INTRODUCING GLOBAL MINIMUM EFFECTIVE TAX RATE - CHALLENGES FOR THE MACEDONIAN TAX SYSTEM

Abstract

This paper analyses the challenges for the Republic of North Macedonia, as a developing country, of
the implementation at national level of the global minimum corporate tax rate introduced at the end of
2022 on a European level with the Council Directive on ensuring a global minimum level of taxation
for multinational enterprise groups and large-scale domestic groups in the Union (Pillar Two Directive).
The Pillar Two Directive codifies in the EU law the OECD/G20 Two pillar solution to address the tax
challenges arising from the digitalization of the economy. The global minimum tax is introduced
through the global anti-base erosion rules (GloBE rules) which are an important shift in international
taxation policy. These rules apply to both multinational enterprises (MNEs) and large-scale domestic
groups with a combined group income of €750 million or more. GloBE rules are enforced in cases
where the effective tax rate (ETR) of the MNEs and their constituent entities in a specific jurisdiction
falls below 15%. In this case, a top-up tax is imposed to ensure that the ETR in each jurisdiction is
brought up to 15%. The Directive outlines two mechanisms through which this top-up tax may be
implemented: the income inclusion rule (IIR), which mandates a top-up tax on the ultimate parent entity
(UPE) for all constituent entities with a jurisdictional ETR below 15%, and the undertaxed profit rule
(UTPR), which serves as a safeguard when the UPE cannot be a subject to a qualifying IIR or if the
parent entity is unable to collect top-up tax for other reasons. Additionally, the Directive offers the
option to apply a qualified minimum domestic top-up tax (QMDTT), which is remitted to the Member
State for the constituent entities situated within their jurisdiction in situations when those entities are
subject to ETR within the respective jurisdiction that is lower than 15 %. This rule acts as a backstop
for the UPE's overall liability for top-up tax. The Pillar Two and the designed GloBe rules constitute a
mechanism that is expected to curtail tax competition in corporate income tax, concurrently ushering in
the global minimum corporate tax rate of 15% and reducing the profit shifting and base erosion of the
MNEs. This paper will present the theoretical framework governing the rules of Pillar Two, elucidate
the core principles underpinning the Pillar Two Directive, and delve into the assessment of the minimum
standard from the perspective of the Macedonian tax system. North Macedonia will be affected by the
global minimum taxation initiative regardless of whether it responds with domestic implementation of
GloBe rules or not. The internationally agreed standard gives the possibility for potential tax revenues
for the hosting country of the in-scope MNEs on the one hand, and on the other for the participating
jurisdiction where their constituent entities are located when the effective tax rate falls below 15 %.