While some items are proceeding slowly- Unshell and SAFE - there have been new proposals introduced with the BEFIT suite of proposals, including the Head Office Tax system and Transfer Pricing initiatives.
The Belgian presidency has indicated that they share the Spanish presidency’s desire to tackle aggressive tax planning and so will focus on getting the Unshell directive agreed upon. However, in 2024 with the upcoming elections for the European Parliament there is expected to be a change amongst European Council Commissioners and a new composition of the European Parliament potentially bringing a shift in priorities.
Pillar One
Overview
Pillar One provides measures to ensure the reallocation of taxing rights over profits of the largest and most profitable multinationals operating and/or generating revenue in a single market. It is part of the two-pillar solution developed by the OECD/G20 to address the tax challenges of the digital economy.
The European Commission has stated it will put forward a proposal to implement Pillar One in the European Union once the OECD work on the Pillar One initiative has progressed.
Current state of play
In October 2023 the text of the Multilateral Convention to Implement Amount A of Pillar One (the MLC) was published by members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework).
In the press release by the OECD, the publication of the MLC is noted as representing significant progress towards practical implementation. It is hoped that the MLC will be finalised by 1 March 2024.
Amount B is the component of Pillar One that aims to simplify transfer pricing rules of baseline marketing and distribution activities in accordance with the arm’s length principle. The OECD published a discussion document for Amount B in July 2023. Public comments on Amount B suggest that there are technical issues that need addressing before implementation. The main discussion points were:
- It was not made clear whether the new rules would be mandatory or voluntary for taxpayers with the main suggestion being that Amount B is applied as a safe harbour
- As mentioned, Amount B would apply to baseline marketing and distribution activities. A two-alternative approach has been put forward in the discussion document to determine if a transaction is within the scope of Amount B: A versus Alternative B. Alternative A does not require a separate qualitative scoping criterion to identify and exclude non-baseline contributions while Alternative B does. Feedback suggests that Alternative A better aligns with the goal of simplifying the rules but also that there may be little difference between the two alternatives if applied.
- Transactions that fall within the scope of Amount B can be priced in two ways. Firstly by using a pricing matrix contained in the framework and secondly by using a mechanical pricing tool. The matrix was criticized and it was highlighted that it will need to be changed and consideration given to its appropriateness.
The OECD mentioned that a follow-up document on Amount B is expected in early 2024. After the publication of this document, the proposal should move into the implementation phase.
Pillar Two
Overview
Following the publication of the G20/OECD inclusive framework on BEPS' Global Anti-Base Erosion Model Rules (Pillar Two) which is aimed at establishing a global minimum level of taxation for multinational groups (with a minimum effective tax rate of 15%), the European Commission (EU Commission) introduced a draft directive on December 22, 2021.
This directive aims to implement the OECD inclusive framework model rules across European Union (EU) member states. The EU Commission's proposal aligns with the EU's commitment to rapid action, positioning itself among the first to adopt the political consensus arising from the OECD/G20 inclusive framework on Pillar Two.
138 countries worldwide have agreed to implement Pillar 2 rules in their national legislation, with a significant number having introduced domestic legislation enacting Pillar 2. As of January 2024, the US has yet to implement Pillar 2 legislation.
Pillar Two Subject To Tax Rule (STTR)
The recently introduced Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule is an integral component of the Two-Pillar Solution devised to address the tax challenges stemming from the digitalization of the economy. This Convention, now open for signing, represents significant progress in the completion of work under Pillar Two.
The Subject to Tax Rule (STTR) is designed to enable developing nations to tax specific intra-group payments in cases where these payments are subject to a nominal corporate income tax rate below 9%. The STTR grants source jurisdictions (where the covered income originates) the authority to levy a tax, when under the terms of tax treaties they would otherwise be unable to do so. The STTR is aimed as a benefit for developing countries to mitigate the negative effect Pillar 2 has on the taxing rights of these countries.
As outlined in the Inclusive Framework Outcome Statement on the Two-Pillar Solution in July 2023, this new multilateral instrument will allow countries to implement the STTR within their existing bilateral tax treaties. Over 70 developing members of the Inclusive Framework have the right to request the inclusion of the STTR in their agreements with Inclusive Framework Members that apply corporate income tax rates below 9% to covered payments.
Current State of Play
EU rules came into effect on 1 January 2024 introducing a minimum effective rate of tax rate of 15%. Groups with a turnover of more than €750 million will be subject to new regulations.
The multilateral instrument concerning the Subject To Tax Rule has been open for signature since 2 October 2023.
Grant Thornton is an international network with global Pillar 2 specialists available to assist you with both the implementation of Pillar 2 and all your Pillar 2 compliance obligations.
