Legal disputes have brought obstacles to the EU’s implementation of global taxation agreements

Brussels is struggling to overcome resistance from three EU member states, which opposed last week’s International agreement Rewriting corporate tax rules, Hungary and Estonia believe that the proposal may even violate EU law.

The EU may need the unanimous support of member states to adopt the OECD’s proposal to rewrite global corporate tax rules agreed last week. But so far, Ireland, Hungary, and Estonia have refused to sign this global agreement, thus clashed with larger member states within the European Union.

This The main but not the only point of contention for adherents It revolves around the 15% minimum tax rate proposed by the OECD.

Ireland has stated that it is “committed to this process” and hopes to find results that Dublin can support, but it has expressed reservations about the proposal that the global minimum effective tax rate is at least 15%. Hungary also stated that the lowest interest rate would “hinder economic growth”.

In addition, Hungary and Estonia believe that the current proposal violates EU law because it requires countries where large companies are located to apply minimum tax rates to subsidiaries in low-tax jurisdictions.

They argued that the minimum rate rule would violate a 2006 European Court of Justice ruling involving the candy company Cadbury Schweppes.

The ruling stated that placing a subsidiary of a multinational company in a lower tax system does not constitute tax avoidance.

“The European Court of Justice’s ruling on Cadbury Schweppes clearly shows that under the current legal system, such rules should not exist,” said Helen Pahapill, Deputy Secretary-General for Tax Affairs of Estonia.

The opposition within the EU is in a showdown between large and small member states-all member states need to agree to the OECD proposal to become EU law.

The OECD agreement consists of two main elements: the minimum effective tax rate for multinational companies is 15%, called Pillar 2; Pillar 1, which will redistribute the profits of the largest 100 companies to the residences where they sell.

“The smaller EU countries have questioned the legitimacy of Pillar 2 under EU law,” Pahapil added.

Before the target date of the October OECD agreement, the EU is seeking to win the support of opponents in the coming months.

Daniel Gutmann, a partner at the CMS Lefebvre law firm, said that Brussels needs to make regulatory recommendations in a manner consistent with the EU’s main laws on the freedom of business establishment.

“If this principle is restricted, the question that the committee must answer is whether it is reasonable,” he said.

Nevertheless, officials close to the negotiations said that the design of the global minimum tax has been discussed with the legal department of the European Commission, and they believe it is in line with EU law.

Poland also expressed reservations about the minimum tax proposal, believing that it would undermine economic growth. But Warsaw began to support the OECD agreement last week.

Polish Finance Minister Tadeusz Koscinski told the Financial Times that Poland has decided to support the agreement because it includes the divestiture of a large number of commercial activities, and the agreement did not appear in the earlier negotiations.

“We must have musical instruments [to incentivise business to locate in Poland] One of them is our domestic tax system,” he said.

“I am not interested in companies from France or Germany entering Poland and selling back to France and Germany and transferring profits to Poland,” Koscinski added. “But I support them in coming to Poland to help us build innovation capabilities and sell products in local and third-party markets. This must count towards the lowest global tax.”

Although this obstacle has now been overcome, at least in the case of Poland, another complicating factor is the European plan to tax digital services.

Opposed to Washington because it mainly targets large US technology companies, Brussels is expected to announce its proposal later this month.

The EU leaders authorized the Commission to levy taxes in July last year, part of which will be used to repay loans accumulated under its 800 billion euros next-generation EU recovery plan.

The European Parliament is particularly keen to introduce new sources of income allocated to the committee, such as digital taxes.

The EU’s previous technology tax attempts failed in 2019, but this idea reappeared as the Trump administration set up obstacles to the international process.

The committee said that the new tax will apply to hundreds of companies, most of which are European companies, and it will complement the global tax agreement rather than conflict with it.

However, given that the global corporate tax agreement is intended to replace the national digital tax, the EU is facing pressure from the United States to postpone this idea. In a recent document sent to EU diplomats, Washington stated that in view of the sensitive juncture of the negotiations, the proposed levy may “completely disrupt” the tax negotiations.

Pascal Saint-Amans, head of tax management at the OECD, said: “The negotiations are full of vitality and we hope that all countries will eventually join the agreement.”

Additional reporting by Laura Noonan and Marton Dunai

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