Upcoming changes in tax legislation – Pillar II and ATAD

What is Pillar II?

In 2021 the OECD, as a result of joint efforts of 135 countries signing up for a global tax reform, released the highly anticipated Model rules (interchangeably referred to as the »Anti Global Base Erosion« or »GloBE« rules). The Model rules form a part of a two-fold, or a so-called »two-pillar« solution to address the tax challenges of the digitalisation of the economy. While Pillar I deals with digital taxation, and covers a more limited number of taxpayers, Pillar II's objective is ensuring a global minimum effective level of taxation for multinational groups.

In 2022, the Council adopted the Council Directive (EU) 2022/2523 on global minimum level of taxation for multinational groups (Pillar II Directive), which has to be implemented into local legislation by 2024. In light of the upcoming deadline for implementation, the Slovenian Ministry of finance on 23 June 2023 issued a draft wording of the Minimum Tax Act , that is currently open for comments and deliberation.

While the general perception is that the upcoming Pillar II rules will only affect a handful of Slovene companies, the Ministry of Finance identified more than 400 multinational entities (MNEs) with parent companies in Slovenia or abroad and subsidiaries in Slovenia, that yearly exceed the EUR 750 mio consolidated revenue threshold for Pillar II reporting/taxation.

Main objectives of Pillar II

This Directive lays down rules for ensuring minimum 15 % effective corporate taxation of large multinational groups and large-scale purely domestic groups.

The Pillar II framework consist of two interlocking domestic rules: the »income inclusion rule« (the IIR) and the »undertaxed payment rule« (the UTPR), together known as the Global anti-Base  Erosion (GloBE) rules.

The IIR sets a minimum effective tax rate of 15% for large multinational groups and large-scale purely domestic groups (the MNE group)^[1] with a combined turnover of at least EUR 750 million (based on consolidated financial statements), while the UTPR, serving as the IIR's backstop in cases where the IIR does not apply, requires MNE groups with effective tax rates below the minimum, to pay a so-called »qualified domestic minimum top-up tax« to achieve fair taxation in any particular jurisdiction.

Moreover, with aim of preventing companies from using tax loopholes and tax havens for tax avoidance, the effects of Pillar II are not limited to income generated in the country adopting the rules. For instance, the Pillar II Directive provisions that where the ultimate parent entity is located outside the EU in a jurisdiction that does not apply a qualifying IIR, all its constituent entities in jurisdictions will be subject to the UTPR and will have to pay in their Member State, a share of the top-up tax linked to the low-taxed subsidiaries of the MNE group.

^{[1]Government entities, international organisations, non-profit organisations, pension funds and investment funds that are Ultimate Parent Entities (UPEs) of an MNE Group are not subject to the rules briefly outlined in this article.}

Implications for your business

Even though the legislation will become effective only in 2024, the complex nature of Pillar II rules and related tax and reporting obligations will require a thorough and extensive preparation both on the company and group level. Pillar ll rules therefore require early stakeholder engagement to adequately budget and allocate resources needed.

The new Pillar II rules will demand an interconnected / joint approach and collaboration of accounting and tax experts. In order to adequately prepare for the upcoming tax obligations and tackle the new upcoming challenges, our experienced team of professionals can:

• help you understand the implications of the new Pillar II rules,
• assist you with the implementation of internal systems and procedures,
• assess the tax impact for the Group/ selected companies as well as
• provide assistance with scale up reporting requirements.

ATAD - new interest limitation rule

In 2016, the EU council adopted Directive 2016/1164 (referred to as the Anti-Tax Avoidance directive or ATAD 1). This was followed up with the adoption of EU Directive 2017 / 952 (referred to as ATAD-2) in 2017. Building on BEPS initiatives, the main objective of the ATAD Directives was to implement common rules against tax avoidance practices (e.g. interest limitation rule, GAAR, CFC, hybrid mismatches).

While most of the ATAD rules were already implemented into the Slovenian tax law, the adoption of the interest limitation rule was deferred until 2024, as Slovenia already had in place an equivalent domestic rule (4:1 thin capitalisation safe-harbour provision). The interest limitation rule provisions that the tax deductibility of borrowing cost is limited up to 30% of taxpayer’s EBITDA (earnings before interest, taxes, depreciation, amortization). The EBITDA interest limitation rule is intended to limit base erosion using excessive interest deductions.

Slovenia is obliged to transpose the EBITDA interest limitation rule into the Slovene legislation by 2024. In the light of forthcoming changes, companies will have to review their existing financing arrangements to assess potential tax implications. Our experienced team of professionals can provide assistance and help you being compliant with the newly established regulations.