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.

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, with a revised framework published in October – see our blogs here and here. 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. A proposal for the Pillar Two Directive has now been published, with implementation of both pillars by 2023. For more on the OECD pillars, see our dedicated Global Tax Reform webpages.

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 agreed to put its work on the digital levy on hold indefinitely.

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). For more information, see our blog on BEFIT here.

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. For more information, see our blog on DEBRA here.

Creating own resources

The EU hopes to create additional resources to finance the NextGenerationEU post-Covid recovery fund. This includes CBAM and the new ETS and proceeds from the OECD pillar one proposals. A further package is due to be announced in 2023 which could potentially include a Financial Transaction Tax, although there is less consensus among Member States for this. The Commission has also proposed the creation of a new own resource linked to the corporate sector which will build on the BEFIT proposals.

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.