New ideas for tax harmonisation from the European Commission

by Valeria Tempesti | Jun 16, 2021 | Blog

On 18 May, the European Commission presented an action plan with measures to be taken by 2023, whose  main – and certainly most interesting – objective is to create a code of harmonised rules with which to tax businesses in Europe.

With the Communication on Business Taxation for the 21st Century (“Communication”), the European Union aims to promote a robust, efficient and fair tax system, outlining both short- and long-term measures to support the continent’s economic recovery and to ensure a tax harmonisation across European countries in the coming years.

 

What are the proposals launched by the Commission?

Firstly, by 2023 the Commission will present a new framework for European taxation which aims to create a more business-friendly environment in the single market. The framework will be summarised in the document “Business in Europe: Framework for Income Taxation” (also called “BEFIT”), and will constitute a sort of single code of taxation for European companies allowing for a fairer allocation of taxing rights between Member States.

It should be noted that Europe, already in 2011 with President José Manuel Barroso, seemed ready to introduce the Common Consolidated Corporate Tax Base (CCCTB) as an attempt at tax harmonisation for European countries, and as an important tool to avoid tax dumping, i.e. downward competition between the 27 European tax systems. Until now, some states such as Ireland and Luxembourg had strongly opposed and blocked any attempt at harmonisation in these terms, but with the BEFIT, the Commission is taking a new step in this direction, definitively giving up the old proposal and replacing it with a new “future-proof” tax agenda, to be implemented by 2023.

In this regard, therefore, the Commission will prepare a sort of multilateral convention, to be transposed into two ad hoc directives, which will contain, in particular:

  • a first pillar, which will reform the way in which ‘tax jurisdiction’ is distributed among the various countries in which a multinational company operates, going beyond the mere criterion of physical presence, which is now unsuitable in a global economy that is moving largely on the digital market (as we have also seen in our other articles on the subject);
  • a second pillar, summarising the details of the minimum level of effective taxation for European corporate income (global minimum tax).

Secondly, and focusing on the short and medium term, the Communication sets out a practical tax agenda for the next two years, containing measures to promote productive investment and entrepreneurship, and to better protect national revenues. The measures include:

  • countering the growth of so-called conduit companies and the abusive use of shell companies, by providing new anti-avoidance measures;
  • supporting the recovery of economic activities, encouraging companies to finance their activities through equity instead of resorting to debt, by means of related tax incentives;
  • encouraging EU countries to change their rules on the use of tax losses.

In this regard, the Communication invites Member States to extend the use of tax losses generated in the years of the pandemic emergency, favouring the retroactive offsetting of such tax assets against the taxable income of years prior to 2020, and benefiting from the restitution of taxes paid in the years preceding the pandemic crisis (also, and possibly, in the form of tax credits).

Such “carry-back” measure would be added to the usual carry-forward mechanism, which allows available  losses to reduce future profits, and would have the advantage of providing companies with liquidity when they need it most, without necessarily waiting for new tax profits to be generated.

In terms of timing, the Commission invites Member States to allow the carry-forward of tax losses immediately, suggesting that companies that have determined a taxable profit in the 2019 financial year should be able to write them off, with the possibility of considering an extension for 2018 and 2017. The extension of the time window of the carry back should be particularly useful for those small and medium-sized companies that may not have a taxable income in the year 2019 only.

In conclusion, we can certainly assess positively Europe’s attempt to make decisive progress towards a harmonised tax reform, also thanks to the boost coming from the United States, which has recently opened up to a global minimum tax. We will monitor the evolution of the proposal put forward by the Commission, hoping that it will finally be an opportunity to introduce a common tax system for all EU countries.

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