Pillar Two, which ensures that an MNE’s in-scope income will be subject to a minimum tax rate of 15%, is ready to go. On December 2, the Model Rules were agreed upon within the OECD Inclusive Framework and the EU is willing to speed up Pillar Two implementation. The formal endorsement by the Inclusive Framework (IF) and release of the Model Rules to the public are expected next week. A week later, on December 22, the draft EU Directive should be available and a EU Council discussion is already planned during the first week of January 2022. With respect to the primary rule of Pillar Two, the Income Inclusion Rule (IIR), the contemplated EU directive would apply when an Ultimate Parent entity (UPE), an Intermediate Parent Entity (IPE) or a Partially Owned Parent Entity (POPE) is located in a EU Member State.

In October 2021, 136 member jurisdictions of the OECD /G20 Inclusive Framework on BEPS reached a political agreement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy. Since then, the technical work has been pursued focusing on Pillar Two, the GloBe rules (the IIR and the “Undertaxed Payment rule” or “UTPR”). The GloBe rules will be implemented through changes in the national legislations based upon the Model Rules agreed upon at the OECD level and the Commentary. The Model Rules have been agreed within the IF on December 2 and should be released next week. The Commentary however will only be available later on. To achieve a coordinated implementation across all Member States, the EU will work with a Directive to be implemented in the national legislation of each Member State within an imposed time frame. The EU plans to release the draft Directive implementing GloBe reflecting the OECD Model Rules by December 22. The Commentary being not available yet will be incorporated later on during the legislative process. The EU Directive should change the Model Rules only to the extent required to comply with the EU Law such as the application of IIR to domestic entities too. The goal is to achieve an agreement by all Member States by spring.

The ambitious EU timeline reflects the OECD goal to have the IIR applicable as of January 1, 2023, and the UTR as of January 1, 2024. The third tool of Pillar Two, the Subject to Tax Rule (STTR) will require a change in the bilateral tax treaties and the EU is not an actor in this process. A Multilateral Agreement (MLI) is most likely to be developed to speed the implementation of the STTR in the treaties linking the signatories.

This acceleration of the implementation within the EU raises concerns such as:

  • What if Pillar II still evolves during 2022, shall we end up with two sets of rules, one for the EU and one for the rest of the world?
  • Shall we really have an uniform implementation across the EU while the Member States are keeping Sovereignty as to their tax policy on their territory?

Still a lot of technical work to come….