Event: What should companies expect from the OECD and EU initiatives on Tax Reform; What is the impact and future challenges for investors and MNEs

April 6th 2022 15:00 – 18:00 at Crowne Plaza

Organized by Cyprus International Businesses Association in collaboration with Taxand.

We looked at the developments on Tax at a Global and EU level and what we as companies should consider going forward.

The OECD Global Taxation Initiative which was agreed at the G7 Summit and 137 countries coupled with the summer initiative of the European Commission’s paper on “Communication for Business fit for taxation in the 21st Century” have brought forth developments that need to be examined.

We scrutinized at the following topics that underlay the above developments:

(1) Pillar Two Model Rules, released on 20 December 2021, are part of the Two-Pillar Solution to address the tax challenges of the digitalization of the economy that was agreed by 137 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS and endorsed by the G20 Finance Ministers and Leaders in October. Taxpayers in scope (more than EUR 750 million in consolidated revenues) of the rules calculate their effective tax rate for each jurisdiction where they operate, and pay top-up tax for the difference between their effective tax rate (not nominal rate) per jurisdiction and the 15% minimum rate. It is expected that Pillar Two will come into domestic legislation during 2022, to be effective in 2023.

(2) Pillar One Model Rules.
Pillar one in-scope companies are multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue). For in-scope MNEs, 25% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.

(3) Initiative To Fight Against The Misuse Of Shell Entities For Improper Tax Purposes
On 22 December 2021, the European Commission presented a key initiative to fight against the misuse of shell entities for improper tax purposes. If a company crosses all three gateways, it will be required to annually report more information to the tax authorities through its tax return:
i. more than 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s trading activity or if more than 75% of its assets are real estate property or other private property of particularly high value (i.e. bulk of the company’s income passive e.g. dividends, interest on bonds, etc.);
ii. majority of transactions are cross-border; and
iii. corporate management and administration services are performed in-house or are outsourced.

Undertakings presumed not to have minimum substance and which do not rebut the presumption of lack of substance would be denied tax benefits under double tax treaties in force with the Member State, as well as under the EU Parent Subsidiary Directive and the EU Interest and Royalty Directive. Once adopted by the Member States, the Directive should come into effect on 1 January 2024.