The ‘direct taxation omnibus’ is the latest in a series of business-friendly measures proposed by the European Commission under the second term of its president Ursula von der Leyen, shifting from her first-term focus on sustainability. The omnibus has been proposed alongside plans to change and integrate the EU’s nine directives on administrative cooperation (DAC), which underpin collaboration between the 27 member states on taxation and corporate governance issues.
The commission has made some major claims about the impact of these reforms. In a press release at the time of the announcement, Valdis Dombrovskis, commissioner for both economy and productivity, and implementation and simplification, said: ‘Our tax simplification proposals offer solutions that will radically improve clarity and legal certainty for businesses and tax administrations alike.’ He added that the resulting compliance cost reductions for European businesses would total almost €8bn per year, including €3.3bn in annual administrative costs.
‘Changes deliver a considerable reduction in burdens and costs for crossborder businesses’
Looking at the details, key points include:
- abolishing withholding taxes on crossborder payments of dividends, interest and royalties between EU companies
- a minimum standard for taxing investments in R&D-related assets, allowing full and immediate expensing in all member states
- streamlining and harmonising implementation of the EU’s controlled foreign company (CFC) rules, designed to prevent multinationals parking assets and profits in low-tax jurisdictions. These proposed changes will remove CFC rules that overlap with those implementing the OECD’s ‘Pillar Two’ minimum tax system.
- simplifying the anti-tax avoidance directive’s intra-group interest payment deduction rules so that these are capped at 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA), unless the interest is €3m or below (in which case it can be deducted). Third-party borrowing and standard market-based financing arrangements deemed a low tax avoidance risk will be clearly excluded – and hence all deductible.
- The commission has proposed changes to the EU dispute resolution mechanism directive to make it easier for taxpayers to settle crossborder tax disputes.
- The EU’s tax merger directive, designed to regularise the taxation of EU companies being merged or taken over through crossborder intra-EU, will be expanded to all forms of EU-regulated corporate reorganisations, such as de-mergers, changing headquarter offices and intra-group mergers.
- The commission will remove reporting obligations for 3,000 multinational groups covered by the Pillar Two minimum 15% tax rate, ‘generating compliance cost savings of around €300m’.
- A single notification requirement for country-by-country reporting will be introduced, with central filing of top-up tax information returns, saving compliance costs of over €260m annually. DAC changes will also raise reporting annual thresholds for online goods sales to €3,000, as well as scrapping a requirement to file for more than 30 transactions. This, the commission believes, will remove reporting obligations on more than 10 million private sellers, with compliance cost savings of €678m for digital platforms.
Burden reduction
Johan Barros, policy director for accounting federation Accountancy Europe, says that the DAC changes deliver ‘a considerable reduction in burdens and costs for crossborder businesses and their advisers’, including a ban on EU member states introducing national reporting requirements that overlap with those required by the directive.
‘Smaller businesses face a disproportionate administrative burden when expanding across borders’
These changes, Barros says, will deliver ‘much-needed simplification for tax advisers, while still safeguarding the access of tax administrations to the information that they need’. Similarly, the tax omnibus changes offer ‘extremely important simplification measures with a considerable reduction in burdens and costs for cross border businesses’.
Noting that these reforms will require unanimity from the EU Council of Ministers, Barros is hopeful that they will not be watered down and, rather, that they will be intensified. For example, Barros believes that taxpayers should report crossborder tax arrangements that risk involving tax avoidance, rather than intermediaries such as accountants, as at present. He would also like SMEs to be carved out from anti-tax avoidance directive rules.
Meanwhile, Sakis Elisseou, CEO at the Paris- and London-based accounting and business management firm NLE, says that the fact that the commission is addressing tax reform and harmonisation is a positive step aiding small businesses across the EU. ‘At present, large multinational companies are often best placed to benefit fully from the single market, as smaller businesses face a disproportionate administrative burden when expanding across borders,’ he says.
Elisseou considers a planned removal of withholding tax on royalties and interest as most important: ‘It would free up cashflow for businesses to use immediately, rather than having funds tied up for months or even years while waiting to reclaim the tax,’ he says.
VAT reform calls
Elisseou would like additional simplification, involving scrapping the EU’s reverse-charge VAT mechanism for businesses, introduced when IT and tax-administration systems ‘were far less advanced’. ‘Today, it creates additional administrative work and confusion for businesses, without delivering the same benefits it once did,’ he argues.
In this regard, Dr Stefania Lotito Fedele, VAT and indirect taxation senior associate lead for Amsterdam and Abu Dhabi-based tax advisers NOEMA Global, is concerned that the package simplifies direct tax while leaving VAT untouched, even though ‘the two are increasingly intertwined at the transaction level’. Indeed, EU tax case law is trending towards ‘more granular, fact-specific scrutiny of the direct/indirect tax interface’, she says, adding that this is of concern given that it is ‘precisely the dimension this simplification package leaves untouched’.
That said, Fedele supports abolishing withholding taxes on crossborder dividend, interest and royalty payments: ‘Withholding tax friction, refund backlogs and relief-at-source procedures have long been a structural drag on intra-EU investment and a significant source of trapped cash and administrative costs.’
