Global minimum taxation - tax sharing agreements

In the context of the global minimum tax framework, tax sharing agreements (TSAs)can be effective at addressing tax disparities that may result from allocating the jurisdictional top-up tax to constituent entities in proportion to their GloBE Income as per the OECD’s Pillar Two model rules. These rules can give rise to situations in which highly-taxed entities (i.e. those that are already paying more than the 15% minimum effective tax rate) end up being allocated a portion of the jurisdictional top-up tax, simply because they share a jurisdiction with other entities of their group that are subject to lower taxation. In such cases, TSAs allow the tax liability to be apportioned fairly and aligned with the operational structure of the multinational group.

Pillar Two establishes a global effective minimum tax rate of 15% on the profits of MNEs (multinational enterprises) that have consolidated revenues of EUR 750 million or more. As mentioned in previous publications, in Spain this top-up tax is regulated by Law 7/2024.

The main purpose of this framework is to ensure that MNEs pay a 15% effective minimum tax rate. Pillar Two establishes different types of top-up tax for each entity within the group. Where a low-tax jurisdiction has its own domestic top-up tax, resident group entities will be liable for its payment. Otherwise, under the Pillar Two rules the Income Inclusion Rule (IIR) may be triggered, with liability falling on the ultimate parent entity, intermediate parent entity or partially-owned parent entities, depending on the ownership structure and how the Pillar Two rules are applied in the relevant jurisdictions.

Irrespective of the type of top-up tax, there are two aspects to the procedure for calculating and paying the top-up tax that often lead to the tax burden falling directly or indirectly on constituent entities that already have an individual effective tax rate of above 15%. These are the jurisdictional blending approach and the allocation of the jurisdictional top-up tax, and the mechanisms used to impose or designate liability.

Under the jurisdictional blending approach, the top-up tax is determined at the jurisdictional level and then allocated among the constituent entities resident in that jurisdiction in proportion to their share of eligible income (i.e. GloBE Income). As a result, subsidiaries that are already taxed above 15% may be allocated a portion of the top-up tax that they would not have had to bear were it not for the fact that, in the same jurisdiction, there are other entities of the same group that are taxed at a lower rate.

A similar disparity arises from the rules on assignment of tax liability. Where the IIR applies, the liable entity – generally the ultimate parent entity – may be required to pay tax attributable to income earned by subsidiaries located in low-tax jurisdictions, even if it has limited or no ability to influence their operations or tax outcomes.

TSAs

As mentioned, TSAs can play a crucial role in the global minimum tax framework by helping to allocate the top-up tax burden among entities within a multinational group.

These agreements do not alter the Pillar Two rules for calculating or applying the tax; the entity that is liable to pay in accordance with these rules will continue to be liable for the top-up tax. What TSAs offer, however, is a mechanism to redistribute the additional tax burden more equitably among the entities that had the ability to influence the decisions that led to the taxable event.

As a result of the jurisdictional blending approach under the Pillar Two rules and the method for designating liable entities, situations may arise in which the entity responsible for paying the top-up tax lacks both control over the operations of the low-taxed entity and the ability to take measures to ensure its effective tax rate does not fall below 15%.

This disparity can be addressed through the use of TSAs, which allow the tax burden to be redistributed within the group by establishing rules that allocate the top-up tax either to entities that failed to meet the minimum effective tax rate or to those with the ability to influence the tax position of the non-compliant entity.

The equity and redistribution benefits that a TSA offers often justify the time and cost involved in its design and practical implementation. Crafting a TSA requires a detailed analysis of the group’s structure, including its organisational chart and the geographic locations of its subsidiaries. The aim is to design a TSA that reflects the group’s internal understanding of fair tax burden allocation – determining which entities should ultimately bear the top-up tax. In some cases, the multinational group may prefer to allocate the burden to the entity that exercised control over the non-compliant subsidiary and failed to ensure it met with the 15% effective minimum tax rate, rather than the low-taxed subsidiary itself.

However, the use of TSAs introduces uncertainty, particularly with respect to the intra-group pass-through of the top-up tax. A key issue is whether such payments qualify as covered taxes that can be included in the numerator of the effective tax rate calculation. If not, the focus shifts to whether the payment is deductible from the tax base of the recipient entity – a question that affects both the group’s overall corporate tax liability and the denominator of the effective tax rate calculation.