The European Union reached a breakthrough overnight to agree on implementing a 15 per cent minimum taxation rate for large companies across the bloc after overcoming a Hungarian veto.
The ambassadors of the 27 member states agreed to put in place the minimum element of the international reforms agreed by the OECD, known as Pillar 2, by the end of 2023.
This involves setting a minimum rate of 15 per cent tax for multinational and domestic groups or companies with a combined annual turnover of at least €750 million.
“I am very pleased to announce that we agreed to adopt the directive on the Pillar 2 proposal today,” Czech finance minister Zbynek Stanjura, who chaired the negotiations, said in a statement.
“Our message is clear: The largest groups of corporations, multinational or domestic, will need to pay a corporate tax that cannot be lower than 15 per cent, globally.”
The EU directive “has to be transposed into member states’ national law by the end of 2023″, according to the European Council press release, which added that the EU would be a “front-runner in applying” the global agreement.
In the US, a 15 per cent minimum corporation tax rate passed as part of the US’s Inflation Reduction Act falls somewhat short of the OECD agreement in its design, as it applies to companies’ reported overall “book income” and not on a country-by-country basis, raising concerns that it will not prevent the abuse of overseas tax havens.
The EU’s deal was made possible after Hungary dropped its veto, which had been holding up agreement on the minimum tax as well as on the provision of €18 billion in emergency financing for Ukraine.
Hungary risked losing 70 per cent of EU Covid-19 stimulus funds if a breakthrough was not reached by the end of the year, a grave prospect for its struggling economy. In the deal, the EU signed off on the recovery money for Hungary, though it will only be available to spend if Budapest is deemed to have complied with milestones on rule-of-law reforms.
The EU states also agreed to hold back €6.3 billion in Hungary’s EU cohesion funding, which is intended as investment to bolster less-affluent member states, on the basis that the European Commission found Budapest had not fulfilled 17 commitments to strengthen its rule of law.
The amount of funding frozen is slightly less than the €7.5 billion that was initially at risk, a compromise that managed to unlock Hungary’s agreement on both the tax and funding for Ukraine.
Approved by ambassadors and now set to be adopted formally by written procedure, the agreement is the first use of the EU’s new “conditionality” tool, which allows it to deny funding to member states if there is evidence that breaches of rule of law endanger the financial interests of the union.
Hungarian prime minister Viktor Orbán is accused of overseeing democratic backsliding since the country joined the EU in 2004, including accusations of the funnelling of EU funds to allies, a crackdown on civil society and elections deemed unfair by international observers.
