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On 22 December, the European Commission delivered an early Christmas present to tax policy analysts in the form of three new major tax initiatives:

  • Directive to implement OECD pillar two (minimum taxation) into EU law;
  • An announcement for new EU own resources, including a portion of the OECD pillar one re-allocation of taxing rights related income;
  • Directive to tackle shell entities inside the EU.

With these measures, the Commission has taken its first steps towards EU implementation of the OECD’s international tax agreement reached last October.

The pillar two Directive follows very closely the OECD model rules for implementing that pillar; there is very little, if any, real ‘gold plating’. This is because the Commission and the French Council Presidency (that began its six-month term in January) want to reach an agreement on the file by mid-2022. This urgency is pivotal to enable the EU to stick to the OECD’s ambitious 2023 implementation timeline.

As with the OECD agreement, the Directive’s objective is to ensure a global minimum effective tax rate of 15% for large groups operating in the EU. The scope includes any large group, both domestic and international, including the financial sector, with combined financial revenues of more than €750m a year, and with either a parent company or a subsidiary situated in an EU member state.

The inclusion of purely domestic large groups was one of the two major ‘deviations’ from the OECD agreement. The Commission had to include such domestic groups in order to not discriminate against multinational groups – something that would have constituted a breach of CJEU case law.

The other ‘deviation’ – or rather a flexibility option enabled by the OECD agreement – allows EU member states to exercise the option to apply a domestic top-up tax to low taxed domestic subsidiaries. This thus allows the top-up tax (the ‘income inclusion rule’ or IIR) due by the subsidiaries of the multinational group to be charged locally, within the respective member state, rather than at the parent entity level.

As a next step, the EU Council will have to adopt the proposal by unanimity. The French Council Presidency aims for an agreement by June 2022 at latest, but it remains to be seen how feasible this is. Some countries might hesitate on the elements that go beyond the OECD model rules (such as the inclusion of purely domestic groups), while other countries might use their de facto veto right as political leverage for concessions in completely unrelated policy areas.

Regardless, the Council is moving fast. A first Council working party meeting already took place on 4 January, and a first high-level discussion between EU finance ministers took place on 18 January. The general consensus was that the Directive should be adopted quickly and to avoid divergence from the OECD model rules except where this is necessary to make it compatible with EU law, although some member states thought the timetable too ambitious. Moreover, the French finance minister stated that their ambition is to try to find an agreement at the 15 March meeting of EU finance ministers – a timeline that for now at least appears unrealistic.

European Parliament must also submit its non-binding opinion. The Council does not need to take the opinion into account, but this opinion must be provided before the Directive can become EU law.

The Commission also issued proposals for three new own resources to flow into the EU budget and help repay the EU’s jointly issued covid-recovery debt of €750bn. These new own resources are:

  • 75% of the revenues generated by the carbon border adjustment mechanism (CBAM). Revenues for the EU budget are estimated at around €0.5bn per year over the period 2023–2030.
  • 25% of the revenues generated by EU emissions trading scheme (ETS). Revenues for the EU budget are estimated at around €9bn per year over the period 2023–2030.
  • 15% of the share of the residual profits of the largest and most profitable multinational enterprises, as defined in the OECD pillar one agreement. Revenues for the EU budget could amount to up to €2.5bn–4bn per year

For the pillar one own resource to become reality, the OECD must first finalise its multilateral convention which is aimed to be finalised by June. An EU pillar one Directive is currently scheduled for 27 July 2022, but naturally this may still change. The so-called digital levy seems to have completely disappeared from the Commission’s planning – at least for now.

And finally, the shell entities Directive sets up a process to identify tax-evading shell companies in the EU (except certain financial actors and listed companies already regulated by the relevant prudential regulatory framework).

Under the new rules, any company of any size established in an EU country for tax purposes would be required to self-assess against three relevant cumulative ‘gateway criteria’. Companies that meet all three criteria will be considered to be at risk, and will then have to justify in their annual tax return how they meet the following ‘indicators of minimum substance’ each tax year, which are:

  • the company has its own premises in the member state or premises for its exclusive use;
  • it has at least one active bank account of its own in the EU; and
  • a manager resides in the vicinity of its premises and is dedicated to the activities of the business or, alternatively, a sufficient number of employees are engaged in the main activities of the business and reside in the vicinity.

A company that does not meet the above mentioned substance criteria would be considered a shell company for the tax year under review and lose any tax benefits.

However, it would still be able to demonstrate that it was not set up for tax evasion purposes, even if it failed the substance test, by showing its business logic, the scope of the role played by its employees, and its decision-making power over the revenues generated.

As with the minimum tax Directive, EU member states will decide by unanimity and the European Parliament must provide its non-binding opinion. The expectation is that the French presidency will prioritise the Directive on pillar two over one on the shell entities.

Issue: 1560
Categories: In brief