Pillar Two and EU Law
Global Minimum Taxation?: An Analysis of the Global Anti-Base Erosion Initiative (A. Perdelwitz & A. Turina eds., IBFD 2020), Books IBFD
Posted: 29 Oct 2021
Date Written: September 15, 2020
This chapter focuses on addressing the prospective compatibility of the proposed Pillar Two rules with EU primary law and, in particular, the fundamental freedoms. In this respect, the authors observed that, as the Pillar Two package is a composite one, a distinction would need to be made between, on the one hand, the GloBE rules stricto sensu (namely, the IIR and the UTPR), which would have to be introduced in the domestic laws of the Member State, and, on the other hand, other sets of rules that would have to be included in the Member State’s tax treaty network (namely, the switch-over rule and the STTR).
With regard to the two GloBE rules stricto sensu (IIR and UTPR), there are concrete grounds to foresee that these rules would need to be assessed on the basis of the free movement of capital, hence leading to an impact not only on intra-EU relations, but also on relations involving third countries. Both rules appear to raise issues in that regard, as, in substance, they would virtually end up creating a link between the exercise of a fundamental freedom and the imposition of a top-up tax, which would likely be found to entail discriminatory and less favourable treatment of taxpayers exercising their fundamental freedoms. Moreover, it is doubtful as to whether the most traditional justifications that have been invoked to uphold measures triggering such consequences may apply to the proposed GloBE rules.
As such, the only way by which such friction could be overcome would be to foresee the extension of the scope of application of such rules also to domestic situations. Such a development would not be deprived of potential adverse consequences, but, in the view of the authors, it may also contribute to greater overall policy consistency of the GloBE initiative by minimizing the room for disparities. Such an extension should not be discarded, as the analysis of the connected trade-offs may ultimately be positive.
When it comes to treaty-based rules, a distinction should be made between the switch-over rule and the STTR. The switch-over rule appears much less problematic regarding its interaction with primary EU law and, in particular, the fundamental freedoms, and it may ultimately be upheld in light of the Columbus Container case law. On the other hand, the analysis concerning the STTR would need to be a two-pronged one. As far as the prong of the rule consisting of the source state regaining taxing rights is concerned, it is the authors’ view that this should likely be considered as not incompatible with the fundamental freedoms. On the other hand, with regard to the prong consisting of the triggering of a top up tax, the main issue concerns the asymmetrical application of the rule, which would place companies making cross-border payments in a different and worse tax situation than that of comparable companies making payments to domestic counterparts. At the same time, the EU law constraints on this rule would be somewhat less disruptive than what has been observed in connection to the IIR and UTPR, as it would apply only to closely related persons, hence most likely falling under the purview of the freedom of establishment. In conclusion, and despite the amendments introduced by the Blueprint, there are still many issues concerning the compatibility of Pillar Two with EU law that ought to be solved before the rules are adopted. Otherwise, it is highly likely that the Court will challenge them as being incompatible with EU law.
Keywords: Taxation, Tax law, European taxation
JEL Classification: K33, K34, F13, E62, D78, E62, F02, F23, F42, H20, H22, H23, H25, H26, H87, O19, O23, O24
Suggested Citation: Suggested Citation