Future direction of EU business taxation

The European Commission has issued its Communication on Business Taxation for the 21st Century, summarising current actions and future plans in response to the OECD debate on changes to international tax rules and the introduction of minimum taxation. In five points, the Commission also presented its own tax agenda, primarily aimed at stepping up the fight against profit shifting and helping to rebuild the economy. The Commission also wants to pave the road to change the tax mix in EU member states where the taxation of labour accounts for half, and to gain resources for the EU budget.

Existing initiatives

The European Commission continues to prepare the amendment to the Energy Taxation Directive, to reform the existing EU emissions trading system, and also to draft a new carbon tax (the last two should bring EU its own resources). Legislative proposals should be published this July.

The proposal for a new digital levy should be independent of the outcome of the negotiations at the OECD level and compatible with the obligations arising from international trade agreements. The aim is for the digital levy to generate a new source of EU revenues. The Commission will withdraw the previous Digital Services Tax and Digital Presence proposals.

Minimum tax

The legislative proposal for the minimum taxation of multinationals contained in OECD Pillar 2 will be presented in 2022 in the form of a new directive. Conclusions of the OECD negotiations will also affect the existing rules contained in the ATAD Directive, in particular concerning the taxation of controlled foreign companies (CFC). The Interest and Royalty Directive will also be amended, to the effect that the exemption from withholding taxes will not be granted if there is no taxation in the country of the recipient.

At the same time, the Communication indicates that Pillar 2 of the international taxation reform allowing profits to be taxed regardless of physical presence in a given country will apply to all multinationals above a certain size, regardless of the business sector. The agreement reached at the OECD level should then also be transposed into EU law, in the form of a directive.

Shell companies

A legislative proposal aiming to prevent the use of companies with no real economic activity (shell companies) and artificial arrangements is to be presented in the second quarter of 2022. The Commission has launched a public consultation on this. 

Tax loss carry back

On the date of issuing the Communication, the Commission also released a legally non-binding recommendation to member states to allow for the claiming of tax losses incurred in 2020 and 2021 retroactively against 2019, 2018 or 2017 tax bases, provided that no tax loss was recognised in these periods. For such tax loss carry backs, the recommendation sets a limit of EUR 3 million per taxable period. 

Tax advantages for equity-financed companies

In the first quarter of 2022, the Commission will present a proposal for a directive introducing a special allowance for equity financing. By this, the Commission aims to address the debt-equity bias in corporate taxation. 

Common set of rules for income taxation

The Commission will propose a new framework for the income taxation of multinational enterprises in Europe, based on key elements: a common tax base, which will subsequently be allocated to individual member states using a formula. This would mean that current transfer pricing rules will no longer be necessary in the future. The legislative proposal intended to replace all pending proposals for a common corporate tax base is to be published in the course of 2023. 

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