Five EU finance ministers promise to enact pillar two
A group of EU countries will enact pillar two unilaterally if the European Council cannot reach an agreement on it.
Finance ministers from France, Germany, Italy, Spain and the Netherlands issued a joint statement on Friday, September 9, which states they will enact pillar two legislation alone if the European Council does not make any progress on its minimum corporate tax directive in coming weeks.
The statement, officially issued by the German Federal Ministry of Finance, reads: “As inflation hits… companies must pay their fair share of the burden to alleviate the impact of the global energy crisis.”
It continues: “This is why we reaffirm today our strengthened commitment to swiftly implement the global minimum effective corporate taxation. It is a key lever for further tax justice through a more efficient fight against tax optimization and evasion.”
The statement continues: “At the June 2022 ECOFIN [Economic and Financial Affairs Council meeting], 26 out of 27 EU member states expressed their willingness to implement this important step towards tax justice...”
Benjamin Angel, the director of direct tax at the European Commission in Brussels, said at the IFA Congress 2022 in Berlin on September 8 that there is a strong political will for pillar two to be enacted in the EU.
Hungary was the only country that voted ‘no’ to the pillar two directive at the June ECOFIN meeting, preventing a minimum corporate tax proposal to pass the European Council. Hungary’s finance minister Mihály Varga argued that approval of the plan could harm the European economy.
The joint statement also reads: “Should unanimity not be reached in the next weeks, our governments are fully determined to follow through on our commitment. We stand ready to implement the global minimum effective taxation in 2023 and by any possible legal means.”
The five largest EU economies could start enhanced cooperation – a legal procedure that only needs 10 member states – to pass pillar two.
EU countries completing the work on pillar two are forming a path to enact the proposal for better reallocation of taxing rights under pillar one. The goal is now to sign a multilateral convention by mid-2023.
Angel told the IFA Congress that they can expect a report on pillar one by June 30 2023.
EU directive v OECD pillar two
However, there are some differences between the EU directive on pillar two and the OECD’s version of the global minimum tax framework.
Some differences in the EU directive are a wider scope, a more simplified version of the domestic top up tax rule, a safe harbour measure to avoid double computations, and sanctions of up to 5% on turnover for non-compliant reporting.
One head of tax at a financial services company in London who has been following the developments says that a pact between these countries was predictable, except for the Netherlands, which is an outlier.
“This is not a surprise from France, Germany and Spain,” says the head of tax. “After news came from Germany about a unilateral approach, I already predicted France, Spain and Italy would follow,” he adds.
There could be a joint statement issued after the next formal ECOFIN meeting, which is scheduled for October 4.