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On 18th May 2021, the European Commission published the Communication on Business Taxation for the 21st Century, that sets out the EU tax agenda for the next two years, with measures aimed at providing a fair, simple, and effective taxation and promoting a sustainable business environment.
The current international corporate tax system is based on principles such as tax residence and source that are becoming increasingly outdated due to globalisation and digitalisation. For instance, nowadays companies do not have to maintain a physical presence in a country to carry out their business activities.
With Business Taxation, the Commission addresses the need to align tax rules with modern business realities and to harmonise the current patchwork of national corporate tax rules, and facilitate cross-border investment in the Single Market.
The Communication builds on the OECD Inclusive Framework agreement - a two-pillar approach to redesigns the international tax framework by re-allocating the taxing rights of certain multinational enterprises (MNE) across market countries, irrespective of whether the MNE has a physical presence there (Pillar 1) and setting a minimum level of tax on all the profits made by multinational business each year (Pillar 2) – and set forth proposals to:
Ensure the publication of effective tax rates (ETRs) paid by large companies, based on the methodology under discussion in Pillar Two of the OECD negotiations (by 2022).
Neutralise the misuse of shell entities for tax purposes (by Q4 2021).
Address the debt-equity bias in corporate taxation via an allowance system for equity financing (by Q1 2022).
Move towards a common tax rulebook to provide a fairer allocation of taxing rights between Member States (by 2023)
Although the overall composition of tax revenue in the EU has remained relatively stable over the last two decades, megatrends such as climate change and the digital transformation of the labour market are likely to have an impact on the future tax mix in EU Member States.
For this reason, the Commission will launch a broader reflection on the modernisation of tax systems which should conclude in a Tax Symposium on the ‘EU tax mix on the road to 2050’ in 2022.
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