- The European Union (EU), which has been marshaling its 27 countries to agree to implement rules for the 15% global minimum tax that is at the center of the Organization for Economic Cooperation and Development’s (OECD) Pillar 2 initiative, failed to win the needed unanimous support as Hungary became the latest country to fall out of line, according to Grant Wardell-Johnson, global tax policy leader with KPMG International.
- Previously the lone holdout had been Poland but at the EU’s Economic and Financial Affairs Council (Ecofin) meeting earlier this month Hungarian Finance Minister Mihaly Varga revoked his country’s previous support, citing the economic impact of the Russia-Ukraine war, concern about uncertain economic consequences as well as possible harm caused by the measures’ delayed implementation, according to a June 17 PwC report.
- “The factors preventing the Hungarians from supporting the proposal will present a tricky obstacle for the EU Council to overcome. None of the reasons given (the war in Ukraine, difficult economic environment with rising interest rates, fears of being a first mover on the Pillar Two rules) are likely to be easily resolved with any measure of speed, if indeed the EU has any control over these pressure points at all,” according to the PwC Tax Policy Alert report.
If the EU wins support for a directive on the global minimum tax it would likely have broader implications well beyond Europe. Success there could help U.S. proponents of the initiative, such as Treasury Secretary Janet Yellen, who have been grappling with flagging momentum since the Build Back Better legislation that includes the global minimum tax stalled in the Senate.
The minimum tax is at the center of the so-called Pillar 2 piece of the OECD’s base erosion and profit sharing (BEPS) project that is designed to fight tax avoidance and shut down tax havens. In October, 137 countries reached a multilateral agreement to overhaul global tax rules. The new tax regime will apply to companies with annual revenue exceeding 750 million euros ($850 million) and generate about $150 billion in additional annual global tax revenue, according to the OECD.
Its implementation will be years in the making. Even if the EU directive is approved the group has delayed its effective date to Dec. 31 2023 from Jan. 1 2023, according to PwC. Meanwhile, countries with no more than 12 multinational companies that are affected by the rules could opt to defer the adoption for six years.
Poland ultimately threw its support for the global minimum tax following a visit from Yellen to Warsaw in May and an EU.agreement to release the equivalent of $37.4 billion to help the country recover from the pandemic, according a Monday report in The Wall Street Journal.
Similarly, Hungary’s 11th hour opposition could be designed to wring out other benefits from the EU, Wardell-Johnson said in an email. “This could be considered a strategic [maneuver] to secure concessions in other matters with the EU, primarily over rule-of-law breaches and disputes over EU funding,” he wrote, adding that it may take several months to work through. But Wardell-Johnson remains optimistic that the EU will ultimately move forward with Pillar 2 directive in spite of the latest roadblock. “I don’t see this as a major obstacle,” he wrote. It’s “more of a bump along the road.”