More information about Pillar Two
Unshell Directive (ATAD 3)
Overview
ATAD3 aims to combat 'shell companies' and includes a 'filtering' system for EU companies, which will have to pass three gateways. These gateways relate to passive income, cross-border activities, and outsourced management and administration. This proposal aims to get sufficient 'substance' at the level of the EU company. Certain types of entities are carved out including listed entities, insurance companies, and pension funds.
EU companies deemed to be lacking in substance are presumed to be 'shell companies'. Consequently, if the presumed shell is unable to rebut this presumption or cannot obtain an exemption, it will lose certain tax advantages granted through bilateral tax treaties or EU directives.
Current state of play
There was considerable discussion under the Spanish Presidency to try to get this initiative over the line and despite compromise versions being offered agreement has yet to be reached.
The first compromise offered a two-step approach, with the first step being the exchange of information on companies considered shell entities. This would turn the proposal into an amendment to the directive on administrative cooperation (DAC). Step two would include an amendment to the directive to include tax consequences implemented by Member States.
While this approach did receive some support from Member States, another approach suggested was to make the substance criteria a minimum standard. The minimum substance criteria include own premises, own active EU bank account, and at least one director and/or most full-time employees resident in entities Member State.
It seems that many Member States are satisfied with their current regimes and there is a fear that the current proposals in place will act to water down existing rules.
Although tackling tax evasion was a focus of the Spanish presidency in the Council of the European Union, due to lack of agreement, the Unshell directive is now with the Belgian presidency, who have also declared it a priority. The current concern is that there will be no agreement on the Unshell directive proposal in the short term. Member states' positions still vary widely on the purpose and scope of the directive where unanimity is required.
Securing the Activity Framework of Enablers (SAFE)
Overview
The SAFE proposal aims to combat the role that enablers can play in facilitating schemes that can lead to tax evasion or aggressive tax planning within the EU. The objective of the SAFE proposal will be to prevent enablers from setting up such structures in non-EU countries when used to erode the tax bases of the EU Member States.
The Policy options considered are:
- Due diligence to be undertaken by all enablers;
- Prohibition on facilitation of tax evasion and aggressive tax planning plus due diligence to be undertaken and a requirement for EU registration;
- Code of conduct for all enablers.
Current state of play
The European Commission has made clear that the SAFE proposal is linked to the ATAD3 (‘’Unshell’’) proposal. When the Unshell proposal was adopted, the European Commission announced that it would propose a follow-up proposal to respond to the challenges linked to non-EU shell entities. The SAFE proposal is a response to these challenges and simultaneously represents another important step in the Commission’s continued commitment to combatting tax evasion and aggressive tax planning.
In July 2022, the European Commission opened a public consultation. The likelihood that a SAFE proposal will be introduced depends on the implementation of the Unshell directive.
Business in Europe: Framework for Income Taxation (BEFIT)
Overview
The European Commission launched the BEFIT proposal on 12 September 2023. The proposal introduces a single set of rules to determine the tax base for large businesses that operate out of more than one Member State. The new rules will be mandatory for groups with a combined global annual revenue of at least €750m and the ultimate parent holding at least 75% of ownership rights. BEFIT groups would comprise the same group as Pillar Two but would be limited to EU entities.
For groups headquartered outside the EU, their Union subgroup will only apply BEFIT rules where they achieve €50m combined revenues in at least 2 out of four previous fiscal years or 5% of the total group revenues.
The rules are discretionary for smaller groups, provided they prepare consolidated financial statements.
Current state of play
While the aim of the BEFIT proposal to reduce the administrative burden on companies has been acknowledged and welcomed, feedback on the proposal does suggest however that despite best efforts the benefits may be outweighed by the costs and administrative burden it will likely place on businesses and tax jurisdictions.
Tax authorities will have to deal with tax systems to accommodate BEFIT and non-BEFIT groups, provide resources for the BEFIT team dealing with and agreeing on the BEFIT return, and dealing with joint, cross-jurisdictional audits. MNEs will have to prepare a BEFIT return and a separate Pillar 2 computation, and group members will still need to file individual tax returns along with a group return. There have been calls for aligning the Pillar 2 and BEFIT returns.
It will likely take some time to negotiate the BEFIT proposal. Unanimous approval from all Member States will be required before adoption.
An implementation date of 1 July 2028 has been proposed.
Video - BEFIT, One Stop Shop?: Sasha Kerins, International Tax Partner at Grant Thornton Ireland and Monique Pisters, Head of Tax at Grant Thornton Netherlands discuss BEFIT, the proposed directive that was issued by the EU Commission.
