Interaction of new minimum tax with Pillar Two and summary of White Paper on international tax
Spain’s National General Budget for 2022, published on 29 December 2021, makes various changes to the tax system, including the introduction of a 15% corporate “minimum tax.” On its face, the minimum tax would appear to be in line with the global minimum tax in Pillar Two of the OECD/G20 BEPS 2.0 framework and the proposed directive that would implement Pillar Two in the EU, but as described below, this actually is not the case (for prior coverage of the OECD two-pillar framework, see the article in the November 2021 issue of Corporate Tax News and the tax alert dated 23 December 2021 for an analysis of the EU directive).
Pillar Two will introduce a global minimum tax rate of 15% that will apply to multinational entities (MNEs) where a company has consolidated revenue in excess of EUR 750 million. The minimum tax will be established through the introduction of two interlocking rules, i.e., an income inclusion rule (IIR) and an under-taxed payments rule (UTPR), collectively referred to as the GloBE rules (for prior coverage, see the tax alert dated 21 December 2021). Under the IIR, the ultimate parent entity is primarily liable for all “top-up tax” that is applied to profits if the effective tax rate in any jurisdiction is below the minimum 15% rate. As a backstop, the UTPR can apply by way of a disallowance of a tax deduction to low-taxed income not brought into charge under the IIR.
According to commentators, Spain’s new minimum tax and the OECD GloBE rules are intended to coexist. However, as explained below, based on the current wording of Spain’s minimum tax, it would not be a “qualifying minimum tax” for Pillar Two purposes.
Overview of the domestic minimum tax
Spain’s minimum tax, which applies for tax periods starting on or after 1 January 2022, is intended to prevent companies from exploiting loopholes in the tax law and using tax deductions to pay less tax than the normal 25% statutory corporate tax. The minimum tax is levied at a rate of 15% and is applicable to the following taxpayers:
Entities, including permanent establishments of foreign entities, whose turnover in the 12-month period immediately before the start date of the current tax period is at least EUR 20 million; and
Entities that are taxed under the tax consolidation regime, regardless of turnover.
The tax base for purposes of the minimum tax cannot be lower than 15% of the taxable base of the relevant year for companies operating under Spain’s general regime, i.e., those determining their taxable base by adding up the accounting result of the year plus/minus the necessary book-to-tax adjustments.
It would appear that the current iteration of Spain’s minimum tax is not aligned with the tax under Pillar Two. The thresholds for triggering the minimum tax differ in Spain and under the GLoBE rules nor is the way of determining the minimum tax comparable under the two sets of rules and the Spanish minimum tax does not include the IIR or the UTPR. Thus, Spain will still have to adapt its corporate tax legislation to the provisions to be set at the OECD level, as well as measures that may derive from the directive on the EU-wide global minimum tax, whose entry into force has been postponed from 2023 to 2024 (and that has not yet received final approval from EU member states).
White Paper on tax reform
The Ministry of Finance appointed a Committee of Experts in 2021 to prepare a “White Paper for Tax Reform.” The committee was charged with making a holistic assessment of Spain’s tax system and developing proposals to improve the tax situation and competitiveness of corporate taxpayers, address conflicting situations for the future, taking into consideration the battery of revenue measures introduced since Spain’s last major tax reform in 2015, some of which are being challenged in the courts as excessive and not compliant with principles in Spain’s constitution.
The committee report, published in February 2022, contains the following recommendations:
- Codify the concept of “place of effective management” for purposes of determining tax residence, by introducing criteria such as the place where the board of directors or equivalent bodies meet, the place where the CEO and other executives carry out their duties, the location of the main office or the place where the day-to-day management is carried out. Implementation of this recommendation would help to minimize residence issues under both domestic law and Spain’s tax treaties.
- Streamline the provisions relating to the taxation of permanent establishments with the rules referring to Spanish corporate taxpayers to prevent potential discrimination that could be in breach of EU law and principles or the provisions of Spain’s tax treaties.
- Amend the anti-offshoring rule in the Corporate Income Tax Act, by introducing the concept of a “non-cooperative jurisdiction” and specifying the criterion of “substantially lower level of effective taxation.” This could ultimately be linked with the OECD minimum effective tax concept.
- Two alternatives for Spanish holding companies (i.e., ETVEs):
- Maintain the current rules but reinforce tax authority control over these entities; or
- Maintain the current rules but eliminate the preferential aspects of the ETVE regime and wait for the ATAD 3 (i.e., the EU shell company directive) to be transposed into domestic law.
- Undertake a review of the participation exemption on dividends and capital gains on the sale of shares of certain entities. The participation exemption regime was amended in the 2021 budget to reduce the amount of income that can benefit from the exemption to 95%, with the remaining 5% deemed to constitute nondeductible expenses. The Committee recommended that these changes be repealed and the previous 100% restored but introduce stricter requirements to qualify for the exemption (e.g., increase the minimum holding threshold from 5% to 10% and the minimum holding period from one to two years).
- Progressively adapt the minimum taxation rules to OECD developments.
The committee recommended that Spain refrain from moving forward on any tax reform measures until both the economy and the international environment stabilise. The government has not yet made any statements on its intended next steps.