Norway: Draft legislation implementing Pillar Two minimum tax

The Norwegian Ministry of Finance on 6 June 2023, issued a public consultation paper containing new draft Norwegian legislation implementing a minimum tax.

The proposed legislation is largely consistent with the OECD’s Pillar Two Inclusive Framework and the EU Minimum Tax Directive (2022/2523), but is adapted to a number of Norwegian conditions.

In the 139-page report, the Ministry of Finance proposes legislation for a minimum top-up-tax (suppleringsskatt). The intention of the legislation is to provide that an effective minimum tax rate of 15% is paid in all jurisdictions when a multinational enterprise (MNE) has legal entities and branches. 

The top-up tax would apply to:

• Large domestic groups
• MNEs with consolidated revenues of at least €750 million in two of the prior four years

Certain companies and institutions would be exempt from the top-up tax (e.g., non-profit organizations, pension funds, government entities, and investment funds). Although these entities would not be within the scope of the Norwegian top-up tax, their revenue would still taken into account for the overall scope threshold test. 

In general, top-up tax would apply when the effective tax rate (ETR) in a jurisdiction is lower than 15%. The ETR would be calculated by dividing the total amount of covered taxes in a given jurisdiction, by the “GloBE” income in that jurisdiction. The GloBE income would be based on accounting revenue with certain adjustments, while the amount of covered taxes would be calculated based on accounting current and deferred taxes with certain adjustments.

The draft legislation also provides for a substance-based income carve-out which would be determined as a mark-up on the carrying value of eligible tangible assets and eligible payroll costs in line with the OECD Model Rules / EU Directive.

An income inclusion rule (IIR) and qualified domestic minimum top-up tax (QDMTT) would apply to financial years beginning after 31 December 2023.

An undertaxed profits rule (UTPR) is not provided for by the draft legislation, which is proposed to enter into force at a later stage. There are indications in the public consultation paper that it would apply from 2025, in line with the European Union.

The report also includes a proposal for safe harbors in accordance with the OECD guidance issued on 20 December 2022. If certain conditions are fulfilled, a simplified calculation may be allowed to demonstrate that the ETR exceeds 15% (2023 and 2024), 16% (2025) and 17% (2026). If this is the case, there would be no top-up tax payable. Most likely, the figures from country-by-country (CbC) reporting can be used, although details have not yet been confirmed.

If the conditions for simplified calculations are not met in a country, a complete calculation of the ETR and top-up tax would be required under the regular rules. 

The consultation paper proposes that both a top-up tax report (GloBE information return) and a top-up tax return be introduced. In addition, the proposal also contains an obligation to notify the Norwegian tax agency when another group entity submits a top-up tax report in another jurisdiction.

The draft does not provide any new specific penalty rules or fines in the introduction phase until 2028 in line with the GloBE Implementation Framework. However, existing penalty rules would apply similar to corporate income tax, and the tax authorities will closely monitor for non-filing and top-up tax evasion. 

The Ministry of Finance assumes that approximately 40 Norwegian based MNEs would be affected by the new rules.

The proposed legislation contains many definitions that are similar to those in the GloBE rules and the EU Directive, but that do not always correspond to the definitions established in Norwegian tax legislation.

Certain shipping revenues would be exempt from the GloBE rules. However, an important challenge for shipping companies will be that the draft legislation for this exemption is not aligned with the Norwegian tonnage tax regime rules (e.g., only vessels with operations in “international water” will be exempt and not vessels with domestic operations nor so-called windmill vessels).

There is also an entire body of accountant regulation to take into consideration. Under Norwegian law, the accounting rules are important for the accrual of income and expenses, but in applying the Norwegian law on top-up tax, the accounting rules seems also to control which income is taxable and what expenses are deductible. This clearly brings new challenges in terms of interpretation and application.

In light of the complexity of the GloBE rules, and the heavy administrative burden that may be associated with their application, tax professionals in Norway recommend that groups need to consider the following steps in order to get ready for Pillar Two:

• Analysis of whether the group is in-scope of the rules (there may be a substantial number of Norwegian based MNEs that do not exceed the €750 million threshold in two of the last four accounting years, especially considering that Norwegian currency is weak compared to the euro).
• Analysis of the group structure to identify entities that may be liable for top-up tax (e.g., ultimate parent entity (UPE) and partially-owned parent entities (POPEs)) as well as joint ventures, minority-owned subgroups, and investment entities, for which a separate ETR calculation would be required.
• Analysis of whether the simplified tax calculations under the transitional CbC reporting safe harbour rules could be applicable in the initial phase.
• Detailed assessment of where potential tax liabilities under the GloBE rules may be triggered. Such calculation models need to also take into account some of the elections that are available under the GloBE rules.
• Data gap analysis to identify the information needed for the GloBE calculations and for reporting, some of which may already be available to MNEs based on existing systems and processes, but other data points may need to be refined or collected separately.
• In-scope groups will also need to consider their exposure to Pillar Two taxes for their Q1 2024 financial reporting. While deferred tax accounting is not required in the initial period based on recent IAS 12 amendments, MNEs will have to disclose certain information that is known or can be reasonably estimated at the reporting date.

The consultation ends on 1 August 2023 and the aim is to submit final legislation to the Norwegian Parliament before year-end.

For more information contact a KPMG tax professional:

Svein G. Andresen | svein.andresen@kpmg.no

Sunniva Sande | Sunniva.sande@kpmg.no