EU’s path forward on global minimum tax is under debate

By Doug Connolly, MNE Tax

EU member states are at odds on various issues in connection with the directive to implement within the EU the global minimum tax portion of the OECD agreement, with several members expressing concerns about key aspects in an Economic and Financial Affairs Council public meeting on January 17.

In the debate, economic and finance ministers of EU member states disagreed with respect to how much the implementation of the global minimum tax (Pillar Two of the OECD agreement) should be legally intertwined with the other portion of the OECD deal relating to a reallocation of taxing rights between nations (Pillar One). The ministers also raised concerns about the implementation timeline and the rules for domestic application within the EU.

The French presidency of the Council of the European Union began this month and runs until June. Bruno Le Maire, French Minister for Economic Affairs, Finance, and Recovery, called for the adoption of the minimum tax directive within the EU in the first half of 2022 as a priority for the French presidency.

In opening the Council debate, Le Maire noted that all EU member states have already endorsed the OECD tax deal through the October 8 agreement. As such, he suggested it would be disingenuous for the states to not then agree to the proposed directive to implement the agreement within the EU, as the directive has been drafted to closely follow the OECD model rules, except for certain changes to comply with EU law.

Accordingly, Le Maire pressed for a quick implementation, expressing a hope to continue discussions and adopt the directive in an upcoming March 15 meeting.

Timeline

EU Commissioner for Economy Paulo Gentiloni reiterated the call for swift adoption of the directive, i.e., during the French presidency in the first half of 2022. Gentiloni noted this will be necessary for countries to transpose the laws domestically to meet the agreed timeframe under the OECD deal, which calls for implementation in 2023.

“Our proposal should ensure the timely entry into force of the model rules in all member states by the same deadline next year, as we and all our global partners have committed,” Gentiloni stated.

However, not all EU member states consider the matter of the implementation timeline to be resolved.

Hungary’s finance minister stated that “the presidency’s intention to finalize the directive in the first semester and start applying the rules on the first of January 2023 is too ambitious.” As well as noting compliance concerns for businesses, he explained that “the complexity of the matter requires member states to have sufficient time to analyze and implement the directive.”

Sweden was also among the states that see the timeline as too ambitious. “A system up and running by 2023 is a problem for us, considering our constitutional, domestic lawmaking requirements,” the Swedish government noted – adding, “we look forward to further discussion on the implementation date.”

Pillar One contingency

Some EU member states would like to move forward with implementation in the EU of the Pillar Two minimum tax while the OECD continues to work out technical details on Pillar One, which would then require a multilateral convention.

German finance minister Christian Lindner acknowledged a political connection between the two pillars but expressed criticism of imposing a legal link between them. He suggested that “the best way of making progress on Pillar One would be to apply Pillar Two and make progress there as quickly as possible. … We need to maintain the momentum.”

Austria’s finance minister Magnus Brunner similarly expressed support for both pillars independent of each other, stating that he sees “no need at all to interlock their implementation or to make the adoption of one pillar dependent on the other.”

Likewise, the Dutch government contended that “the technical work on Pillar One should not limit us in moving forward with Pillar Two.”

Poland, however, stated that it is not on board for Pillar Two without it being linked to Pillar One. “We need to insist on putting legal safeguards that both pillars are implemented,” the Polish government said. “It is important to ensure that both pillars start functioning at the same time.”

Similarly, Estonia’s finance minister noted “it is very important to keep in mind” that the global reform, to which Estonia agreed, consists of two pillars. Accordingly, she stated that the EU must work on safeguards to ensure implementation of both pillars, noting that “it is not very clear right now how we will progress with Pillar One … on a global level.”

Likewise, Hungary argued that the EU will weaken its negotiating position internationally if it implements Pillar Two before “other countries …  live up to their political commitments on Pillar One.” Accordingly, the Hungarian finance minister stated that “both pillars should be treated together and developments on Pillar Two should be parallel to implementing Pillar One.”

Domestic application

Regarding the proposed directive for implementing the minimum tax within the EU, Gentiloni explained that “the directive treats equally cross-border and purely domestic multinationals. This equal treatment is necessary to ensure compatibility with the EU treaties and with the fundamental freedoms of the European Union.”

However, Estonia sees the approach as overstepping the OECD agreement, and this is the country’s “biggest concern right now” (although not its only one). Estonia’s finance minister stated that “mandatory implementation that might impact not only the multinational companies but also internal … that was not part of the deal in the OECD.” She added that “the purpose of the OECD agreement, which we are also part of, is to tackle the tax base erosion in cross-border situations.”

In addition, Estonia also called for changes “to prevent the erosion of the de minimis exemption” through the introduction of an “indexation mechanism” in the model rules.