On 14 December last year, EU Member States unanimously agreed on a landmark deal to introduce minimum effective taxation in the EU, bringing more fairness, transparency and stability to the international corporate tax framework. The TAXUD Newsletter team sat down with Bert Zuijdendorp, Head of Unit for Company Taxation, to learn more about the agreement and what comes next.
The introduction of the new rules will ensure that revenues of the biggest companies will now be taxed at an effective tax rate of at least 15%. Why is this so important?
The overall ‘Pillar 2’ rules are part of a global agreement endorsed by around 140 jurisdictions around the world. That agreement provides for a new common standard for minimum effective taxation, which will ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of at least 15% on all their profits, wherever they arise.
This key feature will help to ensure that there is a floor to tax competition, and that the race to the bottom on tax rates that we’ve seen in recent years will come to an end, in particular for those MNEs in scope. Essentially what it will achieve is that MNEs will no longer be able to avoid paying their fair share of corporate taxation by artificially shifting their profits to low- or no tax jurisdictions, or so-called tax havens.
In turn, there will be a much more level playing field between companies irrespective of their size, their activities or which country they are located in. This is a major breakthrough for tax fairness in the world.
Why did the EU decide to introduce legally-binding legislation and what challenges did you face in translating the landmark international deal into hard law?
The OECD agreement provides for a set of model rules which countries can, but don’t have to, implement. We felt it was important to have a coordinated and consistent implementation of these rules in the EU. That’s why we proposed a Directive at the end of 2021, just after the OECD finished its work on the model rules. The Directive was then adopted by Council just before Christmas last year, on 14 December.
We believe it is very important to have a consistent implementation of the rules across Member States to the benefit of taxpayers who will then be faced with only one set of rules, rather than 27 slightly different interpretations of the same rules. It also brings benefits for Member States because it gives them additional legal certainty that the rules they are applying are consistent with other EU law.
One of the aspects we needed to address in the Directive was to ensure that these global standards were implemented in a way consistent with EU law. This meant that we had to make certain adjustments to the global rules, which are compatible but are specific to the needs of the EU. For example, to avoid any discrimination between MNEs and similar large-scale domestic enterprises we expanded the OECD rules - generally centred on cross-border transactions by MNEs - to cover similarly-sized purely domestic companies operating in only one Member State as well. This was also why it was important to do this in the form of an EU Directive.
So when will the new framework enter into force and how will you ensure its correct and uniform implementation across the EU?
Member States will need to transpose the Directive in national legislation by the end of 2023 at the latest, although we would hope and indeed encourage Member States to adopt their implementing legislation as quickly as possible so that taxpayers have sufficient time to get their systems ready and in place to apply the new rules, since they will apply to tax years starting from 31 December of this year - it’s quite a tight timetable!
For our part, we will assist Member States by organising a series of expert group meetings to discuss any issues that may arise during the transposition of the Directive, like we’ve done for previous initiatives. This will also offer an opportunity for Member States to compare notes with each other and to also learn from others how they have addressed certain issues.
And since work is still ongoing at the OECD to prepare detailed implementation of the new rules, we will also be having coordination meetings with Member States to ensure that we align our positions at the OECD and ensure that what is agreed in the OECD is consistent with the legal obligations we now have in our EU Directive.
The international tax agreement also developed new rules around apportionment (so-called Pillar 1), while the Commission has plans for an overhaul of the EU tax landscape to make it work better for business. How does the international work fit into the rest of the EU tax agenda?
The work on both Pillars of the OECD agreement is extremely relevant for our wider EU tax agenda, in particular for our Business in Europe: Framework for Income Taxation initiative (BEFIT) which we are due to present later this year which will provide for a new system of business taxation in the EU. BEFIT will be guided by the principle of simplicity: we want to provide EU business with a competitive and simple tax system that will also be competitive vis-à-vis the rest of the world.
In designing BEFIT we also want to build on international developments. For example, Pillar 2 provides for a new way of establishing the tax base starting from the consolidated financial accounts of the group rather than the set of detailed tax accounting rules. One thing we are looking at to establish the base in BEFIT is whether we can follow a similar approach, where we would use as a starting point the global financial accounts of the group which they would anyway have to report under the existing country-by-country reporting standard. Basically, we would use information derived from obligations companies already have to carry out, rather than coming up with something new.
Another example is that we plan to propose a new way of allocating or apportioning profits between Member States using a formula comprising a number of factors, rather than through the more traditional transfer pricing. Here we will be able to draw inspiration from Pillar 1 which also provides for a similar approach to reallocating certain profits of the biggest and most profitable MNEs among jurisdictions. So there is a lot of experience and detail that we can draw on from the international agreement as we progress on the EU’s business taxation agenda.