December 16, 2022
EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules
On 15 December 2022, the Council of the EU (i.e., the EU Member States) unanimously adopted the Directive ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the Union (the Directive). This adoption follows a Permanent Representatives Committee II meeting (COREPER II) held on 12 December 2022 where EU Member States' ambassadors reached unanimous agreement on the Directive and made the decision to advise the Member States to adopt the Directive via written procedure.
The text in the adopted Directive is the version that was published by the Czech EU Presidency on 25 November 2022. The adopted version includes only editorial changes following a legal-linguistic review by the EU institutions, as compared to the previous compromise text of 21 June 2022.
EU Member States have until 31 December 2023 to transpose the Directive into national legislation with the rules to be applicable for fiscal years starting on or after 31 December 2023, with the exception of the UTPR which is to be applicable for fiscal years starting on or after 31 December 2024.
On 22 December 2021, the European Commission (the Commission) published a legislative proposal for a Directive setting out rules on ensuring a global minimum level of taxation for multinational groups active in the EU.1 The draft Directive provided a common framework for Member States to implement into their national laws the Model Rules on the Pillar Two Global Minimum Tax (GloBE),2 as agreed by the G20/OECD Inclusive Framework on BEPS and released on 20 December 2021. The draft Directive was intended to ensure the GloBE rules were implemented in a coordinated manner throughout the EU, as adjusted to comply with EU law and taking into account the specifics of the EU Single Market.
Since the beginning of 2022, negotiations on the Directive among EU Member States have been ongoing. During three meetings of the ECOFIN this year, the proposal was presented for adoption, but unanimous agreement was not reached. The outcomes of these meetings were:
During the most recent ECOFIN meeting on 6 December 2022, the Directive was taken off the formal agenda as Hungary would not drop its veto. As reported during the press conference following the meeting, Hungary's veto was linked to negotiations on Hungary's access to significant EU funding which had to date been withheld by the EU. Negotiations subsequently intensified, with the withholding of funding earmarked for Hungary put into a package together with the provision of financial aid to Ukraine and the Directive. Unanimity on the latter two matters was blocked by Hungary.
EU Member States' unanimous adoption
Continued negotiations ultimately led to a compromise being reached on 12 December, with EU ambassadors advising that:
Following agreement at this meeting of EU ambassadors, a written procedure for formal adoption was launched with an initial deadline of 17h00 CET, 14 December 2022. This deadline was later extended until later in the afternoon CET, 15 December 2022 due to negotiations on reservations raised by Poland.
In addition to the Directive being adopted, EU Member States also approved a statement, which among others:
On the same date, the European Council (i.e., the EU leaders) also held a meeting where they adopted conclusions that included the following reference on the two Pillars:
The European Council recalls the European Union's determination to have both Pillar 1 and Pillar 2 implemented as agreed in October 2021 and calls on the Commission to monitor ongoing negotiations of the multilateral convention (MLC) on Pillar 1 and to put forward if appropriate a proposal by the end of 2023 in case of absence of agreement on a Pillar 1 solution.
The Directive introduces minimum effective taxation for large multinationals with annual revenues of at least €750 million. It sets forth a system consisting of two interlocked rules - the IIR and the UTPR - through which an additional amount of tax called a "top-up tax" should be collected each time that the effective tax rate (ETR) due on the income of an MNE group in a given jurisdiction is below 15%. In such cases the jurisdiction is considered to be low tax.
Under this system, any parent entity of an MNE group located in a Member State has an obligation to pay an IIR top-up tax calculated according to its allocable share in every entity of the group that is low-taxed (including itself), whether such entity is located within or outside the EU. The UTPR acts as a backstop to the IIR and would for example apply in cases where the ultimate parent entity (UPE) is located outside the EU in a jurisdiction that does not apply a qualifying IIR or where such jurisdiction operates a qualifying IIR but the UPE and its local subsidiaries are low-taxed. The UTPR allocates any residual amount of top-up tax among constituent entities of the MNE group located in jurisdictions that apply the UTPR.
The Directive generally follows the content of the Model Rules, with some specific differences and additions, including the following:
Timing and next steps
The final version of the Directive is expected to be published in the Official Journal of the EU in the coming days. EU Member States are to transpose the provisions of the Directive into their national laws by 31 December 2023 and generally apply these provisions for fiscal years starting on or after 31 December 2023. This means that the IIR will be applicable in EU Member States for fiscal years starting on or after 31 December 2023. However, the Directive provides for the UTPR to apply for fiscal years starting on or after 31 December 2024. Note that other Member States shall nevertheless apply the IIR/UTPR as of 31 December 2023 to constituent entities of an MNE group that is headquartered in a Member State that has elected for a delayed application of the IIR/UTPR.
The preamble of the Directive refers to the GloBE Implementation Framework as a source of illustration and interpretation and states that Member States may choose to incorporate such guidance into domestic law. The Directive also includes a specific provision which deems the top-up tax due by a group in a jurisdiction to be zero if the level of taxation fulfills the conditions of a qualifying international agreement on safe harbors. As the preamble of the Directive specifically refers to the safe harbor rules in the Implementation Framework, the safe harbor guidance that will be released by the Inclusive Framework will effectively be incorporated in the Directive through this provision.
The EU adoption of the Directive represents a significant advancement of the Pillar Two global minimum tax. Other countries around the world also have begun activity with respect to the implementation of global minimum taxes and global legislative activity on Pillar Two is expected to intensify in 2023.
It is important for businesses to monitor the transposition of the rules by the EU Member States and prepare for compliance with the GloBE rules in the EU. Businesses also should continue to monitor developments in other countries that are relevant to their footprint. Consideration should be given to the potential impact of the minimum tax changes both on their tax positions and on their data and compliance processes and systems
Furthermore, the Commission has announced6 the intention of developing an EU Directive requiring in-scope MNEs to publish their effective tax rates calculated based on Pillar Two methodology. Now that the Directive has been adopted there may be an increased momentum for this initiative.
For additional information with respect to this Alert, please contact the following:
EY Société d'Avocats
Ernst & Young Belastingadviseurs LLP
Ernst & Young LLP (United States)
1 See EY Global Tax Alert, European Commission proposes tax Directive for implementing BEPS 2.0 Pillar Two Model Rules in the EU, dated 22 December 2021.
2 See EY Global Tax Alert, OECD releases Model Rules on Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.
3 See EY Global Tax Alert, EU Finance Ministers express broad support for compromise text for Pillar Two Directive which includes a one-year delay of the implementation timeline, but no unanimous agreement yet, dated 16 March 2022.
4 See EY Global Tax Alert, EU Finance Ministers continue negotiations to adopt Pillar Two Directive in light of Poland's remaining objection, dated 6 April 2022.
5 See EY Global Tax Alert, EU Finance Ministers are unable to adopt Pillar Two Directive as Hungary changes position, dated 17 June 2022.
6 See EY Global Tax Alert, European Commission publishes Communication on Business Taxation for the 21st century, dated 18 May 2021.