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Profit allocation to countries where there is a recipient of goods and services (Pillar 1) and a global minimum tax (Pillar 2) are the two main solutions for fair distribution of taxation in the world in connection with the digitalisation of the economy. The above solutions are proposed by 137 countries that are members of the project against tax base erosion and profit transfer operating within the OECD framework, including Poland (the so-called OECD/G20 Inclusive Framework on BEPS). What awaits entrepreneurs in the near future and are they prepared for it?
Already a dozen years ago, the OECD pointed out that large multinational groups achieve significant financial results by operating in many countries, which often resulted in little or no reporting of taxable income in those countries. In addition, changes in the global marketplace, most notably its digitalisation, have affected (and continue to affect) the way business is conducted.
The new solutions in international corporate taxation proposed under Pillars 1 and 2 are to be the answer to the tax challenges arising from the digitalisation of the economy. Over the past few months, work on the new solutions has gathered pace. The OECD has published a number of regulations covering the Model Rules for Pillar 1 and Pillar 2. In turn, the European Commission has proposed a draft Council Directive to implement the Pillar 1 Model Principles in EU Member States. The long-awaited changes are expected to come into force mostly as early as 2023.
Main assumptions of Pillars 1 and 2
Pillar 1 implies the introduction of taxation of companies not only in the country where they carry out their physical activity, but also where they sell goods or provide services. For this purpose, companies will be obliged to reallocate an appropriate part of their consolidated profit to the so-called market jurisdictions. In particular, the portion of profit subject to reallocation will be 25% of profit before tax representing more than 10% of revenue. The draft legislation regulates in detail - albeit in a complex manner - the calculation of the tax base and the allocation of revenues to the market jurisdictions. Furthermore, it is assumed that all taxes on digital services (or equivalent) will be abolished and no new taxes will be introduced.
The essence of Pillar 2 is a global minimum tax of 15% effective rate. As a general rule, the ultimate parent entity will be liable to pay a top-up tax in its country of residence if its subsidiaries in a particular jurisdiction are effectively taxed at a rate lower than 15%. Also under Pillar 2, companies will face complex rules.
Unfortunately, the published Pillar 1 and Pillar 2 rules are not identical with respect to the calculation of profit to be reallocated under Pillar 1 and the calculation of the tax base under Pillar 2. As a result, it is likely that enterpreneurs will be required to make separate calculations for each Pillar.
Entities covered by the revolutionary changes
Pillar 1 is to apply to multinational companies with a profitability of more than 10% and a global turnover of more than EUR 20 billion. Pillar 2, on the other hand, will cover those multinational groups (and, in the case of the European Union, national groups as well) with consolidated revenues of at least EUR 750 million in at least two of the four years preceding the implementation tax year.
What does the above mean for Polish companies in the retail sector?
Although the suspension of work on the implementation of a separate digital tax is certainly welcome, it was not retailers engaged in e-commerce activities who were to be covered by it. On the other hand, Pillar 1 or 2 solutions cover a wide range of entities, including retailers.
Moreover, it may initially appear that the new reform will primarily affect parent companies and consolidating financial statements. However, it will be the subsidiaries of the above companies that will be obliged to prepare financial and tax data of appropriate quality. Consequently, Polish entrepreneurs will have to prepare themselves systemically and methodologically to report the above data.
It should be noted that the new rules of international tax reform are likely to result in the calculation of two additional financial/tax outcomes for businesses. In addition to the standard calculations (for financial reporting and local calculation of income tax liability), calculations for Pillar 1 and, separately, Pillar 2 purposes will be required.
Do we have the ability to track every item listed on invoices? Do we have adequate information on the recipients of our services/goods? Do we carry out complex transactions, in the so-called packages - goods and services? Is the data required by the new regulations fully (or partially) available? These questions and many more will have to be asked by Polish entrepreneurs, and then they will have to plan the steps necessary to implement the change of IT systems and prepare the staff for the new obligations. Even if, in the end, the group of companies to which the Polish company belongs will not be required to reallocate profits or pay the top-up tax, the economic burden of the new reporting obligations may also fall on the Polish company.
Next steps
The consultation on Pillar 1 and 2 regulations is still ongoing. Some of the provisions that are theoretically supposed to come into force already from 2023 have not even been published yet. As announced, further draft rules will be systematically made available later this year. However, due to the complexity of the already published regulations, the deadline of 1 January 2023 seems difficult to meet. A postponement of this date to 31 December 2023 has already been proposed within the European Union, to which most Member States have responded positively. However, given the scale of the changes, we recommend that you actively engage and do not hesitate to review how these issues may affect your business.
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