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EU Countries Balk at Accepting 21% Global Minimum Tax Rate (1)

April 29, 2021, 8:45 AMUpdated: April 29, 2021, 1:34 PM

Opposition in the EU to a high corporate minimum tax rate could be a deciding factor in the OECD-led negotiations on a global tax overhaul.

After the Biden administration proposed that the U.S. apply a 21% global minimum rate—sparking speculation that it would push for a high rate in the multilateral talks, too—several European Union countries said they wouldn’t agree to such a high number.

Ireland, the Czech Republic, and Hungary have voiced concerns about a higher minimum effective tax rate. Any one of these countries could use its veto power and derail the minimum tax plan in the EU.

Negotiators have yet to publicly settle on a rate, but the Biden administration has raised the stakes in the years-long negotiations by proposing to increase the U.S. minimum rate for income known as GILTI to 21%. Currently, GILTI is a 10.5% tax on companies’ low-taxed foreign income.

“What they are concerned about is that the real activity is shifting out of the U.S. rather than just profits,” said Michael Devereux, Director of the Oxford University Centre for Business Taxation.

The EU must adopt a global minimum tax regime in order for the OECD rules to be effective, because it contains some of the world’s biggest economies and largest companies.

Unanimous agreement in the EU is crucial because the bloc will most likely have to implement a minimum tax agreement through a directive, which requires unanimous support from member countries when it involves tax matters.

The Organization for Economic Cooperation and Development is working to find consensus among nearly 140 countries on a two-pillar plan to address concerns that multinationals—especially tech giants—aren’t paying enough in taxes. The first pillar would reallocate corporate profits among countries, while the second pillar would create a global corporate minimum tax.

France and Germany recently voiced their support for a 21% rate. But French Finance Minister Bruno Le Maire has expressed doubts that the final U.S. rate—which will have to pass Congress—would ultimately be 21%.

“It feels like it’s a pretty obvious land grab, as it were, by the U.S. because the effect of having a minimum tax rate would be that it removes incentives to move income offshore and the higher you set it and the closer it is to your domestic rate the better,” said Ross Robertson international tax partner at BDO.

The OECD and the Treasury Department didn’t respond to requests for comments.

Countries Object

“I believe that small countries, and Ireland is one of them, need to be able to use tax policy as a legitimate lever to compensate for the advantages of scale, location, resources, industrial heritage, and the real material and persistent advantage that is sometimes enjoyed by larger countries,” Paschal Donohoe, Ireland’s Minister for Finance said during an April 21 webinar.

Hungary’s Secretary of State for Taxation at the Ministry of Finance Norbert Izer has said that setting the rate to 21% would be unfair.

“We are of the view that countries should be given the right to make their sovereign decisions on their tax system and on the taxation of genuine activities, taking into account the level of economic development and other relevant factors,” a spokesperson for the Hungarian Finance ministry said Thursday.

The “fight against unfair tax competition shall not become a fight against competitive tax systems,” the spokesperson added

Technical hurdles also remain, the spokesperson said, such as how to deal with the differences between tax systems and what to do about tax incentives.

The Czech Finance Ministry published a note April 14 stating, “the minimum tax carries the risk of reducing the sovereignty of countries in the area of income taxation and tax competition. For example, in the Czech Republic, tax harmonization, with the current setting by the USA, would mean an increase in the corporate income tax rate for our companies to 21%.”

Implementation Hurdles

The objection of any member country to Pillar Two could ultimately derail its implementation in the EU, Benjamin Angel, European Commission director of direct taxation, said April 15 at a virtual event hosted by Accountancy Europe.

“We cannot say with any certainty” that countries will give any EU directive implementing Pillar Two of the OECD plan unanimous support—a requirement for all new EU tax law, he said.

“What would make Pillar Two binding in the European Union is EU law. And, unfortunately, the taxation still obeys a very outdated decision-making process, requesting unanimity in Council,” Angel said.

The EU’s free movement of capital rules could restrict how the Pillar Two rules are applied. EU rules bar member countries from enacting laws that prevent companies from other member states from establishing themselves there.

The minimum tax proposal could arguably create such a restriction, since it could reduce the incentive for companies to base themselves in lower-tax EU countries and “indeed, in one sense that is the point of the proposal,” said Greg Price, corporate tax partner at Macfarlanes LLP.

CFC Rules

The EU may also not be able to legally sign on to an OECD agreement that doesn’t have a substance based carve-out.

The OECD included a formulaic, substance-based carve-out in its October 2020 blueprint document for Pillar Two—a working version of the plan, as countries try to reach agreement by this summer.

But the Biden administration proposal for revamping GILTI would eliminate such as carve-out from the GILTI regime known as qualified business asset investment (QBAI).

EU law precludes controlled foreign corporation rules—a type of anti-tax avoidance measure—that don’t have a substance based carve-out for businesses from other member countries.

Part of the Pillar Two rules resemble CFC rules, which means it would likely have to comply with this rule.

EU law established in the Cadbury Schweppes case that CFC rules that don’t have a carve-out for real economic substance in a jurisdiction violate the Treaty of the Foundation of the European Union. The treaty is the basis for EU law and established the principle of free movement of capital.

The court said that for a country to apply a CFC rule to an entity based in another member country, it would have to prove that the entity in question was wholly artificial and created for the purpose of evading tax.

“The Court of Justice has limited states’ ability to apply anti-abuse rules to corporations’ substantive activities abroad in other EU member states,” said Ruth Mason, Professor of Law and Taxation at the University of Virginia School of Law.

“So some have taken the view that EU states would need a substance-based carve-out from Pillar Two, perhaps similar to the QBAI in U.S. GILTI, which the Biden administration hopes to repeal,” she said.

—With assistance from Isabel Gottlieb.

(Adds comments from the Hungarian Finance Ministry in paragraphs 15, 16 and 17.)

To contact the reporters on this story: Hamza Ali in London at

To contact the editors responsible for this story: Meg Shreve at; Vandana Mathur at