New European Union tax rules came into force this week, introducing a minimum rate of effective taxation of 15% for multinational companies active in EU member states.
“The framework will bring greater fairness and stability to the tax landscape in the EU and globally, while making it more modern and better adapted to today's globalised, digital world,” said the European Commission.
The rules, unanimously agreed by member states in 2022, formalise the EU's implementation of the so-called ‘Pillar 2' rules agreed as part of the global deal on international tax reform in 2021.
While almost 140 jurisdictions worldwide have now signed up to those rules, the Commission says it has been a “front-runner” in translating them into hard law.
By lowering the incentive for businesses to shift profits to low-tax jurisdictions, Pillar 2 aims to curb a "race to the bottom" - the battle between countries to lower their corporate income tax rates in order to attract investment.
The rules apply to multinational enterprise groups and large-scale domestic groups in the EU, with combined financial revenues of more than €750m a year, and with a parent company or a subsidiary situated in an EU member state.
The Directive includes a common set of rules on how to calculate and apply a “top-up tax” due in a particular country should the effective tax rate be below 15%. If a subsidiary company is not subject to the minimum effective rate in a foreign country where it is located, the member state of the parent company will also apply a top-up tax on the latter.
In addition, the Directive ensures effective taxation in situations where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules.
The Commission reckons the new tax regime “could” generate an extra $220 billion annually to help countries around the world fund investments and better quality public services.
