This month a new five-year term for the European Commission began. Now led by President Ursula von der Leyen, the Commission has a broad agenda including several 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. policy proposals, many carried over from the previous Commission. These include policies that would change the taxation of large multinationals corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, and digital services, and target carbon emissions.
Common Corporate 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. (CCTB)
The CCTB is a proposal to adopt a uniform corporate tax base at the EU level potentially alongside a system of formulary apportionment. The policy has been under debate for several years and there are ongoing discussions on both technical and political fronts. One key question that remains unresolved is whether to apply the uniform corporate tax base to both large multinational companies and smaller companies that operate across borders.
As with any tax base, the CCTB would set standards for capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. s, losses, inventory treatment, and other key elements of defining income. Because corporate tax bases vary so widely across Europe, the European Commission faces a serious challenge in finding political agreement on a tax base that is dramatically different than the tax base in some countries.
Additionally, there is disagreement about whether the CCTB should be paired with a minimum corporate tax rate for the EU.
Digital Services Tax (DST)
In 2018, the Commission proposed a DST across the EU. Negotiations led to a stalemate earlier this year, and since that time several European countries have been working to adopt a DST unilaterally. The new Commission will continue to work on the DST proposal.
The proposal that was left on the table would apply a 3 percent tax on revenues of certain large multinationals that provide online advertising services, online marketplaces, and sales of data. France adopted such a tax in the summer of 2019, and because the policy mainly targets U.S. companies, the U.S. has been exploring retaliatory tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s in response to the DST.
The new Commission has directly connected the status of the EU DST to the ongoing efforts at the OECD on the taxation of the digitalized economy. If an international agreement is not reached at the OECD in 2020, the Commission will restart work on the DST.
Updates to Value-Added Taxes (VAT)
Over the decades, one of the most significant roles for the European Commission in tax policy has been in managing the rules for the EU VAT system. Recently, much of the work has been focused on modernizing the system, coordinating reduced rates, and simplifying the system. Key areas of work including e-commerce, VAT rates reform, and technical challenges associated with the overall system.
Current proposals on VAT rates include requiring that any member state’s weighted average VAT rate exceeds 12 percent and creating a list of goods that should always be taxed at the standard VAT rate (rather than a reduced rate). On simplification and e-commerce, the Commission will continue to work out permanent solutions to many transitional rules that were adopted recently.
European Green Deal
A new initiative for this Commission is to pursue several policies focused on the environment under the umbrella of a European Green Deal. On tax policy, this includes the challenge of working out the feasibility of a carbon border tax which would tax the carbon content in imports to the EU. Additionally, the European Energy Tax Directive (a policy that governs taxation of fuel and electricity in the EU) will likely be reformed to expand the scope of that directive. In general, the policy will likely mean heavier taxes on some sources of energy (such as kerosene) or types of travel (such as aviation).
Qualified Majority Voting (QMV)
Tax files at the European Commission currently require unanimity for adoption; however, some countries have complained that the procedural barrier this creates is unnecessary. Instead, some countries would like to have tax files be decided by a qualified majority or 55 percent of member states representing at least 65 percent of the EU population.
A shift from unanimity to QMV would likely change the outcome for debates over CCTB and the DST (if that policy is revisited). Other tax policy debates that were moved away from universal adoption (like Financial Transaction Taxes) could be reconsidered in light of the changed procedure.
However, unanimity would be required to move to QMV, so countries that strongly oppose the various proposals that could become EU policy under QMV would likely also oppose the procedural change.
The new European Commission has a significant amount of tax policy work currently on the agenda. There are opportunities for simplification and others for creating new, distortionary taxes. Although the path to agreement and implementation on any of these policies may be challenging, policymakers should be careful to consider how the various policies will impact economic outcomes in the EU.
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