One way to attract foreign businesses to a given country is to apply low tax rates. Some countries are known primarily for their very low income tax rates, and in some cases, no tax is collected at all. These are known as tax havens. This approach raises objections from countries applying higher rates, which are causing a noticeable outflow of businesses. The Organisation for Economic Co-operation and Development (OECD) has proposed a solution to this problem. This solution involves, among other things, introducing a minimum tax rate. The draft law reflects the views of 136 countries. All European Union member states, among others, have announced the implementation of a minimum tax. The EU itself is in the process of adopting a directive regulating this matter.
The minimum tax would apply to businesses operating in more than one tax jurisdiction and generating at least €750 million in consolidated revenue. If the effective tax rate applicable to such an organization in the country of operation is lower than 15%, it will be required to pay tax equal to the difference between the effective tax rate and the minimum rate (15%). The tax "surcharge" would be applied in the country where the business's headquarters is located. However, if the country of residence does not implement minimum tax regulations, a surcharge would be paid in the source country.
International organizations and state entities are excluded from the above regulations.
The consequence of implementing the above solution will be the need to examine the effective tax rate in a given country. The effective tax rate is the ratio of the actual tax paid to the tax base. This is determined by taking into account any applicable tax relief. In Poland, the tax rate is 19% and 9% (depending on sales revenue). Considering the reliefs and exemptions available in the Polish tax system, it's not difficult to imagine the effective tax rate being below 15%.
According to the project's assumptions, a portion of the value of tangible assets and employee compensation costs will, however, reduce income for minimum income tax purposes. If income is generated with a significant involvement of employee costs and fixed assets, even with a relatively low effective tax rate, the equalization tax will be avoidable. Considering that the largest foreign corporations entering Poland invest in both fixed assets and employees, it may turn out that the Polish jurisdiction, with its range of tax breaks, will continue to be an interesting destination for expansion, allowing for avoidance of the minimum income tax.
Determining the effective tax rate for each entity operating within an international capital group can be crucial for potential restructuring. Early assessment of the impact of planned solutions on the organization will allow for advance preparation and the development or modification of existing tax strategies. It's also important to remember that a minimum income tax will be in effect in Poland from January 1, 2024. This is a separate institution from the one described above. However, it is currently unknown whether the implementation of the EU directive will abolish the provisions of the "Polish" minimum tax, or whether these regulations will operate in parallel. Currently, the EU has not yet developed the final version of the minimum tax directive. It is also unknown when Poland will implement this directive. We will keep you informed of any changes in this regard.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of July 12, 2023
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