After lengthy negotiations and consultations, the Member States of the European Union reached an agreement on the introduction of the so-called Component 2 (Pillar Two) - a minimum tax for transnational corporations with a turnover of more than 750 million euros per year. From 2024, large companies will pay at least 15% tax if they are established in one of the EU jurisdictions.
OECD plans
The Organization for Economic Co-operation and Development (OECD) has been working over the past years to eliminate gaps and inconsistencies in tax legislation that allow large multinational corporations to underpay taxes. In particular, in connection with the disproportionate distribution of corporate tax, developing countries annually suffer losses of 95-230 billion euros.
In 2021, at the suggestion of the OECD, 137 countries entered into a two-component agreement on improving tax legislation in the following areas:
- Component 1 (Pillar One) suggests that a portion of the profits of multinational enterprises should be taxed in the jurisdiction in which their goods or services are used or consumed. This means that technology companies can be taxed where their consumers are, even if their employees are far from their customer base. In a world where e-commerce is now widespread, this is a necessary change.
- Component 2 (Pillar Two) provides for the introduction of a global minimum tax rate of 15%. The purpose of this move is to prevent companies from shifting their profits to countries with lower taxes (“tax havens”) through international trading structures.
Based on the proposal of the OECD, on December 22, 2021, the European Commission published a draft Directive of the relevant content - European Anti-tax avoidance directive 3 (ATAD 3). Throughout 2022, there were discussions of this project in the EU countries.
Online consultations in the Netherlands
On October 24, 2022, the Ministry of Finance submitted a bill based on a draft directive for online consultations. If adopted, Dutch organizations that are part of multinational groups with a global turnover of at least 750 million euros per year will have to pay taxes under the new rules.
The law must ensure that a multinational group pays a minimum of 15% tax on income reported in the consolidated financial statements. It is called effective tax rate. Based on the results of online consultations, the bill will be amended before it is sent to Parliament. The plan is to submit the amended bill to the House and Senate during 2023. The law is then expected to take effect on January 1, 2024.
According to official reports from the Ministry of Finance, the Netherlands is a strong supporter of the introduction of a minimum tax rate for multinational companies in the EU. Such a move would no longer allow countries to compete with each other by offering a lower tax rate. International companies with a turnover of more than 750 million euros per year must pay at least 15% corporate tax, regardless of which jurisdiction is the place of their incorporation.
Making a decision in the EU
On December 12, 2022, the European Commission adopted the directive proposal unanimously. Now all member states of the European Union will have to implement the directive into their national legislation no later than the end of 2023.
Earlier, the Hungarian government opposed the introduction of a minimum corporate tax of 15%, arguing that an increase in the tax burden on national companies would undermine their competitiveness and destroy thousands of jobs in the country. Poland was also against it, which we wrote about in our article. However, now all disagreements are in the past, and Europe is ready to take the next step towards creating a system of tax coordination. At the same time, the changes do not affect small and medium-sized businesses.
Publication Date: 29.12.2022
