Tax Policy Update

• European Commission publishes set of new major tax initiatives
• Pandora Papers: European Commission allegedly thinking about further measures on tax advisors
• Council finds long overdue agreement on VAT rates reform

European Commission publishes new major tax initiatives

European Commission’s (EC) early Christmas gift was expected for 22 December, in the form of new major tax initiatives. These were published on schedule and will constitute new major workflows for EU policymakers in the months ahead.

There are three initiatives:

• Directive to implement OECD Pillar 2 (minimum taxation) into EU law
• Directive to tackle shell entities inside the EU
• Proposals for new EU own resources, including a portion of the OECD Pillar 1 re-allocation of taxing rights related income

The minimum tax Directive’s objective is to ensure a minimum effective 15% tax rate for multinationals with combined annual revenues of EUR 750 million or above. It follows very closely the OECD Model Rules for implementing Pillar 2. This is aimed to ensure that EU Member States can find an agreement at the very latest by June 2022 – a key ambition of the ongoing French Council Presidency. Two alterations to the OECD rules are clear in the EC proposal:

• including also purely domestic groups that fulfil the scope criteria. This is to ensure that the rules do not discriminate against particular types of companies and are compatible with EU Single Market rules
• allowing EU Member States to apply a domestic top-up tax to low taxed domestic subsidiaries. This will allow the top-up tax due by the subsidiaries of the multinational group to be charged locally in the Member State, rather than at the level of the parent entity

The shell entities and own resources proposals are covered under the European Commission section below.

European Commission

Commission reportedly considering regulating tax advisers

EC is reportedly looking into regulating professional tax advisers on a EU wide basis in response to the Pandora Papers revelations of aggressive tax avoidance by wealthy and politically powerful individuals.

Regulating the conduct of advisers when they have breached professional ethics is difficult in the EU, where each of the 27 Member States has different — and in some cases non-existent — regulations governing the selling of tax advice, Law360 writes. The EC’s Directorate-General for Taxation and Customs Union (DG TAXUD) is therefore investigating the possibility of creating an EU-wide framework and enforcement mechanism, according to an official who spoke on the condition of anonymity. Read more

Commission’s 22 December tax package: shell entities Directive

The shell entities Directive sets up a process for identifying tax-evading shell companies in the EU. Any company established for tax purposes in an EU country, regardless of its size, would first be required to self-assess against three cumulative ‘gateway criteria’.

Companies that meet all three criteria will have to justify in their annual tax return how they meet three substance indicators each tax year:

• the company has its own premises in the Member State or premises for its exclusive use
• it has at least one active bank account of its own in the EU
• a manager resides in the vicinity of its premises and is dedicated to the activities of the business or, a sufficient number of employees are engaged in the main activities of the business and reside in the vicinity

The process for approving the Directive is as with the Pillar 2 Directive – Council unanimity with European Parliament’s (EP) non-binding opinion.

Commission’s 22 December tax package: new own resources

Finally, EC also issued a proposal for 3 new own resources to flow into the EU budget, and notably to help repay the EU’s jointly issued COVID recovery debt of EUR 750 billion. These new own resources are:

• 75% of the revenues generated by the carbon border adjustment mechanism (CBAM). Revenues for the EU budget are estimated at around EUR 0.5 billion per year over the period 2023-2030
• 25% of the revenues generated by EU emissions trading scheme (ETS). Revenues for the EU budget are estimated at around EUR 9 billion per year over the period 2023-2030
• 15% of the share of the residual profits of the largest and most profitable multinational enterprises, as defined in the OECD Pillar 1 agreement. Revenues for the EU budget could amount to up to EUR 2.5-4 billion per year

Council unanimity will be required for adopting these new own resources.

European Parliament

Parliament adopts draft report on impact of national tax reforms

On 6 December, the Committee on Economic and Monetary Affairs (ECON) has adopted its draft report on the impact of national tax reforms on the EU economy with 36 votes in favour, 9 votes against and 13 abstentions. The non-binding report was prepared by the MEP Markus Ferber (EPP/Germany). A final Plenary vote is scheduled 17 January.

ECON adopts draft report on 6th VAT Directive

ECON also adopted on 6 December its draft report on the Implementation of the 6th VAT Directive with 43 votes in favour, 4 votes against and 11 abstentions. The non-binding draft report was prepared by the MEP Olivier Chastel (RE/Belgium). As with the report on national tax reforms, a final vote in the EP’s Plenary is currently scheduled for 17 January.

MEP questions & replies

Commission confirms residence of ultimate beneficial owner determinant for excluding an entity from financial support

• question by MEP Nikolaj Villumsen (The Left/Denmark)
• reply by Commissioner Gentiloni

Council

Council endorses major VAT rates changes in the EU

EU Member States unanimously adopted a major reform of EU’s VAT rates framework, at the 7 December finance ministers’ Economic and Financial Affairs Council (ECOFIN) meeting. The Commission issued its original proposal in 2018.

These are some of the main elements of the agreed text:

• Member States will have more flexibility to choose the products or services to which they will apply reduced rates
• this flexibility is counterbalanced by provisions to “avoid the proliferation” of reduced rates, effectively by limiting their number
• the existing VAT derogations for some countries will be extended to all Member States to ensure equal treatment
• the Directive aligns with the European Green Deal’s objectives, with phasing out of reduced rates for the supply of fossil energy and the phasing in of reduced rates for environmental and health-related goods
• the rules are adapting to the digitalisation of the economy and the economy will be more responsive to “exceptional circumstances” such as a pandemic

EP still needs to provide its non-binding opinion, in the course of spring 2022.

But fails to agree on CoC revised mandate

At the same 7 December ECOFIN meeting, EU finance ministers failed to reach an agreement on the proposed revisions to the EU Code of Conduct. This was due to Hungary’s and Estonia’s objections.

The changes to the Code would have extended its scope to generally applicable tax characteristics of a Member State which create possibilities for double non-taxation or which may lead to multiple use of tax advantage.

Hungary reportedly objected due to ongoing disagreements with its access to EU COVID recovery funding, whilst Estonia wants to first see how the OECD Pillar 2 is implemented into EU law. Read more

Government support cushions tax revenues in OECD countries from the worst impacts of the COVID-19 crisis

The impact of the COVID-19 pandemic on tax revenues was less pronounced than during previous crises, in part due to government support measures introduced to support households and businesses, according to new OECD research published on 6 December.

The 2021 edition of the OECD’s annual Revenue Statistics publication shows that the OECD average tax-to-GDP ratio has risen slightly to 33.5% in 2020, an increase of 0.1% since 2019. Although nominal tax revenues fell in most OECD countries, the falls in countries’ GDP were often greater, resulting in a small increase in the average tax-to-GDP ratio. Read more