Wednesday, May 19, 2021
The EU needs a robust, efficient and fair business tax framework that supports the post-COVID-19 recovery, removes obstacles to cross-border investment and creates an environment conducive to fair and sustainable growth.
That is why, on 18 May 2021, the Commission published the Communication on Business Taxation for the 21st Century. The Communication sets out both a long-term vision to provide a fair and sustainable business environment and EU tax system, and a tax agenda for the next two years, with targeted measures that promote productive investment and entrepreneurship and ensure effective taxation.
What are the main problems this Communication addresses?
The context for EU business taxation policy has changed radically in the past year. The public health challenges stemming from the COVID-19 pandemic turned into the most drastic economic crisis in the EU history, causing rising inequality, and deeply impacting social safety nets.
The pandemic has also accelerated existing trends, such as digitalisation, and highlighted problems with the current corporate tax system:
- The current international corporate tax system was designed more than a century ago and is based on outdated principles of tax residence and source. Developments in globalisation and digitalisation have left these principles increasingly out of synch with the economy of today and the made tax rules increasingly difficult to apply to modern business realities.
- In the EU, the patchwork of national corporate tax rules creates complexities for businesses operating cross-border in the Single market. Grappling with up to 27 different national tax systems creates particular challenges for EU SMEs, start-ups and other businesses looking to grow, expand and trade cross-border. This hurts investment and growth, as well as the EU’s competitiveness.
- While corporate income is taxed at the national level, business models continue to become ever more international, complex and digital. This creates high compliance costs for business and risks of double taxation. At the same time, some companies exploit loopholes between tax systems through aggressive tax planning strategies. This also makes it difficult for citizens to know how much companies are actually paying in tax, which risks undermining trust in the tax system as a whole.
What will the Commission propose?
In the long-term, the Communication will create a new framework for business taxation in the EU, which will reduce administrative burdens, remove tax obstacles and foster a more business-friendly environment in the Single Market. The “Business in Europe: Framework for Income Taxation” (or BEFIT) will provide a single corporate tax rulebook for the EU, based on a formulary apportionment and a common tax base. BEFIT will cut red tape, reduce compliance costs, reduce tax avoidance opportunities and support jobs, growth and investment in the EU.
In the short term, the Communication also sets out a series of targeted initiatives to address current problems in business taxation and create a more stable, supportive and fair corporate tax framework for the future. The Commission will propose to:
- Better support business, and particularly SMEs, in their recovery, with a Recommendation on the domestic treatment of losses. The Recommendation prompts Member States to allow loss carry back for businesses to at least the previous fiscal year. Loss carry back has the advantage of benefitting only the businesses that were profitable in the years before the pandemic, so it supports healthy businesses. Companies that were making a profit and paying taxes in the years prior to 2020 would be able to offset their 2020 and 2021 losses against these taxes. This ensures that the measure is targeted at businesses suffering as a direct result of the pandemic, and that public money is not spent trying to help private businesses that are failing for reasons unrelated to the crisis. Member States will also have to limit the amount of losses to be carried back to €3 million per loss making fiscal year. This will help level the playing field and better support business during the recovery, and will particularly benefit SMEs.
- Promote innovation by addressing the debt-equity bias in corporate taxation through an allowance system. The economic crisis following the COVID-19 pandemic has contributed to a significant increase in companies’ stock of debts. The current pro-debt bias of tax rules, where businesses can deduct interests attached to a debt financing, but not the costs related to equity financing, can encourage companies to accumulate debts. This could lead to high waves of insolvency, with a negative effect for the EU as a whole. The Commission proposal will try to redress the debt-equity bias and contribute to the re-equitisation of companies financially vulnerable because of the COVID-19 crisis.
- Ensure greater public transparency on the taxes paid by businesses, by proposing that certain large companies operating in the EU should have to publish their effective tax rates. The proposal will allow public scrutiny where aggressive tax planning strategies are used and will provide policy-makers with a better overview of the tax contribution made by large multinational companies in the EU.
- Tackle the abusive use of shell companies, through new anti tax-avoidance measures. Shell companies are legal entities and arrangements that have little or no substance and economic activity, and in some cases may be used purely for aggressive tax planning. The Commission will propose new monitoring and reporting requirements for shell companies, so that tax authorities have better oversight and can better respond to aggressive tax planning through these entities.
What is the timing for the upcoming proposals?
- Adopt a recommendation on the domestic treatment of losses for SMEs during the recovery (alongside this Communication) – published
- Table a legislative proposal to address aggressive tax-planning opportunities linked to the use of shell companies (ATAD 3) - by Q4 2021
- Make a legislative proposal creating a Debt Equity Bias Reduction Allowance (DEBRA) - by Q1 2022
- Make a legislative 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 - by 2022
- Table a proposal for BEFIT (Business in Europe: Framework for Income Taxation), moving towards a common tax rulebook and providing for fairer allocation of taxing rights between Member States - 2023
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