This contribution is a summary of the EU Commission’s recently proposed tax policy for business taxation in the EU.
1 Introduction
In May 2021, the European Commission introduced its agenda concerning business taxation for the next two years. The agenda is called Business Taxation for the 21 st Century and is introduced in a communication from the Commission to the European Parliament and the Council.1
The agenda is introduced against the background of the work which is being done by the OECD Inclusive Framework to reform international corporate taxation. This work is aimed at addressing different but related tax issues linked to globalisation and digitalisation of the world economy. The agenda comes in the wake of the Commission’s more general EU Tax Package2 where it was declared that the Commission would set out an action plan to reform the corporate tax system to fit the same developments and to realign taxing rights with value creation and a minimum level established for effective taxation of business profits.
In its agenda for business taxation the Commission discusses how the on-going work being done within the OECD Inclusive Framework will eventually be implemented within the EU and introduces five actions, which all concern certain proposals to be implemented by the EU. The actions are the following: i) table a legislative proposal for the publication of effective tax rates paid by large companies, based on the methodology under discussion in Pillar 2 of the OECD negotiations, ii) table a legislative proposal setting out union rules to neutralise the misuse of shell entities for tax purposes, iii) adopt a recommendation on the domestic treatment of losses, iv) make a legislative proposal creating a Debt Equity Bias Reduction Allowance and v) table a proposal for framework for income taxation based on a system of a common tax base and the allocation of profits between the EU Member States.
According to the Commission, EU’s business taxation policy has changed radically in the past year due to the coronavirus and against a background of ongoing major trends that shape the economies and societies of the EU, including population ageing, climate change, environmental degradation, globalisation, transformation of the labour market and digitalisation. The Commission states that there is now a consensus that the fundamental tax law concepts of tax residence and source are outdated. The current rules of international taxation are unfit to cope with digital business activity which is conducted without physical presence. Digitalisation has further allowed companies to manipulate the existing principles through tax planning.
Even though the Commission acknowledges that governments have implemented various measures to counter tax avoidance and evasion, these have caused further complexities. International discussion is progressing towards a global solution to reform the system with action on the reallocation of taxing rights and minimum effective taxation. At the same time, international partners, like the United States and the United Kingdom have introduced plans to shape their tax systems for the coming years. Because of this, the Commission considers that the EU needs a robust, efficient and fair tax framework that meets public financial needs, while also supporting the recovery and the green and digital transition by creating an environment conducive to fair, sustainable and job rich growth and investment.
COM(2021) 251 final.
COM(2020) 312 final.
2 The EU Tax Policy Agenda
The Commission emphasizes that EU action within the field of business taxation has to be embedded in a comprehensive agenda. The tax system should be guided by the principles of fairness, efficiency and simplicity. To achieve this vision, enabling fair and sustainable growth and ensuring effective taxation is important.
Two priorities are considered vital in achieving this vision. First, to enable fair and sustainable growth within the EU. In this context the Commission refers to measures which make part of the so-called “Fit for 55”-package, consisting of various measures to update EU’s climate and energy laws to reflect the 55% net emissions reduction target that the EU set for 2030 and that concern taxes. A proposal to reform the Energy Taxation Directive is forthcoming and also to a new and reformed pricing mechanisms to support EU climate objectives, notably a Carbon Border Adjustment Mechanism and a proposal for a revised EU Emissions Trading System.
The second priority that the Commission considers vital in achieving a tax system guided by fairness efficiency and simplicity is ensuring effective taxation. In this context, the Commission’s communication discusses the composition of taxes which the Member States rely on, the so-called tax mix, and stresses that the Member States’ tax systems have to be modernised to better reflect ongoing and future economic and social developments. In 2022, the Commission intends to conclude a Tax Symposium on the “EU tax mix on the road to 2050” to discuss these developments following a reflection. This reflection will take into account a number of considerations that are discussed in the communication. Among other things, the Commission points out that the Member States rely heavily on labour taxes, including social contributions, and VAT while tax bases such as environmental, property and corporate income taxes contribute relatively little. Trends such as climate change, digital transformation of the labour market, population ageing and increase in non-standard work are likely to have an impact on the future tax mix in the Member States. The Commission believes that the high tax burden on labour income within the EU will have to be further reduced to support competitiveness, employment and job creation post-crisis. Priority should also be given to limit the inefficient use of reduced VAT rates and exemptions, which often fail to deliver on their presumed policy objective. On the other hand, behavioural taxes, such as environmental and health taxes are of growing importance for EU tax policies. A future-proof tax mix will require the fair and effective taxation of capital income, both from individuals and corporations. At the same time, simplification and other measures to reduce administrative complexity will be needed. In addition, recurrent taxes on immovable property can be a relatively efficient way of raising tax revenue. These are some of the considerations, which the Commission believes will affect the tax mix of the Member States in the decades to come.
The Commission believes that the same principles, on enabling fair and sustainable growth and ensuring effective taxation should apply to the system of own resources financing the EU budget. In this context the communication discusses the so-called Carbon Border Adjustment Mechanism, a revised EU Emissions Trading System, a digital levy, Financial Transaction Tax and an additional own resource linked to the corporate sector.
