Executive summary

On 20 December 2023, the Ministry of Finance published draft legislation to introduce into Spanish domestic legislation the Pillar Two effective tax rate of 15% for multinational enterprises and large-scale domestic groups for public consultation.

The draft legislation is generally aligned with the European Union (EU) Minimum Tax Directive¹ and the Pillar Two Model Rules² (OECD Model Rules) as approved by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The draft legislation is structured as a separate tax law that is not intended to be embedded in the existing Spanish Corporate Income Tax Law.

The draft legislation incorporates an Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR). The draft legislation makes use of the option provided in the EU Global Minimum Tax Directive to introduce a Qualified Domestic Minimum Top-up Tax (QDMTT), allowing Spain to collect top-up tax on the excess profit of a low-taxed Spain entity that is part of an in-scope group. Further, the draft legislation includes an interpretative clause stating the dynamic interpretation of the Spanish domestic rules in accordance with the OECD Model Rules, Commentary and Administrative Guidance.

The IIR and the QDMTT will be effective retroactively for fiscal years starting on or after 31 December 2023. The UTPR will apply for Fiscal Years starting on or after 31 December 2024. The draft legislation also includes a Transitional Country-by-Country Reporting (CbCR) Safe Harbor, a QDMTT Safe Harbor and a transitional UTPR Safe Harbor.

The draft legislation was open to public consultation until 19 January 2024.

Detailed discussion

The EU Global Minimum Tax Directive introduces minimum effective taxation of 15% for large multinational enterprise (MNE) groups and large-scale domestic groups with annual revenues of at least €750m in at least two of the last four fiscal years. It sets forth a system consisting of two interlocked rules — the primary IIR and the secondary UTPR. The draft legislation also makes use of the option provided in the EU Global Minimum Tax Directive to introduce a QDMTT.

The IIR and the QDMTT will be effective retroactively for fiscal years starting on or after 31 December 2023, while the UTPR will apply for Fiscal Years starting on or after 31 December 2024.

In line with the EU Minimum Tax Directive, Spanish parent companies of an MNE or large-scale domestic group must pay an IIR top-up tax calculated according to their allocable share in every entity of the group that is resident in a low-tax jurisdiction (including itself), whether the entity is located within or outside the EU. If the entity has been subject to a qualifying QDMTT in its country of location, the amount of QDMTT paid will reduce the amount of the IIR top-up tax at the level of the Spanish Ultimate Parent Entity (UPE) or parent company.

The UTPR, as foreseen in the Spanish draft legislation, acts as a backstop to the IIR. Where the UPE of an in-scope group is located in a low-taxed third-country jurisdiction or in a third-country jurisdiction that does not apply a qualified IIR (i.e., a set of rules equivalent to, and administered consistently with, those in the EU Global Minimum Tax Directive or the OECD Model Rules), the draft legislation foresees that a Spanish-based constituent entity belonging to the same group will be subject to an additional tax equal to the UTPR top-up tax amount allocated to Spain for the fiscal year. The UTPR top-up tax amount allocated to Spain is determined based on the top-up-tax attributed to the group's low-taxed entities that is not collected under an IIR. A pro-rata formula is applied that considers the number of employees and value of tangible assets in Spain compared to the number of employees and value of tangible assets in all UTPR jurisdictions.

QDMTT

The draft legislation incorporates a QDMTT in Spain, imposing an additional tax on low-taxed profits. This tax will be applicable to all MNE groups and large-scale domestic groups with consolidated revenues of €750m in at least two of the last four fiscal years.

The QDMTT is to be determined based on the accounting standard used for preparing and filing the consolidated financials of the UPE accounts, unless it is not possible to reasonably determine the accounting result under this accounting standard. In such case, the Spanish accounting standard is allowed, as long as permanent differences above €1m are adjusted. This subsidiary rule is only possible when the Spanish constituent entity has the same accounting period as the UPE.

In this regard, although the QDMTT determination is in line with the EU Global Minimum Directive, the QDMTT as defined in the draft legislation excludes several provisions from the OECD Administrative Guidance on the QDMTT design. These include provisions not allowing >a Controlled Foreign Corporation tax downward attribution or "push down," the introduction of a QDMTT transition period and a separate calculation for constituent entities subject to special rules (e.g., joint ventures and minority owned constituent entities).

