On May 18, 2021, the European Commission (Commission) of the European Union (EU) released a Communication on ‘Business Taxation for the 21st Century’ (the Communication), setting out a long-term vision for providing a future – proof of the EU tax system and a tax agenda for the next two years with targeted measures to ensure effective taxation and promote post-COVID-19 recovery. These solutions, if implemented, would go well beyond BEPS 2.0.
The role of the EU in the implementation of BEPS 2.0 in EU Member States
The Commission recognizes in the Communication the importance of having a global consensus-based solution to reform the international corporate tax framework in order to tackle the problems associated with the increasing globalization and digitization of economies global. To this end, the discussion led by the OECD Inclusive Framework (BEPS 2.0) focuses on two main streams of work: Pillar 1 (partial reallocation of taxing rights) and Pillar 2 (minimum effective taxation of profits. multinationals). See here for our four-part series on BEPS 2.0.
Acknowledging recent progress on BEPS 2.0 (and expressly acknowledging the positive engagement of the new US administration, which we have reported here), the Communication sets out the Commission’s plan to implement BEPS 2.0 in the EU. The Commission will propose a directive for the implementation of pillar 1 in the EU. The main method of implementing Pillar 2 will be a new EU Directive which will reflect the OECD Model Rules with the necessary adjustments. The Commission will examine the interactions between Pillar 2 and existing EU initiatives, including:
- the interaction between the income inclusion rule under pillar 2 and the rules on controlled foreign companies under the anti-tax avoidance directive;
- The potential facilitation of Pillar 2 of the EU Member States’ agreement on the pending proposal to recast the EU Interest and Royalties Directive, which will render the benefits of this Directive (that is to say, the abolition of withholding tax on interest and royalty payments within a group of companies) provided that the interest is subject to tax in the State of destination; and
- the potential introduction of pillar 2 as an additional criterion to determine whether a foreign jurisdiction should be included in the EU’s blacklist of non-cooperative jurisdictions. In view of the EU’s plan to implement Pillar 2, the number of jurisdictions that could be added to the EU’s blacklist could potentially be significant if this measure is adopted.
EU Pillar 1 – wider and further (and with a worthy new name!)
As it is foreseen that Pillar 1 will only apply to an initially limited number of companies, the Commission clearly envisages that the EU will go further. As a result, the Commission will propose a new income tax framework for businesses in Europe, known as “Businesses in Europe: Framework for Income Taxation” or BEFIT.
BEFIT will be a single set of corporate tax rules for the EU, based on the main features of a common tax base and the distribution of profits among EU member states on the basis of a formula. BEFIT will use a formula for the partial reallocation of profits under pillar 1 and common rules for calculating the tax base for the purposes of applying pillar 2. This common regulation aims to get rid of the burden of complying to up to 27 different sets of rules. corporate tax rules. The only discretion left to each EU member state is the determination of the national corporate tax rate, at which profits allocated to that EU member state will be taxed.
This breakdown by form will also remove the principles of residence and tax source that underpin the current system of corporate taxation at the international level. It will also depart from the “arm’s length principle” which members of a group are currently required to adhere to in order to comply with transfer pricing rules.
The Commission will present BEFIT by 2023, replacing the pending proposals for a Common Consolidated Corporate Tax Base (CCCTB).
Targeted solutions to fight tax evasion
In addition to the long-term vision for the implementation of BEFIT, the Commission is also proposing two targeted solutions in its tax agenda for the next two years in order to combat tax evasion.
The Commission proposes that certain large companies operating in the EU be required to publish their effective tax rates, calculated using the methodology agreed for the Pillar 2 calculations.
To step up the fight against the misuse of shell companies, the Commission proposes that a new initiative be introduced to counter the abuse of shell companies for tax purposes. The proposal would include actions such as the obligation for companies to declare to the tax authorities the information necessary to assess whether they have a substantial presence and a real economic activity, the denial of tax advantages linked to the existence or to the the use of abusive shell companies; and the creation of new tax information, tax control and transparency requirements. The Commission also intends to take further steps to prevent double non-taxation of royalties and interest payments leaving the EU.
Some post-COVID-19 supporters
To promote post-COVID-19 recovery, the Commission is proposing the following aids to companies to invest and develop.
The Commission recognizes that there is a persistent bias in favor of debt and against fairness in the tax rules of EU Member States (and other countries). This bias increases the accumulation of debts, and thus amplifies the risk of strong waves of insolvency in times of economic crisis. To correct this perceived imbalance, the Commission proposes to tackle the debt-to-equity bias in corporate taxation through an allocation system for equity financing. However, the proposal will also include anti-abuse measures to ensure that these “allowances” are not used for unintended purposes.
To alleviate the cash flow problem for businesses that would have been healthy without COVID-19, the Commission is proposing to adopt a recommendation urging EU member states to allow carry-over of losses for businesses at least until ‘Previous exercice. However, EU Member States will have to limit the amount of losses carried forward to € 3 million per year in deficit.
By the way, other European taxes are coming soon …
Although it does not fall within the scope of the Communication, the Commission mentions that it will propose other new EU tax provisions. These include proposals for a carbon border adjustment mechanism, a digital tax, a review of the EU emissions trading system and a revamped set of proposals. for the tax on financial transactions. These should be independent of the implementation of BEPS 2.0 and BEFIT.
Companies operating in the EU should closely follow the Commission’s tax reform proposals. Many proposals are almost revolutionary, especially those related to BEPS 2.0 and BEFIT. While the CCCTB proposals were controversial when proposed over a decade ago, it is reasonable to envision even greater concerns about the BEFIT proposals to homogenize the EU tax base. At the very least, these proposals, if implemented in the form advertised, will significantly affect a company’s tax and / or administrative burden or a group’s tax planning.