The discipline of the Global Minimum Tax, Calculation of effective and supplementary taxation
The third round of the GMT newsletter is dedicated to an examination of how to calculate the Effective Tax Rate (ETR), and how to calculate the supplementary tax, of which the Substance-Based Income Exclusion (Sbie) reduction, recently introduced by the October 11, 2024 Implementing Decree of the MEF, is an integral part.
(ETR) CALCULATION OF EFFECTIVE TAXATION (ETR)
Article 33 of Legislative Decree No. 209/2023 highlights the rules for calculating the effective tax rate (ETR) for business groups, local and multinational. This is a calculation to determine whether or not, in the reporting year, the group is subject to a minimum level of taxation.
The effective tax rate (ETR) must be calculated separately for each fiscal year and for each country in which the enterprises belonging to the group are located, assuming there is significant net income in the country. The formula for calculating the effective tax rate is equal to the following ratio:
Adjusted relevant taxes of the country / Relevant net income of the country
As regards the numerator, the relevant taxes to be taken as a reference are generally represented:
- by taxes recognized in the financial statements as income taxes
- from taxes on dividends;
- from the taxes substituted for income taxes;
- from taxes applied with reference to the value of undistributed profits and equity, as well as applied on several components based on income and equity.
Of these taxes, however, their adjusted value, determined by making decreases and increases, in accordance with Articles 28 and 29 of Legislative Decree 209/2023, will have to be taken for the purpose of calculating the ETR. In a nutshell, the adjustments include the exclusion of taxes on dividends and those on capital gains/losses from equity investments excluded from taxation, and the inclusion of deferred tax assets and liabilities, which must be re-proportioned to the minimum rate of 15%.
As for the denominator, the relevant net income of the country or loss is determined as difference between the relevant income of all enterprises located in the country and the relevant loss of all enterprises located in the same country. Relevant income and loss have to be calculated, in accordance with Art. 22 of LD 209/2023, by making the changes referred to in Art. 23 co. 2 below to the net accounting income or loss. This is a figure that has no relation to the taxable income determined according to the rules of the TUIR, since the changes to be made to the accounting profit or loss are established worldwide, based on an agreement that had to balance the criteria provided by all participating states.
The starting data is, for each company, the net accounting profit or loss for the year determined in accordance with the accounting principles used by the parent company for the drafting of the consolidated financial statements before consolidation adjustments (Art. 22 co. 1 of Legislative Decree 209/2023). Specific adjustments must then be made to this amount represented, synthetically, by dividends and capital gains/losses excluded from taxation, foreign exchange gains and losses, unlawful charges and non-deductible penalties; profits from international shipping and ancillary activities must also be excluded.
CALCULATION OF SUPPLEMENTARY TAXATION
Based on the provisions introduced in Article 34 of Legislative Decree No. 209/2023, the supplementary tax (top-up-tax) is due if in a given year the effective tax rate (ETR) calculated as highlighted in paragraph 1.1 is lower than the minimum tax rate (15%). It is determined on a country-by-country basis and, if due, is apportioned to each individual enterprise in the country with relevant income.
The top-up tax is first determined as the product between the country’s excess profit and the top-up tax rate. To this product, possibly increased by the “supplementary supplementary taxation” in cases of income and/or tax adjustments, the amount of the national minimum tax or national minimum tax equivalent, if due, shall be subtracted until it is zero.
The excess profit is determined as the difference between the country’s relevant income and the reduction from substantial economic activity (Sbie) mentioned in the introduction and better analyzed in Section 2.1 below.
Substance Based Income Exclusion
The rationale underlying the provision of the Substance Based Income Exclusion (Sbie) is to be found in the intention not to penalize corporate groups that establish themselves in a low-tax jurisdiction with personnel and/or production equipment. Therefore, as a general rule, the reduction in relevant income due to substantial economic activities is represented by a percentage that, when fully implemented, is equal to 5% of personnel expenses and tangible fixed assets.
Specifically, with regard to the reduction for salary expenses, it should be noted that it includes, expenses related to employees and also those incurred for so-called assimilated employees: part-time workers and independent contractors who participate in the ordinary activities of the multinational and domestic group under its direction and control
Regarding the reduction for tangible assets, eligible tangible assets are all tangible assets commonly used in the production cycle (property, plant and equipment, office machines, etc…) or for administrative purposes. Also included in the scope of the reduction are the “rights” of the lessee or lessor to use tangible assets, as well as licenses or similar agreements.
The source of the data to be considered for the calculation of the Sbie is the data used for the preparation of the consolidated financial statements of the parent company or, in the case of the determination of the national minimum tax, the data resulting from the individual financial statements or accounts of the enterprises, prepared in accordance with local accounting standards
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