The European Union has made major progress on two key tax issues.
Firstly, on December 15, 2022, after months of intense negotiations, all EU member states reached an agreement to implement the OECD’s so-called Pillar 2 at the European level.
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The Council had been invited by the ambassadors of the EU member states to adopt the Pillar 2 Directive, which was first presented a year ago on December 22, 2021.
Pillar 2 focuses on the so-called ‘minimum tax’, that is, a minimum rate of 15 percent on the profit of large multinational companies with consolidated group revenues of at least € 750 million per year, a rule that should be implemented from 2023.
The companies concerned by the Directive will have to pay a minimum effective tax rate of 15 percent in each country in which they operate.
Groups with effective tax rates below the minimum in a particular jurisdiction will be required to pay the additional tax, in accordance with Pillar 2’s basic rule, the so-called ‘Income Inclusion Rule’, under which the ’top-up tax‘ is paid in the jurisdiction of the parent company.
If the Pillar 2 regulations have not been implemented in the state of the parent company, the so-called ‘Undertaxed Payment Rule’ will be applied secondarily. Consequently, the additional tax will be paid by dividing it among the other jurisdictions in which the group is present, and which have implemented the regulations locally.
Although the Directive will still need to be transposed into the member states’ national law by the end of 2023, the consensus can be seen as a bold move by the EU, sending an important message to the international community about the next steps to reduce the risk of profit shifting.
Secondly, on December 13, 2022 a provisional agreement on the Carbon Border Adjustment Mechanism (CBAM) was reached. The agreement still needs to be confirmed by the member states’ EU ambassadors and the European Parliament and adopted by both institutions before being considered as final.
The CBAM is a crucial instrument for achieving carbon neutrality in 2050 and aims to prevent the risk of carbon leakage outside the EU and also to encourage partner countries to design carbon pricing policies to curb climate change.
Regarding the products and sectors concerned by the new standards, the new environmental measure will initially cover a number of specific products in some of the most carbon-intensive sectors like:
- iron and steel
- concrete;
- fertilizers;
- aluminum;
- electricity and hydrogen.
Under the provisional agreement, the CBAM will come into force from October 2023 and will have an impact on both an operational and a strategic decision-making level for businesses within the European Union and in the rest of the world.