"At the eleventh hour": EU Directive on BEPS 2.0 Pillar 2 agreed. Pillar 1 year in review

14 December 2022
Tax Messenger
What has happened?

On 12 December the EU announced that its member states had unanimously agreed to adopt an EU-wide directive on Pillar 2 of BEPS 2.0 (even though, only shortly before, the subject had been dropped from the agenda of the last ECOFIN meeting on 6 December). After being bogged down since December 2021, the process of approval of the directive was suddenly resolved, with the result that Pillar 2 will take full effect from 1 January 2024.
The details

On 12 December 2022, the EU Council announced that a consensus had been reached on the adoption of a directive integrating the BEPS 2.0 Pillar 2 framework into European regulation. This development came as a surprise, to say the least, after the news that the directive had been excluded from discussions at a meeting of the ECOFIN Council of Ministers and in light of the long hiatus in the approval process owing to the refusal first by Poland, then by Hungary, to vote in favour and the postponement of the start date of the new rules from 2023 to 2024.

This situation had also prompted a number of countries (France, Germany, the Netherlands, Italy and Spain) to draft their own laws and adopt Pillar 2 standards on an individual basis without waiting for a breakthrough at EU level. In October 2022 the Netherlands published a 337-page bill based on the draft EU directive and the published GloBE rules.

It is notable that the consensus was reached in a relatively informal way by means of ambassadors of the member countries advising the EU Council of their unanimous approval of the draft directive, which is not the usual means of resolving tax matters at EU level. In any event, the final text of the directive will now have to be adopted by the EU Council through a formal procedure. All EU states will be required to implement the directive into their national law by the end of 2023 and it is expected that corporate groups with revenue exceeding € 750 million will begin to be taxed at a minimum rate of 15%.
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What is happening outside Europe — Pillar 2

  • As far as Pillar 2 in the US is concerned, the new 15% alternative minimum tax for companies with revenue exceeding USD 1 billion based on AFSI (adjusted financial statement income) is not compatible with the taxation system proposed in Pillar 2 and no steps have been taken to align it with that system. Given the current political landscape, it is unlikely that a "compatible" version of Pillar 2 will be adopted in the US in the foreseeable future. It is possible that certain adjustments will be made to enable America’s alternative minimum tax to be taken into account in calculating taxation levels in the EU, but we have yet to see any information on such discussions.
  • Meanwhile, Switzerland, the UK, Australia, Malaysia, Mauritius and South Korea are actively joining the initiative to implement Pillar 2 and have already published their own draft laws.
  • China supported the adoption of Pillar 2 in 2021 alongside other G20 countries. However, there is not yet any public indication of action being taken to develop the idea at national level and China has not passed any new legislation reflecting the Pillar 2 rules.
  • The Government of Hong Kong, for its part, announced that it would postpone the implementation of Pillar 2 at least until 2024 (a legislative proposal may be adopted in 2023), taking its cue from developments in the national law of other jurisdictions.

As we see it, progress on the adoption of Pillar 2 legislation in G20 countries in 2023 will also determine the impact that this process has for Russia, and particularly for businesses with a presence in the EU. It is important to keep track of developments in this area on top of other changes in Russia’s tax landscape.
Year in review — Pillar 1

  • On 11 July 2022, the OECD Secretariat issued a revised timetable for implementing the Pillar 1 provisions. The new target is for Pillar 1 to take effect in 2024. However, not one member country has yet adopted or announced plans to implement Pillar 1 standards into their national law. Given that negotiations between countries on this issue have now stalled, the start date could get pushed beyond 2024. It will be recalled that adopting Pillar 1 involves finalising relevant tax rules and drawing up, signing and ratifying an international agreement.
  • Unlike Pillar 2, the participation and support of the US is essential to the implementation and operation of Pillar 1, since the US accounts for a large proportion of companies with turnover exceeding € 20 billion, which are precisely the companies to which Pillar 1 applies. For other countries, Pillar 1 may be relevant but has a far lesser economic significance.

The ratification of a US international tax agreement requires at least 2/3 of senators to vote in favour of it. However, the US Republican Party, which secured a small majority in the House of Representatives in the mid-term elections this November, has repeatedly expressed opposition to both parts of the global tax reform (Pillar 1 and Pillar 2). It is worth noting that the Republicans have always viewed Pillar 1 as more of a discretionary framework than a binding initiative.

Since it is not possible for Pillar 1 to be implemented at the level of the national law of individual countries, and given the domestic political situation in the US, it is our view that none of the provisions of Pillar 1 will be passed into law in the near future.

Authors:
  • Vladimir Zheltonogov
    Partner
    International Tax and Transaction Services
  • Oleg Lvov
    Senior Manager
    International Tax and Transaction Services
  • Nataliya Averina
    Manager
    International Tax and Transaction Services
  • Elizaveta Gladchenko
    Senior
    International Tax and Transaction Services
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