The European Commission unveiled, on Wednesday 22 December, its proposal for a directive to introduce into European Union law the ‘minimum taxation’ component (pillar II) of the international corporate tax reform agreed at the OECD in early October (see EUROPE 12808/2).
Under the terms of the agreement, which has been approved by 137 countries to date, multinationals with a consolidated annual turnover in excess of €750 million and which have their headquarters or a subsidiary in the EU will be taxed at a minimum rate of 15%.
“The Directive will provide legal certainty and ensure that the Pillar Two rules are enacted in a manner that is compatible with EU law”, said the EU Commissioner for Economy, Paolo Gentiloni.
The legislation is based on the applicable rules recommended by the OECD earlier this week (see EUROPE 12857/13). These rules concern the determination of the companies falling within the scope, how to calculate the effective tax rate of a multinational by jurisdiction, if applicable, the percentage of top-up tax to be applied taking into account possible deductions and finally the entity of the multinational liable for the top-up tax.
“Our proposal is fully consistent with the final version of the OECD’s Model Rules. [...] That means no gold plating; no departure from the international agreement”, stressed Mr Gentiloni.
However, the proposal introduces minimum taxation rules for large companies acting in a purely domestic context. It is a question of “equal treatment”, said the former Italian Prime Minister.
By sticking to the agreement drawn up at the OECD, the Commission intends to reassure the Member States - Estonia, Hungary, Ireland - which were reluctant to enter into the final stages of the international negotiations. It also expects Cyprus, which is not a party to the OECD process, to approve the Directive.
“We don’t abolish tax competition (...), but we cannot accept the idea that tax competition is a real race to the bottom”, commented the Commissioner. While saying he was “confident”, he did not rule out the possibility that these countries could hold the legislative proposal hostage in order to put pressure on other issues, such as the Hungarian recovery plan.
Rapid negotiations are hoped for in the EU Council, where unanimity of the Member States is required. The French Presidency of the EU Council in the first half of 2022 aims to reach an agreement by the end of June.
“The EU wants to give a signal that it is the first to start the process of integrating the agreement into the OECD”, an EU official said on Tuesday, referring to initial technical discussions by national experts in the EU Council as early as “4 January”. The Ecofin Council may also take up the issue in January.
On the ‘reallocation of taxing rights’ (Pillar I), negotiations are continuing at the OECD with a view to agreeing on rules for June. The aim is to implement the entire agreement in 2023.
The EU institution remains cautious about the amount of additional tax that will be available to Member States. The EU official made the point that the Commission does not have the same tax data as the Member States.
For Mr Gentiloni, “a few billion” of the “150 billion dollars” in taxes from the OECD’s estimate of global Pillar II revenues alone will be returned to the EU. According to the European Tax Observatory, Belgium is expected to raise the most revenue, around €20 billion per year, followed by Ireland with around €11 billion (see EUROPE 12823/8).
Asked about potential difficulties in the US implementation of international tax reform, Mr Gentiloni praised the work of the Biden administration in reaching the agreement and noted that the ongoing discussions across the Atlantic are not about corporate taxation. The vote on the US Pillar II reform legislation is expected in January.
See the Commission’s proposal for a directive: https://bit.ly/32kqSFd (Original version in French by Mathieu Bion)