Dutch legislative proposal on Pillar 2 implementation submitted with Parliament

The legislative proposal is, just as the draft legislative proposal, based on the Pillar Two Model Rules of the OECD and the EU Minimum Tax Directive (2022/2523). Based on the latter,
EU Member States have until 31 December 2023 to implement the rules of the Directive into national law.

The legislative proposal has been shared with the public and contains a few changes compared to the consultation document. Most of these changes relate to further updates provided by the OECD’s Inclusive Framework.

In this blog, we will first provide a summary of the Pillar Two Model Rules. Thereafter, we will discuss the relevant changes between the legislative proposal submitted to the Parliament compared to the consultation document, followed by a few further remarks. We will finalize with our key take away.

Summary of the Pillar Two Model Rules rules

The Pillar Two Model Rules aim to achieve that multinational enterprises with an annual consolidated revenue of € 750 million or more will be subject to a profit tax at a minimum rate of 15% at a jurisdictional level. In line with the Pillar Two Model Rules and the EU Minimum Tax Directive, the Dutch legislative proposal introduces the following concepts/rules:

1. The Income Inclusion Rule (“IIR”) – the parent entity of a group is obligated to impose a top-up tax on a jurisdictional basis if that group is subject to an ETR of less than 15% in that jurisdiction.
2. The Undertaxed Payments Rule (“UTPR”) – in case the IIR has no (full) effect in the jurisdiction of the parent entity, the UTPR allocates the (additional) top-up tax due to other jurisdictions on the basis of a certain formula. The top-up tax must then be paid in those jurisdictions.
3. The Qualified Domestic Minimum Top-Up Tax (“QDMTT”) - this rule ensures that if a group has an ETR below 15% (for example because it is subject to a special tax regime) in the Netherlands, that the top-up tax is paid in the Netherlands and not in another jurisdiction based on the IIR or the UTPR.

We refer to our previous blog for more details on these rules.

Key aspects of the legislative proposal

Proposed effective date

The proposed effective date of the legislative proposal is 31 December 2023. With respect to the UTPR, the proposed effective date is 31 December 2024. Dutch group entities falling within the scope of the GloBE rules will be obligated to file a GloBE information return and a GloBE tax return. The information return should in principle be filed within 15 months after the relevant year, whilst the tax return should in principle be filed within 17 months after the relevant year and the top-up tax due should be paid on declaration. As such, reporting obligations over the year 2024 will apply for the first time in 2026. 

Transitional safe harbours

On 15 December 2022, the OECD/G20 Inclusive Framework published transitional safe harbours relating to the country-by-country (“CbC”) report of the group. According to the legislative proposal, the safe harbours are only available if the CbC is based on qualified information, meaning the consolidated financial statements of the ultimate parent entity, and the separate financial statements of each group entity to the extent  these are prepared in accordance with an acceptable or authorized financial accounting standard and are reliable.[1]

The safe harbours are applied per jurisdiction and can only be applied to financial years starting on or before 31 December 2026 and ending prior to 1 July 2028. Main advantages are that the taxpayer does not have to make a detailed calculation and the top-up tax in that jurisdiction is deemed to be nil if one of the safe harbours applies. The safe harbours are the following:

1. De minimis test – the group reports revenue of less than € 10 million and the profit before income tax amounts to less than €1 million (or a loss) per jurisdiction.
   
   
2. Simplified ETR test – based on a simplified calculation, the ETR is 15% in the jurisdiction (the 15% rate is increased to 16% in 2025 and 17% in 2026).
   
   
3. Routine profit test – the amount of profit in a jurisdiction is equal or less than the excluded amount of substance based income (referring to step 3 of the IIR in our blog of 23 December 2023).

Please note that if a group has not applied a transitional safe harbour in a jurisdiction,
it cannot apply the safe harbour in a later year.

Permanent safe harbours

The OECD/G20 Inclusive Framework also published permanent safe harbours. These safe harbours should apply if based on a simplified calculation:

1. The average qualifying revenue in a jurisdiction does not exceed EUR 10 million and the average qualifying income is less than EUR 1 million;
   
   
2. The amount of profit in a jurisdiction is equal or less than the excluded amount of substance based income; or
   
   
3. The effective tax rate is at least 15%.

Although these permanent safe harbours seem similar to the temporary safe harbours, we note that this may not be the case as there are no instructions (yet) on how the simplified calculations should be carried out. The legislative proposal acknowledges that and leaves room for further guidance by the OECD in respect of this point.  

Further remarks

OECD Guidance

On 2 February 2023, the OECD/G20 Inclusive Framework published administrative guidance on the Pillar Two Model Rules and thereby addressed a wide range of issues that came up with the application of the Pillar Two Model Rules calculations. This has resulted in several, detailed, amendments of the legislative proposal.

The Dutch government also indicated that future guidance on the Pillar Two Model Rules by the OECD may be reflected in the Dutch law and regulations still.

Financial statements

As already referenced above, the filing deadline for the Globe information return is 15 months after the relevant year and for the Globe tax return it is 17 months after the relevant year. Consequently, the first moment that the positions taken will have a material impact is when the financial statements are prepared. However, the International Accounting Standards Board amended IAS 12 Income Taxes and thereby introduced a temporary exception to the requirements to recognize and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes. As a result the Pillar Two rules should have no effect on the financial statements of 2023.

Key takeaway

We recommend to start on your analyses for Pillar Two as soon as possible even though the deadline seems far away. We expect that it will be challenging for taxpayers to obtain all information required, to make the analysis and to fulfill all obligations in each jurisdiction. 

Please feel free to reach out to us if you require any assistance on this.

[1] We note that there are no additional requirements to the information used for the CbC report for group companies that are not included in the consolidation of the ultimate parent based on the size of the interest in this company or its materiality.