global tax

The OECD has released a progress report on Pillar One of the new global tax rules, and specifically on the design of the so-called Amount A. The report confirms the need for further agreement before it is ready to be reflected in a multilateral convention. The convention will also include rules for withdrawing existing unilateral digital services taxes, which have been sprouting in many jurisdictions.

The rules under Pillar One will ensure that profits are distributed more fairly. Those very large companies, which generate billions in revenues will have to pay taxes on 25% of the profit they make above a 10% threshold of revenue – a threshold referred to as Amount A.

The public consultation on the progress report is open until 19 August 2022.

Hungary’s Parliament has adopted a resolution opposing the proposed deal on a global minimum tax. This comes days Hungary blocked the directive at the EU Council.

The reasons given for the resolution were inflation and the economic crisis due to the ongoing war between Russia and Ukraine. Hungary said the OECD Pillar Two’s minimum tax, which the EU directive is seeking to implement, will put European countries at a competitive disadvantage.

Hungary’s corporate tax rate stands at 9%, the lowest in Europe. The country remains the only member state opposing the proposed EU directive.

In a turn of events at today’s Economic and Financial Affairs Council meeting (17 June 2022), Hungary has withdrawn its support for the proposed EU directive to implement Pillar Two of the OECD’s global minimum tax. Poland, which was the only country with reservations so far, announced its support for the compromise text – the third compromise text by the French candidacy (published 16 June 2022) since the start of the negotiations at ECOFIN.

Hungarian Finance Minister Mihaly Varga explained his position by referring to ‘critical voices’ within the Hungarian Parliament. The parliament’s concerns related to the economic impact of the Ukrainian war, and the uncertain consequences that would flow from the introduction of the minimum tax at such an early stage.

In response, French Finance Minister Bruno le Maire said that Hungary had already supported the proposed directive at previous ECOFIN meetings.

The withdrawal of support by Hungary was expected, following earlier statements by the Hungarian parliament.

The directive requires the unanimous support of all EU member states to become law.

OECD Secretary General Mathias Cormann has announced that the implementation of Pillar One of the OECD’s global tax framework will be delayed until 2024 at the earlier, rather than 2023 as originally planned. Cormann was speaking during a panel at the World Economic Forum in Davos, Switzerland.

The Secretary General said that although it was intended that a multilateral convention to implement Pillar I would be agreed in time for a G7 summit in June, it was more likely to be agreed upon in time for a G20 meeting in November.

Pillar One targets companies which generate billions in revenues – including Google, Amazon, Facebook, and Apple – and aims to establishes new rules for the allocation of profits among various countries, regardless of whether the companies have a physical presence in those countries.

The likelihood is that Pillar Two, which sets out a minimum global tax, will be implemented sooner.

European MEPs have approved the proposed directive to implement the OECD’s so-called Pillar Two of the global tax rules, which sets a minimum corporate tax rate of 15%. The OECD’s Two-Pillar approach was approved by 136 jurisdictions in October 2021.

The proposed directive, published in December 2021 was adopted by the European Parliament by 503 votes in favour, 46 votes against and 48 abstentions.

MEPs have approved the key elements of the proposed directive, including the implementation deadline of 31 December 2022 to ensure a swift application of the law. They made limited changes to the proposal.

Parliament’s text will now be passed on to the EU Council, which must adopt a final text by unanimity. Back at the Council, Poland is the only EU member state which stands opposed to the proposed directive.

European Commission president Ursula von der Leyen has criticised unanimity voting, causing a stir among member states.

Speaking during the EU citizens’ assembly, the Conference on the Future of Europe (9 May 2022), von der Leyen said: ‘I have always argued that unanimity voting in some key areas simply no longer makes sense if we want to be able to move faster.’

While she did not mention any ongoing issue, it is believed that her comments were triggered by the ongoing disagreement among EU member states over the implementation of the OECD’s minimum global tax rules. Poland is the only remaining country to block the proposed directive implementing Pillar Two of the tax rules.

Member states reacted immediately in a published non-paper, expressing their opposition to any change. ‘While we do not exclude any options at this stage, we do not support unconsidered and premature attempts to launch a process towards Treaty change. This would entail a serious risk of drawing political energy away from the important tasks of finding solutions to the questions to which our citizens expect answers and handling the urgent geopolitical challenges facing Europe.’

The document was endorsed by Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, Latvia, Lithuania, Malta, Poland, Romania, Slovenia and Sweden.

Poland has blocked the compromise proposal for an EU directive to implement Pillar Two of the OECD’s global tax package, saying that the Two-Pillar solution needed to be tackled together within the same directive. The vote took place during today’s Economic Financial Affairs Council (ECOFIN) meeting (5 April 2022), the third this year.

Disagreements among the EU’s finance minister over the proposed EU directive, published in December 2021, led the French to table various compromise proposals. France had hoped that all the disagreements would be resolved by today’s ECOFIN meeting. Estonia, Malta, and Sweden were among the governments to resist the directive, but joined the majority during previous meetings.

In response to the Polish veto, French Finance Minister Bruno Le Maire said that he was ‘not convinced by the Polish argumentation’, and reiterated that France ‘would continue to pursue this goal, which we believe will be a step forward, until it is adopted.’

The proposed directive must be passed unanimously by EU member states in order to become law.

Finance ministers from Sweden, Poland, Malta, and Estonia have withheld their support for the compromise proposal on the Pillar Two draft directive introduced in December 2021. Although the proposed directive still lacks unanimous support, the lack of support from only four member states is an improvement over the previous Economic and Financial Affairs Council (ECOFIN) meeting in January 2022.

In between meetings, France, which is currently holding the presidency of the EU Council, offered a compromise proposal on March 12. The compromise text extended the deadline to transpose the rules into domestic law to 31 December 2023. The deadlines for other rules were also extended. Since member states requested that the implementation of both pillars of the plan be directly linked, France suggested including a statement confirming the commitment of all member states to the ongoing process on Pillar Two.

However, speaking during today’s Economic and Financial Affairs Council (ECOFIN) meeting (15 March 2022), the countries cited various concerns related to the timeframe (not enough time), and to the linking of the two Pillars (work and schedule of both Pillars need to be linked).

French finance minister Bruno Le Maire remains optimistic that an agreement is reached by the next ECOFIN meeting on 5 April 2022.

The OECD has released additional technical guidance on the 15% global minimum tax agreed in October 2021 as part of the Two-Pillar solution to address the tax challenges arising from digitalisation of the economy. The model rules on Pillar Two were published in December 2021.

Pillar Two consists of two rules intended for introduction in national domestic tax laws – together known as the Global anti-Base Erosion (GloBE) rules – as well as a treaty-based rule. The technical advice issued today is composed of a commentary to the GloBE rules, which includes clarification of certain terms to ensure consistent interpretation, and examples illustrating the rules.

The OECD has released public comments on the model draft rules for Pillar One. The public consultation closed on 18 February 2022.

Comments said that there was a need for predictability, and that any nexus rules covering companies without a a physical presence in a jurisdiction ‘should be clear, measurable, predictable, and applied consistently and neutrally across all industries and business models, and across all jurisdictions’.

Comments also reiterated the need for signatories ‘to adopt and fully implement the new consensus to ensure that all income is properly taxed only once across all applicable jurisdictions’.