Why all top-up tax variants in the EU Pillar Two Directive collide with the EU’s fundamental freedoms (and how to solve this)

In this contribution, the authors operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the notions of the internal market and the fundamental freedoms. The various top-up tax mechanisms under the Directive impose differences in tax treatment between domestic and cross-border business operations within the internal market. These differences result in unjustified de facto restrictions of the freedoms of movement. The core of this legal deficit lies in the chosen approach under the Directive in which top-up taxation is determined on a per country basis (jurisdictional blending). This, while the internal market is about creating an area without internal frontiers within which factors of production and goods and services should be able to move freely (regional blending). Possible means to solve the issues created include the introduction of EU regional blending or even global blending, or the repeal of the EU Pillar Two Directive. The latter, if chosen, may be accompanied by a simultaneous introduction of a harmonised competitive corporate tax system for the internal market. If no measures are taken, it seems only a matter of time before the Court of Justice of the European Union will rule the top-up taxation mechanisms under the Pillar Two Directive essentially incompatible with EU law.