#tax2025: Eliminate technical deficiencies of the minimum tax

POSITION | TAX POLICY | INTERNATIONAL TAX LAW

#tax2025: Eliminate technical deficiencies of the minimum tax Necessary measures for an effective and feasible minimum taxation

May 2022 Implementation of the minimum tax in the European Union The EU Commission has presented a draft directive for the implementation of the globally agreed minimum tax in the EU at the end of 2021. It is based on a global consensus among around 140 countries on a global minimum tax for corporate profits of 15 per cent (“top-up tax”). Further it is intended to create a ‘level playing field’ for the taxation of corporate profits and to reallocate the resulting tax revenue more appropriately among countries.

Initial application not until 2024 Given the enormous complexity of the new rules, effective implementation by 2023 is ambitious and not realistic. German industry urgently calls for simplifying transitional provisions and a postponement at least until 2024.

Reduce disproportionate burden on businesses and administrations The global minimum tax can only be effective if it is implementable for businesses and does not impose a disproportionate administrative burden. It is therefore essential to simplify the GloBE rules and abolish GloBE determination requirements for groups of companies in high-tax countries.

Whereas the revenue potential of the minimum tax is low, it comes along with disproportionate compliance costs. Further simplification and application guidelines are necessary in order to increase the efficiency of the GloBE rules and to create a legally secure and reliable administration of the complex rules for businesses and tax administrations alike.

From a German industry point of view, there are still significant technical deficiencies in the current GloBE rules which could be addressed by the following solutions:

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#tax2025: Eliminate technical deficiencies of the minimum tax

BDI’s simplification proposals: Take deferred taxes fully into account The GloBE rules are intended to determine the effective tax expense of a group of companies. In doing so, however, some major and system-inconsistent adjustments are necessary. In particular, the insufficient consideration of deferred taxes causes high bureaucratic effort and systemic distortions.

Currently, the GloBE rules only allow a consideration period of five years for certain deferred taxes. In addition, they are capped at the minimum tax rate of 15 per cent. This period is unrealistic as temporary effects often last longer than five years. Due to the short consideration period, not the entire tax payment but only a fraction is anticipated. In addition, the subsequent recognition of longer temporary differences creates a significant additional administrative burden, as a “shadow accounting” is required. This means that individual deferred items would have to be tracked and determined specifically for the GloBE rules. Yet deferred taxes can arise in any asset, so there is an endless number of individual items to consider.

In addition, capping the consideration of deferred taxes at 15 per cent is inconsistent. Entities calculate deferred taxes at the applicable tax rates in their jurisdiction of operation, in Germany usually at 30 per cent. However, the GloBE regulations require a valuation at the minimum tax rate of 15 per cent, thus halving the effective tax rate and considering only half of the taxes that will be due on the underlying temporary differences. If tax credits in certain jurisdictions or an investment incentive are added, the effective tax rate may fall below the minimum tax rate due to the GloBE provision and triggers a top-up tax, even though the actual tax burden is far above the minimum tax rate. This does not only lead to a de facto double taxation, but also runs counter to the economic effects in the case of investment incentives intended by tax policy.

Proposed solution: An adoption of deferred taxes as reported in IFRS financial statements is necessary to significantly reduce the compliance burden on companies and to prevent systemic distortions.

Deferred taxes must be adopted as reported in the IFRS financial statements in order to significantly reduce the compliance burden and prevent systematic distortions. A deviating consideration of deferred taxes causes complex shadow calculations, which can thus be avoided. In any case, the reporting adjustment must be reduced to an administratively feasible level.

Implement safe-harbours and a “white list” for high-tax jurisdictions Most jurisdictions have a tax rate that is significantly higher than the minimum tax rate of 15 per cent.

The total tax burden in Germany is 31.3 per cent1 and the global average corporate tax rate is nominally 23.5 per cent.2 This indicates that the corporate tax burden of many countries is indisputably above the minimum tax rate. A considerable simplification can be achieved if group companies in high-tax countries do not have to perform the GloBE calculation. The introduction of a “white list” could exclude these countries from the minimum tax or the national minimum “top-up tax”. Otherwise, the GloBE rules would require

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BDI/VCI, Die Steuerbelastung der Unternehmen in Deutschland, 2020/2021, S. 7.

Tax Foundation, Corporate Tax Rates around the World, 2021, Fiscal Fact No. 783, files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf, (11 April 2022).

