On 10 July 2021, the G20 found an agreement as for the Pillar Two tax reform that was lately endorsed by 132 countries and jurisdictions, constituting the vast majority of the OECD/G20 Inclusive Framework (inclusive framework) on Base Erosion and Profit Shifting (BEPS). Pillar Two, the key components of which are commonly referred to as the "global minimum tax" or "GloBE," introduces a minimum effective tax rate of at least 15%, calculated based on a specific rule set. Groups with an effective tax rate below the minimum in any particular jurisdiction would be required to pay top-up tax to their head office location. The tax would be applied to groups with revenue of at least EUR 750 million.
The tax imposed under the GloBE Rules is a “top-up tax” calculated and applied at a jurisdictional level. The GloBE rules use a standardized tax base and definition of covered taxes to identify those jurisdictions where an MNE (multinational enterprise) is subject to an effective tax rate below 15%. It then imposes a coordinated tax charge that brings the MNE’s effective tax rate on that income up to the minimum rate (after taking into account a substance-based carve-out).
Under the IIR (Internal Rate of Return), the effective tax rate of each jurisdiction, calculated in accordance with specific global minimum tax rules, will be determined based on the financial results of all the consolidated companies or branches in that jurisdiction. It will then be compared with the minimum tax rate of at least 15%. Top-up tax will be charged to the head office or, in some cases, to intermediate entities (subholding). At this regard:
- The amount of a Constituent Entity’s Covered Taxes is determined by taking the Constituent Entity’s current taxes for the Fiscal Year, adjusted to reflect certain timing differences;
- The GloBE Income or Loss of a Constituent Entity is determined by taking the Financial Accounting Net Income or Loss for the Constituent Entity for the Fiscal Year and then adjusting the amount according to the Globe rules.
Two of the main adjustments to the net income, according to GloBE rules, consists of dividends and capital gains. More in detail:
- As for dividends, there is an exception for a shortterm portfolio shareholding, i.e. a shareholding of less than 10%, which has been held for less than one year at the date of the distribution;
- As for capital gains, there is an exception for any gain, profit or loss arising from changes in fair value or the disposition of an ownership interest of at least 10% that is included in the financial accounting net income or loss is excluded from the net GloBE income as an excluded equity gain or loss.
This adjustment assimilates the treatment of dividends for GloBE purposes to the (supposed) treatment for tax purposes as many jurisdictions exempt dividends from tax to avoid economic double taxation. In such cases, as a general rule, excluded dividends (or capital gains) are neither part of the domestic tax base nor part of the net GloBE income or loss. In such cases, excluded dividends are neither part of the domestic tax base nor part of the net GloBE income or loss. Their non-taxation under domestic tax law does not lower the ETR.
However, the GloBE adjustments are not always coincident with national rules. The joint application of such adjustments and of the national rules could create some distortions, as outlined by international and Italian scholars.
In a nutshell, according to Italian national tax rules:
- Dividends are 95% excluded from taxation, notwithstanding the amount of the shareholding owned; however, dividends distributed by black listed entities are totally taxable in the hands of the Italian percipient;
- Capital gains are 95% excluded from taxation provided that the following requirements are met: (i) the minimum holding period of 12 months preceding the disposal; (ii) the booking of the participations as a fixed financial asset (longterm investment) in the first financial statement; (iii) the residence of the participated company in a white-listed country; and (iv) the carrying on by the participated company of a real business activity.
Starting from the fiscal year 2019, a foreign jurisdiction, different from EU/EEA member states, should be considered as blacklisted if:
- In case of qualified participations, the foreign entity is subject to an effective tax rate lower than 50% of the effective tax rate that would have applied if that entity was tax resident in Italy; and
- With regard to non-qualified participations, the nominal foreign tax rate (as established by also taking into account special tax regimes) is lower than 50% of the nominal tax rate
If the taxpayer is a IAS/IFRS adopter, in case of portfolio shareholdings, dividends are in principle totally taxable and capital gains/losses are totally taxable/deductible.
Based on above, the joint application of the Globe rules and of the national rules can lead to the following consequences:
- Dividends/capital gains are excluded according to the Globe rules, but they are taxable according to the national rules: this will result in higher ETR and therefore, the application of national rules will not affect the application of the Globe rules; by itself the application of Italian rules will not lead to an ETR which is lower than 15%;
- Dividends/capital gains are not excluded according to the Globe rules, but they not taxable according to the national rules: this will result in a higher Globe income and in a lower amount of covered taxes; such effect could lead to an ETR lower than 15%.
In the second case, the distorsion is evident. In order to avoid such distorsion, it would be advisable to amend the Italian tax legislation, as for dividends and capital gains, in order to make it consistent with Globe rules.