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Rethinking EU business tax: Commission sets out new agenda

Author: ICAEW Insights

Published: 07 Jun 2021

A new paper adopted by the European Commission sets out plans to promote a robust, efficient and fair business tax system in the EU, supporting post-pandemic recovery and boosting public revenues in the future.

The Commission’s Communication on Business Taxation for the 21st Century is part of wider tax reform measures in the bloc, including forthcoming proposals on digital levies and a review of the EU’s green taxes, and outlines short-term actions and a longer-term vision to create a more equitable and stable business environment in the EU. The plans build on a roadmap issued last summer while also taking account of progress made in G20/OECD global tax talks.

A new corporate income tax framework by 2023

The centrepiece of the new strategy is the Commission’s announcement that it will present a new framework for business taxation by 2023. Stressing that the lack of a common business tax system in the EU acts as a drag on competitiveness, the ‘Business in Europe: Framework for Income Taxation’ (BEFIT) will aim to cut red tape, reduce compliance costs and minimise tax avoidance opportunities.

The Commission wants BEFIT to provide a single corporate tax rulebook for the EU, leading to the consolidation of the profits of EU members of a multinational group into a single tax base to be then allocated to individual EU countries using formulary apportionment, to be taxed at national corporate income tax rates. In doing so, the Commission proposes to build on concepts already present in OECD tax discussions. BEFIT will replace the long-pending proposal for a Common Consolidated Corporate Tax Base, which will be withdrawn.

With a focus on the cross-border dimension, the Commission wants to see BEFIT helping to ensure a fair sharing of taxable revenue between countries – while also calling on complementary action at national level. Financial support for significant tax policy reforms as well as funding for modernising tax administrations can be made available via the EU’s recovery facility and other accompanying instruments.

The EU’s tax mix to 2050

The Commission will also launch a broader reflection on the future of tax in the EU, leading to a large-scale symposium on the ‘EU tax mix on the road to 2050’ in 2022. Noting that the overall composition of tax revenue in the EU27 has remained broadly stable in the last two decades, the Commission points out that mega-trends such as climate change, population ageing, and digital transformation may start to have a significant impact. The traditionally high labour tax burden in the EU – alongside increases in VAT rates during the last decade – point to the need for a broader rethink of tax bases, likely leading to a greater focus on behavioural green or health taxes. All this will be debated during next year’s tax symposium.

Tackling the debt-equity bias

In the meantime, the Commission will move forward in the next two years to tackle specific issues, including the current debt-equity bias. Noting that the COVID-19 crisis has contributed to a significant rise in company debt, a new legislative proposal for a Debt Equity Bias Reduction Allowance (DEBRA) will seek to encourage greater company financing through equity. The proposal – which would need to be adopted by all EU countries – is scheduled for publication in early 2022.

Maintaining focus on tax transparency

Maintaining the focus on transparency, the Commission will table draft legislation by 2022 to mandate the publication of effective tax rates paid by large companies. This would provide information on the proportion of corporate tax paid by companies relative to the amount of taxes generated rather than in relation to their taxable profits, based on methodology being discussed in the OECD negotiations.

New anti-tax avoidance measures to be published before the end of this year will address the abusive use of shell companies, by introducing new monitoring and reporting requirements. In particular, the Commission will propose that companies should report to tax administrations the necessary information to assess whether there is substantial presence and real economic activity. Further steps are also outlined to prevent royalty and interest payments leaving the EU from escaping taxation.

Despite mixed outcomes of recent legal appeals, the Commission sets out its intent to continue to use all tools available to ensure companies pay their fair share of tax, including via enforcement of EU state aid rules. Reference is also made to the potential use of a market-distortion legal base only requiring majority voting and allowing tax unanimity rules to be circumvented.

Tax treatment of pandemic-related losses

Alongside the communication, the Commission also adopted a recommendation on the domestic treatment of losses during the COVID-19 crisis thereby enabling EU countries to allow loss carry-back for businesses to at least the previous fiscal year. It is hoped that this measure will particularly benefit those SMEs that were profitable pre-pandemic. The amount of losses that can be carried back is limited to €3mn per loss-making fiscal year.