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Navigating EU BT 21

EU BT 21: Transforming the tax system

Proposals contained in the EU BT 21 package will radically change the tax framework for multinationals operating in the EU. There are measures that seek to build on the ongoing discussions at a global level, as well as others that seek to strengthen the Single Market and aid economic recovery.

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Changing the tax framework for multinationals

OECD Pillars 1 and 2

The global discussions on the OECD’s two-pillar approach reached a pivotal moment with over 130 Inclusive Framework members reaching agreement on this in July. The EU has committed to implementing what is agreed on Pillar One (on reallocating taxing rights to the jurisdiction where sales are made without there necessarily being a physical presence) and Pillar Two (providing for a minimum level of taxation of profits of multinationals) by way of Directives. Proposals for these Directives are expected in 2022.

Digital levy

The EU has been considering introducing a digital levy for a number of years and in 2018 put discussions on this on hold pending the outcome of discussions on the two OECD pillars. However, Covid led to a pressing need for funds and the EU digital levy was put back on the table as a source of new revenues going directly into the EU budget. Although the EU’s position was that this would sit alongside the new OECD framework, there was mounting pressure (particularly from the US) for the EU to drop its digital levy plan. The European Commission has now agreed to put its work on the digital levy on hold again, with the situation to be reassessed in the autumn.

Changes to the Interest and Royalties Directive (IRD)

Hoping to build on the progress made on the OECD Pillar Two discussions, the EU is looking to reinvigorate its proposals for amending the IRD to make exemption from withholding under the IRD conditional on interest being subject to tax in the destination state – this is currently looking likely to be discussed in 2022.

BEFIT (Business in Europe: Framework for Income Taxation)

Reflecting a new-found openness to formulary apportionment demonstrated in the OECD Pillar One discussions, BEFIT looks to consolidate the profits of EU members of a multinational group into a single tax base, which will be allocated to Member States using a formula. We expect to see a proposal for this in 2023. This will replace past EU attempts to implement a common consolidated corporate tax base (CCCTB).

Changing the EU tax mix on the road to 2050

Looking further into the future, the EU is launching a “reflection” on changing the tax mix from a reliance on labour taxes to environmental and health taxes to support the green transition, as well as ensuring the fair and effective taxation of capital income from both individuals and corporates. The EU is planning to hold a Symposium to discuss findings relating to this in 2022. Political competencies on tax issues will remain strongly national at this stage, so although this workstream may lead to a shift of paradigm at an EU level, it is unlikely to have any immediate concrete consequences.

Supporting recovery and strengthening the Single Market

Recommendation on losses

To support recovery post-Covid and level the playing field, the EU has recommended that all Member States allow loss carry backs for FY 2020/21 for at least one year. This recommendation was published in May 2021 and is available here.

DEBRA (Debt Equity Bias Reduction Allowance)

The EU is seeking to end the bias towards debt to encourage financing of innovation through equity and to improve financial stability by discouraging the excessive accumulation of debt.

Creating own resources

The EU hopes to create additional resources to finance the NextGenerationEU post-Covid recovery fund. This includes the new EU digital levy, CBAM and the new ETS, and could potentially include a Financial Transaction Tax although there is less consensus among Member States for the latter. Previously, the Commission also proposed the creation of a levy on “large multinationals” which draw most of their benefits from the EU Single Market. Although this was not approved by EU Heads of States and Governments last year, the EU BT 21 package suggests that this idea might not have been completely abandoned.

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.