Background of Pillar Two
On 8 October 2021, 137 jurisdictions of the OECD/G-20’s Inclusive Framework reached agreement on a two-pillar solution, followed by a set of model rules (the global anti-base-erosion (GloBE) rules). The objective of Pillar Two is to guarantee a minimum level of taxation by introducing rules that grant jurisdictions additional taxation rights, and to limit tax competition between jurisdictions. As a result, the new rules should reduce the risk of tax base erosion and profit shifting. A minimum tax rate of 15 percent was agreed. See also our previous Tax Alerts of 24 December 2021 and 31 October 2022.
On 22 December 2021, the European Commission published a proposal for a directive (2021/0433 (CNS)), which included the OECD GloBE rules. Almost one year later, on 12 December 2022, as a result of the proposed directive being blocked by Hungary for some time, the EU Council announced that the EU Member States had reached an agreement to implement Pillar Two. The agreement on Pillar Two was formally ratified on 15 December 2022.
In short, the agreed directive aims to target both international and domestic groups whose consolidated group revenue exceeds EUR 750 million in at least two of four consecutive years. Compared with the OECD GloBE rules, the scope of the agreed directive is extended by the inclusion of large-scale domestic groups, to ensure compliance with EU freedoms (especially the freedom of establishment). The aim is for the rules to be implemented in all 27 EU Member States by 31 December 2023, effective 1 January 2024. As a result, the European Union will be frontrunner in applying the global OECD/G-20 agreement on Pillar Two.
Pending the agreement at EU level, the Dutch government already initiated steps to avoid the national implementation of Pillar Two being delayed. A public consultation was held for that reason from 24 October until 5 December 2022. During the consultation, interested parties were able to submit their input on a draft bill and explanatory notes (the Draft Bill) to enhance the quality of the future legislation. The text of the Draft Bill largely corresponds with the EU Draft Directive, which was published on 16 June 2022, showing the intention of the Netherlands to align its national legislation with the European regulations.
On 16 December 2022, a day after the European formal ratification of Pillar Two, the Dutch State Secretary for Finance sent a letter to the Lower House. The letter shows that the Dutch government intends to present the final legislative proposal, the Minimum Tax Rate Act 2024, in spring 2023. In addition, a technical briefing for the Lower House will be held on 24 January 2023, during which the Members of Parliament will have the opportunity to ask questions about the proposed measures. This effectively means that, although much has already been worked out on both a European and a national level, the exact content and scope of the Dutch implementation of Pillar Two remains uncertain for the time being. It is expected that the Minimum Tax Act 2024 will enter into force on 1 January 2024.
As a result of the agreement being reached by the EU Member States, Pillar Two will become reality in all EU Member States and it is expected that other, non-EU countries will follow. Given that the Netherlands is a strong supporter of Pillar Two and has already launched a public consultation to implement the rules, it is important now for multinational and largescale domestic groups to assess the potential impact of Pillar Two on the group and the Dutch entities. More specifically, it is essential to analyze whether Pillar Two could lead to top-up tax being due and which reporting obligations may exist.