What will EU Tax Reform bring to Business Taxation?
On 18 May 2021, the European Commission issued a communication on „Business Taxation in the 21st Century". The document follows up on the current discussions on international tax rules and presents its own tax agenda, which aims to continue the fight against profit shifting and help to rebuild the economy.
The topic of the reform of the international corporate tax framework is still relevant. The OECD is working on a new global solution to the reform in two broad work streams - the pillars. The first pillar focuses on the partial re-allocation of taxing rights through a new distribution of profits. The second pillar deals with measures to ensure a minimum level of taxation, regardless of seat location.
The Commission introduces plans to establish a robust, fair and efficient business taxation system and to support the Europe's recovery in the short and long term. It also sets out a broader EU tax reform agenda with five action points for the next two years:
1. Greater public tax transparency - certain large companies with operations in the EU will be required to publish an actual effective corporate tax rate.
2. Fight against the abusive use of shell companies - The European Commission will focus on new measures (Anti-Tax Avoidance Directive ATAD 3) against companies with no or limited real economic activity. The proposal is expected to include requirements for companies to disclose to the relevant tax authorities, information necessary to assess the (lack) of economic substance and rules to deny tax benefits where shell companies are used.
3. Recommendation on the domestic treatment of tax losses – in order to reduce the negative effects of pandemic and support small and medium-sized enterprises, Member States are encouraged to allow for the claiming of tax losses retroactively. Companies that were making a profit in the tax periods before 2020 would be able to offset their 2020 and 2021 losses against the already taxed profits from previous years. The limit of the claimed loss should not exceed the amount of EUR 3 million for one tax period.
4. Tax advantages for equity-financed companies (Debt Equity Bias Reduction Allowance - DEBRA) - The Commission commits to make a legislative proposal which should introduce a tax benefit for equity financing. The aim of the initiative is to address the debt – equity bias in corporate taxation.
5. Implementation of BEFIT (Business in Europe: Framework for Income Taxation) - the long-term ambition is adopting a common set of tax rules. This new proposal will replace CCCTB (Common Consolidated Corporate Tax Base), first presented in 2011. BEFIT would consolidate the profits of the EU members of multinationals into a single tax base, to be subsequently allocated to Member States using a pre-defined formula that will replace the current transfer pricing rules.
According to the Communication, other future "green reforms" are also being considered, including a Carbon Border Adjustment Mechanism (CBAM) and revised EU Emissions Trading System (ETS).
In addition, on 14 July 2021, the European Commission will publish and discuss a forthcoming proposal for a digital levy as an independent initiative of the future global agreement. It is expected to have a relatively low tax rate and to serve as the own resource for the EU budget.
The deadline for the adoption of the final tax reform remains unclear, and it is questionable whether all 27 Member States will express the unanimous support. However, the European Commission refers to ongoing trends (COVID-19 pandemic, population aging, climate change, globalization), which call for adequate public revenues in the future.