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The Netherlands and its Approach to Pillar Two

Policy Paper
The Netherlands Government issued Parliamentary Paper 22112 (3278) on February 14, 2022 in which it provided comments on the EU Commission’s proposed directive for the implementation of Pillar Two. 
 
The Government notes that it is ‘positive’ in relation to the proposed directive and that the EU draft directive is almost entirely identical to the OECD Model Rules (subject to some specific EU carve-outs such as the application to domestic groups).
 
The Netherlands expects to generate additional tax revenues of approximately 100 million euros from Dutch UPEs with foreign low-taxed subsidiaries. 
Headline CIT Rate
They don’t expect any top-up tax to be levied overseas on Dutch subsidiaries given the Dutch statutory corporate income tax rate is 25.8%.  
 
It should be noted that the headline corporate income tax rate is a relatively poor determinant of whether top-up tax would be levied under the Pillar Two Rules. Tax incentives and credits can in many cases significantly reduce the rate.
 
In the Netherlands, enhanced tax deductions are available for investments in energy-efficient assets and environmental assets. The extra allowance deduction can be up to 45.5% of the costs involved in 2022 (and up to 128 million euros for energy efficient assets). This could be a significant permanent difference and would reduce the effective tax rate for Pillar Two purposes. 
 
However, this assumes that there are no behavioural effects. The Dutch Policy Paper states that it is expected that jurisdictions will increase their effective tax rate to 15% for MNE’s with turnover exceeding 750 million euros. They suggest that this will occur as if they don’t other countries will apply top-up taxes to collect the additional tax.
 
Of course, another option would be for jurisdictions to simply levy a qualifying domestic minimum top-up tax. Low-taxed profits in a jurisdiction would then be taxed in that jurisdiction, and any QDMTT suffered would effectively be a tax credit to reduce any foreign top-up tax liability. 
Restructuring
They also note that MNEs are expected to restructure their operations such that fewer profits will arise in jurisdictions with a low effective tax rate, in order to avoid a top-up tax liability. This will mainly apply to profits on activities allocated to jurisdictions principally to take advantage of low tax rates. 

Therefore they assert that such profits are likely to be transferred to jurisdictions with a higher effective tax rate, such as the Netherlands. 
 
The current assumption is that multinationals will allocate around 80% of their profits to higher tax jurisdictions. The Netherlands expects to generate an additional 500 million euros tax revenue from such profits being reallocated to them.
 
The Pillar Two treatment of intra-group asset transfers generally follows the financial accounting treatment.

This generally values the transfer of assets at fair value.

Therefore any gain or loss recognised for accounting purposes would also flow through to the GloBE income calculation.

However, the Article 9.1.3 of the OECD Model Rules provides that if an asset is transferred between group entities after November 30, 2021 and before the first year the GloBE rules apply to the group, the asset is recorded at its historic cost providing the entities would have been subject to the Pillar Two GloBE rules had they been in-scope.

The reason for this is to prevent an uplift in the base cost of assets (with potentially additional tax relief and reduced gains on a future disposal) when any original gain on the intra-group transfer was not taken into account for Pillar Two GloBE purposes as the group was not subject to the rules.

Method of Implementation

The draft EU Directive allows individual jurisdictions to determine how the provisions of the Directive will be transposed into domestic law. 

The Policy Paper notes that the Netherlands has two options. Either to integrate the new rules into the Dutch Corporate Income Tax Act, 1969, or to enact a separate law. 

Implementing the Pillar Two Rules into the corporate income tax act would be considerably more complex than having iit as a separate law, as the Pillar Two calculation does not fit in with the design of the corporate income tax system. For instance, the starting point for Pillar Two is the profit from the financial accounts, as opposed to taxable profit. 

The Dutch Government will therefore enact separate law, outside the corporate income tax act, to implement Pillar Two.   

This is a similar approach taken in the UK, which has issued draft legislation for a separate tax (the ‘multinational top-up tax’) that is outside the corporation tax act. [/s2If]