EU taxation: Looking back, and ahead | Epthinktank

Written by Pieter Baert.

As the new parliamentary mandate begins, this note looks back at notable achievements of the previous legislative term in the area of ​​taxation. It then looks ahead to possible future action that could help the Member States and the European Union (EU) meet revenue needs in the context of climate and defense spending requirements, or bolster competitiveness by simplifying tax compliance for businesses operating across the single market.

Accomplishments and on-going work

Over the past few years, EU Member States’ public finances have been under considerable strain owing to the COVID-19 pandemic and the twin energy–cost-of-living crisis, following Russia’s invasion of Ukraine. As these significant economic challenges evolved, tax administrations across the EU were quick to respond to constantly changing circumstances, introducing various tax-support measures to shield struggling households and businesses when prices skyrocketed.

In terms of legislative action at EU and international level, the key milestone was the 2021 OECD Inclusive Framework global agreement on a two-pillar solution to reform the international corporate tax system. The subsequent adoption of a minimum corporate tax (‘Pillar Two’) in the EU has ensured that large multinationals operating in the EU are today subject to an effective tax rate of at least 15%. A multilateral convention to implement the other half of the global tax deal (‘Pillar One’), concerning the re-allocation of taxing rights on the profits of very large multinationals, should be opened for signature soon, with the rules entering into force in 2025 (provided the convention is ratified by a critical mass of signatory countries).

At EU level, negotiations on some of the previous Commission’s initiatives remain ongoing, such as proposals to create a harmonized corporate tax base across the EU (BEFIT) or to update energy taxation rules (see Table 1). The Hungarian Presidency of the Council has committed to advancing the discussions on pending taxation fileswhile prioritising ‘fighting tax evasion, ensuring legal certainty for taxpayers, and supporting the international engagement of the EU’.

Table 1 – Ongoing initiatives in the Council in the area of ​​taxation (non-exhaustive)

Legislative proposal	Objective	European Parliament (opinion)
Energy taxation	Align taxation of energy products and electricity with EU Green Deal objectives	Awaiting Parliament opinion
VAT in the digital age	Lower value added tax (VAT) administrative costs, harmonize VAT reporting and fight VAT fraud	Opinion
Debt-equity bias reduction allowance (DEBRA)	Reduce debt-equity bias in corporate tax, encourage the re-equitization of companies, strengthen capital markets union	Opinion
Transfer pricing rules	Enshrine transfer pricing principles within EU law, avoid double taxation and increase tax certainty	Opinion
Business in Europe: Framework for income taxation (BEFIT)	Harmonize corporate tax base, lower business compliance costs and increase tax certainty	Awaiting Parliament opinion
Head office tax system (HOT)	Lower tax compliance costs of cross-border operating small businesses	Opinion
Unshell	Counter shell companies when they are used for abusive tax purposes	Opinion
Faster and safer tax excess relief (FASTER)	Accelerate withholding tax relief and strengthen capital markets union	Opinion*

*In May 2024, the Council reached a general approach on the FASTER initiative. As the text supported by the Council deviated considerably from the original Commission proposal, Parliament will be ‘reconsulted’ to provide its opinion. For further information on the state-of-play of EU initiatives, see the EU Legislative Train Schedule.

What might the future bring?

While upcoming legislation will ultimately depend on the priorities of the new College of Commissioners, and in particular the new Commissioner in charge of taxation, over the years the European Commission has carried out a range of preparatory studies and public consultations that may feed into potential future legislative initiatives.

In the area of direct taxationthe Commission is currently evaluating two directives that are instrumental in combating abusive tax practices. The first is the Directive on Administrative Cooperation (DAC), through which national tax authorities share an increasing amount of information with their EU counterparts. The second is the Anti-Tax-Avoidance Directive (ATAD), a series of EU-wide measures against corporate tax avoidance. These evaluations will take stock of the current rules and their efficacy. They may then recommend modifications to strengthen or streamline the current framework. The EU will also continue the practice of listing third countries that fail to comply with international good governance tax standards and will evaluate how effective the measures taken by Member States against the listed countries have been.

In the area of VATthe European Commission has been carrying out preparatory work concerning the travel and tourism industry, looking at the potential modernization of VAT rules for travel agents, international flight and maritime passenger transport, and refunds for non-EU tourists as well as the possibility of changing the VAT rules for the financial and insurance services industry.

The Commission may also propose changes to the Tobacco Taxation Directive (which lays down EU-wide minimum tax rates on tobacco products), and the Excise Duty Directive (concerning excise duty rules on cross-border purchases of products, such as cigarettes and wine) , taking into account the objectives of the Europe’s Beating Cancer plan.

The European Commission announced several other files during the last term that have yet to be tabled. These include for example an EU charter on taxpayer’s rights. This charter would pinpoint residual tax barriers within the single market (such as the taxation of cross-border teleworkers) and recommend best practices drawn from across the EU. Other potential upcoming initiatives include measures to address the role of ‘enablers’ in creating complex and opaque tax structures, or to advance public transparency around multinationals’ tax payments. The Commission’s action plan for fair and simple taxation also committed to exploring how to make full use of Article 116 of the Treaty on the Functioning of the European Union, to allow taxation proposals to be adopted by ordinary legislative procedure, under certain circumstances.

In the context of the repayment of Next Generation EU funds, the debate on new ‘own resources‘ – revenue streams to the EU budget – is likely to resurface. The Commission has already put forward several proposals, currently pending in Council. Revenue from other sources – such as the financial transaction tax (FTT), Pillar One or BEFIT – may be allocated to the EU budget in the future, if those initiatives are adopted.

A number of important taxation developments are meanwhile under way beyond the EU’s borders. Acting on a request made by the Brazilian presidency of the G20, professor Gabriel Zucman (head of the EU Tax Observatory) published a blueprint for a global minimum wealth tax in June 2024. Under the proposal, individuals with more than US$1 billion in wealth would be required to pay a minimum amount of tax annually, equal to 2% of their wealth. G20 finance ministers meeting on 25-26 July will discuss a possible way forward.

A potential obstacle to the historic OECD Inclusive Framework agreement is the critical stance of the United States Congress, which could complicate application of Pillar One in particular. The European Parliament has called on the Commission to come forward with a unilateral measure – a digital levy on digital companies or similar – in the event that there is a clear lack of progress on Pillar One.

In addition, following criticism by a number of non-EU countries of the outcome of the OECD tax reform, work is ongoing to establish a United Nations (UN) framework convention for international tax cooperation. The EU position is that this convention should focus on strengthening tax enforcement mechanisms, mobilizing domestic resources, and avoiding inconsistencies or overlaps with the OECD’s work.

This note updates a previous editionsince February 2024.

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Read this ‘at a glance’ note on ‘EU taxation: Looking back, and ahead‘ in the Think Tank pages of the European Parliament.