EU Crackdown Shows Hurdles to Enacting Global Minimum Tax Deal

The European Commission on Jan. 25 announced it was sending infringement letters to Cyprus, Greece, Poland, Portugal, Spain, Estonia, Latvia, Lithuania, and Malta for being late in adopting legislation to implement the global minimum 15% tax known as Pillar Two.

This announcement may not seem like a big deal—surely, these countries will legislate soon enough—but it highlights the inflexibility under which EU countries must operate compared with the relative flexibility afforded non-EU countries when adopting Pillar Two.

This raises problems for both countries and businesses now and even bigger problems as we head toward January 2025—the effective date of the undertaxed payments rule, which would allow the taxation of domestic income in a headquarters country such as the US where the directive rules deem it to be low-taxed.

The inflexibility of the directive could cause the UTPR to become a critical flashpoint when an unstoppable force (the directive) meets an immovable object (particularly the US) with unknown consequences for international tax.

Infringement Procedure

The latest infringement procedure could have technical and strategic reasoning. Because it aims to prevent distortions in the internal market, uneven adoption of the rules across different timelines could result in competitive distortions among member states. Nonetheless, the EC has discretionary power to decide when to launch an infringement procedure.

To start the procedure, the EC issues a request for information to a member state, demanding a response within two months. An unsatisfactory reply may lead to a formal request to comply, offering another two months. Noncompliance could escalate to the Court of Justice of the European Union, whose ruling mandates immediate compliance. Failure to do so risks a second procedure, with fines.

The commission has been aware of potential implementation challenges, but acting now could guarantee member states’ readiness for compliance and addresses the potential inability for some countries to introduce retroactive legislation—particularly for 2024.

More broadly, the EU’s role in developing Pillar Two has been pivotal, with its largest economies championing the initiative. Consensus among the EU’s 27 member states was crucial for the project’s practical success. Today, effectively implementing the rules within the EU becomes more critical as several jurisdictions outside Europe, including Brazil, China, India, and the US have yet to implement.

Overall, the infringement procedure also could indicate the EU’s stringent approach toward noncompliance, signaling potential firmness in international contexts, such as peer reviews, details of which remain largely unknown.

Business Implications

Delayed implementation presents unique challenges for businesses. Many large multinational groups prepare quarterly financial statements that are subject in the case of the US to review by their financial statement auditor.

While the exact criterion depends on the relevant financial accounting standard, tax expense generally can’t be recorded in such financial statements for new taxes that haven’t been enacted by a legislative body. Accordingly, delayed legislation may create uncertainty and operational complexities for multinational groups as they begin to prepare quarterly financial statements in 2024.

For example, a group that expects a Spanish income inclusion rule to apply within its structure may not be able to record an expense for the top-up tax to be collected under that income inclusion rule until later in 2024, when Spain’s Pillar Two legislation is enacted.

This issue is compounded for multinationals expecting more than one set of rules to apply, generating potentially significant compliance costs and inefficiencies. Delayed enactment also raises the question whether every delayed jurisdiction that intends to apply the rules in 2024 will be able to do so.

Additional uncertainty for multinationals may arise from delayed implementation to the extent that certain jurisdictions may not be able to legislate retroactively. The Pillar Two administrative guidance issued in December hinted at this, noting that not all jurisdictions may be able to adopt a provision of the guidance that included a reference to a date in 2022.

Accordingly, the guidance provided that such jurisdictions may need to use a later date due to constitutional or other superior law considerations. It follows that such jurisdictions also may struggle to adopt rules starting Jan. 1, 2024, to the extent retroactive legislation is problematic under constitutional or other superior law grounds.

Law Versus Politics

While not belittling the problems that businesses and EU member states face because of the EU directive’s rigidity, the EC is only doing its job. But as we’ve seen over the past 12 months, the issues created by the Model Rules seem to have grown rather than diminished.

Issues around non-refundable tax credits, for example, have raised serious political concerns in the US because of the final version of the UTPR, which allows taxation of domestic income in the ultimate parent entity jurisdiction, meaning the home country of the multinational group’s parent.

So far, the OECD—and, it seems, the European Commission—have accepted that credits accounted for under equity accounting are Pillar Two compatible up to the amount invested, and more recently that transferable credits are the same as refundable credits.

But is there a solution to the issue of research and development credits and other nonrefundable credits such as those in the US? And is there truly no possibility of a permanent UTPR safe harbor? These issues make the UTPR a dangerous flashpoint with the potential to exacerbate not only tax, but also trade and political tensions.

A political solution is possible, but what the infringement actions may show us is that the directive has certain technical boundaries that can’t be crossed. What for non-EU countries may be an achievable, albeit difficult political decision may be much more difficult for the EU, even if the mechanism is described as a safe harbor.

As the directive reminds us, a safe harbor is only valid as long as it’s consistent with the directive and EU law. That boundary may be slightly fuzzy—but it’s still a legal boundary. The infringement actions underscore the likely clash between an unstoppable force and an immovable object.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Will Morris is PwC’s global tax policy leader and has served as chair of the business and industry advisory committee to the OECD.

Giorgia Maffini is director in tax policy with PwC in London and was deputy head of the tax policy and statistics division at the OECD.

Steven Kohart is a principal in PwC’s international tax services group in New York and was an adviser at the OECD’s Centre for Tax Policy and Administration.

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