Business Taxation in Europe in the 21st century moving to the next level in the context of global action

By Hanna Surmatz and Hanna Hanses

On 18 May 2021, the European Commission has adopted a Communication on Business Taxation for the 21st Century. The Communication sets out both a long-term and short-term vision to support Europe’s recovery from the COVID-19 pandemic and to ensure adequate public revenues over the coming years. The Commission also takes account of the progress made in the G20/OECD discussions on global tax reform. Whereas the G20/OECD agreements are expected later in the year, the EU already announces that the substance of these discussions will influence the shape of the EU business agenda regardless of whether a concrete global agreement is reached. The Communication also announces that the EU seeks to go beyond the OECD agreement.

1. EU Tax policy framework and business taxation

The EU action on business taxation is embedded in a comprehensive EU tax agenda and a tax system guided by principles of fair and sustainable growth, efficiency and simplicity. The Commission will launch a broader reflection on the future of taxation in the EU, which will culminate in a Tax Symposium on the “EU tax mix on the road to 2050” in 2022. The communication already states that tax systems need to be modernized to better reflect ongoing future economic and social developments. The reform will also look at limiting inefficient use of reduced VAT rates and exemptions, which would impact on public benefit organisations and their VAT treatment.

One important part of EU measures in the pipeline is the “Business in Europe: Framework for Income Taxation” (or BEFIT). BEFIT seeks to provide a single corporate tax rulebook for the EU, providing for a fairer allocation of taxing rights between Member States. BEFIT aims to cut red tape, reduce compliance costs, minimise tax avoidance opportunities and support EU jobs and investment in the Single Market. BEFIT will replace the pending proposal for a Common Consolidated Corporate Tax Base, which will be withdrawn.

BEFIT aims to…

• …create a common rulebook for groups of companies operating in the Single Market in more than one Member State, reducing barriers to cross-border investment;
• …reduce red tape and cut compliance costs in the Single Market, thereby lessening the administrative burden on tax authorities and taxpayers;
• …combat tax avoidance, and support job creation, growth, and investment;
• …provide a simpler and fairer way to allocate taxing rights between Member States;
• …ensure reliable and predictable corporate tax revenues for Member States.

BEFIT aims to create a single corporate tax rulebook for the EU, based on the key features of a common tax base and the allocation of profits between Member States based on a formula (formulary apportionment). It will build on progress in the global discussions, where these concepts are already present. BEFIT should consolidate the profits of the EU members of a multinational group into a single tax base, which will then be allocated to Member States using a formula, to be taxed at national corporate income tax rates. BEFIT aims to ensure that businesses in the Single Market can operate also cross-border without any undue tax barriers. At the same time, it should ensure that the differences in corporate tax systems in the EU do not undermine the ability of Member States to raise revenue to fund national spending priorities. It should also ensure that opportunities for aggressive tax planning that are hampering a level playing field get closed.

In line with the subsidiarity principle, EU action on business taxation will look at challenges with a clear cross-border dimension but progress at EU level should be complemented by supporting national action such as domestic measures to improve tax administration and facilitation of tax compliance. Where appropriate, it may include more targeted measures, such as well-designed and efficient tax incentives to support wider policy goals, as well as providing financial support for national reforms and investment. The Communication states that the EU can also have an agenda shaping and information sharing role. From a philanthropy perspective, it will be important to engage around potential EU action on tax incentives for corporate donors for public benefit activities in this context.

The communication also sets out a plan for a holistic EU business tax framework for the decades to come.

2. Reform of the international corporate tax framework

Mandated by the G20, the OECD is working on a global consensus-based solution to reform the international corporate tax framework. The EU is also an active actor at the global level. Discussions focus on two broad work streams: Pillar 1 (partial reallocation of taxing rights) and Pillar 2 (minimum effective taxation of multinationals’ profits). Philanthropy Advocacy contributed to consultations undertaken by the OECD end of last year and is following the developments with the overall aim to ensure that efforts at the international level do take the perspective of philanthropic actions into account.

3. Going beyond the OECD

With targeted solutions, the EU aims to improve the current system focusing on dual priorities of ensuring fairer and effective taxation and supporting productive investment and entrepreneurship. The Communication mentions efforts around increasing public transparency on taxes paid by large economic actors covering also tax allowances and proposals to neutralize the misuse of shell entities for tax purposes. The communication also mentions the enabling side of tax policy such as looking into recommendations on the domestic treatment of losses and a legislative proposal creating a Dept Equity Bias Reduction Allowance.

Philanthropy Advocacy will continue to monitor next steps both at EU and OECD/G20 level with the aim to analyse the implications for philanthropy including corporate giving.