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EU watch: public consultations, environmental taxation and the digital levy

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First, the Commission launched a few public consultations on tax issues. The first of these is about a future Commission proposal, expected for 22 December 2021, to mitigate the use of shell companies in the EU. The public consultation was launched on 4 June and the deadline for responding is 27 August. The consultation seeks input on the extent to which existing rules in the EU tackle the risk of tax avoidance through the abuse of shell entities and what kind of new rules should complement the existing framework.

A second public consultation, launched on 1 July and running until 7 October, asks stakeholder feedback on the Commission’s plans to set up a so-called debt-equity bias reduction allowance (DEBRA). The purpose of this legislation is to address the debt-equity bias in Europe and foster the development of capital markets.

Another public consultation launched by the Commission concerns a cooperative compliance pilot project for SMEs. This would allow tax administrations to solve together, in a preventive manner, cross-border tax issues faced by SMEs operating within the EU.

The Commission also took a major step towards advancing its environmental taxation agenda. On 14 July, it published a Directive revising the EU Energy Tax Directive (ETD), as well as a whole new proposal on a carbon border adjustment mechanism (CBAM).

The revised ETD proposes to align the taxation of energy products with EU’s climate ambitions, promoting clean technologies, and removing outdated exemptions and reduced rates that encourage the use of fossil fuels. Its key elements include:

  • introducing an energy taxation system based on the energy content of the energy products and electricity, and their environmental performance;
  • putting an end to the energy tax exemptions enjoyed by maritime and aviation sectors; and
  • proposing tax exemptions and reductions for products that support EU’s climate objectives.

ETD’s legal base will be article 113 of the EU Treaties (indirect taxes), and thus a member states’ unanimity will be needed for approval. This signals difficult and potentially lengthy negotiations ahead, and if there is an agreement, it may differ in significant parts from what the Commission has proposed.

The CBAM proposal, for its part, will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage'.

Under CBAM, EU importers will buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the intra-EU carbon pricing rules. Conversely, if a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

And finally, the latest hot topic in Brussels is the fate of the Commission’s planned digital levy. According to the latest information, this new tax would be separate from and complement a prospective OECD agreement. It would introduce a 0.3% tax rate on businesses with online sales in the EU exceeding €50m.

The levy was initially scheduled for 14 July, but it was then postponed to 20 July following criticism from the US that it discriminates against US companies and undermines OECD efforts to find a global agreement. The Commission has now decided to further postpone the levy until ‘the autumn’ when it will reassess the situation. It remains to be seen whether the levy will be revived if, as expected, a final international agreement is reached in October. It was intended that income from the levy would support the EU budget and help repay Europe’s covid recovery support debt. But it is entirely possible that the Commission decides to shelve the proposal. After all, the levy was first proposed by EU member states in their July 2020 Council conclusions, and the Commission was never a big fan of the levy in the first place.