EU agrees on global minimum tax rate for pillar two

Hungary withdraws its veto as the EU takes the initiative in implementing the OECD's pillar two agreement.

Yesterday, December 12, EU member states made a historic step by agreeing to impose the OECD's global corporate minimum tax rate of 15% across the bloc.

The decision to implement the minimum tax rate, known as pillar two, came after the Hungarian government abandoned the final remaining challenge to the measure's application in the EU.

In exchange for Budapest withdrawing its veto on the tax floor rate, EU ambassadors released certain post-COVID recovery monies that had previously been blocked owing to a rule of law disagreement between Hungary and the EU.

The Czech Republic, which now holds the rotating presidency of the Council of the EU, welcomed the deal as a clear and powerful message to businesses on taxation.

“The largest groups of corporations, multinational or domestic, will need to pay a corporate tax that cannot be lower than 15% globally,” he said in a statement.

The historic two-pillar approach achieved by 137 nations at the OECD Inclusive Framework in October 2021 is the most far-reaching attempt to reduce profit-shifting by global firms.

Pillar two seeks to ensure that major multinational corporations with revenues of at least €750 million ($790 million) pay an international minimum effective tax rate of 15% in all countries where they do business.

Meanwhile, pillar one would restructure international taxation rights to require multinational corporations to declare profits and pay taxes in the jurisdictions where they do business. The rule would apply to huge multinational corporations with revenues in excess of €20 billion ($21.1 billion).

After facing significant political and commercial opposition on both sides of the Atlantic, the EU's minimum tax rate increase is considered as critical to saving pillar two.

European ambassadors have now formally advised the Council of Ministers to adopt the pillar two directive, kicking off the process of implementing the tax floor rate. The EU law is anticipated to be transferred into domestic rules in member countries by the end of 2023.

By fLEXI tEAM