BEPS 2.0: Global Measures and Their Impact for Portugal

In July 2021, 132 countries, including Portugal, came to a preliminary agreement on international taxation, with the purpose of creating “a new international tax order,” capable of facing the challenges brought about by the digitalization of the world’s economy, namely the strategies employed by big international corporations to avoid paying taxes.

This agreement has been dubbed Base Erosion and Profit Shifting 2.0 (BEPS 2.0), since it is the latest effort from the BEPS Inclusive Framework, a special group within the Organization for Economic Development (OECD) and the G-20, dedicated to fighting tax evasion and increasing worldwide fiscal transparency.

The focus of the initiative is on the large international corporations, namely the digital giants (Apple, Microsoft, Google, and Facebook, among others) who have enjoyed record profits and paid less and less tax since the start of the Covid-19 pandemic.

The solutions put forward by BEPS 2.0 are organized into two main groups, Pillar One and Pillar Two.

Pillar One

Pillar One contains new rules that will grant taxation rights to the countries where international corporations have many or most of their consumers, even if these entities do not have a subsidiary or a permanent establishment there. These rules will apply to international corporations that have reached a turnover of at least 20 billion euros ($23.3 billion) or a profitability rate of at least 10% in the previous year.

Pillar Two

For Pillar Two, the aim is to ensure that the profits of major international corporations are subject to a minimum effective tax rate of at least 15%. This does not mean that countries will have to raise their domestic tax rates, but it will impose additional taxation on international corporations when their foreign-sourced profits come from countries with lower tax rates.

Implementation

Regarding implementation, it should be noted that the preparation stage of the agreement is set to continue until October 2021, when a more detailed report will be prepared, which will then be subject to discussion between the G-20 and the European Central Bank.

The final version of the plan should be ready at the start of 2022, and its entry into force is currently scheduled for 2023, which is ambitious, considering the usually lengthy process of implementing multilateral agreements in the context of the OECD.

Regardless, the EU already has plans to start implementing measures in line with BEPS 2.0, namely a cross-border digital tax and the entry into force of the Anti-Tax Avoidance Directive III (ATAD III), which is expected to address the problem of shell companies.

Impact for Portugal

The fight against international tax evasion and abusive planning should be commended, as profit shifting remains a cause of great inequality on a global scale. However, at such an early stage of the BEPS 2.0 initiative, it is still difficult to evaluate the impact that its measures might have.

While it is early to predict the exact impacts of these measures, they are expected to slightly benefit Portugal’s tax revenue and fiscal competitiveness.

In fact, as of 2020, it is estimated that Portugal loses around 600 million euros annually to countries, regions and jurisdictions with lower tax rates and generally more favorable tax regimes.

Where Portugal is concerned, since the general tax rate (21%) is already higher than the minimum rate that BEPS 2.0 seeks to implement (15%), fiscal competitiveness should see an increase, as jurisdictions with lower tax rates become less attractive to international corporations.

In recent years, several international corporations, such as Google, have increased their presence in Portugal, mainly attracted by a highly qualified, low wage workforce. However, these corporations have rarely incorporated a subsidiary or created a permanent establishment in Portugal.

The worldwide minimum tax rate that BEPS 2.0 seeks to implement will help create a more level playing field in fiscal terms, which could be an added incentive for international corporations to reduce their reliance on low tax jurisdictions and increase the size of their operations in countries like Portugal by incorporating subsidiaries or establishing other forms of permanent representation therein.

In addition, most of Portugal’s special tax regimes, which have helped the country attract foreign investment in recent years, will likely still be allowed to exist under BEPS 2.0’s Pillar Two rules. Such is the case for example with the Madeira Free Trade Zone, a tax regime that provides tax rates as low as 5%, justified by the region’s particular regional status, based in EU Law, and sanctioned by the European Commission.

There are other examples, such as Portugal’s productive investment incentives, which grant tax relief to companies that carry out significant asset investments in any given fiscal year, or the significant benefits granted yearly to small or medium-sized enterprises that choose to reinvest their profits instead of distributing them to shareholders.

As for BEPS 2.0’s Pillar One rules, Portugal should experience a slight increase in tax revenue, despite being a relatively small country in terms of population, as digital services such as Netflix and Amazon continue to gain popularity among Portuguese consumers, whose buying power has only started to recover from the devastating effects of the Covid-19 pandemic.

Going Forward

In fact, while the discussion surrounding BEPS 2.0 began before the pandemic, it is clear that its entry into force could not be more timely, as the crisis is finally showing signs of winding down and economic recovery becomes a global priority.

On a final note, and according to OECD estimates, the BEPS 2.0 initiative should help to balance tax revenue between jurisdictions, while increasing it by a total of 4% on a global scale. However, these new rules are also expected to bring further complexity to international taxation. At such an early stage of the initiative, it is difficult to evaluate the impact of the measures.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Rogério M. Fernandes Ferreira is a Partner with RFF & Associados.

The author may be contacted at: rogeriofernandesferreira@rffadvogados.pt