Tax and Legal News - April 2023

Editorial - Pillar 2 is coming

Presently, there is no bigger change in the tax world than Pillar 2. Some of those affected have not yet started to address it, some have delegated responsibility to their headquarters (after all, implementation requires a central procedure) and others are already immersed in the details. It's a big change for one obvious reason: the introduction of taxation based on purely accounting variables. So, it requires working with source data that until now has tended to show the tax rather than determine it. On that note, working with deferred tax warrants special consideration.

But beyond that are a number of other considerations that are not entirely of implementation nature. For example, I think that Pillar 2 has the potential to change the tax competitive environment among countries and even among individual businesses. Among countries, so that the effective tax rate is set at the jurisdiction level, essentially giving large high-tax jurisdictions the ability to offer tax breaks along the lines of investment incentives without the (effective) tax rate per jurisdiction falling below 15%. Same incentives, same size project, just a different, smaller, jurisdiction, and it means a 15% surtax because the other group's business in the jurisdiction will not provide the appropriate cushion. In the second case, the effect of the incentives is reduced to being completely wiped out.

The competitive environment among businesses is influenced by the fact that there may be two competitors in a given jurisdiction, both with an effective tax rate of 10%. But one of them, let's say the smaller one, will pay 5% on top of the effective tax rate of 10% just because it is part of a large group. It can be expected to make a surcharge in its jurisdiction, because the rational behaviour of all EU countries is to introduce a qualified domestic top-up tax, since the tax will otherwise be levied by another jurisdiction. It thus seems to me that Pillar 2 has discriminatory potential. Unlike the increased reporting for large groups, this is already a higher tax burden.

There is no Czech implementation of the directive; individual Member States are moving forward, and it is primarily an OECD initiative, so jurisdictions outside the EU are introducing similar rules. The first safe harbour rules are emerging, the interaction with the relevant double tax treaties needs to be resolved and it will be a while before we have a full picture of the rules, let alone established practice or conflict resolution. The period of uncertainty will continue for some time.

And on top of all this is the public discussion about the need to increase the tax burden in our country, because the state budget deficit is reaching monstrous proportions.

I wish you a pleasant and enriching reading of this edition of our Tax News.