In answering what this means for EU business taxation, the Commission states that such taxation should ensure that the tax burden is fairly shared across businesses and that taxable revenue is fairly shared between different jurisdictions. The overall system should be simple, in order to reduce compliance cost, and facilitate investment and growth, thus reinforcing the Single Market. Despite progress in removing barriers to the Single Market in other areas, companies doing business in the EU still need to grapple with up to 27 different national tax systems. This creates unnecessary compliance cost for businesses, which discourages cross-border investment in the Single Market, leads to loopholes and complexities that can leave open opportunities for aggressive tax planning and hurt investment and growth and the EU’s competitiveness in comparison to international partners.
The Commission considers that EU action on business taxation should look at challenges with a clear cross-border dimension by removing barriers to the smooth operation of the Single Market and to cross-border investment created by differences between national tax systems. Progress at EU level should be complemented by supporting national action in areas where Member States are best placed to judge the needs of their economy and society.
In addition, the communication sets out measures in the area of business taxation in both short and longer term.
3 OECD Inclusive Framework and the two-pillar approach
In recent years, the so-called OECD Inclusive Framework has worked on a global solution to reform the international corporate tax framework and which is divided into two pillars. Pillar 1 concerns partial re-allocation of taxing rights to reflect increased ability of companies to do business without a physical presence. Its goal is to give jurisdictions a right to tax part of profits of certain non-resident businesses by providing for a reallocation of a portion of global profits among the jurisdictions where the group has customers using an agreed formula. Pillar 2 aims at setting a floor to excessive tax competition by ensuring that multinational businesses are subject to a certain minimum level of tax on all of their profits each year. It will enable jurisdiction to top up the amount of tax paid by large multinationals to a minimum effective level, while leaving individual countries free to decide on the features of their own tax systems. The European Council has stated that it will strive to reach a consensus-based solution within the framework.
In its communication, the Commission states that once the two pillars have been agreed upon, they will be implemented at the EU level. In order to ensure that Pillar 1 will be consistently implemented in all EU Member States, the Commission will propose a directive for its implementation in the EU. The principal method for implementing Pillar 2 will be a directive reflecting the OECD Model Rules with the necessary adjustments. Its implementation will also have implications for existing and pending directives and initiatives.
4 Actions to ensure fair and effective taxation
The Commission intends to present two actions to ensure fair and effective taxation within the EU. By 2022, it aims at tabling a legislative proposal for the annual publication of effective tax rates paid by large companies, based on the methodology under discussion in Pillar 2 of the OECD negotiations. This will be done to ensure greater public transparency on the taxes paid by large companies and expose them to additional public scrutiny.
By the end of 2021, the Commission also intends to table a legislative proposal setting out EU rules to neutralise the misuse of shell entities for tax purposes. The Commission considers that even though several actions have been taken to tackle the use of such structures, legal entities with no or only minimal substance and economic activity continue to pose a risk of being used for improper purposes. The intention is that the proposal will encompass actions such as requiring companies to report to tax authorities the necessary information to assess whether they have substantial presence and real economic activity, denying tax benefits linked to the existence or the use of abusive shell companies and creating new tax information, monitoring and tax transparency requirements.
Further steps will also be taken to prevent royalty and interest payments leaving the EU from escaping taxation. The Commission intends to use all tools at its disposal to ensure that companies pay their fair share of tax, including the enforcement of State aid rules.
5 Enabling productive investment and entrepreneurship
Alongside the communication, the Commission adopted a recommendation on the domestic treatment of losses, which the Member States currently treat very differently. The Commission recommends the Member States to allow loss carry-back for businesses to at least the previous fiscal year. This is supposed to benefit businesses that were profitable in the years before the pandemic, allowing them to offset their 2020 and 2021 losses against the taxes paid before 2020. The goal is to help ensure fair competition between companies and support businesses during the current recovery. This is considered to be particularly beneficial for small-and-medium sized enterprises.
In the first quarter of 2022, the Commission intends to make a legislative proposal creating a Debt Equity Bias Reduction Allowance. The reason for this is that the Commission considers that there is currently a pro-debt bias of tax rules, since companies can deduct interest attached to a debt financing but not costs related to an equity financing, such as the payment of dividends. This incentivises businesses to finance through debt rather than equity and could contribute to an excessive accumulation of debt with high wave of insolvency in some countries and spill-over effects in the EU. The proposal will incorporate anti-abuse measures.
6 BEFIT instead of CCCTB
Finally, the Commission declares that in 2023 it intends to propose a new framework for income taxation for business in Europe; Business in Europe – Framework for Income Taxation, BEFIT. This will be a single corporate tax rulebook for the EU, based on the key features of a common tax base and formulary apportionment. The intention is to reduce barriers to cross-border investment, lessen administrative burden on tax authorities and taxpayers, combat tax avoidance and support job creation, growth and investment. The Commission considers that this will provide a simpler and fairer way to allocate taxing rights between the Member States and ensure reliable and predictable corporate tax revenues to the Member States. Important aspects of BEFIT were also featured in the proposals on the Common Consolidated Corporate Tax Base (CCCTB), introduced in 2011 but never implemented. However, the Commission considers the BEFIT-proposal different since it will build on the approach taken in the forthcoming global agreement for the definition of the tax base. It will also feature a different apportionment formula, which supposedly will better reflect the realities of today’s economy and global developments.
Gunnar Baldvinsson, works as Doctoral Candidate in Fiscal Law at the Department of Law, Uppsala University. His research is funded by the research foundation Uppsala Centre for Tax Law.