Pillar 1 & 2 and EU Tax, Compliance Policy Bulletin 81

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Pillar 1 & 2 and EU Tax, Compliance Policy Bulletin 81

David Marinelli

January 15, 2022

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EU Commission 2022 Work Programme & Q4 Pillar 1 and 2 Tax Policy Priorities

The European Commission work programme for 2022 indicates that the EU will focus its taxation policy priorities on implementation of the global tax agreement concerning Pillar 1 (reallocation of taxing rights) and Pillar 2 (global minimum company tax). The work programme states the “European Commission will now strive to show the EU’s leadership in global tax fairness, by ensuring a swift and consistent implementation across the EU.” Implementation of Pillar 1 largely depends on the ongoing technical level work at the OECD, which should inform the EU legislative process. Depending on the agreed solution, EU’s implementation of Pillar 1 OECD global agreement on re-allocation of taxing rights might come as a legislative item (directive), under Article 115 TFEU, which requires consensus of all Member states.

Regarding the work priorities for the last quarter of 2021, the Commission listed:

Directive to fight the use of shell entities; and,
Proposal on implementation of the OECD global agreement on minimum effective taxation (Pillar 2).

Concerning the initiative to fight the use of shell entities, the EU intends to allow Member states to tax a shell entity located in another EU Member state, satisfying certain conditions, as if the shell were located within their own taxing jurisdiction. It is expected that the criteria identifying a company as a ‘shell entity’ would be based on a methodology similar to the one already used by the EU in the DAC6 hallmarks.

US, UK & EU Countries Agree Transitional Repeal of Unilateral Digital Taxes

Following the agreement reached by 136 jurisdictions on global minimum corporate tax and the partial reallocation of profit to market countries, recently endorsed by G20, the Finance Ministers of Austria, France, Italy, Spain and the United Kingdom have now issued a joint statement with the United States, setting out an agreement reached for a transitional approach to walking back the existing unilateral digital taxes in those countries.

In the statement, Austria, France, Italy, Spain and the United Kingdom set out that they have agreed that the unilateral measures will remain in force until Pillar 1 (reallocation of taxing rights) is implemented, but that if the amount of tax collected in the jurisdictions exceeds the equivalent amount that would be due under Pillar 1 in the first full year of implementation, the excess amount will be creditable against the portion of the corporate income tax liability associated with Amount A (amount allocated to market jurisdiction) as computed under Pillar 1 in these countries, respectively.

Further, the United States has also undertaken to terminate any proposed trade action and refrain from taking any further action against Austria, France, Italy, Spain, and the United Kingdom in relation to their unilateral digital taxes until the implementation of Pillar 1 takes place.

The agreement notes that although the United States had argued for an immediate withdrawal of unilateral measures, effective as of the date of the political agreement, i.e. 8 October 2021, the countries with unilateral digital taxes preferred for the withdrawal of these measures to come into effect upon implementation of Pillar 1.

World Leaders Endorse Global Tax Deal

Following the agreement on global minimum corporate tax and the partial reallocation of profit to market countries, endorsed on 8 October by G20 Finance Ministers, the G20 political leaders issued a political declaration setting out their commitment to implement the deal as agreed with the OECD-endorsed timeline. The leaders of 19 nations in Rome were joined by their Russian and Chinese counterparts via video-link to confirm the final political agreement. The latest communique notes the “historic achievement through which we will establish a more stable and fairer international tax system.”

The world leaders called on the OECD and the BEPS Inclusive Framework “to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023”. The leaders also endorsed further support for developing countries through the Inclusive Framework and further domestic resource mobilisation efforts.

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, speaking at the Web Summit technology conference in Lisbon last week, said there are outstanding issues with the implementation, including in the US.

European Parliament Adopts Public Country-by-Country Reporting Legislation

The European Parliament has now adopted legislation introducing public country-by-country reporting obligations for multinationals to declare the amount of tax paid in EU Member States. Under the legislation, multinationals and their subsidiaries which have an annual revenue over €750 million and are active in more than one EU country will be required to publish the following information:

The nature of the company’s activities;
The number of full-time employees;
The amount of profit or loss before income tax;
The amount of accumulated and paid income tax and accumulated earnings.

If a subsidiary is deemed to exist solely for the purpose of avoiding the reporting requirements, the subsidiary will also be required to report the same tax information. The reported information will be made publicly available online in a harmonised format.

