BDO Global Tax Alert

No agreement on compromise text of directive to implement 15% minimum tax and UK defers implementation of Pillar Two

20 June 2022

EU finance ministers have again failed to agree on the adoption of a 15% corporate minimum tax after Hungary objected at the last minute. A new compromise text of the directive proposed by the European Commission on 22 December 2021 on the implementation of the OECD/G20’s Pillar Two Global Anti-Base Erosion (GloBE) rules and the introduction of a global 15% minimum tax for multinationals (MNEs) was presented at the meeting of the finance ministers on 17 June 2022 (for prior coverage, see the Global Tax Alert issued on 16 March 2022 and the alert published on 23 December 2021).

In the meeting, Poland, which was the only EU member state still not to approve the directive, agreed to the amended language, but Hungary suddenly withdrew its support, thus thwarting the attempt to obtain unanimous political agreement of all 27 EU member states, which is required for the directive to be ratified. Hungary cites changed economic conditions and the fact that work on Pillar One on the reallocation of taxing rights was progressing slower than anticipated as the main reasons for its veto of the compromise text.

The minimum tax under the directive generally would apply to constituent entities located in an EU member state that are members of an MNE or a large-scale domestic group that has annual revenue of EUR 750 million or more. The tax is part of global tax reform agreement reached by 137 of the 141 developed and developing countries in the OECD/G20 Inclusive Framework to address tax challenges presented by the digitalization of the economy (for prior coverage, see the article in the November 2021 issue of Corporate Tax News). This major global initiative aims to end practices of MNEs that allow them to shift profits to jurisdictions where they are subject to no or very low taxation by introducing a set of international tax rules to ensure that MNEs pay their fair share of tax wherever they operate through the establishment of a global minimum level of taxation.

The directive proposed in December 2021 delivers on the EU's pledge to move swiftly and be among the first to implement the global tax reform. The text of the directive—which generally follows the OECD model rules—previously was revised on 28 March and 5 April 2022 in an effort to garner support from all EU member states. The proposed directive sets out how the effective tax rate will be calculated per jurisdiction and includes rules that will ensure that large MNE groups in the EU pay a 15% minimum rate in every jurisdiction in which they operate and that the rules are applied consistently throughout the EU. The previous concessions include the following:

  • Extending the deadline for member states to transpose the directive into their domestic law for one year from 31 December 2022 to 31 December 2023 (with the Undertaxed Payment Rule (UTPR) coming into effect in 2024);
  • Allowing member states to opt not to apply the Income Inclusion Rule (IIR) and the UTPR on a temporary basis. Specifically, where an EU member state does not have more than 12 ultimate parent entities (UPEs) of MNEs that fall within the scope of the directive, the member state can elect not to apply the IIR and the UTPR for six consecutive fiscal years beginning 31 December 2023; and
  • Improvements to the connection between Pillars One and Two.

The newly revised compromise text adds a reporting obligation to the proposed directive where a member state elects to defer the application of the IIR and the UTPR. In such cases, the ultimate parent entity must designate a filing entity that must file a top-up tax information return in accordance with the directive, and all constituent entities located in the electing member state must provide the designated  entity with the information necessary to comply with the information reporting requirement.

France, which holds the presidency of the Council of the EU until 30 June (when the Czech Republic assumes the role), will continue to work on an agreement that would be supported by all member states. It is possible that a directive through the enhanced cooperation procedure may be on the table if unanimity of all EU member states is not achieved.

UK defers implementation of minimum tax

In a separate development and following the footsteps of the EU, the UK Financial Secretary to the Treasury published a letter on 14 June confirming that implementation of Pillar Two in the UK will be delayed so that it applies only to accounting periods beginning on or after 31 December 2023. This is a welcome development because it responds to concerns raised by affected businesses of the challenges and potential competitive disadvantages of earlier implementation. However, it appears that the UK government still intends to publish legislation this summer on the implementation of the minimum tax, which could have implications for businesses' reporting requirements, particularly if the legislation is substantively enacted far in advance of the new implementation date. 

Frederik Boulogne

Ross Robertson

Susan Lyons