The European Commission is proposing to set out a medium-term vision and actions for business taxation in the EU, proposing principles and priorities for the EU business tax agenda over the coming years and articulate EU action with the on-going discussions at the international level on taxation of the digital economy and minimum effective taxation.
This initiative will complement other EU initiatives in the area of taxation, such as the 2020 Action Plan on Fair and Simple Taxation Supporting the Recovery Strategy as well as the 2020 Communication on Tax Good Governance in the EU and beyond, which set out the priority areas for action to enhance tax good governance standards and ensure fair taxation at global level.
According to the European Commission, the current corporate tax framework is out of step with the new realities of a globalised and digitalised economy, and even less fit for the challenges to come, such as climate change and population aging.
COVID-19 and the subsequent economic crisis have severely strained public finances and sharply increased public spending, resulting in unprecedented public debt levels. The European Commission strongly believes that tax policies will have a role to play in the post-COVID economy, to support a swift and sustainable economic recovery. The challenges following the pandemic and economic crisis will be exacerbated by already ongoing larger developments that are transforming our economies and societies, including population aging, the globalisation and digitalisation of the economy, and climate change.
Several megatrends put pressure on our tax systems and generate a need for a holistic and ambitious vision for an EU business taxation environment fit for the 21st century:
Population aging is likely to lead to a shrinking working population and thereby reduce labour tax revenue while the costs of maintaining our social model increase. This is likely to increase public spending needs on the one hand and decrease tax revenue in the absence of policy action. Tax policies also have a role to play in supporting businesses in their transition to a green Europe.
The increased globalisation and digitalisation of the economy create challenges for EU countries to tax corporate income fairly and efficiently and have exposed the limits of the current international corporate tax framework. While the Single Market has brought progress and prosperity, the removal of barriers to the free movement of goods, services, capital and labour, combined with the digitalisation of the economy, has intensified tax competition between European countries and with international partners, and has contributed to the emergence of new forms of tax competition, risking a new race to the bottom. In fact, statutory corporate tax rate in the EU have been on a continuous downward trend in recent years, as pointed out in the European Commission’s Taxation Trends reports. In addition, the current international corporate tax framework is misaligned with the realities of the digitalised economy, and offers new tax avoidance opportunities for highly mobile business income. This threatens Member States’ revenues needed to fund public spending and risks creating unfair burden sharing between taxpayers.
The patchwork of corporate tax systems in the EU creates barriers for cross-border investment and prevents stakeholders from fully reaping the full potential of the single market, while also creating loopholes that can be exploited for aggressive tax planning purposes, or conversely lead to double taxation.
To deliver on this ambition, the European Commission is proposing to set out a medium-term vision and actions for business taxation in the EU. It will also take stock of OECD discussions on the reform of the international corporate taxation framework and articulate this with action at EU level. This will take the form of a Communication presenting the Commission’s proposed way vision, priorities and its underlying rationale.