The European Union's French presidency plans to delay implementation of the OECD/G20 Global Anti-Base Erosion (GLoBE) Rules by at least a year.
The GLoBE rules, agreed in December 2021, will impose a 15% global minimum corporation tax on large multinational companies, among other measures designed to ensure that they pay taxes in countries where they have a customer base but no permanent establishment.
In a briefing note on 15 March, Baker & McKenzie said France had put forward a compromise text in an attempt to reach an agreement at the ECOFIN of 15 March 2022, in a new draft of the EU's directive to implement the GloBE rules.
Press reports indicated there had been calls from some Member States for: 1) the implementation of the rules to be delayed to allow more time, given their complexity; 2) implementation of the Pillar Two GloBE rules to be legally linked to the implementation of Pillar One; and 3) implementation by Member States to be optional to some degree.
The global law firm said: "This is an interesting development as the political agreement reached by the Inclusive Framework on 8 October 2021 states that "Pillar Two should be brought into law in 2022, to be effective in 2023, with the UTPR coming into effect in 2024".
"Recital 21 of the compromise text suggests the revised EU timeframe is consistent with that political agreement, but in reality, the directive would now substantively apply from 2024 onwards. The only exception would be an in-scope taxpayer that has an accounting period that begins (rather than ends) on 31 December, which is likely to be rare in practice.
"That said, the 8 October agreement was also explicit that members of the Inclusive Framework are not obliged to implement the GloBE rules, so perhaps delayed implementation is considered better than no implementation at all."
The briefing note continued: "A further development, introduced by the newly included Article 47a of the compromise text, is the option for certain Member States to elect to defer the application of the directive until fiscal years beginning as from 31 December 2025. To be eligible, the member state cannot have more than 10 groups headquartered in its jurisdiction that are in the scope of the directive.
"This temporary deferral mechanism appears to be designed to address concerns from Estonia that they will need more time to restructure their domestic tax system, which levies taxes on profits as they are distributed by companies, rather than when accrued. The trade-off for electing under Article 47a is that the UTPR is applied by other Member States to the companies located in the electing jurisdiction one year earlier in 2024. This would therefore only be a temporary reprieve for in-scope domestic taxpayers in those electing jurisdictions.
"Lastly, the December draft produced by the EU Commission included provisions to delegate authority to the Commission to assess the equivalence status of third-country IIRs and amend the annex to the directive to reflect the outcome of those assessments. The compromise text removed that power; the EU Council would instead make decisions on equivalence through unanimous decision.
"Whilst these are quite significant concessions, it has not been enough (at this point in time) to reach the unanimity required for the directive to move to the next stage in the EU's legislative process, with Estonia, Malta, Poland, and Sweden all expressing opposition to the current draft of the directive."
It further said: "The grounds of that opposition is in some cases based on a desire for more time to consider the proposal, as the Inclusive Framework continues to work through a number of outstanding issues, as well as a desire for greater legal certainty that Pillar One and Pillar Two will progress together.
"The French presidency indicated they are confident they can address those concerns, it is therefore unlikely that the concessions offered in France's compromise text will be withdrawn when the ECOFIN next meet on 5 April 2022. Rather, it seems the question is what further concessions France may be willing to offer to reach the unanimity that is required to progress the directive."
Outside of the EU, the list of jurisdictions that have formally announced an intention to implement the model GloBE rules continues to grow. Governments in the UK, Singapore, Hong Kong, Switzerland, and South Africa have all formally indicated their intention to implement, whilst the UAE has announced an intention to apply a special rate to large companies in the scope of the GloBE rules.
It is likely this list will expand further, Baker McKenzie said, but it remains to be seen whether the likely delay in the EU's implementation will influence the timetable for other jurisdictions.
