On December 12, the 27 member states of the European Union unanimously decided to implement a major component of the Organization for Economic Co-operation Development’s base erosion and profit-shifting framework.
The landmark agreement paves the way for the EU to rollout a global corporate minimum tax rate of 15%, imposed on large multinational companies with annual revenues of $790 million (€750 million). It is known as “Pillar Two,” a proposal drafted by the OECD alongside G-20, an intergovernmental forum comprised of 19 countries and the EU. The other half of the OECD framework, Pillar One, would cover the allocation of taxing rights over large multinationals to jurisdictions where profits are generated.
By October 2021, nearly 140 countries and territories signed onto the deal, but Hungary was a key holdout and had blocked the EU from moving forward with Pillar Two. In response, the U.S. in July responded by disassembling its tax treaty with Hungary. When Hungary relented, the European Council adopted the Pillar Two directive. Members will be required to enact the global minimum tax into their respective tax codes by the end of 2023.
The decision comes less than two weeks after the United Nations approved a resolution to take the reigns from the OECD and begin its own formal discussions on global tax matters.
“I am very pleased to announce that we agreed to adopt the directive on the Pillar 2 proposal today,” said Zbyněk Stanjura, Minister for Finance of Czechia in a statement. “Our message is clear: The largest groups of corporations, multinational or domestic, will need to pay a corporate tax that cannot be lower than 15%, globally.”
U.S. Treasury Secretary Janet Yellen also voiced her support of the EU directive, saying in a December 16 press release that the U.S. will help domestic businesses stay globally competitive and protect workers. A corporate alternative minimum tax was enacted in the Inflation Reduction Act (PL 117-169) that imposed at a rate equal to the excess of 15% of a corporation’s adjusted financial statement income.
“Crucially, implementing this international tax deal will change the world’s corporate tax system to benefit American workers and middle-class families,” said Yellen. “In the United States, rather than being rewarded for moving operations overseas, companies will be incentivized to keep jobs and headquarters at home. And rather than tax havens keeping the profits of U.S. companies, those profits can instead flow back to the United States, allowing us to further invest in our infrastructure, our economy, and our people.”
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