Luxembourg: Pillar Two: Why Has The The EU Directive Proposal On Global Minimum Tax Not Yet Been Adopted?

OUR INSIGHTS AT A GLANCE

• Back in December 2021, the model rules to give effect to the GloBE rules (also called "Pillar Two") were published by the OECD and the EU published a proposed Directive.
• Some concerns were raised by the EU Member States, so the EU Council published two amended proposals for a Directive on GloBE, in March 2022. The final amended Directive proposal differs slightly from the initial proposal, mainly on the time limit for transposition.
• It was initially expected that the Directive would have been adopted by the end of June 2022. Nevertheless, a consensus was not reached at the ECOFIN meetings on 5 April 2022 and 17 June 2022.
• Politically, the EU is struggling to have this Directive proposal adopted, giving a new argument to critics of the unanimity voting requirement in tax matters.

The Global Anti-Base Erosion ("GloBE") rules, also called "Pillar Two", agreed upon on 8 October 2021 by the OECD/ G20 Inclusive Framework ("IF") on BEPS in the Statement to Address the Tax Challenges Arising from the Digitalisation of the Economy and the Detailed Implementation Plan, provide for a coordinated system of taxation intended to ensure large multinational enterprise ("MNE") groups pay a minimum level of tax on the income arising in each of the jurisdictions they operate in. The model rules to give effect to the GloBE rules (the "OECD Model Rules") were published by the OECD on 20 December 2021.

Two days later, the EU Commission published a proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the UE ("GloBE Directive Proposal"). The GloBE Directive Proposal follows the OECD Model Rules closely, with some differences to ensure its compatibility with EU law, and sets out how to calculate and apply the OECD global minimum taxation so that it is properly and consistently applied across the EU.

The initial aim of the EU Commission was to have this GloBE Directive Proposal adopted within 6 months. Nevertheless, practically, the EU is struggling to reach unanimous agreement on the GloBE Directive Proposal.

Here is the state of play:

Following to the ECOFIN meeting held in January 2022, where concerns were raised by a few Member States on the GloBE Directive Proposal, the EU Council published an amended GloBE Directive Proposal (the "Compromise Proposal"), dated 12 March 2022, which differed slightly from the initial Directive proposal, mainly, on the time limit for transposition. As four Member States were still not in a position to approve the Compromise Proposal at the ECOFIN meeting held on 15 March 2022, further work was done to address those last concerns. As a result, the EU Council published a new amended Directive Proposal dated 28 March 2022 (the "Presidency Compromise Text" or, together with the Compromise Proposal the "Amended GloBE Directive Proposal").

Even though the French Council Presidency was confident that an agreement could be reached soon and that the Compromise Proposal could have been approved at the following ECOFIN meeting to be held on 5 April 2022, this approval was delayed once again. On 5 April 2022, during the ECOFIN meeting, things did not really happen as expected by the French Presidency. If Estonia, Sweden, and Malta were finally in a position to approve the Amended GloBE Directive Proposal because they were confident that their concerns had been addressed in the Presidency Compromise Text, Poland maintained its position that Pillar One and Pillar Two should be seen as a package in a single reform and that a Council statement to that purpose wasn't sufficiently binding legally to assure the implementation at EU level of both the 2 Pillars.

Everybody seemed ready to adopt the GloBE Directive Proposal but...

After negotiations, Poland is finally ready to accept a Council declaration that reaffirms the commitment of the EU to the Statement on a Two-Pillar Solution and to support the Amended GloBE Directive Proposal. Nevertheless, many EU commentators consider that Poland has in fact used its veto right as a lever to obtain the validation of its Polish national recovery and resilience plan, which has been blocked, mainly due to breaches of the "rule of law" principles.

As all Member States had expressed their support to the Amended GloBE Directive Proposal except Poland and Poland was now finally ready to support the proposal, all EU Member States seemed ready to adopt the Directive Proposal at the ECOFIN meeting held on 17 June 2022. But this was without counting on the unexpected reversal of Hungary's position.

At the ECOFIN meeting held on 17 June 2022, Hungary raised new concerns – the war in Ukraine which is a major economic and social shock for the continent; the unfavourable geopolitical situation and increasing prices of energy and commodities in the whole European economic region; the increasing interest rates and inflation, the disrupted supply chains. According to Hungary, the EU Commission and Member States should pay attention to the consequences of the war as all these unfavourable developments cause significant losses to companies and household families, and under such circumstances introducing the global minimum tax, at such an early stage, would cause serious damage to the European economies. Secondly, after the recent general elections in Hungary, more vocal and critical voices regarding the Global minimum tax can be heard from many representatives in the Hungarian parliament.

