Global minimum tax of 15% may hurt Portuguese companies with large fiscal benefits

The mandatory minimum corporate income tax rate of 15%, adopted by approximately 140 countries in the Organization for Economic Cooperation and Development (OECD), including Portugal and the other 26 member states of the European Union, could increase the tax payable by Portuguese companies that have significant tax benefits and therefore pay a rate below that threshold, according to the fiscal experts consulted by ECO.

Last November, Portugal transposed the European directive that regulates the global minimum tax regime, known as Pillar 2. This mechanism applies to large multinational groups with a turnover of 750 million euros or more, when the parent company and its branches pay an effective rate of less than 15%. The rule establishes that the difference between the taxation to which these companies are subject up until the 15% threshold must be paid in the country where they operate or in the territory where their head office is located.

“Pillar 2 aims, in a very summarised way, to ensure that a minimum tax rate of 15% is applied to multinational groups and large national groups, i.e. those with annual revenues of 750 million euros or more. If the effective rate applicable to any of the group’s constituent entities is less than 15%, it will be necessary to pay a supplementary tax“, said Leonardo Marques dos Santos, professor of Tax Law and International Tax Law at the Portuguese Catholic University.

Thus, “since Pillar 2 considers effective tax rates, comparing them with a minimum rate of 15%, some tax benefits may be affected to the extent that they contribute to reducing the effective rate”, the tax expert points out, adding that, as such, “Portuguese companies may also be affected, like other companies in other jurisdictions, in cases where their effective rate is below 15%”.

Likewise, Pedro Almeida Jorge, tax manager at PwC, explains that “tax benefits reduce the amount of corporate income tax supported” and, therefore, “may contribute to lowering a group’s effective tax rate in Portugal, which may lead to the need to pay Pillar 2 supplementary tax”. The tax expert also notes that “in a scenario in which the general corporate income tax rate in Portugal is lowered to 15%, as proposed in the government’s programme, these situations could become more frequent”.

Leonardo Marques dos Santos says that “the aim of the regime is not to ‘harm’ companies, but to ensure that a minimum amount of tax is paid, so that there is greater equality in the distribution of tax burdens”.

However, Pedro Almeida Jorge points out that “this is one of the topics that has generated the most controversy in the US regarding this regime”, since “the Republican wing believes that the model of tax incentives via deductions from tax collection, such as deductions for investments in Research and Development [R&D], is undermined compared to models of direct aid via subsidies, allegedly more common in planned economies such as China”.

“This is because tax benefits directly reduce tax (numerator in calculating the effective rate) while subsidies increase income (denominator in calculating the effective rate)”, clarifies the PwC tax expert.