By Doug Connolly, MNE Tax
The European Commission today published its proposal directive implement within the EU the global minimum tax under pillar 2 of the OECD agreement concluded between 137 countries in October. The directive largely follows the OECD agreement, while adding national enforcement to comply with EU anti-discrimination requirements.
“The directive we are proposing will ensure that the new minimum effective tax rate of 15% for large companies will be applied in a way that is fully compatible with EU law,” said EU Economics Commissioner Paolo. Gentiloni. “The European Commission has worked hard to facilitate this agreement,” he added, “and I am proud that today we are at the forefront of its global rollout.”
The directive is subject to certain legislative steps before it can be adopted, including unanimous agreement in the European Council. However, almost all EU states have already accepted the rules of the OECD Inclusive Framework in principle. The only exception, Cyprus – because it is not a member of the Inclusive Framework – has indicated that it also supports the agreement.
The Commission directive does not address the other half of the OECD agreement, i.e. Pillar 1, relating to the reallocation of taxing rights between nations. The Commission expects to issue a directive on Pillar 1 in the summer of 2022, after the planned signature of the associated multilateral agreement.
Broadly compliant with OECD rules
The European Pillar 2 Directive aims to ensure a consistent application of the global minimum tax within the EU.
Like the OECD rules, the directive imposes a minimum effective tax rate of 15% on multinational groups whose turnover exceeds 750 million euros and which are based or have a subsidiary in the EU. If the group is subject to an effective tax rate lower than the minimum in a country in which it operates, the rules allow EU states to apply an “additional tax” via the income inclusion rule or the rule of under-taxed payments.
Also in line with OECD rules, the directive includes a de minimis exception, which exempts small amounts of profit in one country, and substantial exclusions, which relax the application in countries where the multinational group has tangible or a significant payroll (i.e., economic substance). Substance exclusions are partially phased out over several years under the transition rules.
Added app to home groups
The main difference with the OECD rules is that the EU directive adjusts the scope of the rules to include purely domestic groups, while the OECD rules apply the additional tax only foreign subsidiaries of multinational groups. This distinction is necessary to prevent discrimination between national and cross-border groups in order to respect the fundamental freedoms of the EU.
Accordingly, for large domestic groups within scope, UPEs in EU Member States will be subject to the additional tax of the income inclusion rule with respect to low-income constituent entities. taxation. The Directive further allows Member States to apply a complementary tax at the national level to the constituent entities located in their State, rather than having all the tax collected at the level of the ultimate parent entity.