Furthermore, Hungary has consistently stressed that the implementation of Pillar Two, as part of a large-scale package including also Pillar One, at OECD level was key. And in this respect, currently, significant further work is still required regarding Pillar Two, both on substantial and procedural questions before the practical application of the global minimum tax rules. Moreover, the OECD has already declared that the Pillar One project will not be able to meet its agreed deadline. As none of the EU partners neither in America, nor in Asia have transposed Pillar Two yet, the EU is not late and, as the technical work is not ready at the OECD level, taxpayers cannot fully launch the preparation for this complex system either.

As a results of these elements, at that stage, Hungary withdrew its support of the adoption of the Amended GloBE Directive Proposal.

Implications of the reversal of Hungary's position

The declaration of Hungary came as a surprise because Hungary had previously expressed their support to the Amended GloBE Directive Proposal, even after the war had started. This is not very common, and we have no recollection of this happening before, i.e. a Member State reconsiders its positive position and applies its "veto".

Even if the French Presidency was still working to reach political agreement to the Draft Proposal by the end of June, substantial obstacles must be overcome to that aim. Indeed, the EU has very little if any control over the justifications raised by Hungary, such as the Ukrainian war, the economic environment, the result of the national elections and the absence of implementation of the Pillar Two rules elsewhere amongst the OECD jurisdictions.

As no agreement could be reached before the end of the French Presidency of the EU Council on 30 June 2022, the procedure for the adoption of the Directive Proposal will progress under the Czech Presidency beginning on 1 July 2022. The Czech Presidency will then have to start to discuss with Hungary the conditions under which the Directive Proposal could get Hungarian support. In this respect, the question is whether Hungary has other issues – as Poland was rumoured to have in relation to its national recovery and resilience plan – and used its veto right as a lever.

n any case, this saga brings the question of the unanimity required for the adoption of tax measures at EU level back on the table. Bruno Le Maire and Paolo Gentiloni stressed in this respect that the current negotiations and recent vicissitudes on minimum taxation are a good example of why the EU should move from unanimity to qualified majority voting in tax matters. According to Bruno Le Maire "On key texts like this one, we cannot rely on unanimity anymore and we need to have qualified majority voting" to speed up the process. "If this was QMV (...) years ago we would already have a new tax regime which would have enabled to have new tax resources meeting the concerns of our citizens".

Fueled by the Hungarian veto on the Amended GloBE Directive Proposal after endorsing Pillar Two at the OECD level and supporting the adoption of that proposal in previous ECOFIN meetings, members of the European Parliament discussed, in a plenary session on 23 June 2022, recent failures to adopt EU legislation in the field of taxation because of the opposition of a single Member State.

Some MEPs are in favour of a prompt solution: either by moving forward with an enhanced cooperation procedure or by moving from the unanimity voting to a qualified majority voting in the Council in the field of taxation. The latter option has been widely debated in the past months. Conversely, other MEPs strongly oppose the push by the Commission and the French Presidency for an agreement where a sovereign State has already expressed its veto, claiming that this persistence is also a breach of the Rule of Law and of the sovereignty principle.

First, it must be pointed out that the aim of the unanimity voting in the field of taxation is not to slow down the process, but to respect the sovereignty principle of Member States in the field of taxation, as taxation impinges on the Member States own finances and budgets. It also guarantees, in a way, the constitutional principle shared by many Member States that there should be "no taxation without representation". In this respect, the EU Commission is not elected by the citizens and in principle, no delegate of Member States at the EU Council should approve a directive proposal in the taxation field at the ECOFIN meeting without the support of its own democratically elected parliament. Indeed, once an EU directive is approved at EU level, national parliaments must implement it and do not have the opportunity to oppose to it anymore. Recently, in a sign of opposition to this principle, the Hungarian Parliament voted a resolution to reject the approval of the Amended GloBE Directive Proposal.

Nevertheless, if the reversal of Hungary's position is questionable, the pitfalls met in this case are not the best foundation on which to challenge unanimity voting. Indeed, first, Poland opposed to the Proposal because of its own interpretation of the OECD agreement that the proposal is supposed to implement. Second, Hungary does not oppose the adoption of the content of the Proposal itself, but the timing of its adoption taking into consideration the worldwide economic situation and the implementation process of the same rules on global minimum taxation by the other OECD jurisdictions - elements on which the EU has no control over. And this is probably something that the EU will have to live with, especially when it will come to the implementation of worldwide regulations where the EU is not the main but only one of the actors of a broader scene.

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