Joint statement confirming the intention to implement a global minimum tax

In essence, the statement mentions that even though EU-wide implementation of Pillar 2 is preferred (by means of an unanimously adopted EU Pillar 2 Directive), the countries will move forward with implementation even in the absence of an EU-wide agreement, if such is not obtained over the coming weeks. A link to the statement can be found here.

This announcement is just the latest development around Pillar 2 that took place recently, including a similar statement last week by Germany. Also the recently adopted 15% Alternative Minimum Tax (AMT) in the United States (US) likely has some interaction with Pillar 2. Included below is a summary with some observations from our end based on the current status. As the whole process is still constantly moving, it is difficult to predict the final outcome. However, the combined statement mentioned above in our view is a clear push to implement Pillar 2 in the EU. The EU has been a frontrunner with respect to Pillar 2 so this may also be seen as a signal towards other (i.e. non-EU) countries.

Summary of observations

• The original set-up of the Pillar 2 system was for the Income Inclusion Rule (IIR) to be the first top-up tax and the UnderTaxed Profit Rule (UTPR) to serve as a back-stop in case the IIR was not applied. This system is a clear incentive for countries to either tax locally or apply an IIR.
  
• The (Qualified) Domestic Minimum Top-up Tax (QDMTT) was added later to the plans by the OECD and has gained more momentum because of the incentive to tax profits locally.
• With the 15% AMT, the US has introduced a new tax that on the face of it somewhat resembles an IIR, but will likely not qualify under the Globe rules as an IIR. The US GILTI rules – in their current form – may also not qualify as an IIR. It is unclear whether and when the US will change the GILTI rules and make them more aligned with Pillar 2.
• On October 4, 2022, there will be an ECOFIN meeting in which the Czech presidency will try to get unanimous approval for the EU Pillar 2 Directive. With the joint statement, the five countries mentioned above have taken a leap forward in case unanimity is not reached at the ECOFIN meeting. There are two more ECOFIN meetings in 2022 so it is also possible that some form of agreement is reached later this year. It seems logical that a pan-EU implementation of Pillar 2 would still be preferred by most.
• The joint statement mentions the intention of Germany, France, Italy, Spain and the Netherlands to implement Pillar 2 in 2023. It does not mention however if this is as per 1/1/2023 or (e.g.) 31/12/2023. The latter implementation date was (informally) mentioned in the latest EU pillar 2 directive proposal and expectedly will also be the implementation date envisaged by these countries.
• The OECD is due to release its administrative guidance on Pillar 2, which will happen as separate documents on specific topics (e.g. consolidation, dispute resolution). There is a long list of unresolved questions and especially the rules around safe harbor rules are anxiously awaited.
• It is striking that one of the most fundamental elements of the global minimum tax has not been fully resolved: who is allowed to top-up low taxed income first? The model rules indicate that CFC taxation is regarded a covered tax but it is not clear as yet whether GILTI and/or the AMT qualify as such. From a conceptual perspective, it makes sense that a CFC will reduce the application of UTPR (as being the back stop in the mechanism) but makes less sense for the QDMTT. The question about whether CFC taxation qualifies as covered tax is especially relevant for groups headquartered in countries with extensive CFC rules such as the US, China, Brazil, Japan and South-Africa.
• The UK has been the first country to publish more detailed draft rules on Pillar 2 and they are very much aligned with the OECD model rules. Unfortunately, the UK QDMTT rules have not been published yet so it is unclear how the UK will deal with CFC taxation in relation to a domestic top up tax.
• There is growing objection from the developing countries around both Pillar 1 and Pillar 2. The plans are generally perceived as too complicated and especially Pillar 1 does not generate much additional revenue for smaller countries (only 80-100 companies are in scope). On Pillar 2, it could be that some countries just adopt a QDMT as the IIR and UTPR is complex to implement and these countries will hardly benefit from an IIR or UTPR.