On May 18, the European Commission has adopted a Communication on Business Taxation for the 21st century. It sets out both a long-term and short-term vision to support Europe’s recovery from the COVID-19 pandemic and to ensure adequate public revenues over the coming years. It aims to create an equitable and stable business environment, which can boost sustainable and job-rich growth in the European Union (EU) and increase its open strategic autonomy.

First, the Commission will present by 2023 a new framework for business taxation in the EU, which would reduce administrative burdens, remove tax obstacles and create a more business-friendly environment in the Single Market. The “Business in Europe: Framework for Income Taxation” (or BEFIT) aims to provide a single corporate tax rulebook for the EU, which would provide for fairer allocation of taxing rights between Member States. The Commission believe BEFIT would cut red tape, reduce compliance costs, minimise tax avoidance opportunities and support EU jobs and investment in the Single Market. BEFIT would replace the pending proposal for a Common Consolidated Corporate Tax Base and the latter would be withdrawn. The Commission will launch a broader reflection on the future of taxation in the EU, which would culminate in a Tax Symposium on the “EU tax mix on the road to 2050” in 2022.

Second, the Communication also defines a tax agenda for the next two years, with measures that promote productive investment and entrepreneurship, better safeguard national revenues, and support the green and digital transitions. This builds on the ambitious roadmap set out in the Tax Action Plan, presented by the Commission in 2020.

The measures include:

  • Ensuring greater public transparency by proposing that certain large companies operating in the EU publish their effective tax rates. The abusive use of shell companies will also be tackled through new anti-tax avoidance measures;
  • Supporting the recovery by addressing the debt-equity bias in the current corporate taxation, which treats debt financing of companies more favourably than equity financing. This proposal aims to encourage companies to finance their activities through equity rather than turning to debt.

Third, the Commission has adopted a Recommendation on the domestic treatment of losses. The Recommendation prompts Member States to allow loss carry-back for businesses to at least the previous fiscal year. This would benefit businesses that were profitable in the years before the pandemic, allowing them to offset their 2020 and 2021 losses against the taxes they paid before 2020. The Commission said the measure will benefit SMEs particularly.

In addition to the above mentioned corporate tax reforms, the Commission will soon present measures to ensure fair taxation in the digital economy. A digital levy was mooted and if adopted, it would serve as an EU own resource. The Commission will also soon come forward with a review of the Energy Taxation Directive and the Carbon Border Adjustment Mechanism (CBAM), in the context of the “FitFor55” package and European Green Deal.

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