June 17, 2022
EU Finance Ministers are unable to adopt Pillar Two Directive as Hungary changes position
On 17 June 2022, the Council of the European Union (the Council) held an Economic and Financial Affairs Council (ECOFIN) meeting where Finance Ministers publicly discussed the proposal for a Directive on ensuring a global minimum level of taxation for multinational groups in the European Union (EU) (the Pillar Two Directive).1 The discussion took place following the ECOFIN meeting of 5 April where EU Finance Ministers were unable to reach agreement as Poland did not support the Directive.2
During the public debate, Poland dropped its reservation and expressed support for the Directive. Poland mentioned that it has now received the relevant assurances on the link between the introduction of both Pillar One and Pillar Two.
However, Hungary, that supported the Directive in the ECOFIN meeting of 5 April, changed its position and objected to the adoption. Hungary expressed concerns about the Directive, referring to undesirable delays of Pillar One and mentioning the Ukraine war as a new circumstance.
The draft Directive requires a unanimous decision for adoption. French Minister Bruno Le Maire said that he remains optimistic and he still hopes to reach agreement during the French Presidency. On 1 July 2022, the Czech Republic takes over the EU Council Presidency from France.
With 26 Member States committed to Pillar Two introduction, and one country blocking, the EU remains close to adopting the minimum tax rules. Alternatively, even if no agreement can be reached with Hungary, Member States can explore other paths to move ahead without Hungary. Members of the European Parliament (Greens/EFA) already suggested that enhanced cooperation should be considered as a way to move forward with 26 Member States when the block on the introduction of the Pillar Two rules would remain.
In January 2019, the Organisation for Economic Co-operation and Development (OECD) started work on Pillar Two with the release of a Policy Note describing two pillars of work: Pillar One addressing the broader challenges of the digitalization of the economy and the allocation of taxing rights to market jurisdictions, and Pillar Two addressing remaining concerns about potential Base Erosion and Profit Shifting (BEPS) and tax rate competition among countries.3
Since then, the OECD has released a series of documents on the development of the two pillars, culminating with the release in October 2020 of detailed Blueprints on both Pillar One and Pillar Two.4 This was followed in July 2021 with the release of a high-level statement reflecting agreement of members of the OECD/G20 Inclusive Framework on key parameters with respect to the two pillars.5 In October 2021, the OECD published a statement on the final political agreement on the two pillars, which includes an implementation timeline that contemplates implementation of the new rules largely with effect from 2023.6
As a follow up of the implementation timeline, on 20 December 2021, the OECD published the Model Rules on GloBE (Global Anti-Base Erosion) as agreed by the Inclusive Framework.7 On 22 December 2021, the European Commission (the Commission) published a legislative proposal for a Directive setting forth rules to ensure a global minimum level of taxation for multinational groups.8 The proposed rules were generally consistent with the July and October statements of the Inclusive Framework and the Model Rules.
At an ECOFIN meeting of 18 January 2022, Finance Ministers of the 27 EU Member States held a first public policy debate on the draft Directive. Overall, Member States expressed support and confirmed the priority nature of this file. However, eight Member States also expressed concerns related to the tight implementation timeline, the complexity of the rules, the link between Pillar One and Pilar Two and the application of the rules to domestic groups.
On 14 March 2022, the OECD released the long-awaited Commentary together with some illustrative examples, on the Pillar Two Model Rules.9 On the same date, the OECD also launched a public consultation on the Implementation Framework seeking input from stakeholders on the issues of administration, operation, compliance and rule coordination.
One day following the release of the Commentary, the Finance Ministers of the EU Member States discussed a new compromise text of the Pillar Two Directive, but failed to reach agreement as four Member States had remaining concerns which still needed to be addressed (Estonia, Malta, Poland and Sweden).10 The concern which many Member States had expressed in January regarding the tight timeline for introduction was addressed through the extension of the deadline for entry of effect of the rules to 31 December 2023.
