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Brussels is working to overcome the resistance of three opposing EU member states last week international agreement to rewrite corporate tax rules, Hungary and Estonia argue that the proposal may even break EU law.
The EU is likely to need the unanimous support of member states before adopting the proposal to rewrite the global corporate tax rules agreed by the OECD last week. But Ireland, Hungary and Estonia have so far refused to sign the global agreement, establishing an internal EU confrontation with larger member countries.
He main point of discrepancy of holdouts it revolves around the minimum 15% tax rate proposed by the OECD.
Ireland has said it is “committed to the process” and wants to find a result that Dublin can support, but has expressed reservations about proposing a global minimum effective tax rate of at least 15%. Hungary has also said the minimum rate will “hinder economic growth”.
In addition, Hungary and Estonia have argued that the current proposal infringes EU law, as it requires countries where large companies are based to apply this minimum tax rate to subsidiaries in lower tax jurisdictions.
They have argued that the minimum rate rule contradicts a 2006 ruling by the European Court of Justice involving the confectionery company Cadbury Schweppes.
The ruling said that basing subsidiaries of multinationals on lower tax regimes does not constitute tax evasion.
“The ECJ ruling on Cadbury Schweppes clearly demonstrates that such rules should not exist in accordance with the current legal regime,” said Helen Pahapill, Estonia’s deputy secretary general for tax matters.
Opposition to the EU establishes a confrontation between smaller and larger member states, which must agree for the OECD proposal to become EU law.
The OECD agreement consists of two main elements: a minimum effective tax rate of 15% for multinationals, known as Pillar 2; and Pillar 1, which would redistribute the profits made by the 100 largest companies to the homes where they make their sales.
“Smaller EU countries have raised questions about the legality of the second pillar under EU law,” Pahapill added.
The EU wants to win the scrap in the coming months, before the October target date for an OECD agreement.
Daniel Gutmann, a partner at law firm CMS Lefebvre, said Brussels should propose its regulation in a way that is compatible with EU primary legislation on the freedom of establishment of companies.
“If there are restrictions to this principle, the questions the commission will have to answer is whether it is justified,” he said.
However, officials close to the negotiation said the design of the global minimum tax had been discussed with the European Commission’s legal department and they were confident it would be compatible with EU law.
Poland had also expressed reservations about the proposed minimum taxes, arguing that it would harm economic growth. But Warsaw last week backed the OECD deal.
Tadeusz Koscinski, Poland’s finance minister, told the Financial Times that his country had decided to support the deal after the inclusion of a cut for a major trade activity, which had previously been absent from the negotiations.
“We have to have instruments [to incentivise business to locate in Poland] and one of those is our national tax system, ”he said.
“I’m not interested in companies from France or Germany going into Poland to resell them in France and Germany and transfer the profits to Poland,” Koscinski added. “But I am in favor of them coming to Poland to help us build our innovation capabilities and sell to local and third-party markets. This must be taken into account in a minimum global tax ”.
Although this obstacle has already been overcome, at least in the case of Poland, another complication is the provision of a European tax on digital services.
Opposed by Washington, which is largely aimed at large U.S. technology companies, Brussels is expected to release its proposal later this month.
EU leaders ordered the commission last July to draw up the fee, part of which would be used to repay the loans accumulated under its next-generation EU € 800 billion recovery plan. .
The European Parliament is particularly interested in seeing the introduction of new sources of revenue allocated to the commission, such as the digital tax.
The EU’s previous attempt to impose a technology tax founded in 2019, but the idea was revived when the Trump administration launched obstructions to an international process.
The commission says the new rate would apply to hundreds of companies, most of them European, and would complement the global tax deal instead of crashing into it.
But the EU faces pressure from the United States to delay the idea, as the global corporation tax agreement seeks to replace national digital taxes. Washington said in a recent document sent to EU diplomats that proposing the rate now runs the risk of “completely derailing” tax negotiations, given the delicate conjuncture of the talk.
Pascal Saint-Amans, head of the OECD’s tax administration, said: “There is a dynamic in the talks and we hope that all countries will join the agreement over time.”
Additional reports by Laura Noonan and Marton Dunai
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