The COVID crisis has deeply affected societies and economies in Europe and globally. The public health challenge turned into the most drastic economic crisis in the EU’s history with deep social impacts, leaving Member States with unprecedented levels of public debt. And this debt will have to be repaid, one way or the other.
The pandemic also occurred against a background of ongoing mega trends, including population ageing, climate change, and globalisation. The pandemic has also accelerated trends toward the digitalisation of the economy and the labour market. These trends require reflections on the modernisation of our tax systems.
In the coming years, we will need to ask ourselves, how to shape a good mix of those taxes that can generate the revenue needed in a growth friendly and fair manner.
It is the European Commission’s ambition to build and discuss with Finance Ministers a coherent and holistic tax agenda for the coming decade. An agenda designed to contribute to the overall objective of enabling fair and sustainable growth and ensuring effective taxation.
Back in May, we presented our holistic agenda on business taxation. The Communication on Business Taxation for the 21st Century describes how we intend to deliver a long-term vision for an EU business tax system that supports the recovery and the green and digital transitions by creating an environment conducive to fair and sustainable growth and investment while also meeting public financing needs. And I will come back later on that.
In addition, we are currently reflecting on a deeper modernisation of our tax systems. Without doubt, strengthening the role of behavioural taxes will be part of the equation. Both the Carbon border adjustment mechanism and the revamp of the Energy Tax Directive proposed in July contribute in sealing the EU's leadership in decarbonisation.
But there is more that we can do. Taxation will be a vital tool for achieving the objectives of the Paris Agreement. As climate change is the biggest threat of our time, the future of taxation in Europe lies in rules and a system that supports the green transition and turns it into an opportunity.
Behavioural taxes are only one dimension. The Commission will launch a broader reflection on the right tax mix for the future. This reflection should conclude in a Tax Symposium on the ‘EU tax mix on the road to 2050’ in 2022, where I hope to see you all – as believe that there is plenty to learn from the Finish tax system.
Allow me now a step back to talk about what we already have on our plate now, as deep transformations of our tax system are already at our doors.
As you know, after years of negotiations, the overwhelming majority of the OECD Inclusive Framework and the totality of the G20 members - 134 countries and jurisdictions [to date] across the world to be precise – reached and endorsed a political agreement in July to make the international corporate tax framework fairer and fit for today’s economic realities. This agreement will bring stability and predictability in the global corporate tax framework, and its success shows that multilateral cooperation is more effective than a multiplication of national measures.
While we should not underestimate the fact that the work is not yet completed, we can now be fairly certain that after years of hard work and negotiations, there will be a global solution on two Pillars:
- Pillar 2 will set a minimum effective corporate tax rate of at least 15% on a jurisdictional basis. It will apply to MNEs with a consolidated EUR 750 million revenue and include formulaic based substance carve-outs.
- Pillar 1 will define the reallocation of a part of the (super-) profits of the biggest global multinationals towards market jurisdictions. A portion of profits (20-30%) above a 10% profit margin of the worlds’ biggest and most profitable companies will be pooled at global level and then distributed to market jurisdictions where an MNE’s users and customers are located, using a method called “formulary apportionment”.
- This is a concept probably known to many of you, where one would (re)-attribute tax base to certain jurisdictions based on a formula consisting of one or several factors. I will come back to that when I speak about our forthcoming BEFIT-proposal.
This global agreement is not about harmonising tax systems or ending tax competition. It is about moving away from the race to the bottom and establishing a fairer and more efficient global framework that reflects today’s economic reality.
For the EU, I am convinced that both Pillar 1 and 2 will help securing much needed additional tax revenue in the years to come, while providing businesses with a clear and predictable tax environment.
Gathering the support of 140 jurisdictions, large and small, central and peripheral, developed and less developed, open and less open, with different interests and various economic models, requires compromises. The agreement that we reached last July is a compromise agreement, which has required efforts from all parties, including Finland being a small open economy.
I’m also fully conscious that the journey is not over. The coming months up to the end of the year promise intense discussions to agree on the technical details of the reform, among which:
- For Pillar 2, we need to agree on the minimum tax rate, the mark-up for substance carve-out and clarifying the scope of the US grandfathering;
- For Pillar 1, we need to agree on the precise percentage of residual profit to be allocated to market jurisdictions, level of details included in the multilateral convention versus domestic law, and defining the scope of unilateral measures to be withdrawn and the manner of how this should be achieved. We also need multilateral convention (MLC) under public international law and a continued guidance in the future to ensure legal certainty when re-assigning taxing rights across jurisdictions.
But there is significant political opportunity and economic need to move now. We must rally the remaining jurisdictions that have not joined the agreement yet – which includes a couple of EU Member States – and ensure an effective worldwide implementation plan.
The Commission will spare no effort, so that we can reach a final agreement with all EU Member States on board in the course of the autumn. This is our priority.
Following the agreement on a global solution, the Commission will act swiftly to ensure its effective implementation in the EU.
The Commission will immediately propose a Directive for the implementation of Pillar 2 in the EU. This is a necessary step, to ensure that Pillar 2 is transposed in the EU in a uniform fashion and with the legal certainty that the new rules are compatible with the acquis.
- The OECD rules on a minimum effective tax rate (METR) are designed to apply only to cross-border situations, i.e. the rules assess only the level of taxation of foreign subsidiaries without considering those in the parent company’s state.
