In a meeting held on 5 April 2022, the EU Economic and Financial Affairs Council (ECOFIN) reached an agreement that will allow Estonia to postpone the implementation of the global minimum tax until 2030. For a small country like Estonia, where only a few eligible multinational enterprises (MNEs) operate, it would be very costly and complicated to administer and collect the tax. The postponement is necessary to give Estonia time to develop the systems necessary for the administration of the tax. Also discussed at this meeting was the amended version of the EU directive proposed by the European Commission in December 2021 on the implementation of the OECD/G20’s Pillar Two Global Anti-Base Erosion (GloBE) rules and the introduction of the global minimum tax for MNEs (for prior coverage, see the tax alerts dated 23 December 2021 and 16 March 2022). However, since Poland would not support the directive and the unanimous support of all EU member states is required, the directive was not approved.
The idea of a global minimum tax has its origins in the OECD/Inclusive Framework on BEPs, the initiative to discourage MNEs from shifting profits (as well as tax revenue) to low-tax countries regardless of where sales are made (e.g., corporate income from software being migrated from a higher tax country to a tax haven).
In October 2021, 137 out of the 141 countries in the Inclusive Framework reached an historic agreement on the two-pillar solution to reform the international tax rules on the taxation of the profits of MNEs to ensure that large MNEs pay a fair share of tax where they operate and that they pay a minimum corporate tax of 15% to neutralise any potential advantage from moving profits to another jurisdiction (for prior coverage, see the article in the November 2021 issue of Corporate Tax News). The 15% global minimum tax rate will apply to overseas profits of MNEs with EUR 750 million in global sales but if a lower rate applies in a certain jurisdiction, the home country can apply a “top-up” tax. For example, if an MNE has a subsidiary in a low-tax jurisdiction with a corporate income tax rate of 12%, the country in which the MNE is headquartered will be able to apply a top-up tax of 3%, which will result in taxes paid up to the 15% global minimum tax.
The global minimum tax rate will be calculated as an effective rate, not as a nominal rate provided by law. In Estonia, companies generally pay income tax only on distributed profits (at a 20% rate), i.e., corporate income tax is not levied on retained and reinvested profits. Thus, in years when the company does not distribute profits or distributes relatively little profit, the effective tax rate is likely to be below 15%. The effective tax rate is the ratio of the tax paid on the profit calculated in accordance with accounting rules. For example, if an Estonian subsidiary had a profit of EUR 100,000 and distributed EUR 50,000, its tax liability in Estonia is EUR 12,500: (50,000 x 20/80). Thus, the effective tax rate is 12,500/100,000 = 12.5%. This means that the country in which the parent company is located may apply a top-up tax of 2.5%.
There are only a few local corporate groups in Estonia that meet EUR 750 million in global sales threshold and approximately 300 subsidiaries of foreign groups with the required sales revenue. All other companies will not be affected by the global minimum tax.
For companies that do not belong to a group with turnover of EUR 750 million per year, the agreement reached by Estonia will not change anything with respect to the taxation of corporate income. This means that nationally, Estonia will apply the global minimum tax only after 2030, and even then only in the case of MNEs with annual turnover of more than EUR 750 million.
The EU minimum tax directive will be added to the agenda for the next ECOFIN meeting on 24 May 2022.