EU DAC 9 & OECD Pillar Two: Key Tax Reforms & Compliance Insights

After adopting DAC 8 on October 17, 2023, the EU regulators amended the EU Directive on Administrative Cooperation (DAC) on October 24, 2024, by adopting rules and reporting requirements for EU countries’ tax authorities to cooperate closely in direct taxation. The latest amendments to the DAC, known as DAC 9, were adopted following the Global Anti-Base Erosion (GloBE) Model Rules from the OECD Inclusive Framework, also known as Pillar Two.

Both DAC 9 and Pillar Two aim to ensure a global minimum tax for multinational enterprise groups (MNEs) and large-scale domestic groups (LSDGs) in the EU.

Understanding OECD Pillar Two

OECD Pillar Two is a significant milestone in international tax reform. It imposes a 15% global minimum tax on MNEs. The primary purpose of the global minimum tax is to disable profit shifting and tax base erosion by ensuring that MNEs pay a minimum level of tax regardless of where their profits are generated. Pillar Two focuses on large MNEs whose annual revenues exceed EUR 750 million.

By imposing a minimum level of tax on their global revenues, the regulators aim to prevent MNEs from exploiting low-rate tax jurisdictions by requiring a top-up tax in cases where the effective tax rate is under the minimum global rate of 15%.

Reporting Requirements Under DAC9

The introduction of DAC 9 began in 2022 when the Council Directive 2022/2523 on ensuring a global minimum level of taxation for MNEs and LSDGs (the Pillar Two Directive) was announced. Adopting the Pillar Two Directive marked the EU's commitment to support global tax equity while maintaining a competitive market environment.

Under the new rules, in-scope companies must accurately calculate their effective tax rate while ensuring consistency with international reporting standards. The EU regulators had to amend the DAC for the ninth time to ensure new rules on automatic information exchange. These rules facilitate the exchange of information regarding the top-up tax information return and provide the framework for the operational implementation of the Pillar Two Directive.

Following the adoption of DAC 9, EU countries have until December 31, 2025 to implement a system to exchange top-up tax returns using a standardized form automatically. When the national Tax Authorities receive a tax return, they have three months to communicate relevant information to other EU countries. For the first return, due until June 30, 2026, the deadline is extended to six months for EU countries to exchange relevant information.

With implementation of DAC 9 reporting requirements, each company that is part of MNEs only has to file a single top-up tax return, at the central level for the whole group. Without the DAC 9, MNEs would face the obligation to submit multiple tax returns, as each group's member company would have to file a tax return in the country where they are based.

Regarding the standardized form for tax return, the European Commission has included a provision in the DAC 9 stating that it will align it with the OECD's GloBE Information Return (GIR). However, since the OECD announced in January this year that it is working on amending and improving the GIR, it is to be expected that the EU standard will also change accordingly.

Impact on International Businesses

Large international businesses that fall under the scope of Pillar Two, both the OECD and the EU, may face substantial compliance challenges. Although the EU tends to simplify the reporting procedure and requirements, calculating the effective tax rate across multiple jurisdictions requires advanced tax planning, monitoring, and updated data management systems.

Additionally, with the announced changes to the standardized form for tax returns, businesses must keep track of all the developments and make necessary adjustments following the changes to comply with reporting requirements.

Finally, MNEs must evaluate and decide which EU country is most suitable for filing a top-tax return, and whether they should relocate to another EU country to fulfill these obligations more effectively.

US Withdrawal and Pillar Two Future

In January 2025, the US announced withdrawal from the global minimum tax, Pillar Two initiative, therefore, annulling the previous US administration that, although not signing the agreement, issued a letter of intent to join the agreement later. However, the Pillar Two was drafted and developed so that it does not depend on the implementation by individual countries. Nevertheless, there are several possible consequences of the US decision.

First, some countries that have already implemented Pillar Two in their national legislation might decide to repeal it, fearing possible countermeasures, such as the US increasing its corporate tax rates or denying treaty-based withholding tax benefits for companies based in countries that implemented Pillar Two.

Secondly, EU companies may be disadvantaged in international markets compared to US-based companies, as they would have to pay more taxes, incur administrative burdens, and incur more operational costs.

Other potential outcomes include developing special rules for US-based companies and slowing down or postponing the implementation of the Pillar Two rules among countries.

Conclusion

With the US withdrawal announcement from Pillar Two, the EU's efforts to implement tax reporting rules and regulations for MNEs and LSDGs mark a significant moment for the future of the international taxation system. Nevertheless, even with the standardized reporting system under DAC 9 at the EU level, compliance with new requirements still demands meticulous tax planning and robust data management systems from companies.

However, some questions regarding the future of Pillar Two and global tax coordination remain, such as what long-term impact the US decision will have on the OECD international tax reform and whether EU countries and the EU as a whole will step up to lead global tax reform, as they did with GDPR, e-commerce, crypto assets, and AI regulations.

Source: VATabout - DAC7: Comprehensive Guide to the EU’s Digital Tax Directive & Compliance, EU DAC8 Directive: Crypto Tax Reporting Rules & Compliance Guide, VATabout - Global Anti-Base Erosion (GloBE) Model Rules Explained, European Commission, Directive 2011/16/EU - Explanatory Memorandum, Directive 2011/16/EU, Directive 2022/2523, OECD