Portugal missed the deadline for transposing Council Directive (EU) 2022/2523 of December 14, 2022, which aims to ensure a global minimum level of taxation of 15% for multinational enterprise groups (“MNEs”) and large national groups.
The Directive was approved on December 22 and fulfils the EU’s commitment to implement the agreement on global tax reform reached by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to combat profit shifting and base erosion (the so-called OECD Pillar Two Model Rules).
Member States had until 31 December 2023 to transpose it into national law. Most Member States managed to do so with the ground-breaking new rules coming into effect 1 January 2024.
Portugal missed the deadline. The Portuguese Government has not yet even presented to the National Parliament a draft law on this matter.
Considering the current political scenario and the upcoming elections in March, the expectation is that contrary to what was initially envisaged, the said draft law should only be submitted to the National Parliament by the end of the first quarter of 2024, in the most optimistic scenario.
Consequently, the European Commission may now initiate infringement proceedings against Portugal before the Court of Justice of the European Union (which may ultimately result in fines).
How the delay in adopting the Directive could impact the implementation of the new rules in Portugal?
If this is the case, the Directive will only be transposed in the course of 2024, which could raise questions about the time application of said rules (i.e., from when they will take effect on).
In theory, the Portuguese legislator could choose to apply the new rules:
- immediately, during the tax period of 2024 (which would be in line with the obligation imposed by the Directive); or
- in the tax periods that are still to be initiated (ultimately, to the tax period of 2025 for taxpayers that adopt the calendar year).
It is relevant to note, in this regard, that the Portuguese Constitution (“CRP” – Constituição da República Portuguesa) covers the principle of general prohibition of retroactivity of taxes in Article 103 (3)[1]. Furthermore, our General Tax Law Code (“LGT” – Lei Geral Tributária) also provides additional clarification on such prohibition on its Article 12[2].
The non-retroactivity principle may impact differently on each specific tax depending on its nature or structure.
In the field of most indirect taxes (as Value Added Tax) no particular problem usually exists, since there is an immediacy in the relevant fact or set of facts that originate the relevant taxable event.
However, significant issues may arise in the case of periodic or recurrent taxes, where the fact or facts that originate the taxable event are often distributed over a calendar year. The Top-Up Tax seems to be one of these cases.
This new type of tax (the “Top-Up-Tax” in its various dimensions) seems indeed to be a “progressively forming tax” (i.e., “de formação sucessiva”, whose taxable event will be formed over a specific year).
This could mean that a part of the potential profit subject to the new Top-Up-Tax may be already “formed” in the months of 2024 prior to the entry into force of the new rules.
One may argue that since the Top-Up Tax mainly takes into consideration the amount of Corporate Income Tax (“CIT”) due (to ensure that the effective tax rate is at least 15%) and, as per the CIT Code, the taxable event is considered to occur only in the last day of the tax period, no retroactivity concerns should arise.
However, the Top-up Tax is a completely different tax when compared to CIT. It is not regulated by the Portuguese CIT Code. The CIT liability itself, that is assessed each year under the rules of the CIT Code, is only a component of the computation of the Top-Up Tax, which mostly relies on the accounting captions included in the Financial Statements of the entities (including deferred taxes)[3].
Hence, what will the Portuguese legislator do?
In theory, the legislator could be silent and rule that the Top-Up Tax would entry into force in the day after its publication (option 1) or could rule specifically that it would affect all tax periods beginning from 1 January 2024 (option 2).
Option 1 could be potentially treated under the existing general rules regarding time application of law, including a pro rata temporis methodology foreseen in LGT.[4] This procedure was already confirmed in the past by relevant case law, where the pro rata temporis was applied, ensuring that the changes introduced by the new law did not apply to the portion of the fiscal year before its entry into force.
As an example, in the past, changes to periodic taxes’ rules and the introduction of new taxes (such as the state surcharge in the mid-2010) were implemented with immediate affect (i.e., during the formation of the taxable event, applying to the total taxable profit of the tax year of 2010). Such laws were silent on the effect date, which raised doubts about whether the changes would apply to the entire fiscal year (i.e., from its beginning) or, on the other hand, only to the portion of the fiscal year after the entry into force of the changes.
