On 18 May 2021, the European Commission (“EC”) published its long-awaited Communication on Business Taxation for the 21st Century, introducing a short-term and long-term vision for the business tax policy agenda. The proposed agenda should support Europe in recovery from the Covid-19 pandemic and secure sufficient public revenues in upcoming years. This document complements the tax Action Plan presented by the European Commission in July 2020 as part of a package for fair and simple taxation.
You can read both documents – Communication on Business Taxation for the 21st Century and Tax Action Plan – on the website of the European Commission.
The new EU Tax Policy Framework follows these priorities and measurements for their achievement:
- Enabling fair and sustainable growth: The EC will propose a reformed pricing mechanism to support EU climate objectives, i.e. a Carbon Border Adjustment Mechanism (“CBAM”), together with a revised EU Emission Trading System (“ETS”). The EC should publish these proposals as early as July 2021.
- Ensuring effective taxation: The EC will introduce a new Digital levy to ensure a fair contribution of the digital sector to the financing of the recovery in the EU (i.e. should represent a source of income for the EU budget). The initial proposal on the Digital Service Tax (2018) will be withdrawn by Digital levy coexisting with an OECD agreement on sharing a fraction income. The proposal of the new Digital levy shall be published in July 2021.
The new EU Tax Policy Framework sets out the following short-term initiatives:
A) Proposal for the publication of effective tax rates paid by large companies, based on the methodology under discussion in Pillar 2 of the OECD negotiations (expected by 2022).
B) A group of legislative proposals setting out union rules to neutralise misuse of shell entities for tax purposes (expected by Q4 2021). Among these proposals, the amended anti-tax avoidance directive (ATAD 3) introducing sufficient substance presence requirements and provisions preventing the double non-taxation is anticipated.
C) Adoption of a recommendation on the domestic treatment of losses. This recommendation encourages member states to allow loss carry-back to businesses to at least the previous fiscal year. This recommendation shall particularly help small and medium-sized enterprises in their recovery from the Covid-19 pandemic.
D) Proposal creating Debt Equity Bias Reduction Allowance (DEBRA) supporting equity financing as a prevention of excessive accumulation of debts, which may cause that some countries will face high waves of insolvency. DEBRA proposal is expected in Q1 2022.
In the long-term, the EU Tax Policy Framework aims at the introduction of BEFIT (Business in Europe: Framework for Income taxation) moving towards a common tax rulebook and providing for a fairer allocation of taxing rights between the Member States. Similarly to CCCTB (2011), under BEFIT, the allocation of profits between the Member States will be based on a formula (formulary apportionment); however, the new formula should reflect the significant changes in the economy over past years. BEFIT proposal is expected in 2023 and fully replace the pending CCCTB proposal. In this context, the position of individual member states under BEFIT is crucial. It is too early to presume details so need to wait for further development in this area.
We will monitor further development of the EU proposals in the tax area keeping you updated.