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European Commission to overhaul corporate tax

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Today (18 May) the European Commission adopted a Communication on business taxation. The communication broadly lays out the Commission’s plans to create what they say will be a more robust, efficient and fair tax framework that can help support the post-COVID recovery and promote the EU’s green and digital transition.

The Commission has made previous attempts to reform corporate tax to make it fairer. Since the financial crisis in 2008, pressure has mounted on multinational companies for reforms and fairer contributions. They have been accused of abusing weaknesses in the tax system by moving some assets - particularly “intangible assets” such as intellectual property - to more favourable tax jurisdictions. The Commission has long called for tax to reflect real economic activity. The problem is that these reforms have required unanimity and the EU’s own members, notably Ireland, the Netherlands and Luxembourg, have proved to be willing enablers of these distortions - and have therefore been unsupportive of reforms. 

The Commission will present a new framework for business taxation by 2023; the “Business in Europe: Framework for Income Taxation” (or BEFIT) will provide a single corporate tax rulebook for the EU, providing for fairer allocation of taxing rights between member states. The Commission is arguing that this will also help business by making tax arrangements more straightforward. BEFIT will replace the proposal for a Common Consolidated Corporate Tax Base, which will be withdrawn.

However, this should be seen as part of a broader reflection on corporate tax. The Commission wants a review of the EU’s tax mix. In general, labour is more heavily taxed in Europe, disincentivizing employment. 

The Commission is also eager to work with the Biden administration on global tax reform. It is working on reforms that are being led by the G20 finance ministers to reach a global agreement by mid-2021 on tax reform, in particular “pillar 1” - how a multinational allocates profits between different parts of the same group, and “pillar 2” - setting a minimum level of taxation for multinationals reducing the incentive to shift profits to lower tax jurisdictions.

Once agreed and translated into a multilateral convention, the application of Pillar 1 will be mandatory for participating countries and the Commission is proposing a Directive to ensure consistent implementation in the EU. The Commission says it will also propose a Directive for the implementation of Pillar 2, though they acknowledge that this will also have implications for other existing or already proposed legislation.

And there’s more...

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The Commission will propose a digital levy, which will serve as an EU own-resource in July. The Commission will also soon come forward with a review of the Energy Taxation Directive and the Carbon Border Adjustment Mechanism (CBAM), in the context of the ‘FitFor55’ package and European Green Deal. 

The Commission has also outlined other measures, as part of its tax action plan including: plans for large companies to publish their effective tax rates, an end to the use of shell companies to avoid tax and an end to the bias in taxation which leads to companies choosing debt over equity financing.

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