On 24 November 2023 the Conference on the EU Minimum Corporate Income Tax Directive and its Impact on Non-EU Member Countries was jointly organised by the University of Belgrade Faculty of Law, Serbian Fiscal Society, AmCham Serbia and Foreign Investors Council, with the generous financial support from GIZ Serbia. The Conference programme consisted of two parts. The first part was focused on an in-depth analysis of the issues associated with the introduction of the EU Minimum Corporate Income Tax Directive and the impact it is expected to have on non-member countries. The second part considered policy choices available to non-member countries, and the position investors may have on them.

More than 140 attendees in person, with more than 80 connected online (from Japan to South America) in the wonderful Grand hall of the Serbian Academy of Sciences and Arts discussed this highly interesting topic with:

• Academician Prof. Emeritus Dr. Pavle Petrović, President of the Serbian Fiscal Council
• Prof. Emeritus Dr. Dejan Popović, President of the Serbian Fiscal Society
• Prof. Dr. Leopoldo Parada, University of Leeds (UK)
• Prof. Dr. Aitor Navarro, Max Planck Institute for Tax Law and Public Finance, Munich (Germany)
• Prof. Dr. Vikram Chand, University of Lausanne (Switzerland)
• Prof. Dr. Rita Szudoczky, Vienna University of Economics and Business (Austria)
• Prof. Dr. Svetislav Kostic, University of Belgrade Faculty of Law (Serbia)
• Mukesh Butani, Managing Partner of BMR Legal Advocates (India)
• Jan Roderick van Abbe, Partner Deloitte, International and M&A Tax Deloitte Dubai (UAE).
• Igor Lončarević, LLM, Partner KPMG, Member of the Board of Governors of the American Chamber of Commerce in Serbia
• Mr. Dragan Draca, Partner PwC, Chair of the Foreign Investors Council Taxation Committee (Serbia)

The Directive introduces a minimum effective tax rate of 15%, calculated based on a specific set of rules. It is directed at large corporate groups with either a parent company or a subsidiary situated in an EU Member State, provided that the group's combined revenues surpass EUR 750 million. Corporate groups with an effective tax rate below the newly established minimum of 15% in any of the jurisdictions in which they operate will have to pay a top-up tax to bring its effective tax rate up to the minimal 15%. This top-up tax payment is to be enforced primarily by way of the so-called Income Inclusion Rule (IIR) in the jurisdiction in which the ultimate parent entity is resident. Alternatively, if the ultimate parent entity is based in a non-EU jurisdiction which has not implemented the described taxation framework, Member States in which other group entities are based will collect the top-up tax on the basis of a backstop rule, the so-called Undertaxed Payment Rule (UTPR). The amount of top-up tax to be collected is determined on the basis of a formula relying on the group’s employees and assets located in the respective jurisdiction.

The preliminary conclusion of the Conference was that, although Serbia is not an EU member and as such is not required to implement the Directive, the latter could have substantial effect on the size of corporate income tax revenues available for collection in Serbia. The current Serbian tax policy – which is based on low effective corporate income tax rates – ceases to be a viable instrument to attract foreign investment. Retaining such policy will essentially result in the transfer of tax revenues to jurisdictions in which the MNE‘s ultimate parent entity is located (by way of the application of IIR), or to jurisdictions in which other group entities are located (through the application of the UTPR). This is especially important having in mind the interconnectedness of the Serbian market with the Internal Market, evidenced by the fact that EU companies accounted for 59% of all FDIs in Serbia between 2010 and 2022 (National Bank of Serbia, 2023).

Nevertheless, it has also been concluded that the negative effect of the newly established minimum taxation framework could be mitigated, or even prevented by Serbian tax policy makers making sound and timely policy choices. Based on the interaction between the key mechanisms on which the new global minimum taxation framework is built and the existing features of the Serbian corporate income tax legislation, the following policy choices were suggested as worthy of consideration and more thorough assessment.

Since the minimum floor for taxation established by the Directive is based on effective (as opposed to nominal) tax rates, the first step should be to assess the impact of the manner in which the effective tax rate is calculated in accordance with Directive on the existing tax incentives granted under Serbian corporate income tax legislation (e.g. tax holiday under Art. 50a of the Corporate Income Tax Law). Each existing tax incentive should be examined with respect to whether it could be classified under income-based or expenditure-based tax incentives, and to what extent the benefits stemming therefrom will be affected, i.e. absorbed by the top up tax. Therefore, tax incentives capable of lowering the effective tax rate could either be: (a) re-designed so as to not decrease the effective tax rate (e.g. tax incentives qualifying as the so-called qualified refundable tax credits), or (b) substituted with non-tax incentives, such as direct subsidies.

Each of these options poses a number of issues that need to be carefully weighted against their desired results. On the one hand, the re-designing of tax incentives in order for them to be treated as qualified refundable tax credits may prove to be problematic from the point of view of legal certainty. On the other hand, direct subsidies require upfront funds to be dedicated for such purpose, which will be difficult for countries with limited fiscal capacity, such is the case of Serbia. At the same time, non-tax incentives could be more difficult to administer, since their diverse nature likely presupposes the involvement of different governmental departments in their administration. Moreover, the introduction of non-tax incentives such as direct subsidies might be faced with a larger opposition of the public. In addition, the personal scope of the Directive is limited due to the high de mininis revenue threshold, as well as because it excludes certain types of entities (e.g. investment and real estate funds). It will, therefore, generally not affect tax incentives utilized by out-of-scope groups of entities. In this respect, constitutionality and/or selectivity issues might arise in the case of differentiated tax treatment of corporate taxpayers active in different industries or of different size.

Apart from systematically reviewing and re-designing the existing scheme of tax incentives, a more immediate response for Serbian tax policy makers could be to introduce a so-called Qualified Domestic Minimum Top-up Tax (QDMTT), or a generalized domestic minimum tax. These could be particularly attractive since Serbia will rarely, if ever be in a position of the ultimate parent jurisdiction of the in-scope MNE groups. Both of these two policy choices would preserve Serbia’s primary right to tax income sourced within its territory. In other words, they would prevent the revenue “transfer” to the jurisdiction of the ultimate parent entity (which applies the IIR) or jurisdictions of other group entities (which apply UTPR), while at the same time preserving the effects of existing tax incentives. The difference between these two options is that the QDMTT, although considerably more complex to design and administer, would increase domestic taxes only on in-scope MNE group entities and only to the extent that such tax revenue would otherwise be collected by another country by way of a top-up tax. On the other hand, generalized domestic minimum tax would target even not-in-scope corporate taxpayers, while it would require a careful drafting so as to be included in the determination of the MNE‘s overall ETR.