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Where we stand with implementing Pillar two in the EU

As part of the global tax reform, just one EU member state has unveiled draft legislation to implement the Global Anti-Base Erosion guidelines. However, this may be about to change now that the OECD has released technical guidance, which finalizes the implementation framework for a crucial component of the changes: subjecting multinational firms to an effective tax rate of at least 15%. This was published on Thursday, February 2.

A directive "on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the union" was approved by the European Council, which is composed of the heads of state and government of the EU, and the European Commission in December of last year, one year after the Commission had released its proposals. On the timeline for national passage, the agreement clicked "go."

Germany, France, Italy, Spain, and the Netherlands, five member states, made an effort to hasten the Council's decision-making process on September 9, 2022, by announcing that they would implement the GloBE rules in 2023 if the Council was unable to reach consensus on the directive "in the next few weeks."

Hungary had earlier in the year exercised its veto over the accord in a dispute, ostensibly because to the harm it thought a minimal corporate tax would cause to jobs and tax competitiveness. The corporate tax rate in Hungary is 9%.

If the EU's 27 member states were holding off on disclosing their intentions until the OECD's administrative guidelines was released, we can now anticipate that they will start consultations and publish draft laws right away. Given that the directive must be incorporated into national legislation by the end of 2023, they only have less than a year to do so.

The directive mandates that member states begin implementing the undertaxed profits rule (UTPR) for fiscal years starting on or after December 31 2024 and the income inclusion rule (IIR) for fiscal years beginning on or after December 31 2023. If member states so choose, they may enact a qualifying domestic top-up tax. This protects the tax-related sovereignty of the member nations.

If a member state is home to up to 12 ultimate parent entities (UPEs), the application of the IIR and the UTPR may likewise be delayed until December 31, 2029.

Some members of the European Council were not delayed by the debates. On October 24, 2022, the Netherlands produced the first draft legislation for review. Other members states have already started to prepare for implementation, including Ireland, which undertook a two-month consultation between May and July 2022.

Raluca Enache, a member of KPMG's EU tax center in Amsterdam, claims that "the Dutch are the most advanced in the process. We do expect many other member states to launch public consultations this spring and it would not surprise me if the other EU jurisdictions that have signed the September 9 statement in support of GloBE implementation will be among the first to follow suit."

The Federation of German Industries, according to David Gajda, senior manager of tax and financial policy, is "eagerly awaiting the draft."

"We expect the first draft for national implementation in Germany at the end of February or March," he continues. "Tempo is essential here, as companies will have to prepare for specific processes and to adopt IT tools."

Before beginning to prepare for pillar two, taxpayers did not have to wait for EU leaders to provide their approval. The OECD-led Inclusive Framework had already decided to adopt the international tax reform package starting at the end of 2023, so the question for the Council was one of when, not if.

The German industrial company Siemens' head of tax, Christian Kaeser, states, "We started our pillar two project right away in January 2022. The political agreement from December 2022 did not change our project timeline. As our fiscal year deviates from the calendar year, the pillar two start date will be October 1 2024 for us."

"The relevant milestones influencing our implementation and pillar two readiness are the safe harbour rules, IIR and the German domestic implementation," he continues.

When they learn what they will need to do to abide by the requirements of pillar two, Kaeser believes that some German taxpayers will not be pleased.

"I anticipate that in Germany, given the large number of in-scope companies, including many medium-sized ones, there will be a wave of criticism building especially from those medium-sized companies which only now realise what complexity is coming their way," Kaeser notes.

The establishment of a working group with the OECD to assist member states in enacting the directive into their own statute books was rumored, but the European Commission refused to confirm it. It said it is important to coordinate its input into the OECD work to ensure that the outcome of this is aligned with the legal obligations that the directive imposes on member states.

The Commission intends to arrange routine coordination meetings with member states, wherein it will address any technical concerns about putting the pillar two directive into national legislation, as it typically does with a new directive.

Enache of KPMG thinks it is difficult to predict which member states may find enactment more or less difficult in the future, but a few factors, including elections, might have an impact.

"This is not a given but it is often the case that legislators take longer or are more reluctant to introduce new legislation during an election year," she states. "And, of course, member states have different internal procedures for adoption of new legislation. Some can only do so as part of their budget cycles, many are required to give national parliaments ample time to consider draft laws."

General or parliamentary elections are scheduled for seven member states in 2023: Estonia, Finland, Greece, Luxembourg, Slovakia, Poland, and Spain. State elections are also scheduled for at least four additional states.

The clock is ticking for EU member states to implement pillar two regulations. The OECD's technical guidance has arrived to help, and the organization acknowledges that it will need to update it when problems with implementation occur.

The two-pillar strategy's finer aspects are mostly known to the taxpayers now. They simply want to know how member nations intend to implement everything. They will be keeping a close eye. Many things are still up for debate.



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