Global Minimum Tax Delays

The proposed global minimum tax agreement hit a snag in Europe this month when EU finance ministers failed to reach required unanimity on the so-called Pillar 2 minimum tax proposals in a draft directive put forth by the European Commission at the end of December.

Stepping back to October 2021, more than 130 countries, including the United States agreed to an OECD initiative to set a global minimum tax rate of 15 percent as governments look to collectively end a perceived “race to the bottom” on corporate taxation. From there, a draft directive was put forth by the European Commission at the end of December 2021, and that directive would require unanimous agreement among EU finance ministers. In previous blogs, we have noted that the global tax agreement remains subject to many hurdles and is not just a matter of a rubber stamp of approval. This fragility was highlighted earlier this month when EU finance ministers failed to agree on the draft directive. As a result, the implementation of Pillar 2 (a key component to reaching accord on the global minimum tax agreement) will now be subject to a proposed delay. Under the proposed delay, one of the three principal rules of Pillar 2, the income inclusion rule (IIR), would now go into effect in 2024, and another, the undertaxed payment rule (UTPR), would go into effect in 2025. This marks a one-year implementation delay for each rule. As these rules are inextricably linked with the global minimum tax agreement, it stands to reason that progress toward that agreement will also be delayed.

The inaction in Europe reverberates here in the United States. The EU’s failure to reach agreement could pose problems for the Biden administration as it seeks to have the United States conform to Pillar 2 this year by raising the GILTI rate to 15 percent and applying GILTI on a country-by-country basis. Republicans and even some Democrats have raised concerns about the United States implementing Pillar 2 before other countries do so, as this would arguably place U.S. companies at a competitive disadvantage.

While the Administration’s proposals will be monitored closely in the coming weeks and months, the political landscape in Washington remains uncertain and the likelihood of any proposals passing into law in their current form remains unclear. The McGuire Sponsel Global Business Services team will continue to monitor these developments.

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