Under the draft legislation, a Spanish entity of an in-scope group that has an Effective Tax Rate (ETR) of less than 15% in a given fiscal year will be subject to QDMTT, meaning that it will have to pay top-up tax in Spain to achieve the required minimum 15% ETR, rather than the additional tax being collected through IIR at the parent-entity level or through the UTPR at the level of other group entities. In line with the EU Minimum Tax Directive, the draft legislation foresees a substance-based income exclusion amount, calculated as a percentage mark-up on tangible assets and payroll costs.

Safe harbors

In line with the EU Global Minimum Tax Directive, the draft legislation includes the safe harbor rules contained in the guidance released by the OECD/G20 Inclusive Framework on 15 December 2023.³

For fiscal years beginning on or before 31 December 2026, but ending before 1 July 2028 (i.e., the years 2024 to 2026 if the fiscal year equals to the calendar year), a transitional CbCR safe harbor is foreseen that relies on country-by-country data as the basis for calculating an MNE's revenue and income on a jurisdictional basis. For a jurisdiction to qualify for the transitional CbCR safe harbor, one of the three tests must be met: i) revenue and income must be below the de minimis threshold; ii) the ETR must equal or exceed an agreed rate; or iii) no excess profits may remain after excluding routine profits.

If one of the three tests is met, the top-up tax is set at zero for a period covering fiscal years beginning on or before 21 December 2016 but not including a fiscal year that ends after 30 June 2026. If the MNE group does not file an application for a fiscal year during the transitional period or does not meet the test in a fiscal year in a jurisdiction, the Transitional CbCR safe harbors will not be available for any subsequent fiscal years.

The draft legislation also introduces a permanent QDMTT safe harbor rule that permanently reduces to zero the top-up tax for a specific jurisdiction, provided the jurisdiction has levied a qualifying QDMTT based either on the UPE's authorized financial accounting standard or an international admissible accounting standard.⁴

In addition, the draft legislation provides an exclusion for up to five years for MNE groups during their initial phase of international activity. According to this provision, MNE groups will be exempt from minimum tax during this period, if (i) they have constituent entities in no more than six jurisdictions and (ii) the net book value does not exceed €50m for the tangible assets of all of the MNE group's constituent entities located in all jurisdictions, other than the reference jurisdiction.

Administration and compliance

Spanish-based constituent entities to which IIR, UTPR top-up tax and/or QDMTT tax are allocated in accordance with the provisions of the draft legislation must file a tax return stating and paying the amount of top-up tax. The return must be filed and the tax paid within the 25 calendar days after 15 months following the end of the fiscal year. However, for the first year the deadline is extended to 25 calendar days after 18 months following the last day of a transition year.

The UPE or all Spanish-based constituent entities of the in-scope group may designate a Spanish-based constituent entity that will be responsible for filing the tax return and paying the tax, but all Spanish-based constituent entities will be jointly liable for the tax.

Compliance in connection with Global anti-Base Erosion (GloBE) Information Return is, in principle, in line with OECD standard. However, the draft legislation does not include the simplified jurisdictional framework for the initial years of the GloBE rules as per the GloBE Information Return framework.⁵

Next steps

The draft legislation was subject to public consultation until 19 January 2024. The Spanish tax authorities will now analyze the comments submitted by various stakeholders, including the report of the Spanish Council of State, before publishing revised draft legislation. The draft legislation will be subject to the regular legislative approval procedure before the Spanish Parliament.

Implications

The EU Global Minimum Tax Directive marks a milestone in the harmonization of direct taxation within the EU and has wide-ranging implications that taxpayers need to review and be prepared to address. While the Spanish Pillar Two draft legislation runs through the legislative process, it is important for taxpayers to evaluate the potential impact of these new rules on their business structures and internal processes.

Many MNE Groups should conduct assessments of the likely impact of these measures based on the Model Rules, considering the retroactive implementation date of 31 December 2023. In this regard, MNE Groups should address both the technical impact of the rules as well as the organization's data and systems readiness to comply with and report on the rules. It is also important to understand the impact of applying a safe harbor in other aspects of the Pillar Two rules, such as the separate transitional rules under the OECD Model Rules.

In addition, consideration will need to be given to accounting public disclosure rules governing the disclosure of Pillar Two information in financial accounts. These disclosures may be required for reporting periods before the rules take effect. The timing of these disclosure obligations is likely to significantly precede the actual filing of the relevant tax returns with tax authorities.