The Government proposes new legislation on supplementary tax

The rules are very complex and will involve extensive reporting obligations. If the proposal is adopted, the rules will apply in Norway already with effect for the 2024 fiscal year.

Background

The proposal that has now been submitted to the Norwegian Parliament is based on a long-term cooperation on changes in the international framework for taxation of large, multinational corporations. The collaboration is in the Inclusive Framework. This is an international co-operation body with over 140 member states, under the auspices of the OECD. A joint effort has been undertaken to reform international tax rules, with the goal of being better equipped to address new challenges in connection with the digitization of the economy.

In 2021, political agreement was reached in the Inclusive Framework on a two-part solution, referred to as pillars. There is pillar 2 of this two-pillar solution that is now proposed to be implemented in Norwegian law, and which will ensure a global minimum taxation.

The proposal differs from the original proposal issued during the summer 2023, in that the rules are proposed to be implemented in a separate law (the Supplementary Tax Act) instead of being incorporated into the ordinary tax law. The Ministry of Finance justifies this with, among other things, the complexity of the rules, the lack of overlap with existing taxes and the differences in interpretation principles and terminology in OECD's proposals and traditional Norwegian tax law.

Briefly on the Model Rules

The rules on minimum taxation shall ensure that large corporations are taxed at an effective tax rate of at least 15 per cent in all countries where they are established. If the group is taxed at a lower effective tax rate than 15 per cent, other countries will be entitled to taxation on the under-taxed income. The taxation is done by calculating a tax, referred to as “Top-Up Tax” in the model rules. This is calculated from the difference between an effective tax rate of 15 per cent and the actual taxation. This tax is referred to as supplementary tax in the bill.

The main rule on tax inclusion means that parent companies become tax liable for supplementary tax calculated for their subsidiary. Basically, it is the ultimate parent entity, referred to as the top parent company, that becomes taxable. If the top parent company is not covered by qualified rules on tax inclusion, the tax liability is moved to an intermediate parent company that is covered by qualified rules on tax inclusion.

The secondary rule on tax distribution applies if the calculated supplementary tax is not captured by the main rule, because neither the top parent nor an intermediate parent company are taxable for the calculated supplementary tax. Taxation rights for estimated supplementary tax are then distributed to the other countries where the group is established and the rules on global minimum taxation have been implemented. The tax right is distributed according to a distribution key based on the number of employees and the value of physical assets.

The supplementary tax rules mean that the companies covered must calculate the effective tax rate in all jurisdictions where they are established. If the Group has several entities in the jurisdiction, such as several companies and possibly fixed operating locations, the effective tax rate is calculated initially for the income of these entities.

Reporting

The model rules require extensive reporting from the group. A standardized notification shall be provided containing the necessary information to determine and control the supplementary tax. The report has been prepared by the OECD and is referred to as GloBE Information Return (GIR). National authorities cannot make changes to the GIR. In addition, a separate tax return must be submitted for the supplementary tax. These reporting rules follow from proposals for new provisions in the Tax Administration Act.

Summary

The rules are complicated and there will be extensive reporting obligations. How the detailed regulations are designed in the regulations remains to be seen. Although the work on the Pillar 2 regulations has been going on for a while, there is still little time left until the new rules are planned to take effect.