UK and International Tax news

Council Of EU Member States Announces Agreement To Implement Pillar Two

Friday 16th December 2022

The Council of the EU has announced that EU member states have reached agreement to implement at EU level the minimum taxation component known as Pillar 2 of the OECD’s reform of international taxation under BEPS.

The ambassadors of EU member states, through the Committee of Permanent Representatives, have advised the Council to adopt the Pillar 2 directive and a written procedure for the formal adoption will be launched.

The Council expects the effective implementation of the directive to limit the race to the bottom in corporate tax rates. The profit of large multinational and domestic groups or companies with a combined annual turnover of at least €750 million will be taxed at a minimum rate of 15%. The new rules will reduce the risk of tax base erosion and profit shifting and ensure that the largest multinational groups pay the agreed global minimum rate of corporate tax.

The draft Council directive sets out rules to establish an efficient and coherent framework for the global minimum level of taxation at Union level. That framework creates a system of two interlocked rules, based on the OECD’s ‘GloBE rules’, through which an additional amount of tax (a ‘top–up tax’) should be collected each time that the effective tax rate of an MNE in a given jurisdiction is below 15 %.

The two rules are the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR). Under these rules, the parent entity of an MNE located in a Member State should apply the IIR to its share of top–up tax relating to any entity of the group that is low–taxed, whether that entity is located within or outside the Union. The UTPR should act as a backstop to the IIR through a reallocation of any residual amount of top–up tax in cases where the entire amount of top–up tax relating to low–taxed entities cannot be collected by parent entities through the application of the IIR.

Once the EU has formally approved the directive, member states will have a year to adopt legislation and guidance before entry into force of the IIR and, optionally, a Qualified Domestic Minimum Top-up Tax for tax years starting on or after 31 December 2023. The backstop UTPR rule is expected to enter into force one year later.

The reform of international corporate tax rules consists of two pillars:

  • Pillar 1 covers the new system of allocating taxing rights over the largest multinationals to jurisdictions where profits are earned. The key element of this pillar will be a multilateral convention. Technical work on the details thereof is ongoing in the Inclusive Framework
  • Pillar 2 contains rules aimed at reducing the opportunities for base erosion and profit shifting, and to ensure that the largest multinational groups of companies pay a minimum rate of corporate tax.

For more information on the above, please contact Keith Rushen on 0207 486 2378.

 

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