Romania prepares to enact Pillar 2 Global Anti-Base Erosion (GloBE) rules

Wed 22 Nov 2023

Initiated by the Organisation for Economic Co-operation and Development (OECD) the Pillar 2 GloBE rules aim to stop tax competition between countries and to limit the shifting of profits to low-tax jurisdictions. As a result, large multinational groups (MNEs) with global annual revenue exceeding €750m will need to pay a minimum 15% tax on income arising in each jurisdiction in which they operate. However, with a degree of variation allowed on how jurisdictions adopt GloBE rules, it’s essential that MNEs keep track of how GloBE rules are enacted on a country-by-country basis. 

On 4 October 2023, Romania published a draft law concerning the global minimum level of taxation for MNEs and large-scale domestic groups operating in Romania. So what does this mean for MNEs and their subsidiaries based in Romania now that the draft law transposes the provisions of Directive (EU) 2022/2523 into Romanian law?

How the new rules impact MNEs and large-scale domestic groups

The draft law specifies that the minimum tax will apply from 1 January 2024 to groups with an annual income of at least €750m. Certain entities are exempt from GloBE rules, such as governmental entities, international organisations, pension funds and non-profit organisations.

The effective tax rate (ETR) calculation will be performed on an aggregated basis for all entities the group holds in Romania. The ETR will be calculated as the ratio between adjusted covered taxes of Romanian constituent entities and the qualified net profit of those entities. If the ETR is less than 15% for a financial year, the group is liable to pay a top-up tax. The legislation determines which entities will pay the top-up tax for the group’s undertaxed entities, including Romanian entities.

The Income Inclusion Rule (IIR) requires the parent entity of the group to calculate and pay its allocable share of additional tax for entities that are taxed at a reduced rate. If the IIR cannot be applied, based on the Undertaxed Profit Rule (UTPR), another group company is subject to the tax registered as an additional expense, equal to the part of the top-up tax not imposed under the IIR at the parent company level.

In addition, Romania has exercised its right to apply the qualified domestic minimum top-up tax (QMDTT) introduced in the new legislation, whereby any potential tax differences relating to constituent entities in Romania will be collected locally and not in the parent entity jurisdiction using the IIR. For 2024, the top-up tax information return and payment will be performed no later than 18 months after the last day of the reporting fiscal year.

Using safe harbours and simplification rules

Groups preparing and submitting country-by-country reports (CbCR) may benefit, under certain conditions, from a transitional safe harbour regime that reduces the GloBE reporting burden.

The top-up tax shall be deemed to be zero if, based on the simplified calculation using CbCR information for FY 2023, the Romanian constituent entities can meet one of the following conditions: 

• register a total revenue of less than €10m and a profit of less than €1m,

• register a simplified ETR of 15% or more,

– or the profit is less than or equal to the substance-based income exclusion amount, calculated according to the new rules.

Next steps

Companies falling under the scope of GloBE rules should assess the impact from a tax liability perspective. The analysis can start by establishing which Romanian entities are covered by the new rules and by determining the applicability of the safe harbour regime and simplification rules.

Also bear in mind that the new rules for computing the global minimum tax introduce a significant number of terms and concepts, which should be analysed and assimilated by both companies and tax authorities.

Finally, to calculate the top-up tax, groups and Romanian entities will need to collect a large amount of information and understand how to apply the necessary adjustments to determine the indicators. For this reason, communication and exchange of information with the group are essential in the upcoming period.