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#tax2025: Eliminate technical deficiencies of the minimum tax

businesses to calculate the complex GloBE effective tax rate for each applicable country, even though most countries have statutory and IFRS effective tax rates well above 15 per cent, resulting in little or no tax revenue, but coming along with an enormous compliance burden.

Proposed solution: A simple safe-harbour rule for each country that is indisputably above the minimum tax level can eliminate the need to calculate the GloBE effective tax rate. Such an effective safe-harbour rule could be based on country-by-country reporting data or a "white list" that excludes a GloBE calculation for countries that apply effective tax rates above 15 per cent.

A white-list as a safe harbour can reduce the number of cases where multinational companies have to prepare a large number of Effective Tax Rate (ETR) calculations and tax administrations have to review a large number of ETR calculations that reveal, year by year, that the ETR exceeds the agreed minimum tax rate. Calculating the ETR in order to determine that the GloBE rules do not apply is neither expedient nor justified and creates compliance costs for businesses and tax administrations alike. Therefore, this result should be anticipated before the enormous effort incurres.

The white list could be determined based on nominal tax rates of more than 15 per cent and existing tax incentives. BDI also proposes that such a white list should be periodically reviewed by the OECD. Such a list would not be a novelty for the tax authorities, but could be based on similar concepts already existing, for instance the list of the German Ministry of Finance on BEPS nexus compliance in the context of the German royalty deduction barrier.

Application of Country-by-Country-Reporting and IFRS Report One of the biggest challenges for companies is the complex data collection to comply with GloBE regulations and to avoid penalties. This process creates most of the administrative burden.

Genuine relief can be achieved if already existing reporting obligations are also used for the GloBE rules. Synergies can be gained not only from IFRS reporting, but from country-by-country (CbC) reporting.

Large multinational businesses are required to file a CbC report that includes financial information on the allocation of their worldwide profits and their tax liability. A CbC report already contains the information relevant for calculating the ETR under the GloBE rules, in particular the profit or loss and the tax burden incurred.

Proposed solution: It is necessary to allow that the determination of the ETR on the basis of the CbC reporting obligations can be used in order to determine whether a business is in scope of the GloBE regulations or not. This would not impose any additional burden on companies, would be faster and would come along with less documentation requirements while being indicative at the same time.This simplification measure would allow multinational businesses to leverage existing work done for the preparation of their annual CbC report without incurring additional work only for GloBE. Create de minimis and exemption rules for non-material companies Furthermore, there should be a focus on genuine de minimis and exemption rules that do not require further GloBE-related calculations. Thus, businesses with non-material economic activity should be exempt from the minimum tax calculation and documentation requirements without having completed the GloBE determinations first. The current de minimis exemption is not sufficient, as it first 3

#tax2025: Eliminate technical deficiencies of the minimum tax

requires extensive calculations to determine whether the aggregate turnover or profits of all companies in a certain country is below the threshold of ten million euros or one million euros.

An additional GloBE determination for small companies, which basically do not prepare financial statements for consolidation purposes, would be excessive and would extend the local reporting requirements solely for the audit of de minimis cases. These non-material businesses do not represent cases of relevance but would be a bureaucratic burden if special accounting rules suddenly have to be applied. However, a genuine exemption from the GloBE disclosure requirements disproportionately reduces compliance costs for businesses.

Proposed solution: Non-material, non-consolidated businesses should be excluded from the GloBE calculations in order to create a significant simplification. Turnover and profit thresholds should be defined for individual companies and not on a jurisdictional basis, so that no further GloBE determination is required if the materiality thresholds applied to the consolidated financial statements are not met. In this case, only a reference to the "de minimis" exception would have to be made in the GloBE statement.

Summary  Reduce compliance burden and implement a “white list” for jurisdictions where taxation above 15 per cent is assured.  Take deferred taxes fully into account: avoid shadow accounting and prevent systemic distortions  Limit the scope of GloBE using existing reporting requirements such as country-by-country reporting or IFRS financial statements. Limit deviations from IFRS to the maximum extent possible.  Cover only cases of significant relevance and create genuine de minimis rules which do not require any further complex determination for GloBE purposes for non-material subsidiaries.

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#tax2025: Eliminate technical deficiencies of the minimum tax

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 German Lobbyregister Number R000534 Editorial Dr. Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028 1507 m.wuennemann@bdi.eu David Gajda Senior Manager Tax and Financial Policy T: +49 30 2028 1413 d.gajda@bdi.eu

BDI Document number: D 1565

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