Global Minimum Taxation in the EU: A New Era in International Taxation

Overview of the Global Minimum Tax Framework

The rapid globalisation and digitalisation of the economy have fundamentally altered how businesses operate, often to the detriment of traditional tax systems. Multinational enterprises (MNEs), leveraging the ability to move capital and profits across borders, have utilised gaps in tax rules to shift profits to low-tax jurisdictions. This practice, known as Base Erosion and Profit Shifting (BEPS), has led to significant tax revenue losses for governments worldwide, particularly in developing countries, while worsening inequality and disproportionately impacting smaller businesses and individual taxpayers.

The Journey Toward Reform

Responding to widespread public dissatisfaction and economic challenges, the OECD and G20 launched the Inclusive Framework on BEPS. This initiative introduced a two-pillar solution to tackle tax challenges:

1. Pillar 1: Redistributes taxing rights to ensure profits are taxed where economic activities and value creation occur.

2. Pillar 2: Introduces a global minimum corporate tax rate of 15%, reducing incentives for profit shifting to low-tax jurisdictions.

   
   

Key drivers for this reform include:

• Globalization and Digitalisation: Enabled businesses, especially digital giants, to generate significant revenues in countries without physical presence.

• BEPS: MNEs exploiting tax loopholes to shift profits artificially.

• Public and Political Pressure: Growing dissatisfaction with tax inequities fuelled demands for change.

• COVID-19's Economic Impact: Highlighted the urgency to safeguard tax revenues as public spending soared.

The EU's Implementation of Pillar 2

In 2024, the EU enacted rules to enforce the global minimum tax rate for MNEs with annual revenues exceeding €750 million. This ensures that profits are taxed at a minimum effective rate of 15% across all jurisdictions.

Key elements include:

• Excludes government entities, non-profits, pension funds, and investment funds.

• Tax Calculation: If the effective tax rate in a jurisdiction falls below 15%, a "top-up tax" bridges the gap.

• Application to Low-Tax Jurisdictions: Tools like the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) enforce the tax for operations in low-tax countries.

• Exceptions:

  • De minimis exclusion: Exempts jurisdictions with minimal revenues or profits.

  • Substance carve-out: Excludes portions of income linked to tangible assets and payroll, encouraging real economic activity.

  • International shipping: Exempt due to specialised tax regimes.

    
    

Malta's Stance on Implementation

Malta opted for a delayed application of Pillar 2, postponing the full implementation of IIR and UTPR for up to six years from December 2023. During this period:

• Core provisions of the directive are still implemented to ensure compliance with EU and international standards.

• Filing obligations for Maltese entities remain in place, requiring information sharing about tax returns filed by parent or designated entities elsewhere.

  
  

Malta must adopt the full directive sooner if the six-year period lapses, the delay is rescinded, or a qualified domestic top-up tax (QDTT) is introduced.

End Goals of the Global Minimum Tax

The global minimum tax aims to:

• Promote fair taxation and reduce harmful tax competition between countries.

• Ensure transparency, curbing opportunities for tax avoidance.

• Foster a level playing field, balancing the burden between large corporations, smaller businesses, and individuals.

  
  

This historic shift toward coordinated global tax policy underscores a commitment to equitable growth and sustainable economic practices worldwide.

Get in Touch:

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Sabrina Sacco

ssacco@quazar.mt / +356 2388 4600