Pillar Two – What’s coming up?

On 20 December 2021, the OECD published the Model Rules on the implementation of global minimum taxation (Pillar Two). Only two days later followed the draft directive from the EU Commission on implementing the rules in the EU. Consultations are currently taking place on the OECD level on possible simplifications, the publication of which is anticipated by the end of this year. Detailed rules on the declaration procedure are also still outstanding. Parallel with this, in some countries implementation into national law is being prepared for, while in others the process seems to have run into the sand. Below, we give an update on the current situation of Pillar Two and an assessment of further developments.

Background

On 8 October 2021, the Member States of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed to introduce global minimum tax of 15 percent. After the OECD Model Rules and the EU draft directive were published in December 2021, on 14 March 2022, the OECD published the Commentary and illustrative examples on Pillar Two.

The focus for the scope of minimum tax is multinational groups of companies (MNEs) with an annual consolidated turnover of at least 750 million euros. Unlike the OECD, the EU draft directive also includes purely national company groups. The goal of the regulation is to achieve taxation of at least 15 percent in each jurisdiction in which the MNE is resident. As a rule, tax is charged on the parent level (income inclusion rule); if the parent is resident in a state that does not apply the Pillar Two rules, the undertaxed payment rule is to apply on the subsidiary level. The effective tax burden, and consequently the potential minimum amount of tax, is thus examined on the basis of GloBE income and covered taxes. The starting point for calculating GloBE income and covered taxes is the company’s financial data before consolidation in the consolidated financial statements (commercial balance sheet 2 data pursuant to IFRS or German Commercial Code (HGB)). These are then adjusted in many different ways.

Current developments

After a tendency became clear at the ECOFIN meeting on 15 March 2022 to want to postpone implementation by a year, from 1 January 2023 to 1 January 2024, it has not been possible to reach a conclusive agreement on implementing the Pillar Two rules at the EU level since. While Poland firstly blocked agreement at the ECOFIN meeting on 5 April 2022, pointing to a lack of a legal connection between the rules of Pillar One and Pillar Two, it was principly Hungary that has refused to give the necessary consent since the ECOFIN meeting on 17 June 2022. The government in Budapest officially refers to delays in implementing Pillar One, the uncertainties thrown up by the war in Ukraine as well as the fact that Hungary would be heavily affected by Pillar Two, which is why it cannot consent to the implementation of the rules at the present time.

In return, the United States announced it was terminating its double taxation agreement with Hungary due to its blocking of Pillar Two. Yet tangible implementation of the Pillar Two rules in the USA is also still uncertain. The recently adopted introduction of global minimum tax in the USA as part of the Build Back Better (BBB) programme detached from Pillar Two amounting to 15 percent and the interaction of this with Pillar Two remain uncertain, in particular.

In Germany on 7 July 2022, the Scientific Advisory Board of the Federal Ministry of Finance (BMF) published its opinion on the OECD reforms concerning the taxation of multinational enterprises. The Scientific Advisory Board is a committee that is independent of the Federal Ministry of Finance that advises and assists political decision-makers by means of scientifically grounded reports and analyses on many different topics. In its report, the board observed that the OECD project envisages making fundamental changes to the international tax system. At the EU level, the board recommended making the adoption of the directive dependent on the implementation of the Pillar Two rules by important states and trading partners.

Forecast

Against the backdrop of the proposed compromise on postponing the implementation of Pillar Two by (at least) one year on the EU level, which continues to be unresolved, as well as the great worldwide uncertainty surrounding the war in Ukraine and rising inflation, further developments remain to be seen. The exact formulation of the OECD’s implementation guidelines on a globally uniform declaration procedure, which were expected in the last quarter of this year, is also still outstanding. Furthermore, the OECD’s intended simplification rules on certain areas of the assessment of effective taxation are also eagerly awaited. Companies concerned should therefore continue to keep a close eye on developments concerning the implementation of the rules, especially as regards the EU and USA. At the same time, due to the high level of complexity of the rules published till now and the possibility of introduction in 2024, companies should begin to plan for implementation and consider basic questions now.