Rules for the effective minimum taxation of 15%: Law no. 431/2023

The takeaway

Law no. 431/2023 transposes the provisions of Directive (EU) 2022/2523 (hereinafter referred to as “Pillar 2 Directive”) to introduce into the Romanian legislation a complex system of rules for an effective minimum taxation of 15% for multinational enterprise groups and large-scale domestic groups with annual consolidated revenues of at least EUR 750 million in at least two of the four previous financial exercises.

The President of Romania promulgated the law on 29 December 2023. It became law no. 431/2023 and was published in the Official Gazette no. 8 dated 5 January 2024.

Law no. 431/2023 applies to financial exercises starting as of 31 December 2023.

In detail

General provisions

Similar to the OECD Model Rules and Pillar 2 Directive, the provisions of Law no. 431/2023 apply to multinational enterprise groups with annual consolidated revenues of at least EUR 750 million in at least two of the four previous financial exercises. Moreover, in accordance with the Pillar 2 Directive, the legislation targets not only multinational groups but also groups that operate exclusively in Romania and reach the above-mentioned revenue threshold.

Additional minimum global tax regime

The calculation of the global minimum tax is performed through a complex system based on a series of interconnected rules (“GloBE rules”):

• The income inclusion rule (IIR), according to which a parent company of a group is obliged to calculate and pay its allocated part of the top-up tax for the constituent entities of the group with low-taxed income.

• If the top-up tax has not been charged under the IIR at the level of the parent company for the low-taxed constituent entities of the group, the following rule, of undertaxed profit (UTPR), will apply. Under this rule, a constituent entity of a multinational enterprise group owes a tax that is recorded as an additional expense, equal to its share of top-up tax that was not charged under the IIR.

• For the constituent entities of the multinational enterprise group or the large-scale domestic group, the law introduces a domestic top-up tax (QDMTT), which is qualified in accordance with the provisions of the OECD model rules. QDMTT will be calculated on a priority basis, before applying the above rules and may reduce to nil the top-up tax due under the IIR and UTPR rules in other jurisdictions.

The provisions apply as of:

• 1 January 2024 for IIR;

• 1 January 2025 for UTPR;

• 1 January 2024 for QDMTT.

Calculation of the effective tax rate and of the top-up tax

The top-up tax arises at the level of constituent entities that are located in a jurisdiction where the effective tax rate is less than the minimum 15% tax rate. The effective tax rate of a multinational enterprise group or of a large-scale domestic group is calculated, for each financial year and for each jurisdiction, as the adjusted covered taxes of the constituent entities in that jurisdiction divided by their net qualifying income (i.e. profit).

Adjusted covered taxes include the taxes recorded in the financial accounts of a constituent entity with respect to its income or profits, adjusted with a number of elements including deferred tax.

The qualifying income or loss of a constituent entity is determined based on the accounting standard used in preparing the consolidated financial statements of the ultimate parent entity of the respective group. However, for calculating QDMTT, the qualifying income or loss is that recorded in the individual accounting of the constituent entity according to the applicable national accounting regulations if i) all the Romanian constituent entities of the group apply the same national accounting regulations and ii) the fiscal year of the Romanian constituent entities is the same as that in the group consolidated financial statements.

Subsequently, numerous adjustments will have to be made to the qualifying income or loss.

The top-up tax percentage is calculated as the difference between the effective tax rate and the minimum tax rate of 15%.

For the determination of the jurisdictional top-up tax, the top-up tax percentage is applied to the adjusted qualifying net income, reduced by the substance-based income exclusion (i.e. the profit related to the activities with economic substance).

Under the Country-by-Country Reporting (CbCR) Safe Harbour regime, during the period 2024–2026, constituent entities can declare zero top-up tax if certain conditions are met.

Declaration and payment of the top-up tax

For the transition year 2024, the reporting deadline for the top-up tax is 18 months from the last day of the reporting financial exercise. For the following years, the deadline will be 15 months. This is also the deadline for payment of the top-up tax.

The top-up tax should be declared by the relevant constituent entity by submitting an informative statement to the competent tax administration, prepared according to a standard model approved by an Order of to National Tax Administration Agency (ANAF) President to be issued within 12 months as of the date of entry into force of Law no. 431/2023.

Key aspects

The provisions introduced by Law no. 431/2023 will generate several additional activities at the level of multinational/domestic groups:

• QDMTT will likely be the most frequently applied rule by the Romanian constituent entities, making it likely that they will be responsible for calculating, declaring and paying the top-up tax.

• Even if the deadline for reporting to the authorities seems distant, a qualitative and quantitative analysis will be needed much sooner to assess the potential impact of the Pillar 2 rules with a view to reflecting it in the 2024 quarterly financial reports.

• Check the applicability of the CbCR Safe Harbour regime.

• Preparation at the operational level for these new rules, by providing the necessary resources to extract/analyse/process the data flows from the accounting systems for calculating and declaring the top-up tax.

How PwC Romania can help

PwC Romania can provide tax and accounting assistance regarding the obligations related to this new top-up tax, including:

• analysis of the impact of the new rules and assistance with determining the eligibility of the CbCR Safe Harbour regime;

• estimation of the effective tax rate and the additional top-up tax, taking into account the specific provisions of the Romanian legislation introduced through Law no. 431/2023;

• assistance with calculating and reporting QDMTT;

• technical assistance during discussions with your colleagues from the group and with the relevant authorities.

Our team is at your disposal for more information on this topic and its implications for you or for assisting you in calculating the global minimum tax.

Source: [Law no. 431/2023 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups, published in the Official Gazette no. 8 dated 5 January 2024]