EU Commission Fully Supports Permanent Pillar 2 Safe Harbor

The OECD inclusive framework on base erosion and profit shifting has several pillar 2 issues still under discussion, but the permanent safe harbor is “one which is absolutely key, which we hope will come to fruition very quickly,” Benjamin Angel, director of direct taxation at the commission’s Directorate-General for Taxation and Customs Union, said October 31. He spoke during the annual Congress of the International Fiscal Association in Cape Town, South Africa.

There’s already the transitional country-bycountry reporting safe harbor under the pillar 2 global anti-base-erosion (GLOBE) rules, but “we need to do the work on the permanent safe harbor. That’s something we fully support,” Angel said. “This is a major simplification and common sense.”

EU member states in December 2022 approved Council Directive (EU) 2022/2523, which implements the GLOBE rules under pillar 2 of the OECD’s two-pillar global tax reform plan. The GLOBE rules’ goal is to ensure large multinational enterprise groups are subject to an effective tax rate of 15 percent wherever they operate. Jurisdictions may also implement qualified domestic minimum top-up taxes in line with the GLOBE rules. The pillar 2 directive applies to large MNEs and large-scale domestic groups to comply with the freedom of establishment principle

Angel reiterated the commission’s focus on streamlining the direct tax system, especially considering the pillar 2 rules. “We are, at the moment, doing a systematic mapping of all existing pieces of direct tax legislation to see how they fit . . . whether we have duplication, whether there are possibilities of simplification, whether we can drop some reporting,” Angel said. There are straightforward areas to address, such as the interaction between controlled foreign corporation rules and the pillar 2 directive, “but we really want to go beyond,” he noted. “It’s a very serious, systematic examination.” Although pillar 2 is crucial and must be factored into the exercise, it only applies to large companies, so simplifying duplicative measures in that context has its limits, according to Angel. “We really have to be careful with the approach,” he said, emphasizing the need for the EU to balance its drive for simplification with its enduring commitment to combat aggressive tax practices.

The transitional CbC reporting safe harbor temporarily simplifies the calculations that companies are required to make based on data already in their qualified CbC reports and jurisdictional tax data in their qualified financial statements. Business at OECD is pushing a proposal for a permanent safe harbor that is based on the transitional CbC reporting safe harbor, but uses consolidated financial accounts instead of CbC reports, with minimal adjustments.

The inclusive framework is in active discussions about the proposal.

If a permanent safe harbor were to be approved, it would be automatically incorporated into the pillar 2 directive, according to Angel, alluding to article 32, which provides for safe harbors.

The commission is continuing to facilitate pillar 2 implementation, Angel said. He pointed to the October 28 release of a proposed directive for a framework for exchanging GLOBE information returns between EU member states as an example.

The commission is also taking the unusual step of answering EU member states’ questions about the transposition of the pillar 2 directive into their national legislation, according to Angel. Usually, when a directive is adopted, the commission waits for EU member states to transpose the directive, then it checks whether transposition was done correctly, he said.

“Here we have taken an extremely active role,” Angel said, adding that the commission meets monthly with representatives of EU member states to answer all their questions about pillar 2 directive implementation. The commission has already received more than 400 questions from member states, he added.

“It seems it has paid off because we are doing the transposition check at the moment and so far, we have identified very few issues, which, considering the size and complexity of the text, is not to be taken for granted,” Angel said.

Angel noted the commission’s October 3 announcement that it had referred Cyprus, Poland, Portugal, and Spain to the Court of Justice for their slow transposition of the pillar 2 directive. However, Portugal’s referral is over because the country recently promulgated its pillar 2 legislation, according to Angel. “For the three others, we are confident this will be addressed by the end of year,” he said.

To help tax administrations with the pillar 2 rules, the commission created a group bringing EU tax administrations together so they can share their pillar 2 experiences, Angel said. The group allows tax administrations that are lagging behind to catch up quickly to tax administrations that are more advanced, he added.

Angel reiterated the commission’s focus on decluttering the direct tax system, especially in light of the pillar 2 rules. “We are, at the moment, doing a systematic mapping of all existing pieces of direct tax legislation to see how they fit . . . whether we have duplication, whether there are possibilities of simplification, whether we can drop some reporting,” Angel said. There is some low-hanging fruit, like the interaction between controlled foreign corporation rules and the pillar 2 directive, “but we really want to go beyond,” he said. “It’s a very serious, systematic examination.”

Although pillar 2 is important and must be accounted for during the exercise, it only applies to big companies, so decluttering duplicative measures in that context can only go so far, according to Angel. “We really have to be careful with the approach,” he said, adding that the EU must balance its ambition to simplify with its long-standing political will to fight aggressive tax practices.