Global minimum tax in the EU

It was a landmark decision by over 135 members of the G20/OECD Inclusive Framework on 8 October 2021 to agree on a global tax reform including a global minimum level of taxation of 15% for large multinational groups (consolidated group revenue of EUR 750 million or more). This resulted in the release by the OECD on 20 December 2021 of its Pillar Two Model Rules.

On 22 December 2021, the European Commission presented a proposal for a Directive (“Proposal”) which aims to implement the Pillar Two Model Rules in a way which is consistent and compatible with EU law. Decision making at the EU level on the Proposal however has been halted because of political blocking by first Poland and later Hungary.

On 12 December last it has been announced that political agreement has been reached on the Proposal. Subject to formal adoption of the Proposal - which is likely to take place very soon - Member States shall have to adhere to an exceptionally ambitious timeline. The Proposal must be implemented in domestic legislation before 31 December 2023 with effective date 1 January 2024.

In anticipation of the adoption of the Proposal, the Dutch government – as first EU member state - already launched a public consultation on 24 October 2022 on a draft bill to implement the Pillar 2 Model Rules. The draft legislation closely follows the Pillar 2 Model Rules as well as the Proposal. The consultation closed on 5 December last. It is expected that after review of the comments brought forward in the consultation process, draft legislation will be submitted to Parliament after having obtained advice from the Council of State. This is expected to take place in Q2 2023.

Some elements of the draft bill as presented by the Dutch government are:

• It is presented as a separate tax act (‘Act minimum tax 2024’) and not as part of the existing Dutch corporate income tax act 1969.
• There is minimal reference to conceptual approaches of Dutch tax laws; instead to terms and definitions used in the Pillar Two Model Rules.
• It is a return-based tax which means tax authorities do not need to demonstrate a new fact when making adjustments. Each group entity is jointly liable.
• Although Pillar Two Model Rules apply various adjustments to the commercial accounts when determining the so-called GloBe income, not all local differences are covered. For example, the Dutch participation exemption may apply to a shareholding of 5%, whereas GloBe income is only corrected for dividends received from shareholdings of 10% or more or that are economically held for at least one year. In such situations the effective tax rate (“ETR”) under the Pillar Two Model Rules will be reduced, potentially resulting in adverse consequences. Other examples giving rise to similar consequences may include tax deductible liquidation losses, the Dutch innovation box and application of the Dutch tonnage tax regime.
• It contains an Income Inclusion Rule (“IIR”), Undertaxed Profits Rule (“UTPR”) and a Qualified Domestic Minimum Top-Up Tax (“QDMTT”). This latter rule has been presented by the OECD as optional and ensures that profits of low-taxed Dutch entities which are part of a Pillar Two group are first to be topped-up locally, thus preventing other group jurisdictions from taxing these undertaxed Dutch profits.

Corporate income taxpayers now must start making preparations and analyze the consequences of these far-reaching legislation. One of the complicating factors is that many technical elements, guidance and documentation of the Pillar Two Model Rules which serve as the main reference for the Proposal is still under discussion and negotiation in Paris at the OECD.