In a more recent ECOFIN meeting of 5 April, EU Finance Ministers discussed again the minimum tax directive but Poland was the only Member State to block unanimous agreement as it requested a legal link between the introduction of Pillar One and Pillar Two.11 Public reports mentioned that the reason for the veto was also political and related to the requirements posed for Poland to get access to the funds of the recovery package. On 1 June 2022, the Commission approved Poland's national recovery and resilience plan. The Commission's Proposal moved to the Member States that have in principle 4 weeks to approve the plan.
ECOFIN meeting of 17 June
On 17 June 2022, the EU Finance Ministers met for an ECOFIN meeting. In a public session, Ministers discussed once again the proposed Pillar Two Directive with the aim of reaching unanimous agreement.
In advance of the meeting, a new compromise text was published. Also, news outlets referred to other variations of the compromise text. The main differences in relation to the earlier texts related to the inclusion of language on the link between Pillar Two and Pillar One, in particular containing language on the presentation of a solution on the taxation of the digital economy issue at a pre-determined point in 2023, and the introduction of a new compliance requirement on the deferral of introduction of the rules for countries with 12 or less ultimate parent entities in scope (article 47a). These signals show that negotiations on the compromise text are still ongoing and no final text is available yet.
Regarding Poland’s concern on the link of Pillar Two with Pillar One, the French Council Presidency also issued a joint declaration confirming the commitment of all Member States to the ongoing process on Pillar One in the Inclusive Framework. The Commission also committed to send a report to Council by June 2023 on Pillar One progress and to reflect on other measures to be held if Pillar One does not succeed.
During the public debate, Poland dropped its reservation and expressed support to the Directive. Poland mentioned that it has now received the relevant assurances on the link between the introduction of the two pillars. However, Hungary, that supported the Directive in the ECOFIN meeting of 5 April, changed its position and objected to the adoption. Hungary expressed concerns about the Directive, referring to undesirable delays of Pillar One and mentioning the Ukraine war and recent elections in Hungary as a new circumstance. Hungary pointed out that under such geopolitical circumstances introducing the global minimum tax at such an early stage would cause serious damage to the European economies. Also, as technical work at the OECD is not ready yet on the two Pillars, taxpayers cannot start the preparation for this complex system and therefore Hungary cannot support the adoption of a global minimum tax.
In reaction to this, French Minister Bruno Le Maire said that he remains optimistic and he still hopes to reach political agreement during the French Presidency that lasts until 30 June 2022. On 21 June, EU leaders will meet in Luxembourg which the French Presidency could see as a final opportunity to secure unanimity on the Directive.
Finally, Le Maire also made a plea to urgently simplify the legislative process in the EU and move from unanimity to qualified majority voting for tax matters.
Article 115 of the Treaty on the Functioning of the EU is the legal basis for the Directive. Proposals under this special legislative procedure are subject to the Council's unanimity. On 1 July 2022, the Czech Republic takes over the EU Council Presidency from France. The Czech Presidency will aim at formal adoption of the Directive during its term. Since the European Parliament only has an advisory role, it just needs to provide its opinion for the adoption process to be complete. Such opinion was adopted by the European Parliament in plenary on 18 May 2022.
According to the Compromise Text, once adopted, Member States shall transpose the provisions of the Directive by 31 December 2023 and then apply these provisions for fiscal years starting on or after 31 December 2023 except the Under-Taxed Profits Rule, which would apply for fiscal years starting on or after 31 December 2024.
With 26 Member States committed to Pillar Two introduction, and one country blocking, the EU remains close to adopting the minimum tax rules. Alternatively, even if no agreement can be reached with Hungary, Member States can explore other paths to move ahead without Hungary. Members of the European Parliament (Greens/EFA) already suggested that enhanced cooperation should be considered as a way to move forward with 26 Member States if the block on the introduction of the Pillar Two rules remains.
Companies are encouraged to monitor the developments as the Pillar Two policy environment continues to evolve.
For additional information with respect to this Alert, please contact the following:
EY Société d’Avocats, Paris
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United States), Global Tax Desk Network, New York