Tax trends and developments for MNEs

Introduction As 2022 nears its end, it is time for our annual tax bulletin. This bulletin focuses on the tax trends and developments we foresee for 2023 and includes some tips and takeaways. Topics addressed in this bulletin include the next steps in the implementation of the global agreement on Pillar One and Pillar Two, the European Commission’s proposals on the abusive use of shell entities and on debt financing as well as developments in tax transparency and transfer pricing. For Multinational Enterprises (‘MNEs’) that may be affected by Pillar Two, 2023 will be the year to assess the impact and potential actions needed to mitigate undesired effects. In transfer pricing, we see more and more multi-jurisdictional audits and multilateral agreement procedures. MNEs may want to prepare what to do in case they have to face these procedures. In addition, we have included some current tax developments in Belgium, the Netherlands, Luxembourg and Switzerland that might have an impact on MNEs. You will appreciate that the nature of these developments differs per country, so our aim has been not to discuss the same topics for each country. Given the general nature of this tax bulletin, the information contained in it cannot be regarded as legal advice. But as you know, we are happy to share our ideas with you and discuss tailor-made solutions individually. You are most welcome to contact your Loyens & Loeff adviser if you would like to receive more information on any of the topics included in this bulletin. Kind regards, Loyens & Loeff N.V. November 2022 Peter Adriaansen Marja de Best Margriet Lukkien Nicolas Lippens Natalie Reypens Fabian Sutter Tax trends and developments for MNEs 3 < back to indexpage The 2021 agreement on reallocating taxing rights to market jurisdictions (‘Pillar One’) and on the introduction of a global minimum taxation (‘Pillar Two’) has been joined by 137 members of the OECD/G20 Inclusive Framework (the ’Inclusive Framework’). Pillar One The goal is to have Pillar One into force in 2024. MNEs will need to assess the potential impact and take Pillar One into account when reassessing their transfer pricing models. Pillar One seeks to create a new taxing right for market jurisdictions through Amount A. This new taxing right is independent of physical presence and will be determined based on a formulaic approach. During 2022, the OECD’s Committee on Fiscal Affairs released several requests for input on proposed elements under Amount A through public consultations. Those public consultations concerned the draft model rules for (i) nexus and revenue-sourcing (February 2022), (ii) tax base determinations (February 2022), (iii) the scope (April 2022), (iv) the extractives exclusion (April 2022), (v) the regulated financial services exclusion (May 2022), and (vi) tax certainty aspects (May 2022). Following these requests for input, the OECD’s Committee on Fiscal Affairs released two public consultation documents in the form of the Progress Reports on Amount A (‘Progress Reports’). The first Progress Report (July 2022) includes a consolidated version of the operative provisions of Amount A, reflecting the technical work that was completed before the release of this Progress Report. The second Progress Report (October 2022) includes the rules on the administration and the tax certainty aspects of Amount A. 1. Two-Pillar solution Tax trends and developments for MNEs 4 < back to indexpage Based on the Progress Reports, the proposed core elements for negotiating the multilateral convention (‘MLC’) through which Amount A will be implemented are: - Scope. Only MNEs with both a global turnover above EUR 20 billion and a pre-tax profit margin exceeding 10% are in scope of the new taxing right. The global turnover threshold is expected to be reduced to EUR 10 billion eight years after implementation of Pillar One. The pre-tax profit margin threshold must be cumulatively met in the current period, in at least two of the four prior periods and on average across all four prior periods. The period means the reporting period for which the MNE prepares consolidated financial statements. Furthermore, the MNE’s revenues should be corrected by excluding revenues and profits from extractives and regulated financial services. - Nexus. At least EUR 1 million of revenue must be generated in a jurisdiction for an Amount A allocation. This threshold is reduced to EUR 250,000 for jurisdictions with a gross domestic product of less than EUR 40 billion. - Revenue-sourcing. A methodology is introduced to determine where the revenues of an MNE are generated. This methodology is based on information that identifies the source of the revenues or, alternatively, based on an allocation key. - Tax base rules. The consolidated financial statements of an MNE form the starting point for determining the tax base. The rules include a limited number of book-to-tax adjustments and a framework allowing MNEs to carry forward losses. - Profit allocation rules. Amount A will be 25% of the residual profit, i.e. of the profit exceeding 10% of the global consolidated revenue. Where the MNE is already taxable in a market jurisdiction, a reallocation cap applies, being a marketing and distribution profits safe harbour. - Elimination of double taxation rules. Measures to prevent double taxation will be included in the MLC to implement Amount A, with relief to be provided through either the exemption method or the credit method. - Administration process and innovative tax certainty processes. A tax certainty framework will be implemented through mechanisms that guarantee certainty for in-scope MNEs across all aspects of Pillar One, including double taxation relief. These mechanisms are supported by a binding determination panel to resolve any disagreements that arise. In addition to the tax certainty framework, in-scope MNEs benefit from dispute prevention and resolution mechanisms in a mandatory and binding manner. Next steps The