Corporate Tax News Issue 63 - August 2022

Report recommends measures for removal of tax-based obstacles to investment in EU

The Policy Department for Economic, Scientific and Quality of Life Policies, which provides in-house and external expertise to support the European Parliament Subcommittee on Tax Matters (FISC) on 26 July submitted a report to the FISC on the removal of tax-based obstacles and distortions in the Single Market.

The role of the FISC is to assist on tax-related matters, in particular, the fight against tax fraud, tax evasion and tax avoidance and financial transparency for taxation purposes. The FISC asked the Policy Department to provide recommendations on how to remove taxation-based obstacles and distortions in the EU.

The report notes that the inherent complexity of the coexistence of 27 different national tax systems in the EU gives rise to significant obstacles to cross-border business activity in the European Single Market, as well as tax distortions in real investment decisions. This complexity is compounded by transparency and documentation requirements and, for example, un-aligned substance criteria that companies must meet to not fall foul of stringent anti-avoidance rules. The study aims to show the context and developments in European secondary law that have led to the current situation and recommendations are made on how the obstacles to cross-border investment in the Internal Market could be countered both in the short and long term at the legislative, procedural and administrative levels.

Policy recommendations

The Policy Department proposed suggestions for the EU to tackle these problems:

  • The EU should position itself in the global competition for capital and investment. Surprisingly, the Policy Department welcomes an approach similar to that of the U.S. U.S. tax policy has long been characterised by a greater awareness of the realities of international tax competition, providing rewards—in addition to meting out punishments—for investors.
  • Corporate taxation in the EU should be harmonised. For example, a Common Corporate Tax Base (CCTB) would first establish independent and uniform EU regulations for a harmonised profit tax base. Then, consolidation of group profits with subsequent formula-based apportionment to the EU member states would ensue. The European Commission has confirmed this plan under the name, "Business in Europe: Framework for Income Taxation,” or “BEFIT” (for prior coverage, see the article in the July 2021 issue of Corporate Tax News).
  • The EU should reduce the legal uncertainty and actual tax obstacles in the Internal Market and promote harmonised and efficient tax procedures (e.g., the possibility of conducting joint audits through DAC 7). The Policy Department encourages the EU to pursue these types of initiatives.

Potential challenges

The Policy Department’s suggestions could lead to potential violations of EU fundamental freedoms and subsequent lengthy proceedings. To avoid this, the Policy Department recommends a voluntary commitment by the EU member states to a speedy and foreseeable implementation of EU legal requirements. In addition, EU member states should focus more on the opening of the Internal market.

The Policy Department foresees potential challenges arising from the implementation of the BEPS 2.0 anti-avoidance measures. Procedural issues and complexities from the interaction of these measures with existing anti-avoidance rules should be taken into account and addressed to mitigate—and prevent to the extent possible—increased administrative and tax compliance costs and double taxation. The European Commission is working on proposals that will impact the Single Market, so affected companies should continue to monitor developments closely.

Frederik Boulogne

Niek de Haan