VAT in the Digital Age Package
The Commission’s 2020 Action Plan for a Fair and Simple Taxation Supporting the Recovery includes measures to:
- modernise VAT reporting obligations and facilitate e-invoicing;
- update the VAT rules for the platform economy; and
- move to a single VAT registration in the EU.
Following a stakeholder consultation earlier in the year, a forthcoming legislative package on VAT in the Digital Age is expected to include changes to the VAT Directive and the Council Regulation on VAT administrative cooperation, with the objective of harmonising and promoting the provision of cross-border supplies in the single market and improving tax collection. The package is due to be published in December 2022.
DAC8 (crypto-assets and e-money)
Following a consultation, the Commission is due to present an eighth Directive on Administrative Cooperation (DAC8) to enhance tax compliance in the digital economy and assist tax authorities to identify circumstances where tax may be due from persons deriving income and gains from crypto assets and e-money.
The proposed rules are expected to legally oblige exchanges and other crypto asset service providers to report their customers’ transactions to member states’ authorities. DAC8 is also likely to include new rules on penalties and compliance measures for the various reporting obligations under the DAC framework. Legislative proposals are due for publication in December 2022 or early 2023.
Following a related stakeholder consultation that ended in October, the Commission is expected to move forward with a proposal for a SAFE (Securing the activity framework of enablers) Directive. This aims to tackle the role of enablers involved in facilitating aggressive tax planning in the EU. The initiative is supposed to interact and build on existing initiatives to combat tax evasion and aggressive tax planning, notably DAC6, the Anti-Tax Avoidance Directive, the AML Directive and the Whistle-blowers Directive. The stated key objective is to prevent enablers from setting up complex structures in non-EU countries. This erodes the tax base of member states through tax evasion and aggressive tax planning. The Commission is considering the following three options to do this:
a) require all enablers to carry out dedicated due diligence procedures;
b) a prohibition on facilitating tax evasion and aggressive tax planning combined with due diligence procedures and a requirement for enablers to register in the EU; and
c) a code of conduct for all enablers.
Legislative proposals are expected in spring 2023.
Pillar One – Digital Taxation
The EU will also move ahead with legislative proposals to implement Pillar One of the OECD global tax agreement. This targets the largest multinational groups and requires them to pay tax in the locations where their customers and users are located. With finalisation of the multilateral convention required to implement Pillar One slipping, it remains to be seen how the Commission will move ahead with legislative proposals in the absence of international agreement. The EU has floated the potential for a new EU-wide digital levy to apply until Pillar One is implemented by member states. Legislative proposals are pencilled in for summer 2023.
The Commission intends to table a legislative proposal on corporate tax – the Directive on Business in Europe: Framework for Income Taxation (BEFIT) – which would set out a structural reform of the EU business tax framework consistent with the principles underpinning the OECD Two-Pillar Framework. It is also informed by work on previous initiatives, including the 2011 Common Consolidated Corporate Tax Base (CCCTB) and the two 2016 Common Corporate Tax Base (CCTB) and (CCCTB) proposals. The proposed BEFIT system would focus on tax base adjustments and the design of a formula for allocating taxable profits. This applies to EU businesses or companies that are part of groups which, in most cases, are present in more than one EU country. A stakeholder consultation is currently open (deadline 5 January 2023). Legislative proposals are expected in Q3 2023.
Additional VAT measures
The Commission is expected to come forward with further VAT measures, including:
a) revision of the VAT special scheme for travel agents (possible proposal in 2023);
b) greener taxation of passenger taxation (international air and maritime passengers) (proposals planned for 2023); and
c) a review of the exemptions applicable in the financial services area to remove any distortions and limit cumulative charges in supply chains (possible proposals in 2023).
The Commission published a draft Directive laying down rules for a debt-equity bias reduction allowance (DEBRA) in May 2022. The proposal lays down rules to provide, under certain conditions, for the deductibility for tax purposes of notional interest on increases in equity and to limit the tax deductibility of exceeding borrowing costs.
It applies to all taxpayers that are subject to corporate tax in one or more member states, except for financial undertakings. Since SMEs usually face a higher burden to obtain financing, it is proposed to grant a higher notional interest rate to SMEs. This measure will support businesses by introducing an allowance that will grant equity the same tax treatment as debt. The proposal stipulates that increases in a taxpayer's equity from one tax year to the next will be deductible from its taxable base, similar to what happens to debt. Negotiations on the draft Directive have started.
In December 2021, the Commission presented a key initiative to fight against the misuse of shell entities for improper tax purposes. The proposed Directive seeks to ensure that entities in the EU that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers.
This also aims to protect the level playing field for the majority of European businesses. The proposal aims to introduce common rules within the EU to identify shell entities at high risk of tax abuse. Such rules would define objective substance requirements and would ensure that shell entities used for tax abuse can be identified promptly.
The proposal lays down a substance test (using a number of indicators related to income, staff and premises) that will help member states to identify undertakings that are engaged in an economic activity, but do not have minimal substance and are misused for the purpose of obtaining tax advantages. The proposal introduces a filtering system (or gateways) for the entities in scope, which have to comply with a number of indicators. These levels of indicators constitute a type of ‘gateway’.
The draft Directive also addresses the timely availability of information on the existence of identified shell entities, both at national level and in other member states. Lastly, the proposal aims to discourage the use of trust or company service providers from creating shell entities in the EU in the first place. The substance requirements include criteria that aim to combat the very services that trust or company service providers offer, such as setting up postal addresses. Negotiations on the draft Directive have started.
Pillar Two – Minimum Taxation
In December 2021, the Commission proposed a Directive ensuring a minimum effective tax rate for the global activities of large multinational groups. The proposal would enable the EU to implement the OECD global tax agreement. The proposal follows the international agreement and sets out how the principles of the 15% effective tax rate will be applied in practice within the EU. It includes a common set of rules on how to calculate this effective tax rate, so that it is properly and consistently applied across the EU. Negotiations on the proposal have currently stalled in Council, with a number of countries indicating that they would move forward either unilaterally or via use of the ‘enhanced cooperation’ procedure.
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