On January 8, 2024, Law 431/2023 entered into force, transposing the provisions of Directive 2523/2022 into the national legislation of Romania. This involves ensuring a minimum effective tax rate of 15% globally for groups of companies with a consolidated turnover of at least 750 million euros. Pillar Two introduces a minimum effective tax rate (ETR) of 15% for multinational groups in each jurisdiction in which they operate.

The effective tax rate of 15% is calculated for each financial year at the jurisdiction level and not at the entity level, another concept introduced by the new rules. In other words, if the group of companies has 4 companies present in Romania, the indicators at the level of all companies in Romania will be accumulated to determine the effective tax rate in Romania.

Exceptions: Companies that are part of a group reporting a turnover below EUR 10 million and an accounting profit below EUR 1 million in Romania will not owe additional tax. Branches that already prepare CbCR reports will benefit from a simplified process.

Law 431/2023 establishes measures for the effective minimum taxation of multinational enterprise groups and large national groups in the form of:

1. Income Inclusion Rule (IIR): The parent company of a large multinational or national enterprise group is required to calculate and pay its allocable share of the additional tax for the constituent entities of the group that are taxed at a reduced level.

2. Undertaxed Profits Rule (UTPR): A constituent entity of a multinational enterprise group owes additional tax equal to its share of additional tax not collected at the parent company level for constituent entities taxed at a reduced level.

3. Additional National Tax (QDMTT): This is determined with priority and can reduce to zero the additional tax due under the IIR and UTPR rules in other jurisdictions.

Terms of Application in Romania:

• Income Inclusion Rule (IIR) – January 1, 2024

• The undertaxed profits rule (UTPR) – January 1, 2025

• National Additional Tax (QDMTT) – January 1, 2024.

Romania has implemented the QDMTT as of January 1, 2024, which in practical terms means that the additional national tax at the level of constituent entities in Romania that are taxed at a reduced level is calculated according to the rules of the QDMTT (Article 17 of Law 431/2023) and will be collected, declared and paid to the tax authorities in Romania.

Very important to mention, Romania has also implemented the QDMTT protection regime (QDMTT safe harbor), which means that, in principle, an additional tax will no longer be calculated at the level of the parent-final company according to the IIR and UTPR rules respectively, the additional tax national calculated according to QDMTT and paid in Romania being final.

Calculation and Declaration of Additional Tax: Additional tax applies to constituent entities located in a jurisdiction where the effective tax rate is below 15%. The effective tax rate is calculated for each financial year and for each jurisdiction as the ratio of adjusted covered taxes to qualified net profit.

For the transition year 2024, the deadline for reporting the additional tax is 18 months from the last day of the reporting financial year, and for the following years, the deadline will be 15 months.

Summary of the obligations for the adoption of Pillar 2:

1. Determination of Eligibility:

a. Checking whether the group to which the company belongs registers a consolidated turnover of at least 750 million euros in at least two of the last four years prior to the reference year.

2. Identification of Relevant Entities:

a. Identification of constituent entities within the group to which GloBE rules apply and exclusion of exempt entities (e.g. governmental, international, non-profit organizations, etc.).

3. Calculation of the Effective Tax Rate (ETR):

a. Calculation of ETR at jurisdiction level using adjusted covered taxes and qualified net profit according to the consolidated financial statements of the group.

4. Calculation of Additional Tax:

a. In the situation where the ETR is below 15%, determining the additional tax required to reach this minimum rate.

5. Allocation of Additional Tax:

a. Use of the QDMTT, IIR or UTPR methods for allocating additional tax.

6. Other obligations:

a. The option to apply one of the protection regimes must be notified through GIR, annually.

b. The application of a protection regime does not remove the obligation to submit the annual GIR.

c. Certain protection regimes must be applied from the first year in which the group of entities would qualify to apply them, or they will no longer be available in subsequent periods. Thus, it is recommended that the analysis of inclusion in a certain protection regime be carried out as early as possible.

d. Although the reporting and payment deadline under the GloBE rules may seem permissive at the moment, it is important that such a complex exercise is managed in advance at the level of company groups to ensure that they will be able to implement all the measures introduced by the new rules. It may also be necessary to account for anticipated expenses (accrual) before the first reporting period (i.e., 2026).

7. Reporting Obligations:

a. Submission of the informative declaration (GIR) within 15 months from the end of the financial year (18 months for the first year of application, in the case of Romanian entities being 2024).

The model for GIR was published in July 2023, being a complex declaration (the content of the blank declaration is 28 pages) that will require the inclusion of a large volume of information such as ETR calculations, additional tax calculations, options regarding the applicability of certain protection regimes. The model for GIR can be viewed by accessing the website: https://www.oecd.org/tax/beps/globe-information-return-pillar-two.pdf.

GIR document (GloBE Information Return)

The document details the tax reporting obligations for multinational companies (MNEs) under GloBE (Global Anti-Base Erosion) rules.
The GIR document includes the information deemed necessary for the tax authorities to carry out a risk assessment and assess the correctness of the Additional Tax (TuT) obligation of a constituent entity under the Global Anti-Base Erosion (GloBE) Rules, with the aim of ensure that multinational firms pay a minimum level of tax, using TuT as a tool to achieve this objective.

An entity is considered constituent when it is part of an MNE group as a separate legal entity or branch included in the consolidated financial statements of the MNE group.