EU Tax: Business Taxation for the 21st Century
On 18 May 2021, the European Commission published its plans for “Business Taxation for the 21st Century”. The document contains the planned outlines for the EU’s tax policy agenda and also a plan for the EU implementation of the tax innovations that are currently being discussed within the framework of the OECD BEPS 2.0 project.
Implementation of BEPS 2.0
BEPS 2.0 is an OECD project that aims to reorganise international corporate taxation and, in particular, provides for the allocation of profits to sales markets and the introduction of a global minimum tax. The EU Commission is planning to implement the innovations in the form of directives that will be binding on all EU member states.
Fair and effective corporate taxation
In addition to the OECD project, the EU has further ambitious plans for corporate taxation, in particular the following Actions:
Action 1 – Legislative proposal on the publication of effective tax rates paid by large companies (by 2022)
Country-by-country reporting for groups with revenues of more than EUR 750 million was already implemented within the EU in 2016. Now these country-by-country reports are to be made partly publicly available and companies are to publish the taxes they pay in EU states and non-cooperative third countries.
Action 2 – Legislative proposal with anti-abuse rules against letterbox companies (also referred to as “ATAD 3”) (by Q4 2021)
In the view of the EU Commission, there is still considerable scope to use letterbox companies to reduce the tax burden. The Commission’s proposal includes different measures:
- Obliging the tax payer to provide the necessary information for the verification of substantial presence and real economic activities,
- denying tax benefits related to the existence or use of abusive shell companies
- creating new requirements for tax information, monitoring and tax transparency.
- The Commission also intends to take further steps to prevent royalty and interest payments leaving the EU from escaping taxation (so-called “double non-taxation”).
Action 3 – Recommendation on the domestic treatment of losses (parallel to the Communication)
Currently, there are large differences in the tax treatment of losses between Member States. In response to the Covid-19 pandemic and in particular to strengthen SMEs, the EU Commission therefore recommends the introduction of a loss carry-back. Specifically, losses incurred in 2020 and 2021 should be able to be carried back for at least one year and – if desired by a Member State – up to three years and offset against already taxed profits. For Austria, the practical impact of this measure will be minor, as the possibility of loss carry-back was already introduced in the course of the Covid-19 measures.
Action 4 – Legislative proposal to create a Debt Equity Bias Reduction Allowance (DEBRA) (by Q1 2022)
The current tax system generally allows for the tax deduction of interest on debt, but does not allow for the tax recovery of equity costs. According to the EU Commission, this poses the risk of excessive debt accumulation and negative consequences for the EU as a whole if a wave of insolvencies were to occur in some countries. The further increase in debt as a result of the Covid-19 pandemic should therefore be countered by tax incentives for equity financing. This could be done, for example, through an allowance or deduction for equity.
Action 5 – Framework for Income Taxation or BEFIT, which works towards a common set of tax rules and is intended to ensure a fairer allocation of taxation rights between the member states (2023)
A uniform rule for the corporate tax base within the EU is to be introduced. In addition, profits are to be allocated among the EU member states on a formulaic basis in order to prevent the use of transfer prices for tax purposes and the shifting of profits. This EU proposal goes beyond the OECD BEPS 2.0 project and picks up on the EU Commission’s Common Consolidated Corporate Tax Base idea last discussed in 2011.
Further developments regarding these EU plans need to be awaited.