Canada

Global minimum tax is taking shape

TAX ALERT  | 

On Dec. 20, 2021, the Organisation for Economic Co-operation and Development (OECD) released its detailed model, the Global Anti-Base Erosion (GLoBE) Rules, to assist in the implementation of a coordinated international tax system. Developed under Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the GLoBE Rules provide a common framework to implement the global minimum tax of 15% for multinational enterprises (MNEs) beginning in 2023. 

Specifically, the GLoBE rules:

  • Define the MNEs within the scope of the minimum tax. Generally, the global minimum tax will apply to MNEs with consolidated revenue that exceeds EUR 750 million in two of the preceding four fiscal years;
  • Set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis and determining the amount of top-up tax payable under the rules. If the effective tax rate in a jurisdiction is below 15% based on the calculation, additional tax will apply;
  • Impose the top-up tax on the ultimate parent entity of the MNE resident in a jurisdiction that has implemented the rules, in proportion to its ownership interests in those entities that have low taxed income;
  • Provide de minimis exclusions to allow a reduction of top-up tax to zero if (1) the average revenue is below EUR 10 million, and (2) the average profit is below EUR 1 million; and
  • Provide substance-based carve-out rules that allow 10% of the eligible payroll cost and 8% of the eligible tangible fixed assets to be deducted from the income base when calculating the effective tax rate.  

The rules address the treatment of mergers, acquisitions, and disposals of group members and include specific rules to deal with particular holding structures and tax neutrality regimes, for example where an ultimate parent is a flow-through entity. 

The rules also address administrative aspects, including information filing requirements and elections, and provide for transitional rules for MNEs that become subject to the global minimum tax. 

EU updates

Following the release of the GLoBE Rules, the EU Commission published its own proposed directive to incorporate the GLoBE rules, as it aims to have the rules applied in practice by mid-2023. The directive provides a common set of rules for calculating the effective tax rate.

In addition, the EU Commission released a second press release relating to the treatment of holding companies and the misuse of shell companies for tax purposes. The directive introduces substance requirements for certain tax resident companies of the EU. Where such companies do not meet these substance requirements, additional taxation may apply. As such, it is likely that the favourable tax treatment of holding shell companies will be denied where there is no business link with the operating subsidiaries owned through the holding company. 

Next steps for Canada

The government of Canada will now be tasked with drafting and implementing legislation that is in line with the GLoBE Rules. This will likely be a lengthy process, given the government already has a long list of outstanding proposals. Additionally, in light of the EU Commission’s shell company directive, Canadian MNEs with an EU footprint should reconsider any holding structures where economic substance is weak.

RSM CONTRIBUTORS


Subscribe to our newsletters

Subscribe


HOW CAN WE HELP YOU?

Contact us by phone +1.855.420.8473 or submit your questions, comments or proposal requests


CONTACT

Maria Severino

National Tax Leader


Recent Tax Alerts

OECD releases new Transfer Pricing Guidelines

The OECD released the 2022 Transfer Pricing Guidelines reiterating its commitment to combat base erosion and profit shifting.

  • January 26, 2022

New trust reporting on hold but beware of not filing

With filing season upon us, the CRA clarified the new trust reporting rules will not be in force for the 2021 taxation year.

  • January 19, 2022

Global minimum tax is taking shape

The OECD released its model to implement a coordinated international tax system in which MNEs will be subject to a 15% global minimum tax.

  • January 06, 2022

Are you ready for Canada's Digital Services Tax?

The federal government released the draft Digital Services Tax Act proposing a 3% tax on revenue earned from certain digital services.

  • January 03, 2022

Federal economic and fiscal update

The Canadian government provides an overview of Canada’s finances, unveils the areas of focus, and sets out proposed new tax measures.

  • December 15, 2021