In 2021 the members of the Inclusive Framework established by the OECD reached a political agreement on reforms to the international tax system. One of the measures agreed was the introduction of a global minimum effective taxation (Pillar Two). Pillar Two aims to ensure that MNE groups meeting the EUR 750 million revenue threshold are always subject to a minimum corporate taxation of at least 15%. We refer to our Tax Flash of 21 December 2021.
On 22 December 2021, the European Commission published the first draft of a proposed directive setting out the Pillar Two model rules for EU Member States (EU Directive). For an overview of the EU Directive, we refer to our Tax Flash of 23 December 2021. The EU Directive must be adopted by unanimity of all EU Member States. In June 2022 all EU Member States but one voted in favour of the proposed EU Directive. Therefore, the approval of the EU Directive is blocked until today. In the preface to the draft bill to implement Pillar 2 (the Draft Pillar Two Act), the Netherlands reiterates in that it remains committed to find consensus within the EU. There is still a possibility to obtain unanimity of all EU Member States during the ECOFIN meetings on 8 November and 6 December.
Nonetheless, the Netherlands has also issued a joint statement on 9 September 2022 together with France, Germany, Italy and Spain that it is committed to a swift implementation of Pillar Two in 2023 ‘by any possible legal means’. In addition to unanimous approval, these possible legal means could for instance be enhanced cooperation or coordinated unilateral implementation. We refer to our blog of 10 June 2022.
Details of the Draft Pillar Two Act
The Draft Pillar Two Act aims to implement the latest proposed draft of the EU Directive (version dated 16 June 2022). Although the EU Directive is not yet in approved form and is therefore still subject to change, the Netherlands expects that the final EU Directive will be almost identical to the draft of 16 June 2022 because the EU Directive is largely based on the OECD Model Rules.
The Draft Pillar Two Act itself is also considered work in progress. The Dutch legislator mentions that due to the speed with which this draft bill was created, its scope (337 pages including the explanatory memorandum) and the complexity of the bill, it should be taken into account that technical improvements may be made in a number of sections in the coming period. The legislator has nevertheless decided to start the public consultation in order to have sufficient time to improve the quality of the final Pillar Two Act based on the public consultation input.
In line with the latest draft of the EU Directive, the Netherlands proposes an entry into force of the income inclusion rule and qualified domestic top-up tax as per 31 December 2023 (i.e., applicable for financial years commencing on or after 31 December 2023) and of the undertaxed profits rule as per 31 December 2024 (applicable to financial years commencing on or after 31 December 2024).
The proposed EU Directive allows EU members to decide how to implement the EU Directive's provisions into domestic (tax) law. The Netherlands chooses to implement Pillar Two in a separate Pillar Two Act instead of an implementation within its existing corporate income tax act. The Dutch legislator indicates this decision has been made because Pillar Two is conceptually different from corporate income taxation, notably considering that Pillar Two takes as starting point the profit according to financial reporting standards while the Dutch corporate income tax act is based on the profit for tax purposes. Furthermore, embedding Pillar Two in the corporate income tax act would result in an increase in the complexity thereof (also for taxpayers not in scope of the Pillar Two rules) and also an increase of complexity for the Dutch Tax Administration. In addition, the legislator considers that a separate Pillar Two Act is more in line with the concept of Pillar Two to be levied on top of the existing domestic corporate income tax.
The Pillar Two top-up tax should be declared by tax return only (i.e. the Dutch Tax Administration will not issue a tax assessment) because the Dutch legislator is of the view that MNE group entities have the best access to the international financial data needed to complete the Pillar Two tax position. The Dutch legislator does acknowledge that for the approximate 3,000 multinational groups that are in scope of the Draft Pillar Two Act, the administrative burden will increase.
Finally, similar to the draft EU Directive, the Draft Pillar Two Act contains several delegation provisions to details of the Pillar Two system that are not yet in agreed form in the Inclusive Framework, e.g. safe harbour rules, dispute resolution mechanisms and further administrative guidance.
Interested parties can submit their comments to the Draft Pillar Two Act until 5 December 2022.
How can we support you?
Our Pillar Two team is available to support you in analysing and modelling the impact of the Draft Pillar Two Act on your group, setting up compliance processes and exploring ways to mitigate increased taxation and complexity. Especially considering that the Draft Pillar Two Act practically has retroactive effect due to transition rules that apply as from 30 November 2021, we advise in-scope groups to continuously assess these rules in particular.
We aim providing input on the public consultation based on our experience and the experience of our clients. Therefore, do not hesitate to reach out if we can raise any particular issues you encounter.
Should you have any question in the meantime, please contact a member of our Pillar Two team or your regular trusted contact at Loyens & Loeff.