[World Tax News] Germany Publishes Draft Law for Implementing Directive to Ensure Global Minimum Taxation and More

Editorial Team – [2023] 152 taxmann.com 510 (Article)

World Tax News provides a weekly snippet of tax news from around the globe. Here is a glimpse of the tax happening in the world this week.

1. Germany Publishes Draft Law for implementing directive to ensure global minimum taxation

The draft law for the implementation of the Minimum Taxation Directive, aimed at ensuring global minimum taxation for multinational enterprise groups and large domestic groups within the Union, has been released by the German Ministry of Finance.

This draft law, known as the Minimum Taxation Directive Implementation Act – MinBestRL-UmsG, is designed to incorporate the Pillar 2 global minimum tax, as outlined in Council Directive (EU) 2022/2523 of 14 December 2022.

The implementation will encompass key components such as the Income Inclusion Rule (IIR), the Undertaxed Payment/Profit Rule (UTPR), and a Qualified Domestic Minimum Top-Up Tax (QDMTT). The preparation of this draft law involved prior consultations based on a discussion draft earlier in the year. The ministry is currently accepting further comments on the draft until 21 July 2023.

In contrast to the discussion draft that was consulted earlier this year, the current version introduces several significant related measures that amend other laws, including:

(a) The low taxation threshold for the add-back taxation in the Foreign Transaction Tax Act (AStG) will be reduced from 25% to 15%. Additionally, the trade tax liability for the add-back amount will be eliminated.

(b) The restriction on the partial deduction for expenses related to the transfer of rights (licensing) paid to recipients subject to low taxation, as specified in § 4j of the Income Tax Act (EStG), will be repealed.

After the comment period, the draft law will undergo approval in both the German Bundestag (the lower house of parliament) and the German Federal Council (the upper house of parliament – Bundesrat). Once approved and officially published in the Official Gazette, the provisions of the law will take effect for fiscal years commencing after 31st December 2023.

Source: Draft Law

2. OECD releases administrative guidance on Pillar 2 Global Anti-Base Erosion Model Rules

The OECD has released Administrative Guidance concerning the Global Anti-Base Erosion Model Rules (Pillar Two). A significant feature of this guidance is the incorporation of two safe harbours, namely the QDMTT Safe Harbour and the Transitional UTPR Safe Harbour.
The summary of these safe harbours is provided in the guidance as follows:

(a) Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbour

QDMTT refers to a domestic minimum tax enforced by a jurisdiction on Constituent Entities of a Multinational Enterprise (MNE) Group that are either resident or have a permanent establishment within that jurisdiction. The QDMTT functions as a Top-up Tax, which is computed following the jurisdictional Effective Tax Rate (ETR) calculation outlined in Chapter 5 of the Global Anti-Base Erosion (GloBE) Rules.

The implementation of the credit mechanism necessitates at least two distinct Top-up Tax computations for the same jurisdiction. The first calculation is based on the QDMTT legislation applicable in the jurisdiction, while additional calculations are performed following the GloBE Rules (e.g., under the legislation of the Ultimate Parent Entity (UPE) Jurisdiction). Members of the Inclusive Framework have noted that this requirement to conduct separate Top-up Tax calculations for the same Constituent Entities under parallel rules will lead to heightened compliance expenses for multinational enterprise (MNE) Groups and administrative complexities for tax authorities.

The purpose of the QDMTT Safe Harbour is to present a practical resolution to this situation. When an MNE Group meets the criteria for the QDMTT Safe Harbour, Article 8.2 eliminates the application of the GloBE Rules in other jurisdictions by considering the Top-up Tax payable under the GloBE Rules as zero.

Consequently, with a QDMTT Safe Harbour in place, the MNE Group can perform a single calculation under the QDMTT and then utilize Article 8.2 of the Model Rules to automatically reduce the Top-up Tax to zero in any jurisdiction where the GloBE Rules are applicable. As a result, the MNE Group is relieved from the need to conduct an additional calculation under those particular rules.

(b) Transitional UTPR Safe Harbour

The Undertaxed Payment/Profit Rule (UTPR) is designed to match the Income Inclusion Rule (IIR) by encouraging jurisdictions to adopt the GloBE rules and motivating multinational enterprises (MNEs) to organize their group holdings in a way that subjects their operations to the IIR’s taxation.

However, due to the rule order under the GloBE rules, the UTPR effectively becomes the primary mechanism for imposing a top-up tax in the Ultimate Parent Entity (UPE) jurisdiction when the jurisdiction has not implemented a Qualified Domestic Minimum Top-up Tax (QDMTT).

MNE Groups facing potential exposure to the UTPR in the UPE jurisdiction have limited options to alter their ownership structure and include the UPE’s profits within the scope of the IIR. Additionally, during the initial years of implementing the GloBE Rules, the UTPR is expected to be more frequently applicable as jurisdictions finalize the introduction of qualified rules, including QDMTTs.

The purpose of the Transitional UTPR Safe Harbour is to offer temporary relief in the Ultimate Parent Entity (UPE) Jurisdiction during the initial two years of implementing the GloBE rules. Within this transitional period, the UTPR Top-up Tax Amount calculated for the UPE Jurisdiction will be considered zero for Fiscal Years lasting no more than 12 months, commencing on or before 31st December 2025, and concluding before 31st December 2026.

Reference: Administrative Guidance