EU BT 21: Transforming the tax system
Navigating EU BT 21
EU BT 21: Sustainability developments
Sustainability continues to rise up the agenda for governments and multinationals alike. The BT 21 proposals seek to ensure the tax system in the EU supports the green transition, as well as moving towards a fairer tax system, through greater transparency and steps to tackle abuse.
Improving Transparency and Trust
Publishing effective tax rates
Picking up on the methodology being developed as part of the OECD’s Pillar Two discussions and in a bid to increase transparency around EU multinationals, the EU is planning to put forward a proposal for the annual publication of the effective corporate tax rate for certain large companies with operations in the EU. The legislative proposal on this is expected in 2022. It will complement the EU drive for more tax transparency that started with public CBCR (see below).
Public Country-by-Country Reporting (CBCR)
The EU has reached agreement on the requirement for EU multinationals that have total annual global revenues over EUR 750 million to publish a report on their website in relation to relevant tax information (net sales and profits, numbers of employees, income taxes paid etc). Although not part of the EU BT 21 package, this complementary measure will also boost transparency in relation to EU multinationals. From publication in the Official Journal, Member States will have 18 months to transpose these rules, with the first reports due in 2024.
The changes envisaged by DAC 7 and DAC 8, which complement the BT 21 package, will boost the information reporting requirements of the Directive on Administrative Co-operation in relation to platforms and crypto-assets respectively. The EU Council has approved DAC 7 and Member States are required to implement the changes with effect from 1 January 2023. The OECD has also published a set of model rules for reporting by platforms which are starting to be adopted; the UK is expecting to introduce an OECD-based regime from 2023 and other jurisdictions are likely to follow suit. On DAC 8, the EU has held a consultation, with the proposals due to be adopted by Q2 2022.
Tackling abusive use of shell companies (UNSHELL)
The EU has published a proposal for a Directive to prevent the misuse of shell entities for tax purposes (see our blog here). Whilst acknowledging there can be valid reasons for the use of such entities, the EU wants to take action to prevent shell companies being used for the main purpose of reducing tax liabilities or disguising improper conduct of the group, particularly where there is a lack of substance or economic activity in the country of incorporation. The Directive would include transparency standards and indicators to help member states identify entities that are engaged in economic activity but do not even have minimal substance (“shells”) and are misused for the purpose of obtaining tax advantages, with tax consequences flowing from being identified as a shell. The intention is that these new rules would come into force from 1 January 2024.
As part of the “Fit for 55” package aimed at reducing emissions by 55 per cent. by 2030, the EU CBAM proposal published in July aims to reduce the risk of carbon leakage, which occurs if the high cost of greenhouse gas (GHG) emissions in one country causes production to move from that country to other countries where GHG emission costs are lower. Essentially, CBAM puts a carbon price on emissions created by steel, iron, cement, aluminium, fertiliser and electricity imported into the EU from less “climate-ambitious” countries. Importers of in-scope goods will have to calculate the emissions embedded in such imports and surrender a corresponding number of CBAM allowances previously purchased from the CBAM Authority. The price of CBAM allowances is going to be pegged to the EU ETS, more or less levelling the price for carbon emissions in and outside the EU. CBAM is intended to enter into force in stages, starting in 2023 with a transitional period of three years and full implementation by 2026. You can read more about the latest developments in this area in our blog here.
Proposals for the amendment expansion of the EU emission trading system for CO2 allowances (ETS) have now been published. The overall aim of this proposal is to strengthen the EU ETS and to bring it in line with the EU’s overall climate ambitions for 2030. The proposal to amend the EU ETS is a central part of the Commission’s “Fit for 55” package.
To support the green transition, the EU intends to amend the Energy Taxation Directive, by rationalising the system of minimum rates and removing outdated exemptions.
VAT Directive amendments
Hand in hand with the BT 21 measures, changes have been agreed in relation to VAT rates under the VAT Directive to support environmental policies: new products and services that are good for the environment will be eligible for reduced VAT rates and by 2030 Member States will no longer be able to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and to the EU's climate change objectives. There are also due to be changes to the VAT Directive to remove VAT exemptions on international air and maritime passenger transport expected in 2022 or 2023.
If you would like to discuss any of these issues in more detail, please get in touch with your local tax team for more information and access to further relevant content.