How Will the Global Minimum Tax Change Role of CFOs?

Last year, 137 countries agreed to introduce a 15% global minimum tax (GMT) in line with the OECD’s model rules. Broadly, the regulations will require any multinational group of companies with a consolidated revenue of EUR 750 million to pay income tax of at least 15% effective rate (ETR) in any jurisdiction they operate in.

According to the OECD’s proposal, the effective tax rate will not be calculated based on countries’ existing tax laws but on a new set of internationally agreed principles. If a multinational group’s entities in a jurisdiction fall below the 15% threshold, then the group will be charged a so-called top-up tax to make up for the difference. This is irrespective of whether the jurisdiction where the low-taxed entities of the group operate adopted the new rules or not. Due to the cross-border charging provisions of the new regulations, it will be enough for any multinational group to work in just one jurisdiction where these rules have been adopted to fall into scope with its global operations.

After a long-lasting saga, the European Union became one of the first movers and adopted a Council directive to ensure the timely and uniform application of the rules within the block. All member states, including Hungary, will need to transpose the new regulations into their domestic legislation this year for them to become effective from January 1, 2024. With that, a new era will begin for countries and companies.

Tax policymakers must embrace the change and adapt to the new reality, and companies will be compelled to reassess their tax strategies. For example, when planning new investments, companies will need not only to consider applicable tax credits under domestic law but will also have to examine whether the GMT rules will allow them to keep the benefits of such tax credits.

These developments will undoubtedly bring the biggest change for CFOs, whose responsibilities will most likely expand due to the introduction of the global minimum tax. Although it may seem that the new levy will only affect those companies whose effective tax rate is below 15%, practical experience shows that the administrative tasks will equally impact companies with higher tax rates; without completing the entire complex set of calculations, how would one be able to prove that no top-up tax is due?

The OECD is working on proposals to simplify calculations and hence compliance burden for those reasonably expected to be above the 15% threshold. Still, there is reasonable doubt whether these simplifications will be material enough to reduce complexity and workload.

Two of the biggest challenges are that the new rules do not build on the local statutory financial statements of the entities but on the unconsolidated financial data produced according to the generally accepted accounting principles (GAAP) used to prepare the consolidated financial statements of the group. The calculations also rely on complex deferred tax accounting-based adjustments to deal with the issue of temporary GAAP to tax differences affecting the ETR. This can easily mean data that is currently nonexistent or not easily accessible will be required to perform calculations and to be able to fulfill compliance requirements.

Thus, CFOs must become familiar with more than one financial accounting standard, focus on differences between consolidated and standalone financial data, control currently underrated deferred tax calculation exercises, coordinate between different subsidiaries to extract the necessary data and follow the constantly evolving international framework of the GMT.

Why is it important to deal with GMT regulations before 2024? On the one hand, preparing the organization to collect necessary but not yet available data and a new entity-level balance sheet under a foreign financial accounting standard are time-consuming. On the other hand, it may make a difference to how companies enter the new era; there are transitional rules which can preserve certain tax benefits (such as credits and losses) or worsen the overall impact of the new regulations if transactions have been performed in the transitional period without regard to the upcoming changes. And we are already in the transitional period (since December 2021.)

This article was first published in the Budapest Business Journal print issue of April 21, 2023.