European Commission publishes communication on business taxation for the 21st century
The European Commission released the Communication on Business Taxation for the 21st Century on 18 May 2021, which outlines broad corporate and direct tax policy measures for the next two years and beyond. These measures have multiple objectives, including to help the EU recover from the COVID-19 pandemic, ensure the collection of public revenue, and create an equitable and stable business environment that responds to the realities of the modern globalised and digitalised economy. The release of the communication was preceded by a “roadmap” (released 4 March 2021) for public consultation.
The main proposals included in the communication are as follows:
- Once global consensus has been reached on Pillar 1 (partial re-allocation of taxing rights) and Pillar 2 (minimum effective taxation of the profits of multinationals) of the OECD initiative to address challenges arising from the digitalisation and globalisation of the world economy, and the content of the agreement is translated into a multilateral convention, the Commission will propose a directive for implementation throughout the EU. No timeframe for the directive has been announced.
- Three actions are set out to ensure fair and effective taxation and transparency:
- The annual publication of the effective corporate tax rate (on a jurisdiction-by-jurisdiction basis) of certain large companies with operations in the EU, using the methodology agreed for the Pillar 2 calculations. A proposal for this initiative is slated for 2022.
- The Commission intends to intensify the fight against the abusive use of shell companies (i.e., companies with no or a minimal substantial presence and real economic activity). The multi-pronged proposal would encompass actions such as: (i) requiring companies to report to the tax authorities the relevant information needed to determine whether a company has substantial presence and is engaged in real economic activity, and denying any tax benefits linked to the existence or use of abusive shell companies; (ii) creating new tax information, monitoring and tax transparency requirements; and (iii) taking further steps to prevent interest and royalty payments leaving the EU from escaping taxation. A public consultation on how rules should be designed is open until 27 August 2021. The commission is expected to issue a proposal for this initiative—and for potential changes to the EU Anti-Tax Avoidance Directive (i.e., ATAD 3)—in Q4 2021.
- The Commission will use all tools at its disposal to ensure that companies are paying their fair share of tax, and this includes invoking the EU state aid rules in appropriate cases.
- Earlier this year, the Commission held a public consultation on a new digital levy. The Commission was expected to put forward a proposal on the digital levy in July 2021, but this has been postponed to October to allow work to proceed at the global level on the two-pillar global tax reform plan.
- Recommendations will be adopted on the domestic treatment of tax losses to ensure fair competition and help member states with the economic recovery from COVID-19. These recommendations, published on 20 May 2021, include allowing for the carryback of losses incurred during 2020 and 2021 to at least 2019 and possibly extending to the previous three years and setting a limit on the amount of losses that may be carried back.
- The Commission will issue a legislative proposal to address the debt-equity bias in corporate taxation, under which debt financing of companies is treated more favourably than equity financing. An allowance system—the debt equity bias reduction allowance—will be created for equity financing that will include anti-abuse measures to ensure it is not used for unintended purposes.
- By 2023, the Commission will present a new framework for business taxation in the EU, called “Business in Europe: Framework for Income Taxation” (BEFIT), which will reduce administrative burdens, eliminate tax obstacles and create a more business-friendly environment. BEFIT will be based on the features of a common tax base and the allocation of profits between the EU member states and will build on the progress made at the global level on Pillars 1 and 2 of the OECD initiative. BEFIT will provide a single corporate tax “rulebook” for the EU, providing for fairer allocation of taxing rights between the member states. Under the BEFIT, the profits of EU members of a multinational group will be consolidated into a single tax base, which will be allocated to member states using a formula, to be taxed at the relevant national corporate income tax rates. Since BEFIT will provide for a single tax base, it will replace the long-standing pending proposal for a common consolidated corporate tax base, which will be withdrawn.
The European Commission’s agenda is ambitious, both in terms of scope and timing. EU companies and those doing business in the EU should monitor developments carefully and begin now to assess how the measures could affect their business operations.