On May 18, 2021, the European Commission published a communication on “Corporate Taxation for the 21st Century”. The announcements made in it are expected to be implemented in actual legislative proposals over the next three years.
If implemented, they would represent a systematic change in corporate taxation in the EU. Several short-term proposals would build on the existing trends of increased transparency and need for substance, as well as international negotiations on the first and second pillars. The longer term goal is to adopt a common set of rules defining a consolidated EU corporate tax base, which will be shared between Member States according to a formula (tax rates would continue to be set nationally). Finally, the communication also includes measures to help taxpayers. These plans show where the EU could go.
We have divided the planned measures into five categories below. As there are no concrete proposals yet, we are outlining the European Commission’s idea and a first high-level impact assessment for each of them.
Annual publication of the effective tax rate
The European Commission will propose legislation to publish the effective tax rate annually by 2022 (ETR) certain large multinationals (MNEs) active in the EU. The ETR would be determined according to the second pillar (here you can find our tax flash on the blueprint of the second pillar from October 2020).
Subject to implementation of the second pillar, this move should not generate significant additional compliance costs, but would expose the tax affairs of large multinational corporations to additional public scrutiny and greater coordination with the multinational’s environmental, social and corporate ambitions Require governance. This measure also needs to be considered together with the ongoing public consultation on the future country-by-country assessment (CBC) Guideline (here you can find our control flash on CBC matters).
Additional reporting on substance and economic activity
The European Commission will also come up with a proposal by the end of 2021 to combat the misuse of “shell companies”, which are companies with little or no substantial presence and economic activity. The multinational companies would have to provide additional evidence of the substance and the actual economic activities of such companies. This would allow jurisdictions to improve the exchange of information and take action against the (ab) use of these types of businesses, for example by denying tax benefits (measures to be determined).
This proposal, if adopted, would put pressure on the use of intermediate holding and financing companies – especially in low or non-tax areas where the material is very often very limited. The multinationals would likely have to restructure and focus on one or two jurisdictions in order to set up such companies and conduct these activities.
Increase in corporate taxation
Implementation of the first and second pillars and the associated measures
A first measure would be the implementation of the results of the first and second pillars of the OECD through guidelines (to be proposed in 2022) in order to ensure harmonized implementation within the EU. Building on this, the European Commission is considering further additional steps to prevent outgoing license fees and interest from being taxed if there is no taxation at the recipient level (the measure is not specified, but has yet to be confirmed if the second pillar contains the subject – Tax rule). The European Commission also hopes that the Council will adopt the revised version of the Interest and Royalties Directive proposed years ago (which makes performance dependent on taxation at recipient level – possibly even on a minimum tax level).
The impact of implementing the first and second pillars will largely depend on the outcome of the ongoing negotiations at OECD / G20 level. In any event, large taxpayers (with sales of EUR 750 million or more) should expect increased complexity in taxation and tax compliance due, among other things, to a partial departure from the arm’s length principle, the need to calculate effective tax rates in a number of jurisdictions , Adjustments to the tax incentive regulations and possible increases in nominal corporate tax rates.
The interaction and compliance with EU law – in particular the fundamental economic freedoms set out in the EU treaties – will be a central point in the application of the first and second pillars in an internal EU context. With regard to non-EU group companies, EU law is unlikely to provide any protection as non-EU individuals cannot exercise the freedom of establishment.
A digital release from the EU
In addition, the European Commission would like to introduce a digital levy – the measure is initially on the agenda of its meeting on July 14, 2021. This digital levy would apply independently of the measures of the first pillar and represent a further EU resource.
Large multinational companies with significant cross-border activities, largely based on an online infrastructure, will face an additional tax burden. Depending on the design (tax on gross income versus profits), certain activities or business models can even become financially unprofitable.
Financial transaction tax and additional corporate sector contribution
By the end of its mandate in 2024, the European Commission also wants to reintroduce the financial transaction tax (FTT) and propose an additional contribution from the corporate sector (to be collected on the basis of the BEFIT tax base). Both measures would represent additional own resources for the EU.
Increasing the importance of environmental taxes
Several measures to be proposed in the coming weeks aim to increase “green taxation” – reform of the EU directive on energy tax and introduction of a mechanism to adjust carbon limits (CBAM) (to prevent dumping of companies established in countries with loose regulations against environmental pollution) and revision of the EU emissions trading system (EU ETS) to increase the price for CO2 emission rights and to further motivate companies to make their production processes more environmentally friendly. The latter two measures, CBAM and EU ETS, would raise own funds for the EU.
Strengthening EU tax harmonization
The BEFIT proposal
The European Commission’s business in Europe: Framework for income taxation (BE FIT) Proposal would replace the previous CCCTB proposal. If the BEFIT proposal is adopted, the profits of the EU constituents of multinational corporations will be consolidated into a single tax base determined under a single corporate tax framework. Such a tax base would be allocated to Member States using a formulaic apportionment. Member States would retain the prerogative to set tax rates. Perhaps the group could file a single EU corporate tax return. The BEFIT proposal is expected in 2023.
The BEFIT proposal would deviate further from the arm’s length principle (in the EU context) and significantly reduce the possibility for smaller open economies within the EU to increase their competitiveness through tax incentive measures. At first sight, such measures are likely to favor larger Member States. As far as the CCCTB is concerned, one of the main hurdles to the BEFIT proposal will be the need for unanimity among Member States (unless the European Commission wishes to rely on Article 116 TFEU to pass the proposal only by majority vote).
Pillar Two and the EU Black List
The European Commission suggests considering the implementation of the second pillar as an additional criterion to determine whether a foreign jurisdiction should be blacklisted on the EU’s non-cooperative jurisdictions.
If such an idea is implemented, the number of jurisdictions on the EU blacklist could increase significantly (at least initially given the ambitious EU timetable for implementation of the second pillar). This in turn could trigger countermeasures (e.g. additional withholding taxes or non-deductibility of payments to group companies in countries that are on the black list), which would further increase the taxation of EU group companies, and additional reporting obligations (in particular according to DAC 6).
Support taxpayers through tax measures
A loss transfer mechanism
The European Commission recommends the introduction of a loss carryforward mechanism in connection with the Covid-19 pandemic, which allows taxpayers to carry losses back for up to 3 years and up to EUR 3 million.
This is a non-binding recommendation that could help taxpayers in jurisdictions that currently have no or a more restrictive loss carryforward mechanism.
Reduction in the trend in favor of debt financing
The European Commission will grant a Debt Equity Bias Reduction Allowance (DEBRA), which should function like a fictitious interest deduction, which makes it possible to make a deduction for a certain (assumed) remuneration of the equity. The aim is to reduce tax benefits by resorting to debt financing, thereby reducing the risk of instability in the event of an economic downturn.
This is a positive step, even though the tax alignment in favor of debt financing goes beyond the sole deductibility of interest. Withholding taxes can vary, and some countries also have a net wealth tax for corporate taxpayers.
The Commission will continue its work on the proposals over the next three years, according to the above deadlines, to reform taxation in the EU to make it fairer, greener and better suited to the modern economy. If and as soon as a global consensus is reached on Pillar 1 and Pillar 2, the Commission has announced that it will quickly propose measures for their implementation in the EU.
We will keep you informed of further developments. If you have any questions in the meantime, please contact our tax team for the digital economy, our EU tax team or your trusted Loyens & Loeff contact person.
You can download the full text as a PDF Here.
The content of this article is intended to provide general guidance on the subject. A professional should be consulted about your particular circumstances.