Market leading insight for tax experts
View online issue

EU watch: business tax for the 21st century

printer Mail

It’s finally here! Following several postponements, the European Commission, on 18 May, finally published its communication on Business taxation for the 21st century.

The communication did not disappoint: it contains a mix of anticipated policies, as well as some surprising new announcements.

EU’s own resources

According to the communication, the Commission is mulling several options for EU’s ‘own resources’ (or sources of tax income). These will include the upcoming carbon border adjustment mechanism (CBAM) and the digital levy. Additional options could include a pan-EU financial transaction tax (FTT), as well as an ‘own resource linked to the corporate sector’. The latter is most probably a reference to a so-called ‘single market tax’, which was mooted in 2020 as a new tax on large multinationals that operate in and benefit from the EU’s single market. It appears, then, that this single market tax remains on the Commission’s agenda.

Digital levy

The communication also refers to the so-called digital levy, which would be an independent initiative from a prospective OECD agreement. The levy is expected to have a relatively low tax rate and target a broader scope of digitalised businesses. A proposal is expected on 14 July.

EU implementation of OECD pillars one and two

The Commission intends to implement both OECD pillars into EU law. Depending on OECD’s timeline, these proposals would most likely be proposed in 2022.

Pillar two would impact existing EU legislation in three ways:

  • the EU’s anti-tax avoidance Directive’s (ATAD) CFC rules, which would be impacted by pillar two’s income inclusion rule (IIR);
  • the Interest and Royalties Directive (IRD), on which EU member states have been unable to agree for several years, but the Commission believes that, with pillar two, an agreement will now be possible; and
  • including pillar two compliance as one of the criteria for blacklisting third countries as part of the EU’s list of non-cooperative jurisdictions.

Tax transparency

The mysterious ‘tax transparency measure’ has now been clarified. It would be an obligation for certain large companies with operations in the EU to publish, on a country by country (CbC) basis, their effective tax rates using the pillar two methodology. A proposal is expected in 2022. 

Shell companies

In Q4 2021, the Commission will propose an amendment to ATAD to address shell companies in the EU. This would oblige companies to report to tax administrations information to assess whether they have substantial presence and real economic activity. If not, tax administrations would need to deny any tax benefits linked to these ‘shell companies’. A public consultation is expected for June.


The Commission will propose, in Q1 2022, a legislative proposal creating a so-called debt-equity bias reduction allowance (DEBRA). This would be a recast of the allowance for corporate equity (ACE) that the Commission proposed in its 2016 CCCTB proposals. And speaking of CCCTB…


Perhaps the biggest announcement of the communication is the Commission’s intention to withdraw CCCTB, on which member states have to date failed to agree. The CCCTB would be replaced in 2023 by a new framework called ‘business in Europe: framework for income taxation’ (BEFIT). Like the CCCTB, BEFIT would also be based on formulary apportionment and common EU rules for determining the corporate tax base. But unlike the CCCTB:

  • the tax base definition will take into account the rules for calculating the tax base under pillar two;
  • the OECD pillar one formula for the partial reallocation of profits would be incorporated in some way into the BEFIT formula, and either way digitalisation will be somehow accounted for in the apportionment formula; and
  • while BEFIT’s formula would be based on sales, assets and labour, ‘appropriate weight’ would be given for the sales element, and the assets element would also include intangibles.