Inclusive Framework (‘IF’) is working on the detailed provisions of the MLC that will establish the legal obligations of the parties to implement Amount A. It is aiming to finalise the MLC by mid-2023 with the objective of enabling the MLC to enter into force in 2024. In addition to the work on Amount A, the IF is making progress on advancing the work on Amount B, which it expects to deliver in the first half of 2023. Tax trends and developments for MNEs 5 < back to indexpage Takeaways and tips - It remains to be seen whether the envisaged implementation dates are feasible. - In any case, MNEs will need to assess the potential impact and take Pillar One into account when reassessing their transfer pricing models. Loyens & Loeff can assist in preparing a Pillar One Impact Assessment Model to facilitate such assessment. Jan-Willem Kunen Gijs van Koeveringe Pillar Two MNEs should check whether they are expected to be in scope of Pillar Two rules. Pillar Two seeks to enforce a global minimum corporate income tax at an effective rate of 15%, calculated on a jurisdiction-by-jurisdiction basis. Under OECD rules, it will apply to MNEs that meet the consolidated group revenues of EUR 750 million per year. If the minimum 15% effective tax rate is not met in each jurisdiction, a top-up tax will apply. The OECD Global Anti-Base Erosion (‘GloBE’) Rules were released in December 2021, followed by commentaries in March 2022. A public consultation meeting on the implementation of the framework for the global minimum tax was held in April 2022. At EU level, a draft directive on Pillar Two was initially released in December 2021, followed by an updated version in March 2022. The EU draft directive is generally consistent with OECD GloBE model rules, with a few exceptions, among which, the applicability of the rules to purely domestic groups meeting the revenue threshold. For more information reference is made to our Tax Flash of 16 March 2022. Throughout 2022, different Member States have opposed the implementation of the Pillar Two Directive, and the consensus needed could not be reached until now. There is however still a possibility that consensus will be reached during the upcoming ECOFIN meeting on 6 December 2022. For more information on the most recent developments we refer to our webpage which will be updated from time to time. State of play in the Netherlands In September 2022, France, Germany, the Netherlands, Spain, and Italy released a statement supporting the implementation through ’enhanced cooperation’ (a procedure which allows Member States to issue legally binding directives amongst a smaller group of participating Member States). Germany announced its willingness to pursue unilateral implementation should an agreement not be reached. Tax trends and developments for MNEs 6 < back to indexpage Furthermore, on 24 October 2022, the Netherlands launched a public consultation on the draft bill to implement Pillar Two as of 31 December 2023. The Dutch government has repeatedly stressed its preference for a multilateral solution and that it remains committed to find consensus within the EU. The aim of the public consultation is to improve the quality of the definitive legislation based on the input provided by the public. For more information reference is made to our Tax Flash of 25 October 2022. State of play in Belgium In October, the Belgian Finance Minister announced in the Chamber of Representatives that Belgium is willing to participate in the enhanced cooperation procedure should an agreement not be reached. Although no concrete steps have been taken to implement Pillar Two, a temporary substitute for the Pillar Two minimum tax will be introduced as of 2023 based on existing rules. Under these existing rules, companies can carry forward tax losses indefinitely, but their use per taxable period is limited to EUR 1 million + 70% of the taxable result exceeding EUR 1 million. As a result, 30% of the taxable income exceeding EUR 1 million remains taxable. Under the new rules applicable as of 2023, the limit will be cut to 40%, implying that 60% of the taxable income exceeding EUR 1 million will be taxable at a rate of 25%, resulting in a minimum tax of 15% (60% x 25%). The aim is to replace this minimum tax once Pillar Two is introduced. State of play in Luxembourg In Luxembourg, no proposal to implement Pillar Two has been released while it awaits the outcome of the agreement to be reached at EU level. State of play in Switzerland Switzerland too is in the process of introducing the Pillar Two rules into its national law with the aim of passing a constitutional amendment in a public vote during the course of 2023. Such constitutional amendment will allow for an implementation of the new rules based on an intermediary ordinance as of 1 January 2024. Such ordinance would later be replaced by a formal law. A draft of the intermediary ordinance was in public consultation until 17 November 2022. It provided for maximum consistency with the OECD GloBE rules via a direct reference to these rules. Despite the uncertainties as to when and how Pillar Two rules will be implemented, experience has shown that MNEs in scope should already take actions based on the existing framework. Takeaways and tips - Check whether your group is expected to be in scope of Pillar Two rules or whether your group may be in scope in the future. In both cases, the transition rules already apply. - Start modelling the impact of the rules to identify red flags and action points. - Identify the points in the transition rules that require attention. Such points, for instance, include recognition of existing tax attributes, such as tax losses, as well as the Pillar Two effect of business restructurings taking place during the current transition period. - Pillar Two rules are intricately linked to accounting standards. Significant data gathering and calculations will be needed. - Prepare for the additional compliance burden as a result of the Pillar Two rules and check