In depth
The process towards implementation of the Pillar Two Directive is definitely not straight-forward. In order to adopt the said Directive unanimous approval of EU member states is required. When the Pillar Two Directive proposal was initially tabled in March, four member states (i.e. Estonia, Malta, Poland, Sweden) raised their objections and were reluctant to approve the proposal. After careful negotiations with the French presidency (on behalf of the EU Commission), the objections from Estonia, Malta, and Sweden were lifted and these member states approved the Pillar Two Directive during the subsequent ECO FIN meeting.
Until recently, Poland was the only EU member state withholding approval for the Pillar Two Directive. Earlier this month, a compromise was reached between Poland and the other member states and it seemed highly likely that the Pillar Two Directive would be unanimously approved during today's ECO FIN Council meeting. However, surprisingly, after approving the Pillar Two Directive at two previous ECO FIN Council meetings, Hungary started raising concerns earlier this week. Last Wednesday Hungarian government officials requested France to remove the Pillar Two Directive from the agenda of today's ECO FIN meeting. France refused to do, possibly given international pressure.
Today, June 17, Hungary formally objected and therefore the ECO FIN Council could not unanimously approve the Pillar Two Directive. In its remarks at the meeting, Hungary noted that Europe is currently facing major challenges due to the ongoing war in the region and current economic crisis (e.g. increasing interest rates and inflation). Adopting the GloBE rules at this current stage would possibly damage the economy in their view, Moreover, Hungary noted that there is still ongoing technical work required on Pillar Two. Hungary's concern is therefore that taxpayers cannot yet fully prepare for the consequences of the complex Pillar Two Directive. Hungary ended its statement by noting that the EU is in fact not late with implementation, as neither the US or Asian jurisdictions have started implementation.
The French presidency thanked Poland for its constructive approach but was clearly not amused by Hungary and todays outcome. However, they remain optimistic and believe that the objective of the adoption of the Pillar Two Directive is still attainable. Interestingly comments were also made about how important it is for the EU to move to qualified majority voting on tax matters urgently.
With today's decision, the Pillar Two Directive will likely be a topic on the agenda for a next ECO FIN Council meeting on 12 July 2022.
Recommended actions
Irrespective of the adoption of the Pillar Two Directive, jurisdictions outside the EU are free to move ahead with implementing the OECD IF GloBE model rules. For example, the UK already published a draft bill to implement the GloBE model rules. We expect that several jurisdictions will consider following the UK's example. In case the Pillar Two Directive fails to get unanimous consent, EU legal constraints may stop individual member states following the UK's example. Moreover, the aim of the EU is to implement consistent GloBE model rules within the EU, and any effort at individual implementation across the EU member states of the GloBE rules may harm such consistency. If it continues to prove impossible to reach unanimity on the Pillar Two Directive, a group of at least 9 member states in favor of the directive may consider implementing the Pillar Two Directive under he enhanced cooperation procedure of article 20 of the Treaty on the Functioning of the EU. We will continue to closely monitor the developments on the Pillar Two Directive as they occur.
