On May 31, 2023, the government presented the Minimum Tax Act 2024 bill to the House of Representatives. This law enables the Netherlands to impose additional taxes on large multinational corporations that pay less than fifteen percent corporate tax in other countries. The law has been introduced as a kind of safety net that allows the Netherlands to guarantee an effective tax rate of fifteen percent domestically and, if necessary, to impose additional taxes when other countries levy less than fifteen percent corporate tax on multinationals. However, Maarten de Wilde, professor of International and European Tax Law at Erasmus School of Law, expects that the law will not function so much as a safety net but will largely replace the current corporate tax in the long term.
The bill is not a Dutch initiative; it is the implementation of the EU directive for a minimum level of taxation, which is the European implementation of the OECD agreement on a minimum corporate tax of fifteen percent, known as Pillar 2.
OESO agreement
In December 2021, led by the Organisation for Economic Co-operation and Development (OECD), model legislation was published after the global agreement was reached in October 2021 on a global review of the taxation of multinationals. In October 2021, Maarten de Wilde considered this a breakthrough in international tax law. For a successful rollout in the EU of these new agreements, implementation in EU legislation is necessary. The OECD model has two pillars: the redistribution of taxing rights through new profit allocation rules and a new global minimum tax rate. In December, the European Commission published a draft directive to implement a new global minimum tax rate, almost identical to the OESO model legislation.
The minimum tax will come into effect from January 1, 2024, for companies with an annual turnover of at least 750 million euros. "There are several thousand such companies in the Netherlands," De Wilde explains. "A specialised team of 65 employees from the Tax Authority will implement the system in the Netherlands." The government expects that other countries will not quickly impose additional taxes on profits earned in the Netherlands since the current corporate tax rate, with only a few possible exceptions caused by specific measures in the participation exemption, will generally result in a minimum tax of at least fifteen percent of the profit. Additionally, the Netherlands will monitor other countries' effective tax burdens and, where possible, intends to impose additional taxes if other countries do not adhere to the OECD agreements on minimum taxation.
A completely new system
At first glance, the new Minimum Tax Act 2024 does not appear to bring significant changes to the Dutch tax system. However, according to De Wilde, it is quite different: "The government is trying to present the tax as a shadow system of corporate tax, but in reality, it will be the other way around." According to the professor, provisions and definitions in the Corporate Income Tax Act (such as what we understand as profit, deductible costs, or an exemption) will increasingly have to conform to the provisions and definitions established by the OECD under Pillar 2: "The Explanatory Memorandum of the draft bill indicates that all terms in the new law will not have an impact on other tax laws [such as the Corporate Income Tax Act]. Although this is not explicitly stated in the Explanatory Memorandum, the reverse is also true. Therefore, the Minimum Tax Act is a completely new system with new rules and definitions. Ultimately, the Minimum Tax Act may become the dominant tax, for example, when an exemption in corporate tax is more generous than the minimum tax."
Insufficient discussion
The introduction of a global minimum tax erodes the autonomy of countries in determining the tax rate. "What you think about that is a political question," says De Wilde, "but what bothers me is that the introduction of this minimum tax [based on OECD agreements] happens without a real discussion about whether we want this and whether the rules being implemented are the best possible. Naturally, we want to tackle tax avoidance, and that's good. But introducing a globally coordinated minimum tax goes much further, especially when considering how the process unfolds. The Netherlands joined the OECD discussions based on only a few adopted motions in the House of Representatives. It all happens outside the scope of parliamentary control, under the radar and quietly. A few years ago, we couldn't politically agree on plans for tax harmonisation within the EU, and now we're going all-in. We conform to a political agreement based on discussions between representatives of countries, ministry officials, and tax authorities in a discussion platform organised by the OECD, even though the OECD has no institutional position in our legal system.
The manner in which Pillar 2 finds its way into the Dutch tax system raises suspicion from a constitutional perspective. The OECD provides model rules, interpretation rules, and assistance in applying these rules. A lot of power is concentrated within this organisation, which lacks democratic and constitutional legitimacy. Moreover, the political agreement forming the basis for these measures is not a treaty and has not undergone the parliamentary approval process. The tax legislator also indicates that the policy space for the Netherlands is very limited. The same is reflected in the preamble to the EU directive, which also states that it involves implementing what has been agreed upon within the OECD framework. Since we are implementing EU legislation here, it means that our national highest court, the Supreme Court, will not have the authority to interpret the new rules but will have to turn to the Court of Justice of the EU for that."
Backstop
The implementation of the EU directive and the Dutch draft bill on the Minimum Tax Act 2024 demonstrates the commitment of several countries to achieving a global minimum tax. However, there are also major world powers and Western countries that, although they have signed the Pillar 2 agreement, have not yet taken steps to implement a minimum tax or have even stepped back, explains De Wilde: "The EU has made a move and drafted a legally binding directive, and some countries have introduced a framework law. However, some countries, even within the EU, that have not taken any action. Additionally, countries are also retracting, such as the United States, which previously signed the Pillar 2 agreement. The Republicans even sent a letter to President Biden stating that they would use all legal means if countries start imposing additional taxes on American profits." That creates tension. The Pillar 2 agreement is intended to serve as a backstop, emphasises De Wilde: "There is a politically shrewd element in Pillar 2: if countries do not impose additional taxes, then other countries may do so. At the same time, we see countries outside the EU moving towards continuing the competition for investments, but through granting subsidies instead of tax legislation. This is more difficult within the EU due to the European state aid rules."
- Professor
- More information
Want to know more? Click on the link for an extensive article on the implementation of the Minimum Tax Act 2024 by Maarten de Wilde in the Dutch Journal of Tax Law (in Dutch).