- Key Pillar 2 rules resemble so-called controlled-foreign-company rules that the ECJ has repeatedly held to restrict the relevant fundamental freedoms (eg. 2006 Cadbury Schweppes case), when put in place unilaterally by EU Member States.
- If Pillar 2 were implemented via unilateral measures at national level, a Member State could enact rules that limit the METR requirements to cross-border situations. In such case, there would be a clear risk that this practice be found discriminatory under the Treaty Freedoms.
The Commission will also be ready to act if a Directive is needed for the implementation of Pillar 1 after an agreement is achieved.
It is key to see the level of detail in which the OECD final agreement will be spelled out to assess whether a Directive would provide added value.
For good reasons, a global agreement will apply only to a limited number of companies; this is particularly true for Pillar 1. For such a solution to work globally, it needs to be administrable for and between more than 130 jurisdictions, with diverse economic profiles and levels of administrative capacity.
However, a closely integrated European Union with ever increasing number of companies – small and large – involved in more integrated supply chain within the Single Market, can and should go further to support wider EU policies while meeting public financing needs.
In 2023, as announced in our Communication on Business Taxation for the 21st century, the Commission will put forward a proposal for a holistic EU business tax framework fit for the decades to come - The “Business in Europe: Framework for Income Taxation” (or BEFIT).
It will provide a single corporate tax rulebook for the EU, based on a common tax base and a formulary apportionment, building in its key principles on OECD deal.
BEFIT is business friendly. It will cut red tape, reduce compliance costs, reduce tax avoidance and support jobs, growth and investment in the EU. In my opinion, it will allow Member States / tax administrations to raise more revenue, while reducing compliance costs for the business and society: it is a fair deal.
My Services are currently at the stage of reflection and are consulting widely with tax professionals, the business, the academia and other stakeholders in order to properly frame the new challenges and assess which aspects of the current corporate tax systems require reforms.
The new BEFIT proposal will replace the pending CCCTB proposal and will build on progress in the on-going global discussions on international corporate tax reform.
It will reflect the evolving nature of a digitalised economy by considering the contribution of intangibles and giving the appropriate emphasis to the allocation of taxing rights.
I have spoken at some length about our long-term challenges on the road to 2050 and our comprehensive, long-term tax agenda.
Tax abuse is indeed a challenge in terms of sound public finances. But equally so, it is a question of fairness. It is inacceptable that, despite the multitude of measures we collectively put in place, billions of euros are still lost in the EU and globally.
Just to give you some numbers: Tax revenue lost due to cross-border VAT fraud amounts to EUR 50 billion/year in the EU. International tax evasion by individuals results in a tax revenue loss of EUR 46 billion/year for EU Member States. Moreover, it is estimated that EUR 30-70 billion is lost each year in corporate tax avoidance in the EU.
We need to get this fixed. And this means, we need to work on all levels and complement the structural reforms that I described earlier with targeted measures, as announced in the 2020 Tax Action Plan and in our 2021 Communication on Business taxation.
By the end of the year, we will take action to clamp down on the misuse of shell entities for tax purposes. Those entities with no or only minimal substance and economic activity continue to be of extensive use in some EU Member States and are often linked to aggressive tax planning, tax evasion or money laundering. The Commission proposal will create a new tax transparency requirements and encompass actions such as denying tax benefits linked to the existence or use of shell entities.
In addition, we will adopt measures to ensure greater public transparency on the taxes paid by large economic actors. For this, we will propose making use of the method for calculating effective tax rates under Pillar 2, once it is agreed.
Next to adapting our legislation, we are also adapting the way our tax administrations work.
Administrative cooperation and the automatic exchange of information have been at the heart of the EU’s tax transparency agenda in the past years.
In the area of direct taxation, we adopted this year at EU level the revision of the directive on administrative cooperation, DAC7, to extend its scope to income derived from the growing platform economy. And we are preparing DAC8, to also cover crypto assets and e-money. DAC 8 will also include provisions to make the existing exchange of information more effective.
In the area of VAT, this concerns the exchange of payment data to fight VAT fraud – the Central-electronic system of Payment information will start to apply in 2024 at the latest.
Moreover, as announced in the tax action plan, the cooperation in the Eurofisc network will be strengthened in the coming years. We will be providing more data and tools to Eurofisc in order to improve its functioning and to provide more signals/alerts to OLAF and Europol.
I think generally, we need to improve the cooperation between the various agencies and players involved in tackling financial crime. I experience something similar on the Customs side, where I invest a lot to strengthen our cooperation between the Customs authorities, Frontex and other border agencies. Last week, I had the pleasure to kick start the work of the Wise Person Group, in which Martti Hetemaki participates. The group will notably advise the EU institutions and the Member States on how customs can improve the protection of the financial interests of the Member States and of the EU budget.
The exchange of information is a crucial and necessary element of tax transparency and tax fairness. Already its existence will have a deterring effect and thereby reduce tax evasion and avoidance practices. As I said, at a time each euro counts, protecting the financial interests of the EU and its Member States is more than ever a priority.
Once again, let me thank you for giving me the occasion to present the EU tax agenda for the coming years.
You have heard, this agenda is very ambitious and previous attempts for far-reaching EU tax proposals have not always been successful. Yet, in the face of the crisis, I believe that we will have to make bold choices, to build a more resilient Single Market, a stronger Europe in the world. And I want to hope I can count you on board to pursue the discussion and build together a long-term vision for EU taxation.
I will stop here and I look forward to hearing your comments and questions.
- 22 September 2021