovery, penalties,
- Revenue offences, publication of tax defaulters, and tax clearance.