European Union member states have reached agreement to implement at EU level the Pillar Two minimum level of taxation for large companies. The Pillar Two Directive will broadly subject the profits of MNEs with a turnover of at least €750m to a minimum 15% tax rate. Member states will be required to transpose rules into national law by the end of 2023 which implement:
the income inclusion rule (IIR), which applies a top-up tax to parent companies that have low-taxed subsidiaries, from 31 December 2023; and
the back-up undertaxed profits rule (UTPR) from 31 December 2024.
As the Council of the EU press release notes, ‘this will still result in the EU being a front-runner in applying the G20/OECD global agreement on Pillar Two’.
Moving forward with Pillar Two requires unanimous agreement of the member states and had until recently faced opposition from Hungary which had intended to veto the Directive. It is understood that Hungary removed its veto after the EU agreed to release Covid-19 recovery funds. Interestingly, the Hungarian Ministry of Finance had previously published a press release emphasising the importance of not linking the payment of EU funds to ‘completely unrelated matters’ and confirming its opposition to the 15% minimum tax rate, noting the potentially harmful effects on the Hungarian economy (the corporate tax rate in Hungary is currently 9%).
Agreement on Pillar Two was reached by the Committee of the Permanent Representatives of the Governments of the Member States to the European Union (Coreper II) and formal adoption by the Council of the EU is expected to follow.
Bezhan Salehy, tax policy specialist at Macfarlanes, said that while the EU Directive will, like the OECD rules, apply to groups that have consolidated revenues of at least €750m per annum, ‘[it] goes further by requiring countries to also apply the rules to wholly domestic groups that meet the revenue threshold. This approach is intended to address concerns that a “foreign only” rule might violate EU treaty rules that protect the freedom of establishment and freedom of movement of capital and prohibit member states from treating domestic and cross-border enterprises differently.’
‘The implementation timetable outlined above is subject to a grace period for smaller member states,’ Salehy noted. ‘Those with no more than 12 in-scope groups may elect to defer implementing both the IIR and UTPR for six years. The OECD’s recent 2018 Corporate Tax Statistics publication suggests countries including Bulgaria, Hungary, Latvia, Lithuania, Slovenia and Romania will have this option.’
The announcement on Pillar Two came as a surprise to many in the tax community. ‘And just like that, the EU is soon to have a minimum corporate tax for some taxpayers,’ Professor Christiana HJI Panayi (Queen Mary University of London) observed. ‘What was once thought of as unthinkable and a red line has now been crossed. This proposed Directive – to the extent its provisions won't be found invalid due to breach of fundamental rights – is likely to herald a new era of corporate tax harmonisation in the EU.’
‘Until today, I was still coming across a few people in the tax world who were insisting Pillar Two would never happen, despite all the evidence to the contrary,’ Tim Sarson, UK head of tax policy at KPMG said. ‘Today’s EC announcement has probably finally put paid to this line of thinking. Pillar Two is happening and soon.
‘Most of our clients have started to prepare on the basis of a 2024 implementation in the major markets and today shows they were right to do so,’ Sarson added. ‘This is going to be a challenge: the details of exactly how some of the Pillar Two rules will be applied have still to be finalised, and the data and process requirements to comply in such a short timeframe will be steep. I expect big teething troubles and a slowly growing sense of mild panic as the deadline gets closer.’
European Union member states have reached agreement to implement at EU level the Pillar Two minimum level of taxation for large companies. The Pillar Two Directive will broadly subject the profits of MNEs with a turnover of at least €750m to a minimum 15% tax rate. Member states will be required to transpose rules into national law by the end of 2023 which implement:
the income inclusion rule (IIR), which applies a top-up tax to parent companies that have low-taxed subsidiaries, from 31 December 2023; and
the back-up undertaxed profits rule (UTPR) from 31 December 2024.
As the Council of the EU press release notes, ‘this will still result in the EU being a front-runner in applying the G20/OECD global agreement on Pillar Two’.
Moving forward with Pillar Two requires unanimous agreement of the member states and had until recently faced opposition from Hungary which had intended to veto the Directive. It is understood that Hungary removed its veto after the EU agreed to release Covid-19 recovery funds. Interestingly, the Hungarian Ministry of Finance had previously published a press release emphasising the importance of not linking the payment of EU funds to ‘completely unrelated matters’ and confirming its opposition to the 15% minimum tax rate, noting the potentially harmful effects on the Hungarian economy (the corporate tax rate in Hungary is currently 9%).
Agreement on Pillar Two was reached by the Committee of the Permanent Representatives of the Governments of the Member States to the European Union (Coreper II) and formal adoption by the Council of the EU is expected to follow.
Bezhan Salehy, tax policy specialist at Macfarlanes, said that while the EU Directive will, like the OECD rules, apply to groups that have consolidated revenues of at least €750m per annum, ‘[it] goes further by requiring countries to also apply the rules to wholly domestic groups that meet the revenue threshold. This approach is intended to address concerns that a “foreign only” rule might violate EU treaty rules that protect the freedom of establishment and freedom of movement of capital and prohibit member states from treating domestic and cross-border enterprises differently.’
‘The implementation timetable outlined above is subject to a grace period for smaller member states,’ Salehy noted. ‘Those with no more than 12 in-scope groups may elect to defer implementing both the IIR and UTPR for six years. The OECD’s recent 2018 Corporate Tax Statistics publication suggests countries including Bulgaria, Hungary, Latvia, Lithuania, Slovenia and Romania will have this option.’
The announcement on Pillar Two came as a surprise to many in the tax community. ‘And just like that, the EU is soon to have a minimum corporate tax for some taxpayers,’ Professor Christiana HJI Panayi (Queen Mary University of London) observed. ‘What was once thought of as unthinkable and a red line has now been crossed. This proposed Directive – to the extent its provisions won't be found invalid due to breach of fundamental rights – is likely to herald a new era of corporate tax harmonisation in the EU.’
‘Until today, I was still coming across a few people in the tax world who were insisting Pillar Two would never happen, despite all the evidence to the contrary,’ Tim Sarson, UK head of tax policy at KPMG said. ‘Today’s EC announcement has probably finally put paid to this line of thinking. Pillar Two is happening and soon.
‘Most of our clients have started to prepare on the basis of a 2024 implementation in the major markets and today shows they were right to do so,’ Sarson added. ‘This is going to be a challenge: the details of exactly how some of the Pillar Two rules will be applied have still to be finalised, and the data and process requirements to comply in such a short timeframe will be steep. I expect big teething troubles and a slowly growing sense of mild panic as the deadline gets closer.’
