The minimum profit tax at the global level - what can it bring to Romania?

The European directive that aims to protect the taxation rights of each member state of the European Union (EU) over multinational companies is scheduled to enter into force from 2024.

This provides for a global minimum corporate tax of 15%, to be applied to multinational companies , so that there are no situations where, by applying aggressive tax practices, they reduce their total tax bill below this level considered reasonable.

Initially, the rules will apply to groups of companies with a turnover of more than 750 million euros. 

The application of a global minimum profit tax of 15% is practically the second pillar of the international tax reform coordinated by the Organization for Economic Cooperation and Development (OECD), an organization to which Romania has also begun the process of joining.

Hungary opposed

The implementation rules ( GloBe rules ) were issued by the organization towards the end of last year, after the signing of the agreement by the 136 states participating in the negotiations, and in December 2021, the European Commission published a draft directive for the implementation of the minimum tax rate .

To be approved and subsequently effectively implemented, the directive must obtain the vote of all 27 EU member states. Hungary opposed implementation in June this year, but another vote is planned for October 2022.

On the other hand, certain states have already announced their support for this initiative. It is about France, Germany, Italy, Spain and the Netherlands, which signed a joint declaration in this regard on September 9, 2022.

In Romania, however, the subject does not seem to be in the attention of the decision-makers.

However, companies in Romania that are part of multinational groups must prepare for changes regarding the taxation of profits, given that our country will be obliged to apply the minimum tax, after a decision will be made in this regard at the European level .

How the minimum tax will work 

Multinational companies will be required to apply a minimum tax rate of 15% in each country in which they operate.

The difference between the minimum tax and the actual tax paid in the subsidiary jurisdictions is to be collected by the parent company of the group and paid in its state of residence.

Thus, to avoid such a situation, the branch in Romania should have an effective tax rate of at least 15%. Even if in Romania the tax rate is 16%, due to some additional deductions (such as the deduction for research and development activities, the tax exemption on reinvested profit, the tax credit from sponsorship or the tax credit for the purchase of cash registers), the effective rate can drop even below this minimum level of 15%. 

However, both the OECD report on pillar II and the draft European directive provide for a number of exceptions to the application, depending on the income obtained by companies (the so-called "de minimis" exclusion). Thus, companies with revenues of less than 10 million euros and profits of less than one million euros, obtained in the country in which they operate, will not fall under the scope of the new rules.

As a result, micro-enterprises will not be affected by the new minimum profit tax globally, as companies that can apply this tax regime currently have a turnover of less than one million euros, and from January 1, 2023 the ceiling drops at 500,000 euros. 

Host states can take steps to keep taxes in the country

Countries can implement national rules similar to those provided by the OECD, applicable to subsidiaries in their territory,  to collect, at the local level, the difference in tax due.

By implementing these rules at the national level, the additional tax (the difference between the effective tax rate and the minimum threshold of 15%) would be paid in Romania itself, and not in the state of the parent company of the respective group. 

The number of jurisdictions that have already issued preliminary legislation to implement such national rules for setting the minimum global corporate income tax is increasing. Among them are Switzerland, Singapore, Great Britain or the United Arab Emirates.

In conclusion, in order to apply this minimum tax, Romania should as soon as possible propose local regulations for the application of the minimum profit tax at the global level (qualified domestic top-up tax), so that companies have enough time to analyze their applicability.

In the meantime, taxpayers should carefully analyze the rules provided by the draft European directive and the recommendations issued by the OECD on this topic, in order to estimate as correctly as possible their impact on the fiscal position in Romania.

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