Minimum tax rates: proposal for a directive implementing Pillar Two GloBE rules

On 22 December 2021, the European Commission issued a proposal for a directive implementing the Pillar Two GloBE rules uniformly across the European Union. These rules are part of the OECD's proposal for a two-pillar system to address tax challenges arising from the digitalisation and globalisation of the economy.

On 20 December 2021, the OECD published a draft implementation plan of Pillar Two GloBE rules. As we have already mentioned in the article “OECD: Implementation plan of a two-pillar solution”, the GloBE rules as the main components of Pillar Two include:

  • IIR – Income Inclusion Rule; and
  • UTPR – Undertaxed Payments Rule.

In addition to the GloBE rules, Pillar Two also includes the STTR – Subject to Tax Rule, whose exact implementation rules have not yet been presented (however, according to the concept, it should be an optional rule that could be applied in the income source country). The aim of these rules is to introduce a minimum (effective) tax rate of 15%.

The European Commission intends to implement the GloBE rules jointly within the European Union through a directive, the draft of which was published on 22 December 2021 (the “GloBE Directive). The text of the Directive is based on the OECD proposal, but it features certain differences with regard to the preservation of the principles of subsidiarity and proportionality in the single internal market. The most important one is probably the scope of the whole proposal. While the OECD proposal states that large multinational companies whose consolidated turnover exceeds EUR 750 million (i.e. falling within the remit of country-by-country reporting) will be subject to the GloBE rules, the European Commission proposes that large-scale domestic groups, i.e. groups of companies operating within a single EU Member State, should also be subject to the GloBE rules if their turnover exceeds EUR 750 million.

Although the GloBE Directive itself sheds a little more light on the debate on the minimum effective tax rate – for example, it implies that the IIR will be implemented in the EU as the primary rule, while the UTPR will be more of a supplementary rule, it raises a number of unanswered questions. These relate not only to the rules themselves, which the GloBE Directive introduces, but also to how these rules will be implemented in the national legislation of individual states.

It will also be interesting to see how the GloBE Directive fits into the EU-wide legislative framework for tax avoidance rules, in particular the ATAD 1 Directive (EU/2016/1164) and the rule that was implemented by it regarding the taxation of controlled foreign companies (the CFC rules). According to the implementation report of the GloBE Directive, it is envisaged that the CFC rules and the GloBE rules could be applicable together, with the CFC rule being applied first. The implementation of the GloBE Directive could also affect the amendment of the Directive on the common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (EC/2003/49). This has been under discussion since 2011 and there is still no consensus among the Member States as to whether taxation of the relevant income on the part of the recipient should be a necessary condition for exemption from withholding tax at the payer’s end.

We are actively monitoring the interpretation of the GloBE Directive and its implementation, as well as other news in the field of international taxation, and will keep you informed, either through our articles or regular webcasts.

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