Implementation of minimum taxation

On 6 June 2023, the Norwegian Ministry of Finance sent a proposal for public consultations regarding the implementation of global minimum taxation in the Norwegian Tax Act and the Tax Administration Act, which is based on the OECD Pillar Two Model Rules (also referred to as the "GloBE" rules). The implementation of global minimum taxation in the Norwegian tax legislation will contribute to ensure a global minimum effective tax rate of 15% for multinational enterprises. It is expected that the proposed amendments will be implemented into law, with effect from 1 January 2024, and will result in significant fiscal and administrative consequences for large groups.

Background

In October 2021, Norway and 136 other countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS agreed on a two-pillar solution to address the tax challenges arising from the digitalisation and globalisation of the economy. Two months later, OECD published detailed model rules to assist with the implementation of a new reform to the international tax system ensuring a minimum 15% tax rate for multinational enterprises, regardless of where they operate. Please also see the newsletter published 11 April 2022 regarding the EU Minimum Tax Directive (2022/2523) based on the GloBE rules.

IIR and UTPR

The Income Inclusion Rule (No. skatteinkluderingsregel) ("IIR") is meant to include a top-up tax for group entities with a tax rate below 15% and will be collected in the jurisdiction where the group's head office is located. It will be applicable in each of the jurisdictions where the group have constituent entities but will not apply to the jurisdiction of the head office itself. The effective tax rate of each of the jurisdictions will be determined based on a group entity's net result in the financial fiscal year, with certain adjustments. The group's head office will then be charged with a top-up tax for any shortfall.

In case the jurisdiction of the head office is not covered by the rules, the tax liability will be shifted to the jurisdiction of the intermediate parent company. If neither of the jurisdictions are covered by the rules, OECD have also included an "Undertaxed Payment Rule" ("UTPR") which will apply as a secondary rule and serve as a backdrop to IIR. Under the UTPR, the jurisdiction where the constituent entities are located, will be liable to account for the top-up tax. The UTPR has not been included in the proposal by the Ministry of Finance - it is expected to be considered in a separate proposition.

Domestic Minimum Top-Up Tax

The model rules facilitates that the individual jurisdiction in addition can introduce rules on domestic minimum top-up tax (No. nasjonal suppleringsskatt). This means that top-up tax will be calculated for all group entities located in the jurisdiction, even if it is not the location of the group's head office. The minimum top-up tax will then be deducted when calculating the minimum top-up tax from undertaxed group entities of the group's head office company. For practical matters, this means that a jurisdiction where an undertaxed entity is located will conduct the taxation and receive the proceeds. The Ministry of Finance has proposed to include a domestic minimum top-up tax in Norwegian tax legislation.

Safe Harbours

The consultation paper also includes a rule referred to by the OECD as "Safe Harbour", where the purpose is to simplify the calculations and to reduce the groups' compliance costs, as well as the administrative burdens for the tax authorities. Details surrounding the simplified calculation is yet to be clarified but will likely be based on the model rules approach of a transitional Country by Country Reporting, which will be applicable in the transitional phase from the fiscal years beginning on or before 31 December 2026 and ending on or before 30 June 2028. Safe harbour implies that the group's top-up tax for a particular jurisdiction will be reduced to zero if certain criteria are met.

Scope of application

In line with the GloBE rules, it is proposed that the newly introduced changes to the domestic tax laws will apply only to groups with an annual turnover of EUR 750 million or more in at least two of the last four accounting years. Due to potential differential treatment between national groups and EEA groups in accordance with the freedom of establishment, the Ministry of Finance have proposed that the rules should be applicable to Norwegian groups with no companies abroad as well.

Reporting duties

The Inclusive Framework will establish a standardised format to be used for delivery of information, which must be given in English. The purpose of the standardisation is to ensure a consistent practice of the rules between the jurisdictions, and that similar information is received. Sufficient information is essential for the jurisdictions to be able to comply with the provisions on where the supplementary tax is to be taxed (in accordance with the IIR, the UTPR and the rules on national supplementary tax), so that possible disputes and double taxation can be avoided.

According to the model rules, each group entity has an obligation to deliver an information notice to the jurisdiction where it is located. This will ensure that the jurisdictions receive the necessary information to be able to assess the supplementary tax liability. A group entity will be the ultimate parent company, a subsidiary, a permanent establishment etc. in Norway, which is part of a group covered by the supplementary tax rules' scope of application.

Effect of the implementation of global minimum taxation

The Ministry of Finance estimates that the income inclusion rule will be applicable for around 40 Norwegian groups. However, the inclusion of a domestic minimum top-up tax will result in a wider scope of application, as subsidiaries will be subject to the supplementary tax and associated reporting obligations as well. The rules will likely not result in supplementary tax for groups with only Norwegian companies, but the proposal will still involve reporting obligations.

In a broader, global perspective, the OECD estimates that the GloBE rules will lead to an aggregate increase in tax revenue from company profits of around USD 200 billion globally, which corresponds to an increase of approximately 9% in global corporate tax revenue.