The next European Parliament elections will take place in June 2024. It is conventional wisdom within the European Commission that by the summer preceding the next EU elections, the EU’s focus will shift fully on finalising outstanding legislative files and away from issuing new proposals. However, as we have seen in the past weeks and couple of months, this wisdom has given way for new and fairly ambitious tax initiatives. There’s no end in sight to the EU executive’s tax ambitions, even though its own current term draws to an end.
In June, the Commission published its proposal for a EU withholding tax framework. The aim is to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and member state tax administrations, and to help fight fraud (for example, as emerged in the cum/ex and cum/cum scandals).
Some of the key measures in this proposal include:
a common EU digital tax residence certificate that aims to make withholding tax relief procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year; and
two new fast-track procedures complementing the existing standard refund procedure, namely: a ‘relief at source’ procedure, where the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double taxation treaty provisions; and a ‘quick refund’ procedure, where the initial payment is made taking into account the withholding tax rate of the member state where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment.
Then, on 12 September, the Commission published three brand new proposals: the much anticipated Business in Europe: Framework for Income Taxation Directive (BEFIT), a transfer pricing Directive (TPD) as well as a proposal establishing a ‘head office tax system’ for SMEs (HOT).
Under BEFIT, companies that are members of the same group will calculate their tax base in accordance with a common set of rules. The tax bases of all members of the group will then be aggregated into one single tax base, and each member of that ‘BEFIT group’ will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.
Stakeholders are still taking their time to analyse the provisions in more detail, but it appears from the onset that the ‘ambition’ of BEFIT falls somewhat behind from the previous common consolidated tax base (CCCTB) proposals. For instance, BEFIT does not include provisions for the redistribution of taxable profits between EU member states using a pre-defined formula (‘formulary apportionment’). Instead, after BEFIT is in place, the Commission would assess in a few years’ time whether such a measure should be introduced.
Given the unsuccessful track record of CCCTB, it is not surprising that the Commission has now decided to adopt a humbler and an even more of a step-by-step approach than in the 2016 CCCTB proposal.
Moving on, the TPD aims to harmonise transfer pricing rules within the EU and ensure a common approach to transfer pricing problems. It incorporates the arm’s length principle and key transfer pricing rules into EU law, clarifies the role and status of the OECD Transfer Pricing Guidelines and creates the possibility to establish common binding rules on specific aspects of the rules within the EU.
The proposal will, according to the Commission, increase tax certainty and mitigate the risk of litigation and double taxation. Moreover, it strives to reduce opportunities for companies to use transfer pricing for aggressive tax planning purposes.
And finally, there’s the HOT proposal, which would give SMEs operating cross-border through permanent establishments the option to interact with only one tax administration – that of the head office – instead of having to comply with multiple tax systems.
SMEs would calculate their taxes based only on the tax rules of the member state of their head office. SMEs would file one single tax return with the tax administration of their head office, which would then share this return with the other member states where the SME is operating. The member state of the head office would also subsequently transfer any resulting tax revenues to the countries where the permanent establishments are located.
There may yet be even more to come, as there is still the (admittedly, increasingly remote) prospect of a Commission proposal on tax enablers (SAFE) in the Autumn if the Council reaches an agreement on the Unshell Directive on time.
Home >Articles > EU watch: no end in sight to new EU proposals
EU watch: no end in sight to new EU proposals
WHT + BEFIT/TP/HOT + SAFE.
The next European Parliament elections will take place in June 2024. It is conventional wisdom within the European Commission that by the summer preceding the next EU elections, the EU’s focus will shift fully on finalising outstanding legislative files and away from issuing new proposals. However, as we have seen in the past weeks and couple of months, this wisdom has given way for new and fairly ambitious tax initiatives. There’s no end in sight to the EU executive’s tax ambitions, even though its own current term draws to an end.
In June, the Commission published its proposal for a EU withholding tax framework. The aim is to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and member state tax administrations, and to help fight fraud (for example, as emerged in the cum/ex and cum/cum scandals).
Some of the key measures in this proposal include:
a common EU digital tax residence certificate that aims to make withholding tax relief procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year; and
two new fast-track procedures complementing the existing standard refund procedure, namely: a ‘relief at source’ procedure, where the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double taxation treaty provisions; and a ‘quick refund’ procedure, where the initial payment is made taking into account the withholding tax rate of the member state where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment.
Then, on 12 September, the Commission published three brand new proposals: the much anticipated Business in Europe: Framework for Income Taxation Directive (BEFIT), a transfer pricing Directive (TPD) as well as a proposal establishing a ‘head office tax system’ for SMEs (HOT).
Under BEFIT, companies that are members of the same group will calculate their tax base in accordance with a common set of rules. The tax bases of all members of the group will then be aggregated into one single tax base, and each member of that ‘BEFIT group’ will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.
Stakeholders are still taking their time to analyse the provisions in more detail, but it appears from the onset that the ‘ambition’ of BEFIT falls somewhat behind from the previous common consolidated tax base (CCCTB) proposals. For instance, BEFIT does not include provisions for the redistribution of taxable profits between EU member states using a pre-defined formula (‘formulary apportionment’). Instead, after BEFIT is in place, the Commission would assess in a few years’ time whether such a measure should be introduced.
Given the unsuccessful track record of CCCTB, it is not surprising that the Commission has now decided to adopt a humbler and an even more of a step-by-step approach than in the 2016 CCCTB proposal.
Moving on, the TPD aims to harmonise transfer pricing rules within the EU and ensure a common approach to transfer pricing problems. It incorporates the arm’s length principle and key transfer pricing rules into EU law, clarifies the role and status of the OECD Transfer Pricing Guidelines and creates the possibility to establish common binding rules on specific aspects of the rules within the EU.
The proposal will, according to the Commission, increase tax certainty and mitigate the risk of litigation and double taxation. Moreover, it strives to reduce opportunities for companies to use transfer pricing for aggressive tax planning purposes.
And finally, there’s the HOT proposal, which would give SMEs operating cross-border through permanent establishments the option to interact with only one tax administration – that of the head office – instead of having to comply with multiple tax systems.
SMEs would calculate their taxes based only on the tax rules of the member state of their head office. SMEs would file one single tax return with the tax administration of their head office, which would then share this return with the other member states where the SME is operating. The member state of the head office would also subsequently transfer any resulting tax revenues to the countries where the permanent establishments are located.
There may yet be even more to come, as there is still the (admittedly, increasingly remote) prospect of a Commission proposal on tax enablers (SAFE) in the Autumn if the Council reaches an agreement on the Unshell Directive on time.
