EU Commission adopts new communication on business taxation for the 21st century

Deloitte Malta Tax Alert

20 May 2021

On 18 May 2021, the EU Commission published a new communication (the ‘Communication’) outlining its views on the EU’s business taxation policy in the current environment following the impact of the COVID-19 pandemic. The Communication emphasises the needs for a robust, efficient and fair tax framework that meets public financing needs and supports the recovery and the green and digital transition by creating an environment conducive to fair, sustainable and job rich growth and investment.

Below is a summary of the key components of the Communication:

EU Tax Policy Agenda

As part of the EU action on business taxation in conjunction with a comprehensive EU tax agenda, the EU Commission has outlined the following priorities as vital to achieve its vision:

  • Enabling fair and sustainable growth – supporting wider EU policies through a green transition, which would be facilitated by, inter alia, reforming the Energy Taxation Directive and new and reformed pricing mechanisms to support EU climate objectives such as a Carbon Border Adjustment Mechanism (CBAM) and a proposal for a revised EU Emissions Trading System (ETS).
  • Ensuring effective taxation – concluding the ‘EU tax mix on the road to 2050’ in a Tax Symposium in 2022 and issuing proposals on a digital levy (which would coexist with the implementation of an OECD agreement) to serve as an EU own resource and additional new own resources which could include a Financial Transaction Tax and an own resource linked to the corporate sector.  

Reform of the international corporate tax framework

The Communication also tackles the current negotiations on a solution to the tax challenges of the digitalisation of the economy at the level of the OECD/G20 Inclusive Framework on BEPS (Pillar One and Pillar Two) and reinforces the views of the EU Commission that both pillars are in line with its vision for a business taxation framework for the 21st century.

  • Pillar One – In order to ensure a consistent implementation of an international agreement, the EU Commission will propose an EU Directive for the implementation of Pillar One in the EU.
  • Pillar Two – In order to ensure a consistent application within the EU and compatibility with EU law, the principal method for implementing Pillar Two will be an EU Directive that will reflect the OECD Model Rules with necessary adjustments. In addition, it will be necessary to explore how best to accommodate the interaction between the Controlled Foreign Company (CFC) rules under the EU ATAD and the Income Inclusion Rule (IIR) under Pillar Two and to amend the EU Interest and Royalties Directive to make its benefits conditional on the income being subject to tax in the destination jurisdiction.

Going beyond the OECD agreement

The Communication goes over and above the current negotiations on the tax challenges of the digitalisation of the economy and includes, inter alia, the following targeted solutions:

  • Publication of effective tax rates paid by large companies (by 2022) – In an effort to ensure greater public transparency on the taxes paid by large economic actors, the EU Commission will put forward a proposal for the annual publication of the effective corporate tax rate of certain large companies with operations in the EU, using the methodology agreed for the Pillar Two calculations.
  • Neutralising the misuse of shell entities for tax purposes (by Q4 2021) – As a further step to fight against the abusive use of shell companies, the EU Commission shall table a legislative proposal setting out union rules to address structures with no or only minimal substance and economic activity which pose a risk of being used for improper purposes. Such rules may include:
    • requiring companies to report to the tax administration the necessary information to assess whether they have substantial presence and real economic activity;
    • denying tax benefits linked to the existence or the use of abusive shell companies;
    • creating new tax information, monitoring and tax transparency requirements; and
    • preventing royalty and interest payments leaving the EU from escaping taxation through double non-taxation.
  • Recommendation on the domestic treatment of losses (alongside the Communication) – Against the backdrop of the COVID-19 pandemic, the Communication laments that the treatment of losses in EU Member States is still very different and there is scope to improve the environment for investment and growth. Alongside the Communication, the EU Commission adopted a recommendation for EU Member States to allow loss carry-back for businesses to at least the previous fiscal year which will benefit businesses that were profitable in the years before the pandemic, allowing them to offset their 2020 and 2021 losses against the taxes they paid before 2020.
  • Creating a Debt Equity Bias Reduction Allowance (DEBRA) (by Q1 2022) – The Communication also seeks to tackle the persisting pro-debt bias of tax rules by stating that the EU Commission will make a proposal to address such bias in corporate taxation via an allowance system for equity financing which would incorporate anti-abuse measures to ensure that such rule would not be used for unintended purposes.
  • Proposal for Business in Europe: Framework for Income Taxation (BEFIT) (2023) – In a bid to replace the pending proposal for a Common Consolidated Corporate Tax Base (CCCTB), the EU Commission will table a proposal which would move towards a common tax rulebook to provide for fairer allocation of taxing rights between EU Member States. Such allocation would be based on a formulary apportionment system in an effort to ensure that businesses operate in the Single Market without undue tax barriers, reduce mismatches between corporate tax systems and pave the way for the possibility of a single EU corporate tax return for multinational entities.  

The full text of the Communication may be accessed here.

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