On October 24, 2023 the Dutch Secretary of State for Finances has informed the Dutch House of Representatives with respect to the latest developments regarding Pillar 1.

The Secretary of State starts with a providing brief background description. He then provides an update regarding the recent developments surrounding Pillar 1. Subsequently the Secretary of State discusses the possible consequences of the recent Pillar 1 developments. He concludes his letter to the House of Representatives with a brief explanation of the position of the Dutch Government on Pillar 1.


Recent developments Pillar 1

Negotiations on the content of the MLC are almost completed. Only on a few final matters not all countries have yet been able to reach agreement. In the past period, everything has been done to resolve these last points of discussion. Unfortunately, this has not yet led to a successful result. In addition, a number of countries, including the United States, have indicated that they need additional time for internal processes before they can decide whether or not to sign the MLC.

The current version of the MLC was published on October 11, 2023. The published version shows which countries have made reservations and for which provisions they did so. I am pleased to see that this version shows that we have come very close to on an agreement on the functioning of this important revision. The reservations have been inserted with respect to a limited number of provisions by a number of countries (in particular India, Colombia and Brazil). Therefore technical agreement has been reached on all other subjects.

The provisions with respect to which India, Colombia and Brazil have included reservations are mainly those provisions that touch on the marketing and distribution safe harbor (MDSH), including the treatment of withholding taxes. The MDSH is a provision that ensures that if there is already a lot of profit in a country, not an additional amount of profit will be allocated to that country under Amount A. The aforementioned countries are of the opinion that because of the application of the MDSH too few additional taxing rights might be allocated to them. Other countries are of the opinion that a further restriction the MDSH could lead to double counting if countries already tax a lot of profits under the current system.

Possible consequences of recent Pillar 1 developments


Consequences Amount A and the MLC

Because the current MLC is not final and has not been opened for signing, it seems unlikely that a signing ceremony will be organized this year. It is still unclear how long it will take to resolve the remaining points of discussion and to go through the internal processes of the countries involved. Therefore, it is not yet possible to provide a specific date for when the MLC will be completed and when the signing can take place.


Consequences Amount B

With respect to Amount B, no provisions are included in the MLC. However, the developments surrounding Amount A may also have implications for Amount B. Several countries view the implementation of Amount A and Amount B as part of the same agreement. Therewith making the coming to an agreement on and the completion of Amount B dependent on the coming to an agreement on and the completion of Amount A. Therefore, Amount B may be linked to the entering into force of the MLC.

Consequences for the Digital Services Taxes

Part of Pillar 1 is that countries must withdraw their existing Digital Services Taxes (DSTs) or similar other measures and are no longer allowed to introduce such measures. After Amount A comes into effect, this agreement will be laid down in the MLC. To this end, the MLC contains (i) a provision containing a definition of DSTs that may not be levied under the MLC and (ii) a list of existing DSTs that in any case may no longer be levied upon the entry into force of the MLC.

Two years ago, in October 2021, countries agreed not to introduce any new DSTs during the period that negotiations on Pillar 1 are taking place. This agreement runs until December 31, 2023. Last summer, the IF agreed to extend that by the end of 2023 this agreement by one year, provided that the MLC is signed by a minimum number of countries. I consider it unlikely that this condition will be met in time, or that new agreements will be made before January 1, 2024. This means that, unless further agreements are made, as of January 1, 2024 countries could potentially start implementing a DST.

It is currently unclear which countries are actually considering implementing a DST, or when they plan to do so. However, I expect that there are some countries that are considering doing so. Canada, for example, has already indicated that they want to introduce a DST starting on January 1, 2024. Additionally, several countries already have a DST in place that is explicitly included in the MLC as a DST to which the ban applies. These countries are: France, Spain, Austria, Italy, the United Kingdom, India (twice), Tunisia, and Turkey. The United States has made an agreement regarding the treatment of existing DSTs with several countries. This agreement will also expire on January 1, 2024.


Position of the Dutch Government

Over the past year, much progress has been made on the further development of Pillar 1. Nevertheless, recent developments mean that at this moment no MLC can be signed. Without further agreements being made, as of January 1, 2024 the agreement to no longer implement DSTs will expire.

The Netherlands remains in favor of an international agreement on Pillar 1 and will endeavor to have the MLC finalized as soon as possible and have it opened for signature. A review of the international tax system is most effective if as many countries as possible participate.

If at some point there no longer a clear view of a global agreement exists, alternatives should be considered. In that I prefer a European solution over a unilateral DST. In addition to the fact that in the short term it is not feasible to introduce a unilateral DST, I remain in favor of an international solution. The Council of the EU for example has indicated that it is closely monitoring the progress being made and will regularly review the situation in order to find a solution as soon as possible.


Remarks International Tax Plaza

The Secretary of State’s letter raises a few questions.

As with the introduction of a minimum level of taxation for large multinationals, the Dutch government once again indicates its support for an international agreement on Pillar 1. However, what we are missing, or have missed, is a well-founded estimate by the Dutch Government of what the budgetary effects of Pillar 1 will be for the Netherlands. The Dutch Government was also one of the pioneers in introducing a minimum level of taxation for large multinationals and large domestic companies. And for a very long time the Dutch Government also failed to inform the House of Representatives about the expected budgetary effects of Pillar 2. Subsequently, an unsubstantiated structural additional tax revenue of EUR 1 billion was thrown around. An amount that has now been reduced to less than half of it (EUR 466 million) the vast majority of which (EUR 402 million) is classified as very uncertain and of which EUR 55 million sees on tax schemes like the innovation box, the liquidation loss scheme or special tax schemes to encourage environmental friendly investments. So basically where when discussing Pillar 2 with the House of Representatives the Dutch Government initially vaguely spoke about huge positive budgetary effects, then it mentioned an amount of EUR 1 billion and finally the Netherland might end up with only EUR 9 million.

Something that we are missing in the letter is a comment on what the fact that no agreement has yet been reached with respect to Pillar 1 means for the implementation of the EU Pillar 2 Directive. If we remember correctly, when agreeing to the Pillar 2 Directive, several EU countries made the reservation that agreement should also be reached with regard to Pillar 1 since they are of the opinion that Pillar 1 and Pillar 2 together form 1 agreement. Furthermore, we seem to remember that in return for agreeing to the EU Pillar 2 Directive, those countries were promised that progress being made on Pillar 1 would closely be monitored. The question therefore is whether the fact that still no final agreement on Pillar 1 has been reached will affect the implementation of the EU Pillar 2 Directive (by those countries). Unfortunately, the Secretary of State did not refer to this matter.



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