On May 18, 2021, the European Commission announced its vision on “Business Taxation for the 21st century”. It did so by means of a Communication to the European Parliament and Council.
The Communication is part of a wider EU tax reform agenda. It sets out both a short and long-term vision to provide ‘a fair, efficient and simple balanced tax system’. The Commission states that there is a widespread consensus that the fundamental concepts of the international tax system like ‘tax residence’ and ‘source’ are outdated. The current international tax system is unfit to cope with businesses that carry out activities without maintaining physical presence in states i.e. the digitalization of the economy. This resulted in states seeking to safeguard their tax base by imposing specific measures against tax avoidance and evasion. In turn, this increased the complexity of the tax system.
The implementation of the outcome of the international discussions in the EU
The Commission recognizes that the international discussions are currently progressing to a global solution with specific action on the reallocation of taxing rights and a minimum effective taxation. It stresses that the outcome of these discussions will significantly influence the EU business tax agenda. To ensure a consistent implementation in all EU member states (including those that are not OECD-members and do not participate in the Inclusive Framework), the Commission will propose a Directive for the implementation of the OECD Pillar One and Two proposals. The global discussions on minimum effective taxation will also have an impact on the existing and pending EU-Directives.
The European Commission tends to go beyond the OECD agreement
Furthermore, the Communication envisions the following legal actions in the field of corporate taxation:
- On May 18, 2021, the Commission also adopted a recommendation on the domestic treatment of losses to allow loss carry-back for businesses to at least the previous fiscal year;
- By Q4 2021, a proposal setting out EU-rules to neutralize the misuse of shell entities1 for tax purposes to prevent double non-taxation;
- By Q1 2022, a proposal creating a Debt Equity Bias Reduction Allowance (also referred to as ‘DEBRA’). The Commission intends to encourage companies to finance their activities through equity rather than debt via an allowance system for equity financing. The proposal will also entail anti-abuse measures to ensure the system is not used for unintended purposes;
- By 2022, a proposal for the annual publication of the effective tax rates paid by ‘large companies’, based on the methodology under discussion in Pillar Two of the OECD negotiations.
New framework for business income taxation: CCCTB replaced by BEFIT
In addition, the European Commission aims to present a new framework for business income taxation in the EU by 2023 (the new BEFIT2). BEFIT will provide a corporate tax rulebook based on the idea of a common EU tax base for multinational groups. This common tax base would be allocated to the Member States by means of a formula, after which the states can apply their own domestic income tax rates. According to the European Commission, such an approach would avoid the application of complex transfer pricing rules for the companies under the scope of BEFIT.
BEFIT will replace the proposal of a Common Consolidated Corporate Tax Base (CCCTB). Some principles in the BEFIT proposal are similar to the CCCTB, but they will differ in part. For example, a different apportionment formula will be proposed to better remedy the current problems in international taxation.
The European Commission justifies its views by referring to the ongoing social trends like the COVID-19 pandemic, population ageing, climate change and the transformation of the labour market. In light of these social trends, it wants to ensure adequate public revenues over the coming years.
Whether and when these proposals will be adopted remains to be seen. There is no legal value in this Communication. Nevertheless, it clearly shows the emerging agenda of the European Commission. Since the Member States take little action, the European Commission sees wiggle room for its own initiatives. It is quite remarkable that it does so in an area such as taxation, which in principle requires unanimity among all 27 Member States. It raises the question whether the Commission is (more than ever) toying with the idea of discarding this unanimity in favour of a special majority. It is clear that this Communication will lead to discussions among the Member States.
Kimberly Van Sande - Associate (firstname.lastname@example.org)
1Companies with no or minimal substantial presence and real economic activity
2Which stands for ‘Business in Europe: Framework for Income Taxation’.
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
- Koen Morbée (International and EU corporate tax, email@example.com);
- Michiel Boeren (International and EU corporate tax, firstname.lastname@example.org);
- Katrien Bollen (HR tax and global mobility, email@example.com);
- Ben Plessers (Transfer Pricing and Valuations, firstname.lastname@example.org);
- Gert Vranckx (VAT, customs, excises and other indirect taxes, email@example.com);
- Rik Smet (International and EU corporate tax, firstname.lastname@example.org).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.