On 8 June 2021 the Danish Queen signed Law nr 1180, finally implementing articles 7 and 8 (on CFC rules) of the European Union Anti-Tax Avoidance Directive (EU) 2016/1164 (2016) (ATAD Directive).
On 18 May, the European Commission published a new communication titled “Business Taxation for the 21st Century”. With this, the Commission presented its EU tax agenda for the short and long term, following the ambitious roadmap set out in the Tax Action Plan of the Fair and Simple Taxation Package, presented last summer.
This agenda builds on the current discussions on tax policy at the Organization for Economic Cooperation and Development (OECD) level, but also goes a lot further. The Commission announced no less than seven new legislative proposals that will have a big impact on companies that are active in the EU, especially with regards to compliance requirements. Most of these proposals are expected to be published in the second half of 2021. In this blog post, Dr2 Consultants will provide you with an overview of the most relevant initiatives of the communication and will highlight how they will impact your business.
EU Digital Levy
On 14 July 2021, the Commission will publish its proposal for a European Digital Levy. There are indications that the Commission will propose a 0.3 to 0.5% tax on turnover from digital services that are provided by companies with a turnover of €250 million. The EU Digital Levy could therefore impact a lot more businesses than only the U.S. big tech companies. It is therefore likely that the proposal will affect tax compliance costs, tax revenues and the competitiveness of EU digital companies, and ultimately consumers. Read more on this topic here.
To learn more about this topic, we invite you to attend this Digital Tax Virtual Roundtable on 22 June 2021 from 10h30 to 11h30 AM CEST.
Directives following the OECD discussions on business taxation
Since 2019, the OECD has been discussing how to address the tax challenges of the digitalization of the economy (Pillar 1) and how to combat tax avoidance through a global minimum tax (Pillar 2). The G7 finance ministers agreed on 5 June 2021 that market jurisdictions should get a bigger share of the corporate income tax revenue and that there should be a global minimum tax rate of 15%. This deal in the G7 brings the agreement in the G20/OECD discussions on tax reform much closer. It is expected that a high-level political agreement in the G20/OECD could already be achieved in the beginning of July 2021, thus clarifying the details of the agreement during the Indonesia Presidency of the G20 in 2022.
Directly following this agreement in July 2021, the Commission will publish (consultations on) proposals for two new directives to ensure uniform implementation of the OECD proposals in the EU. Even though there might be some push back from Member States with regards to a minimum tax rate of 15%, it is likely that these proposed directives will be adopted quickly. These proposals will lead to higher compliance costs as the impacted companies will have to calculate if and which portion of their profits should be taxable where their customers are located.
Fighting tax avoidance (ATAD 3)
To further support its work on business taxation, in Q4 of 2021 the Commission will present a proposal to prevent the misuse of companies with very little substance and without real economic activity (so-called shell companies). By means of this proposal, EU companies will be subject to new compliance requirements, as this will lead to more reporting to the tax administration on the presence of real economic activity in companies in the corporate structure. Particularly with regards to intermediary holdings this proposal could mean much higher reporting requirements to safeguard access to the benefits of tax treaties.
The Commission will also present a proposal in Q4 that will limit the deduction of royalty and interest payments to companies that are located outside of the EU. The aim is to prevent that these types of payments are used to avoid paying tax in the EU. The consequence of these proposals, however, is that much more information will have to be provided to the tax authorities with regards to these payments to safeguard deduction where there are valid business reasons.
Increasing transparency in business taxation
In the first half of 2022 the Commission will publish a proposal for a directive that requires big companies to publish the effective tax rate they pay over their profits. It is likely that these effective tax rates will need to be published on a country-by-country basis. In addition, it is still unclear if this requirement will only apply to companies with a worldwide turnover of more than €750 million (following from the G20/OECD discussions) or that the EU would put the revenue threshold on €250 million, as they plan to do with the Digital Levy.
Encouraging equity over debt financing
In Q1 of 2022, a proposal for a directive is expected that will make it more attractive to finance investments with equity in order to discourage that companies take on too much debt. The proposal most likely will involve an allowance for equity (ACE). However, the possibility to deduct a percentage of (the mutation of) a company’s equity also comes with new reporting requirements. For instance, it would make it necessary to perform all sorts of corrections to the fiscal equity as it shows on the balance sheet to ensure that the equity cannot be artificially inflated to increase the deduction.
A new framework for business taxation
Finally, the Commission announced a new framework for business taxation in the EU to be published in 2023. The “Business in Europe: Framework for Income Taxation” (BEFIT) will build on the existing proposal for Common Consolidated Corporate Tax Base (CCCTB) that has been pending since 2011. If adopted, BEFIT will make it possible for companies to file their tax assessment for all their EU activities in one Member State. This one-stop-shop approach should mean a reduction in the administrative burden that companies now have to deal with when filing separate tax assessments in all the Member States where they are active. The experience with the CCCTB so far, however, shows that it is not easy for all the Member States to quickly align on this proposal.
What can Dr2 Consultants do for you?
Dr2 Consultants continuously monitors the developments of the discussion on the new global, EU and national tax regimes, so we can help you keep well-apprised of the relevant developments in the coming months. Should you be interested in further information on any of the EU Commission’s business taxation proposals and how these could specifically impact your business, you can reach out to Dr2 Consultants at firstname.lastname@example.org . Also, find out how our monitoring services can help your business here.