On 19 May 2021, the European Commission released a Communication, “Business taxation for the 21st Century”, which sets out both a short-term and a long-term vision, ostensibly to support Europe’s recovery from the COVID19 pandemic and ensure adequate public revenues over the coming years. One of the biggest and most ambitious proposals included in the Communication is the “Business in Europe: Framework for Income Taxation” (“BEFIT”) which the Commission intends to present by 2023. BEFIT would introduce new corporate tax rules applicable in all EU Member States for determining the corporate tax base of companies and allocating their profits among the EU Member States. BEFIT would also allow groups to file one single EU tax return. In the shorter term, the European Commission intends to present a proposal for the publication of effective tax rates paid by large companies, EU rules to neutralise the misuse of shell entities for tax purposes, recommendations on the domestic treatment of losses and a proposal creating a Debt Equity Bias Reduction Allowance. That’s a lot for one communication!
We will review some of these proposals in this alert. While some of them may potentially come through and be implemented in the future, we anticipate a lot of issues and challenges regarding the introduction of a single set of direct tax rules which would apply all over the EU, as this amounts to a frontal assault on Member State tax sovereignty. In addition, while the proposals are presented as being aligned with the current developments at OECD level, in fact they seem to diverge in a number of ways, creating another source of tension.
It is worth noting that the business taxation proposals are placed within an overall context that raises important and interesting questions such as the appropriate tax mix (labour/ business/ capital property...) and other critical areas of taxation such as the Carbon Border Adjustment Mechanism (CBAM). In our view, these may ultimately be far more significant than the actions in the field of business taxation that are proposed in the communication.