The EU expects to approve a directive transposing the minimum effective corporate taxation rules of the OECD inclusive framework agreement in 2022 to guarantee their full application in member states in 2023.
The text of the draft directive implementing the pillar 2 rules, which the European Commission plans to present December 22, is expected to stick to the terms of the international agreement to which all 27 EU member states have already agreed in principle.
France, which will chair the EU Council from January to June 2022, appears eager to have an agreement in the first months of its presidency. “If the EU Commission does not add additional elements in its proposal, it could go very fast,” said an EU official who has been following taxation for over 10 years.
Tax-related directives in the EU require unanimity to be adopted, meaning any of the 27 member states can block them. Ireland, Estonia, and Hungary had opted out of the international deal initially before approving it in early October.
“These countries have already been given assurances that the EU text won’t go further than was agreed at the international level,” said an EU source briefed on the commission’s plans. In particular, the commission is not expected to apply the directive to companies with profits below €750 million annually, or to alter the carveout clause for tangible assets and payroll, the source added.
“The EU Commission has provided assurances to me that the directive it will shortly propose to transpose the OECD agreement will be faithful to the agreement and not go beyond the international consensus,” Irish Finance Minister Paschal Donohoe said in an October 7 statement. “The agreement will allow for the retention of our statutory 12.5 percent rate for businesses with annual revenues of less than €750 million. This will mean that there will be no increase in the corporate tax rate for 160,000 businesses representing approximately 1.8 million employees and they will continue to enjoy all the benefits of Ireland’s longstanding 12.5 percent rate.”
Donohoe reiterated Ireland's reasons for joining the agreement, and the commission's assurances, November 15 during a virtual panel organized by European Movement Ireland and BDO Ireland.
Hungary is said to be especially concerned about the carveout because it hosts a number of foreign-owned factories, in particular for German carmakers. It currently applies a 9 percent tax rate, the lowest in Europe. “This affords Hungary a major advantage from the perspective of promoting investment and job creation,” Hungarian Foreign Affairs Minister Péter Szijjártó said in an October 7 statement.
The only unknown concerns the possible application of the global tax deal to domestic profits. Limiting its application to international profits could result in discrimination, which would be contrary to EU treaties and Court of Justice of the European Union case law.
Several academic studies have proposed extending the rules to domestic profits, and it is likely that this solution will end up in the commission’s proposal, according to the second source. “But I remain optimistic, as this would be the only difference with the OECD agreement,” the EU source said.