Given its grandiose title - ”Business Taxation for the 21st Century” - the European Commission’s initiative is disappointing. What Europe really needs are competitive rules that promote new investments, new jobs and economic growth. This will not be achieved by imposing additional burdens on those who are genuinely guaranteeing our welfare, namely our businesses.
The European Commission has recently presented its Communication entitled ”Business Taxation for the 21st Century”, containing a series of initiatives in the area of company taxation. The flagship of these initiatives is the so-called ‘BEFIT’ (Business in Europe: Framework for Income Taxation) framework, which is scheduled for launch in 2023. In reality, however, BEFIT is to all intents simply a repackaging of the Commission’s previous proposal for a Common Consolidated Corporate Tax Base (CCCTB), which - following two previous failed launches (in 2011 and 2016) - is now on its last legs.
Similar to the CCCTB, BEFIT will allow for the consolidation of profits and losses within the EU, and the net profit will then be allocated to the countries concerned according to a specially devised allocation formula. The lack of rules allowing for cross-border loss relief and the costs of complying with tax rules in 27 countries have long been a major barrier to cross-border trade and thus to achieving an effective EU single market. When the CCCTB was presented in 2011, the Confederation of Swedish Enterprise set out several prerequisites for the business community to support the proposal. The following four basic requirements needed to be fulfilled:
We also criticised the fact that the proposed allocation-key was based partly on companies’ sales, as this approach would disadvantage small, export-oriented countries such as Sweden. The above comments are relevant also for BEFIT.
According to the Commission, the calculation of the tax base in BEFIT should be based on the guidelines that the OECD is currently working on to develop a global minimum tax (Pillar 2). Given that the OECD proposal has already been heavily criticised by both taxpayers and tax authorities for being overly complex, it is worrying that the Commission seeks to use this framework as the starting point for BEFIT. On the other hand, this ultimately may not matter a great deal. Regardless of the name change to BEFIT, it is hard to believe that the Commission will have more success with this proposal than it did with the CCCTB. Many Member States are likely to remain critical of cross-border consolidation, and what they perceive as an attack on national tax sovereignty.
In addition to BEFIT, a proposal to curb the use of shell companies will be announced before the end of the year.
Furthermore, in 2022 the Commission will present yet another Directive with new reporting requirements for companies. This time, companies will have to calculate and publish the effective tax rate paid in different countries. As is the case with BEFIT, the calculation will be based on the heavily criticised guidelines developed by the OECD for the planned global minimum tax. If this Directive becomes a reality, companies should prepare for a significant additional administrative burden.
One small ray of sunshine is the Commission’s recommendation to Member States to allow companies to deduct losses in the pandemic years 2020-21 against profits from previous years (loss carry-back). In 2022, the Commission will also present a proposal addressing the debt-equity bias in corporate taxation.
Given its grandiose title - ”Business Taxation for the 21st Century” - the European Commission’s initiative is disappointing. The current pandemic has seen many companies struggle; following ten years of an unrelenting focus on rules to curb tax avoidance, it would have been refreshing if the Commission - as the title implies - had really chosen a forward-looking approach. What Europe really needs are competitive rules that promote new investments, new jobs and economic growth. This will not be achieved by imposing additional burdens on those who are genuinely guaranteeing our welfare, namely our businesses.