The Directive on Public Country-by-Country Reporting, Directive 2021/2101 amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches, has now been published in the Official Journal of the European Union on 1 December.

The Directive entered into force on 21 December, and Member States thereafter have 18 months to implement the directive into domestic legislation. Reporting obligations will apply from mid-2023.

Commissioner Gentiloni Outlines European Commission Tax Plans for 2022

Commissioner Gentiloni confirmed that implementation of the OECD two-pillar agreement was the number one priority of the Commission, and that a proposal for Pillar 2 would be tabled before the end of the year. He stated that ECOFIN were expected to have their first discussion on the file at its January meeting, with agreement to be pushed for as soon as possible by the French Presidency of the Council of the EU. He stressed that receiving Parliament’s opinion quickly would be key to ensuring adoption takes place in time for rules to come into force in 2023 as planned.

Commissioner Gentiloni also confirmed that once work by the OECD on the text of the multilateral convention for Pillar 1 is more advanced, the Commission will progress its own work in implementing the rules. In the interim the EU digital levy plans will remain on hold, said the Commissioner.

Commissioner Gentiloni also outlined the following as key priorities for 2022:

A proposal on fighting the use of shell entities to ensure that entities with no/minimal presence do not benefit from tax advantages in the EU – expected to be adopted in early 2022;
A “more robust approach for zero tax jurisdictions in the context of the EU list of non-cooperative jurisdictions”, noting that the EU expects the OECD Global Forum on harmful tax practices and the OECD Inclusive Framework to propose an international response to this issue;
Reforming the mandate of the Code of Conduct Group to fight measures leading to double non-taxation or double or multiple tax benefits, noting that although two Member States, Hungary and Estonia, continue to oppose revisions, an agreement is expected soon, and potentially this year;
A proposal to “improve public transparency around the effective tax rate paid by large companies in the EU” which will make use of the method agreed under Pillar 2 for minimum taxation;
A proposal to revise the EU directive on administrative cooperation to extend to crypto-assets;
A proposal for a debt-equity bias reduction allowance: DEBRA, to redress imbalance by ensuring a better balance between the treatment of debt and equity for tax purposes.

EU VAT Committee Publishes Updated Guidelines

The European Commission’s VAT Committee, formed of representatives from Member States and the Commission to promote the uniform application of the provisions of the VAT Directive, has now published updated guidelines following from its 118th meeting which took place on 19 April. The guidelines are of an advisory nature only and are not binding on the Commission or Member States.

The new guidelines concern the following matters:

Quick Fixes: Return of goods placed under call-off stock arrangements, and the moment when the goods are considered as returned and accounting methods to determine which goods are returned;
Calculation of the EU place-of-supply threshold for taxable persons making supplies of intra-Community distance sales of goods and supplies of telecommunications;
Broadcasting and electronic services to non-taxable persons: the decision in Case C‑568/17, Geelen, on interactive sessions filmed and broadcasted in real time via the internet;
VAT rules applicable to transactions related to the recharging of electric vehicles; and
VAT related issues in view of the withdrawal of the UK from the EU.

The guidelines can be found here.

OECD model rules for the 15% global minimum tax

The OECD has published model rules – the Pillar Two Model Rules – for the implementation of a minimum corporate tax rate of 15% which will apply to Multinational Enterprises (MNEs) with revenue above EUR 750 million.

Click here to view the OECD press release and model rules.

Global: Proposal for a directive on ensuring a global minimum level of taxation for multinational groups in the EU

On 22 December 2021 the European Commission proposed a Directive ensuring a minimum effective tax rate for the global activities of large multinational groups. The proposal follows the recent historic global tax reform agreement, setting out how the principles of the agreed 15% effective tax rate (Pillar 2) will be applied in practice within the EU. The proposed rules will apply to large groups with combined financial revenues of more than €750 million a year, and with either a parent company or a subsidiary situated in an EU Member State.

Click here to view the text of the proposed Directive.

Shell Entities: Proposed directive laying down rules to prevent the misuse of shell entities for tax purposes

On 22 December, the European Commission proposed a Directive laying down rules to prevent the misuse of shell entities for tax purposes. This initiative is intended to ensure that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages.

Once adopted by Member States, the proposal should come into force as of 1 January 2024.

Source: Malta Institute of Taxation Click here, CFE Tax Advisors Europe Click Here

Please contact David Marinelli should you wish to discuss any matter relating to your Malta registered company.

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