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 to deliver a future . proof of a European 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.

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 Inclusive Framework of the OECD (BEPS 2.0) focuses on two main areas of work: Pillar 1 (partial reallocation of tax rights) and Pillar 2 (minimum effective taxation of multinational profits. ). 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 reported on here), the Communication presents 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;
  • Potential facilitation of Pillar 2 for EU Member States to agree on the ongoing proposal to recast the EU Interest and Royalties Directive, which will benefit from this Directive (that is to say, the elimination 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 be significant if this measure is adopted.

EU Pillar 1 – wider and more distant (and with a worthy new name!)

As it is foreseen that the first pillar 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 framework for corporate income taxation in Europe, known as “Business in Europe: Income Tax Framework” or BEFIT.

BEFIT will be a single corporate tax regulation 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 is intended to get rid of the burden of comply with up to 27 different sets of corporate tax rules. The only discretion left to each EU member state is the determination of the national corporate tax rate, at which profits attributed to that EU member state will be taxed.

This formulaic allocation will also remove the residency and tax source principles, which underpin the current international corporate tax system. It will also depart from the “arm’s length principle” to which members of a group are currently required to adhere 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 anti-tax avoidance solutions

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 counteract the misuse of shell entities for tax purposes. The proposal would encompass actions such as the obligation for companies to communicate to the tax administration the information necessary to assess whether they have a substantial presence and a real economic activity, the refusal of tax advantages linked to the existence or the use of abusive front companies and the creation of new tax information. , the requirements of tax control and transparency. The Commission also intends to take additional measures to avoid double non-taxation of royalties and interest on exiting the EU.

Some post-COVID-19 media

To promote post-COVID-19 recovery, the Commission is proposing the following aid for businesses to invest and grow.

The Commission recognizes that the tax rules of EU Member States (and other countries) are still biased in favor of debt. This bias increases the accumulation of debt and thus amplifies the risk of strong waves of insolvency in times of economic crisis. To remedy this perceived imbalance, the Commission proposes to combat the debt-to-equity bias in corporate taxation through an allocation system for equity financing. However, the proposal will also be accompanied by anti-abuse measures to ensure that these “allowances” are not used for unintentional purposes.

To alleviate the cash flow problem for businesses that would have been healthy without COVID-19, the Commission proposes to adopt a recommendation that calls on EU member states to allow carry-over of losses for businesses at least over the financial year previous. However, EU Member States will have to limit the amount of losses carried forward to € 3 million per year in deficit.

By the way, more European taxes to come …

Although not falling within the scope of the Communication, the Commission indicates 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 financial transaction tax. . These should be independent of the implementation of BEPS 2.0 and BEFIT.

Conclusion

Companies operating in the EU should closely follow the Commission’s tax reform proposals. Many proposals are close to being revolutionary, in particular those related to BEPS 2.0 and BEFIT. While the CCCTB proposals were controversial when proposed over a decade ago, it is reasonable to consider even greater concerns about BEFIT’s proposals to standardize the tax base of the EU. At the very least, these proposals, if implemented in the form advertised, will have a significant impact on a company’s tax and / or administrative burden or on a group’s tax planning.



Source link