whether there is sufficient budget available to bear this burden. Tax trends and developments for MNEs 7 < back to indexpage Charlotte Kiès Linda Brosens Aline Nunes Selina Many Tax trends and developments for MNEs 8 < back to indexpage On 18 May 2021, the European Commission issued a communication on Business Taxation for the 21st Century (‘Communication’). The announcements made in the Communication will translate into legislative proposals in the years up to and including 2024 and will have a significant impact on MNEs’ taxation and reporting obligations. On the one hand, the legislative proposals aim to increase transparency, making it easier for tax authorities to counteract and deny tax benefits and create some dissuasive effect for MNEs due to potential adverse publicity exposure. On the other hand, they contain targeted measures that, amongst other things, ensure effective taxation and support green and digital transitions. Since then, the European Commission has launched several public consultations and legislative proposals. The initiatives outlined below are relevant for MNEs. The Unshell Proposal: what to expect? MNEs should assess their current substance and set up their business in a way that is efficient from a business perspective and future-proof from a tax perspective. On 22 December 2021, the European Commission published a proposal for a directive laying down rules to prevent the misuse of shell entities for improper tax purposes (‘Unshell Proposal’). This proposal intends to counter situations where taxpayers misuse EU entities that have no or minimal substance and do not perform any actual economic activity, by introducing reporting obligations, information exchange and possibly denying certain tax benefits. To determine whether a company falls within the scope of the Unshell Proposal and what the exact consequences are, specific carve-outs, gateways and substance indicators must be assessed. For detailed information on the Unshell Proposal, we refer to our brochure of May 2022. EU Business Taxation for the 21st Century 2. Tax trends and developments for MNEs 9 < back to indexpage The proposal was open for feedback until 6 April 2022 to give stakeholders a voice and to feed the legislative debate. The European Commission received quite some critical comments from stakeholders who expressed worries about, amongst others, the additional compliance, the vague wording and the use of criteria referring to physical presence to define abuse, especially in the current remote working culture. Discussions are still ongoing at EU level and several options to amend the Unshell Proposal are being considered. We understand that among these options, the possibility of merging the gateways and the substance indicators is being considered, including the modification or removal of some of them. Various options are also on the table with respect to the tax consequences. Next steps It is expected that a progress report on the Unshell Proposal will be presented at the December 2022 Economic and Financial Affairs Council meeting. Both the Czech Republic and Sweden have expressed their doubts about the need for the Unshell Proposal and Sweden will take over the EU Council presidency from the Czech Republic in January 2023. It is to be awaited whether Spain puts this high on the agenda when it assumes the presidency in July 2023. Takeaways and tips - It is important for MNEs to follow the developments regarding the Unshell Proposal and to evaluate its potential impact. - Having sufficient substance in place according to the Unshell Proposal does not mean that a structure can no longer be challenged by tax authorities. Irrespective of the fact that the undertaking would fulfill the (minimum) substance indicators laid down in the Unshell Proposal, tax authorities could still challenge a structure based on, for example, the tax residency of the undertaking, national anti-abuse provisions and/or the concept of beneficial ownership. - Considering the Unshell Proposal and the increased number of tax audits on withholding taxes in many Member States, MNEs should assess their current substance and set up their business in a way that is efficient from a business perspective and future-proof from a tax perspective. - Loyens & Loeff has the tools to assess an MNE’s level of substance and the risks from an EU perspective and from a Dutch, Belgian, Luxembourg and Swiss tax perspective. Furthermore, we can make clear and practical suggestions to improve the structure. Margriet Lukkien Linda Brosens Daniël van der Vliet Tax trends and developments for MNEs 10 < back to indexpage BEFIT high on the agenda of the European Commission Will the EU have a single corporate tax rule book in the future? With its publication of 13 October 2022, the European Commission opened the consultation for the new framework for business taxation within the EU: ’Business in Europe: Framework for Income Taxation’ (‘BEFIT’). This framework provides for a single corporate tax rule book for the EU, based on the key features of a common tax base and the allocation of profits between Member States based on formulary apportionment. The European Commission’s key objectives are inter alia the increase of businesses’ resilience, the removal of obstacles to cross-border investments and the provision of sustainable tax revenue. The Commission wants to receive feedback on the various policy options. Under the policy options still to be decided upon are the scope, the tax base calculation, i.e. whether or not to set up a comprehensive set of tax rules, and the allocation of profit to related entities outside the group, i.e. whether or not to create a simplified approach to transfer pricing in this respect. Next steps Businesses are welcome to provide their feedback through the public consultation until 26 January 2023. A legislative proposal is expected to be published by Q3 2023. Debt-Equity Bias Reduction Allowance The European Commission finds it necessary to reduce the deb