On 18 May 2021, the EU Commission published a Communication on Business Taxation for the 21st century (“the Communication”).
The Communication sets out both a long-term and a short-term vision to support the EU’s recovery from the COVID-19 pandemic, creates a fair and sustainable EU tax business environment, and takes account of the ongoing work on international corporate tax reform at OECD level.
Corporate taxpayers are expected to be significantly impacted by the proposed framework, in particular the new framework for income taxation for businesses in Europe (Business in Europe: Framework for Income Taxation, or “BEFIT”), which will create a common rulebook for groups of companies operating in the EU and replace the current Common Consolidated Corporate Tax Base (CCCTB) proposals.
The action items in the Communication can be summarised as follows:
1) Implementation of the OECD solutions to reform the international corporate tax framework
The Commission reiterates its strong support and involvement in the OECD inclusive framework on a global consensus-based solution to reform the international corporate tax system, known as Pillar 1 and Pillar 2. In this context, the Commission will propose:
A Directive for the implementation of Pillar 1 in the EU, once agreement is reached at the international level. Pillar 1 involves the partial re-allocation of taxing rights. It will give market jurisdictions a right to tax part of the profits of certain non-resident businesses by providing for a reallocation of a portion of these global profits among the jurisdictions where the group has customers or users, using an agreed formula.
A Directive for the implementation of Pillar 2. Pillar 2 aims to ensure that multinational businesses are subject to a certain minimum level of tax on all of their profits each year. The consistency of the new rules with the rules in the anti-tax avoidance tax directive (ATAD) on controlled foreign companies (CFC) will have to be worked out.
In addition, the implementation of Pillar 2 will have an impact on the pending proposal for recasting the Interest and Royalty Directive, as well as the EU blacklisting process.
2) Business tax agenda for the next 2 years
To ensure fair and effective taxation within the EU, the Commission will put forward:
- a legislative proposal for the publication of effective tax rates (ETR) of certain large companies with operations in the EU, based on the methodology under discussion in Pillar 2 (by 2022); and
- a legislative proposal setting out rules to neutralise the misuse of shell entities for tax purposes, called “ATAD 3” (by Q4 2021). In particular, this proposal would require 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 use of abusive shell companies, and creating new tax information, monitoring and tax transparency requirements.
To help businesses recover from the COVID-19 pandemic, the Commission:
- also adopted, on the same date, 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. Member States will have to limit the amount of losses to be carried back to €3 million per loss-making fiscal year.
- will issue a legislative proposal creating a Debt Equity Bias Reduction Allowance (DEBRA) that can broadly be characterised as an allowance system for equity financing aimed at reducing debt funding of companies (by Q1 2022).
3) New framework for business taxation in the EU – BEFIT
The Commission will propose a new framework for income taxation for businesses in Europe called “BEFIT” (by 2023).
BEFIT will be a single corporate tax rulebook for the EU, based on the key features of a common tax base and the allocation of profits between Member States based on a formulary apportionment. The use of a formula to allocate profits is expected to remove the need for the application of complex transfer pricing rules within the EU to the companies within the scope of BEFIT.
This proposal will replace the pending proposals for a CCCTB, which will be withdrawn.
In summary, the following timeline (points 2 and 3 above) should be borne in mind:
By Q4 2021
ATAD 3 legislative proposal: to address aggressive tax planning opportunities linked to the use of shell companies
By Q1 2022
DEBRA legislative proposal: to create a debt equity bias reduction allowance
Legislative proposal for the publication of effective tax rates paid by large companies
BEFIT proposal: to replace the CCCTB
In line with the EU tax package issued in July 2020 and its involvement in the international discussions to move towards Pillar 1 and Pillar 2, the Commission has set an ambitious tax agenda for the coming months and years. Taxpayers will need to carefully monitor the developments and assess the impact of the proposals on their operations.