The global minimum tax and its implications for tax management in Italian groups

In late 2022, the EU Council adopted Directive no. 2022/2523 introducing a global minimum tax for Multinational Entities (MNEs). In September 2023, Italy’s Ministry of Economy and Finance (MEF) drafted a legislative decree, which has been the topic of public consultation. On October 16, a “legislative decree scheme” was released by the government. This decree is slated for approval by 31 December 2023; the Directive and the decree constitute legislation which will enter into force in Italy and other EU member states in 2024.

This legislation slots into the set of measures adopted in the context of aggressive fiscal strategies, in line with the rules initially approved on 14 December 2021 in the Inclusive Framework of the OECD/G20 on BEPS (Base Erosion and Profit Shifting). The aim of these measures is to trigger a competitive mechanism among nations that will result in taxing global revenues of MNEs in the country where their ultimate parent entity (UPE) is located. This will reduce the advantages arising from shifting profits into low- or no-tax jurisdictions.

These rules will apply to MNEs with UPEs in Italy, with revenues of at least €750 million in at least two of the previous four fiscal years. The aim is to ensure that large-scale Italian groups pay an effective tax on global revenues of no less than 15%. In fact, if the tax rate in Italy is below this percentage, the group in question will be subject to a global minimum tax differential to bring the total rate up to 15% (in other words, a top-up tax).

This will give rise to compliance costs, because MNEs will be obliged to demonstrate that they have paid an effective tax rate of 15% on their global income (despite the fact that Italy applies a nominal corporate income tax rate of 24%). To meet this obligation, additional reporting activities are necessary, which will have a major impact on the tax departments of large Italian groups and require considerable effort from their administration, finance and control functions.

The Tax Control Framework is the system for monitoring the strategic control of taxation by establishing lines of communication between the board, the CFO, and the tax department. MNEs will need to task specific company functions with handling the implementation of these control systems, both at a group level and an individual business unit level in the jurisdictions in question.

From the perspective of internal organization, Italian MNEs affected by the regulation will have to deploy a two-phase procedure. The first step is to identify the new, unprecedented key tax issues upstream that will arise when the global minimum tax is enacted. Second, downstream business processes will need to be designed to tackle key tax issues by actioning operational solutions.

Key tax issues come under the direct supervision of corporate tax departments, whose first task is to determine the global accounting income and the taxes actually paid by the group’s business units in the various jurisdictions. This means implementing new control systems that verify the availability and reliability of relevant data.

The second key tax issue pertains to calculating specific levels of gross revenues and profits below which a substance-based income exclusion applies. This exclusion effectively exempts MNEs from the minimum tax. Another substantive key tax issue concerns the quantification of any top-up tax to be paid if the effective tax rate in individual foreign jurisdictions is less than 15%. There are also key tax issues relating to additional reporting obligations, beyond the ordinary ones, as MNEs are required to present a special tax declaration in Italy certifying payment of the minimum tax.

To contend with the key tax issues described above in a concrete fashion via downstream company processes, tax departments must engage with other company functions. The first step in this direction is setting up a dedicated inter-departmental team, onboarding staff from different departments such as administration, finance and control. The mission of this team is to pinpoint relevant jurisdictions and business units.

Once this "mapping" is complete, the team must verify what data are available from the company systems, and whether the internal resources of the various foreign subsidiaries are adequate. These systems must be updated throughout the different tax periods. To do all this means to correctly identify the relevant functions and the right methods for inter-functional interaction. In addition, an intragroup communication system must be put in place to coordinate business units in different jurisdictions.

Ideally, one option to consider would be to automate some of these processes by leveraging innovative Big Data technologies to support managerial decisions, in particular calculations. This would make it possible to forecast the fiscal repercussions of corporate choices made by individual corporate branches.

A second set of downstream business processes involves ascertaining which information is needed for compliance. Specifically, this entails analyzing the mechanisms for calculating the effective tax rate and exceptions, including the exclusion mechanism. This inevitably leads to another consequential sub-sector of business processes: preparing the budget forecast and planning with an eye not only to fiscal strategy, but also financial management.

A profound organizational reflection is beginning to emerge around these two sets of business processes regarding the possibility of moving towards automated calculations. However, any automated decision-making tools will have to factor in a multitude of administrative and fiscal variables relating to the legislation and control practices of the tax authorities, elements which are not easy to translate into algorithms.

In conclusion, we must consider the consequences of introducing the global minimum tax for Italian MNEs in terms of compliance and the complex articulation of managerial processes. These aspects extend along a horizon that goes beyond the area of oversight that tax departments normally deal with. When this measure enters into force, it will generate higher administrative costs, both due to handing tax documentation and the broader need to develop new processes to adapt to the legislation.

Another effect of the global minimum tax will be to multiply fiscal complexity exponentially for companies and for financial administration. Both will have to take on new resources and develop new knowledge, creating strategic interdependencies for Italian taxation that have never been seen before, simultaneously triggering organizational innovation within the groups.