With several months of delay, the European Commission this week adopted its ambitious plan for reforming the EU’s corporate taxation system over the coming years, proposing broad short-term and long-term measures to promote a robust, efficient and fair business tax system in the European Union.
The new strategy, presented by Commission Executive Vice-President for an economy that works for people, Valdis Dombrovskis, and Economy Commissioner, Paolo Gentiloni, is a renewed attempt to reform the EU’s corporate tax system since Member States blocked the last attempt in 2016. The proposal also comes as the global reform talks under the OECD are making process and the Thursday US proposal for a global minimum tax rate of 15%.
The strategy is made up of three pillars on which the Commission is set to bring forward legislative proposals over the coming years. The main pillar of the envisaged reform package is expected to come in 2023 through a new “Business in Europe: Framework for Income Taxation” (or BEFIT) to provide a “single corporate tax rulebook” applicable to all Member States.
With this, BEFIT is as a successor to the failed proposal on a Common Consolidated Corporate Tax Base (CCCTB) which has effectively died in the European Council in 2016.
While the Commission promises that the initiative isn’t about setting new minimum tax rates, or the introduction of new taxes, the intention is to reform the current system in which companies only pay taxes where they are headquartered. This, undoubtedly, is set to be a significant challenge to countries like Ireland or Luxembourg who have so-far blocked any movement on EU tax reform. As part of the Commission’s broader reform plans, it also plans to launch a broader reflection on the future of taxation in the EU, including a Tax Symposium on the “EU tax mix on the road to 2050” in 2022.
In a second pillar to BEFIT, the Commissioners Dombrovskis and Gentiloni also presented a broad tax agenda for the coming two years, setting out several measures promoting “productive investments and entrepreneurship”, as well as better support Commission President von der Leyen’s ambitious plans for the green and digital transitions.
Among the plans, which follows on the Commission’s 2020 Tax Action Plan, it seeks to implement measures for greater tax transparency, especially with regard to so-called shell companies.
In a measure targeted specifically towards home-grown companies, and supporting their post-COVID-19 recovery, it aims to propose measures to address the debt-equity bias in the current corporate taxation. As part of an upcoming 2022 proposal on “Debt Equity Bias Reduction Allowance” (DEBRA), EU companies would enjoy the same tax breaks from issuing stock as they currently do from raising debt.
The initiative would closely align with the Commission’s efforts to deepen its Capital Market Union by incentivizing companies to issue stock to curb mounting corporate debt levels, particularly after companies had to borrow money to manage the economic impacts of the coronavirus pandemic and multiple lockdowns.
Thirdly, the Commission has adopted a non-legislative recommendation on the domestic treatment of losses to prompt Member States to allow loss carry-back for businesses to at least the previous fiscal year. This will benefit businesses that were profitable in the years before the COVID-19 pandemic, allowing them to offset their 2020 and 2021 losses against the taxes they paid before 2020.