Courts have understood, in the mentioned case law[5], that it should apply only to portion of the taxable profit that was generated on the second half of the year (under a pro rata method of distributing the taxable profit in proportion to each calendar day).
In Option 2, concerns could still arise as per article 103 of Portuguese Constitution, taxes cannot be retroactive.
Portuguese scholars and jurisprudence have distinguished various concepts within the retroactivity of taxes and the exact interpretation and limits that shall be considered for the constitutional concept of retroactivity.
There is a significant level of consensus around the fact that the introduction of new taxes and changes in the tax bases or tax rates shall bear retroactive effects, whereas the question of the distinction between (i) pure or authentic retroactivity and (ii) other types of less pure retroactivity (as retrospectivity) which are subject to a less restrictive interpretation, often give rise to discussion.
It is not my purpose to elaborate on the quite extensive list of possible ramifications and meaning of the retroactivity concept, which even may divide scholars and tax literature.[6]
Some authors often identify 3 different degrees of retroactivity – from the 1st to the 3rd:
- 1st degree (pure or authentic retroactivity) – the taxable event occurred in full before the entry into force of the new law;
- 2nd degree (less authentic retroactivity) – the taxable event occurred before the entry into force of the new law, but not all effects have been exhausted and are somehow extended within the new law time frame (as, for instance, the assessment and payment of tax);
- 3rd degree (inauthentic retroactivity or retrospectivity) – the taxable event did not occur in full before the entry into force of the new law, as it continues to be formed within the new law.
In this case, should the legislator take the effect date as 1 January 2024, we may be facing a scenario of a 3rd degree retroactivity – inauthentic retroactivity or retrospectivity, which occurs when a new tax law applies to a taxable event already in formation but still not totally completed.
Unlike in the 1st or 2nd degrees, which seem to be strictly prohibited by the Portuguese Constitution, the 3rd degree retroactivity may be allowed. For these cases, the Portuguese Constitutional Court still imposed[7] in the past a test based on whether the principle of the protection of reliance had been breached: (i) legitimate expectations from the taxpayers have been frustrated and (ii) reasons of general interest exist.
It does not seem difficult for someone to sustain this new law should pass this test. Nonetheless, a great level of (interesting) discussion could still be raised.
Finally, one should note that it seems unlikely that the Portuguese legislator will set other start date for the entry into force than in 2024 (regardless the discussion above). Hypothetically, the second possibility (rules impacting only future tax periods that start after 2024), would not necessarily mean that the Pillar 2 rules would still not be applicable in 2024 to an entity residing in Portugal, at least indirectly, due to the dynamic mechanism of applying Pillar 2 rules.
In fact, if the new rules are already in force in other jurisdictions where other entities of the MNE may be located, such jurisdictions may end-up collecting any complementary tax that could be attributable to Portugal.
Moreover, it must be said that Pillar 2 Directive does not seem prepared for a scenario in which Member States have different implementation timelines.
Looking forward to seeing what the delayed Portuguese transposition will bring us.
Big thanks to João Carmona Lobita for sharing his awesome insights on this topic. Grateful for your time and contribution.
Tiago Vieira
January 2024
[1] Paragraph 3 of 103.º of CRP: “No one shall be obliged to pay taxes that are not created in accordance with this Constitution, which are retroactive in nature, or are not charged or collected as laid down by law.”
[2] Article 12 (1) of LGT: “Tax rules are applied to the facts that occur after their entry into force, whereas it is forbidden to create any retroactive taxes.”
[3] Unlike the CIT, it is not expected that the upcoming law will include any taxable event presumption.
[4] Article 12 (2) of LGT: “If the taxable event occurs successively, the new law applies only to the period that has elapsed since its entry into force.”
[5] As the Supreme Court Decision issued regarding Process 01900/12.0BELRS 0383/17on the effect date of the State Surcharge Law which was enacted in the beginning of the second half of 2020.
[6] Decision no. 399/2010 from the Portuguese Constitutional Court discusses the scope and application of the concept of retroactivity.
[7] Refer to the same decision above and also Decision no. 128/2009 of the same Court.