EU launches second pillar – Taxation


The European Commission has repeatedly expressed its ambition to implement the two-pillar agreement in a consistent and consistent manner across all member states. On December 22, 2021, just two days after the Inclusive Framework published its Pillar 2 package, the EC proposed a directive to implement Pillar 2 for large multinational groups operating in the European Union. The directive would only implement the rules of the GloBe model, leaving the first pillar for another time.

The proposal sets out how the effective tax rate will be calculated by jurisdiction and includes binding rules that will ensure that large EU groups pay a minimum rate of 15% in each jurisdiction in which they operate. The design elements of the directive consist of the OECD model rules and detailed comments and implementation guidance – yet to be published. The Commission proposes that the directive be finalized by the middle of 2022 and transposed into national law in the Member States and effective on 1 January 2023. The timetable envisaged by the Commission is ambitious and poses a problem with regard to the OECD process . This is because the explanatory commentary is not expected to be released by the OECD until January or February, and the implementation guidelines will not be available until late 2022 or even early 2023.

It remains to be seen whether the EU is too ambitious, especially in light of the fact that US legislation that would implement the second pillar is delayed and uncertain.

The starting point for the draft directive is the OECD model rules with some adjustments that are legally required to comply with EU law (see below).

The proposed rules will apply to any large group, both national and international, including the financial sector, with combined financial income of more than 750 million euros per year, and with a parent company or a subsidiary located in a EU member state.

In addition, in accordance with the inclusive OECD / G20 Framework Agreement, government entities, international or non-profit organizations, pension funds or investment funds that are parent entities of a multinational group will not be covered by not within the scope of the OECD Second Pillar Directive. .

The effective tax rate is established by jurisdiction by dividing the taxes paid by entities in the jurisdiction by their income. If the effective tax rate of entities in a given jurisdiction is below the minimum of 15%, then the second pillar rules are triggered and the group must pay additional tax to raise its rate to 15%. This additional tax, called the “Income Inclusion Rule”, applies regardless of whether the subsidiary is located in a country that has adhered or not to the OECD / G20 international agreement. In the inclusive OECD / G20 framework agreement, a consistent and simplified method of calculating the effective tax rate has been agreed by the 137 countries concerned. This is reflected in the proposal for a directive. Calculations will be made by the ultimate parent entity of the group unless the group affects another entity.

If the overall minimum rate is not imposed by a non-EU country in which a group entity is based, Member States will apply what is known as the “under-taxed payments rule”. This is a backstop rule to the primary income inclusion rule. This means that a Member State will effectively collect part of the additional tax due at the level of the whole group if certain jurisdictions where the entities of the group are based impose a level below the minimum level and do not impose any additional tax. The amount of additional tax that a Member State will collect from group entities in its territory is determined via a formula based on employees and assets.

The Commission proposal closely follows the international agreement with the necessary adjustments to ensure compliance with EU law. The directive extends the scope of the second pillar to purely national groups. While the second pillar is limited to multinational groups (MNEs), this expansion was necessary in order to comply with the fundamental freedoms of the EU included in the EU Treaty, in particular the freedom of establishment.

The OECD Model Rules allow jurisdictions to apply a qualifying national minimum tax. The Commission proposal will also allow EU Member States to exercise the possibility of applying a national additional tax to weakly taxed national subsidiaries. This option will allow the additional tax due by the subsidiaries of the multinational group to be invoiced at the local level, within the respective Member State, and not at the level of the parent entity.

Within the OECD / inclusive framework, the rules have been agreed in what is known as a “common approach”. This would mean that members of the Inclusive Framework are not required to adopt the rules, but if they choose to do so, they will need to implement and administer the rules in a manner consistent with the outcome agreed under the second pillar. . It also means that members of the Inclusive Framework will have to come to terms with how other members apply the rules. In practice, multinational groups with subsidiaries in countries that operate at a rate lower than the agreed minimum rate will eventually also have to face the consequences of Pillar Two. The rules test the effective tax rate by jurisdiction and apply an additional tax to companies in low tax jurisdictions. Due to the income inclusion rule or the under-taxed payments rule, a member state will collect additional tax due at the level of the whole group if certain jurisdictions in which entities are based impose a lower tax. at the minimum level and not impose any additional national tax. In other words, failing to apply the Pillar Two rules will not protect jurisdictions from being effectively taxed at least at the agreed minimum rate.

The fundamental principles of the model rules are therefore taken up by the directive. However, the OECD Model Rules leave open technical questions such as the clarification of the terms “excluded entity”, “largely”, “mainly owned”. These issues, among others, will most likely be addressed in the draft commentary and will be discussed during the public consultation session scheduled by the OECD in February The OECD Implementation Framework (including administrative procedures, Safe Harbors and the conditions of coexistence of the US GILTI) is not expected before the end of the year.

In view of the timetable, there is no guarantee today that the work in progress of the OECD and the European directive (and the laws of the Member States …) will be fully convergent.

Next steps

The Member States will have to adopt the directive unanimously in the Council. The European Parliament and the European Economic and Social Committee will also have to be consulted and give their opinion. EU members of the OECD Inclusive Framework already support the global deal that the Commission proposal implements. The only EU member state that is not a member of the inclusive framework and, as such, has not formally committed to the agreement, is Cyprus. The Commission expects Cyprus to support the directive. Additionally, given that US legislation that would implement the second pillar, the Build Back Better Act, has stalled in Congress, it remains to be seen whether one or more member states will use the delay in US legislation to delay approval of the directive. . The EC made a quick exit from the starting grid. Time will tell if the rest of the world will keep pace.

The EU Sets post Pillar Two In Motion first appeared on Best Methods.

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