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Tax Files Under New Council of EU Presidency: Czechia

By: Sean Bray

On July 1st, Czechia assumed the rotating Council of the EU Presidency from France. The country will chair Council meetings and represent the Council in relations with other European Union institutions until the end of 2022. There are many taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -related files that remain in the legislative pipeline from the French Presidency that Czechia will need to manage including;

  • the EU’s Pillar Two Directive implementing a part of the 2021 Organisation for Economic Co-operation and Development (OECD) Inclusive Framework agreement,
  • the possible introduction of the EU’s Pillar One implementing Directive,
  • the Emissions Trading System (ETS)The Emissions Trading System (ETS) is a form of environmental taxation that seeks to use the dynamics of supply and demand to reduce the European Union’s (EU) overall carbon emissions in line with its broader climate change reduction goals. The market price of carbon is set by cleaner firms trading allowances with more carbon-intensive firms while the overall cap on allowed emissions is reduced over time. reform and complementary Carbon Border Adjustment Mechanism (CBAM),
  • tax compliance issues,
  • the debt-equity bias reduction allowance proposal (DEBRA), and
  • managing economic impacts of REPower EU.

At June’s Economic and Financial Affairs (ECOFIN) Council meeting, Poland dropped its reservation on the EU’s Pillar Two Directive after receiving assurances that there will be a link between Pillar One and Pillar Two. However, the Directive did not pass by unanimous vote because Hungary blocked it, citing Pillar One timing concerns and the war in Ukraine’s effect on inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .

Under the Czech presidency, the Directive will likely be considered again in the Council. If the Hungarians remove their objection, the Directive will likely become law. The current proposal states that Member States shall transpose the provisions of the Directive by 31 December 2023 and apply these provisions for fiscal years starting on or after 31 December 2023. The Under-Taxed Profits Rule (UTPR) would only apply for fiscal years starting on or after 31 December 2024.

However, if a unanimous agreement is not reached, the other 26 Member States may begin to consider alternative legislative paths forward.

For one, there is debate in the EU on amending EU treaties to remove the rule of unanimity on tax files. The presidency has so far insisted on more debate before making any changes in this direction.

Another option proposed by Greens/EFA members of the European Parliament (despite the Parliament not having a legislative role in this Directive) would be to use a mechanism called “enhanced cooperation” which requires at least nine Member States to agree on a proposal to jointly move forward. While this strategy could bypass the Hungarian objection, it is unclear if all 26 countries would remain in favor of the Directive without being uniformly implemented.

A third option would be for Member States to implement their own Pillar Two laws at the national level without EU coordination. This process could complicate compliance and cross-border investment decisions.

For Pillar One, the Inclusive Framework envisioned changes to begin in 2023. However, due to ongoing technical discussions at the OECD, it is likely implementation will not start globally until at least 2024. For the EU’s Pillar One implementing Directive, the Commission was supposed to release its proposal on 27 July but has postponed it indefinitely.    

Given this postponement, the Czech presidency may not directly manage the Pillar One file. However, presidency officials may contribute to the EU’s plan for a proposal timeline based on the U.S. midterm election results in November and the likelihood of other countries implementing Pillar One. The question for EU leaders is whether to implement Pillar One domestically without any other major country’s implementation. A Council discussion of Pillar One is expected in December.

In addition to Pillar One, ETS reform and CBAM are proposed as new own resources for the EU budget. The complementary files will be negotiated between the EU institutions starting in September. Current proposals indicate that the CBAM reporting phase should begin in 2023 if a compromise text is adopted. A separate Council discussion on whether these policies should direct revenue to the EU budget is planned for December.

During the six-month presidency, the Unshell Directive faces an uncertain path forward as Czechia, along with the next presidency, Sweden, questioned the Directive’s necessity and design. Additionally, an agreement on the sixth anti-money-laundering Directive faces a difficult negotiation between Member States.

The DEBRA proposal aims to encourage companies to finance their investment through equity contributions rather than through debt financing starting on 1 January 2024. The presidency will need to address resistance from some countries because of potential tax revenue losses and limits to deductions of loan interest. The proposal will need unanimous support in the Council to become law.

Another uncertainty for the Czechs is the war in Ukraine. The EU has laid out its REPower EU plan to break reliance on Russian energy. There are questions for the EU and Member States about how best to support those citizens most impacted by rising energy costs because of the war. The presidency may also need to negotiate defense financing plans and a potential EU windfall profits tax.   

The Czechs have also stated that there are different tax-related files which it would like to address. These measures include a plan to finance an “EU Marshall Plan” for Ukraine, stalled EU trade deals that focus on lowering taxes and barriers, sanctions on Russia, and a strategic industrial policy called the EU Chips Act.

As the Czech presidency considers a plan to manage these tax-related files, it would be wise to consider principled tax policy that broadens the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and reduces the tax wedgeA tax wedge is the difference between total labor costs to the employer and the corresponding net take-home pay of the employee. It is also an economic term that refers to the economic inefficiency resulting from taxes. on strategic investment. Closing the VAT gap and implementing full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for business investment would be two options to raise government revenue while supporting economic growth and other policy objectives.