Head Office Tax (HOT) System
Overview
As part of the BEFIT proposal issued in September, a proposal for a Head Office Tax (HOT) system for SMEs was also published.
This proposal would allow certain SMEs to calculate their tax liability based on the tax rules of the Member State where their head office is located and file a single tax return in that Member State. The tax return and tax revenues will be shared with the Member States in which the permanent establishments are located.
Current state of play
A public consultation seeking feedback was launched on 19th September until early January 2024.
Feedback to date on the proposal does point out that permanent establishments operating in the same member state may be taxed differently depending on where their head office is located. A company could choose to locate in a country that allows for the most favourable tax treatment. Feedback has suggested widening the proposal to include SMEs that operate in the EU through subsidiaries as well as PEs. The EU considered this initially but opted for PEs only.
On 22 January 2024, the European Parliament’s (EP) ECON Committee proposed amendments to HOT directive proposal including shortening the deadline for transposition to 1 January 2025.
The Commission proposed that Member States would implement the directive by 31 December 2025 with the provisions applying from 1 January 2026.
Video - A new Head Office tax system: Monique Pisters discusses the HOT-proposal, the new EU directive for micro, small, and medium-sized enterprises.
Transfer Pricing
Overview
A proposal for a directive on Transfer pricing is also now part of the BEFIT Package to harmonize transfer pricing rules across the EU. Currently, the EC considers that the operation of OECD guidelines differs between Member States, and whilst there is a common approach to basic principles, this is not fully aligned. The Directive essentially incorporates the arm’s-length principle and its interpretation in the OECD Transfer Pricing Guidelines (2022) into the legislation of all EU Member States.
The proposal contains anti-abuse rules and aims to increase tax certainty and reduce the risk of litigation and double taxation. The directive will reduce opportunities for aggressive tax planning using transfer pricing.
Current state of play
Member states have criticised the proposal and raised the question as to why OECD transfer pricing rules need to be codified at an EU level when transfer pricing legislation already exists in member states.
It has been suggested that the proposal appears to remove flexibility for Member States and may result in binding rules for certain transactions at an EU level.
Feedback submitted to date outlines the fact that the proposal of the 25% ownership threshold for associated enterprises is stricter than the current threshold of most member states, increasing the number of transactions falling within transfer pricing rules.
Debt Equity Bias Reduction Allowance (DEBRA)
Overview
The proposal is to introduce a tax allowance on increases in company equity and a limitation on the tax deductibility of interest payments.
The equity allowance will be computed based on the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate, which can be deductible for 10 years.
The aim is to impose a limitation on interest deductibility, under which interest can only be deducted up to the amount of 85% of the taxpayer’s exceeding borrowing costs. The proposal is aimed at all taxpayers who are subject to corporate income tax in one or more Member States, including permanent establishments in one or more Member States of an entity that is resident for tax purposes in a third country. The proposal also contains numerous anti-tax avoidance rules to prevent misuse.
Current state of play
DEBRA has been on hold, and to date, there has not been much progression on the proposal. The European Parliament (EP), in their resolution on further reform of corporation tax rules in December 2023, did invite the Council to “reassess and possibly restart negotiations” on this proposal. DEBRA is mentioned in the Explanatory Memorandum of the BEFIT proposal suggesting that it is still potentially in play; certainly, BEFIT did not include aspects of DEBRA as was anticipated.
On 16th January 2024 the European Parliament adopted a resolution formally approving the council directive for DEBRA, also introducing amendments to the original EC proposal. Resolutions adopted by the European Parliament are not binding on the EC but do need to be considered by the EC and member States when adopting new rules.
Video - The DEBRA Proposal: Monique Pisters discusses the DEBRA proposal, a proposal to introduce a tax allowance on increases in company equity and a limitation on the tax deductibility of interest payments.
Faster and Safer Tax Excess Refund for Withholding Taxes (FASTER)
Overview
FASTER is an initiative that aims to simplify the EU wide system for withholding tax (WHT) on dividend and interest payments. It will also assist tax authorities in identifying and targeting the abuse of rights under tax treaties.
Current state of play
Responses to the public consultation that ran until mid-September 2023 suggest that the proposal’s aims are not met.
It is felt that the Directive does not actually achieve its intended purpose and instead increases potential costs and complexities associated with WHT relief procedures for the following reasons:
- The proposal provides discretion in the way in which the refund system is to be applied by Member States
- The proposal imposes onerous responsibilities on Certified Financial Intermediaries (CFIs) that may discourage them from providing tax services
- Financial flows that do not go through CFIs have not been addressed (e.g. intra-group dividends, interest and royalties)
On a more positive note, the introduction of a common EU digital tax residence certificate is welcomed by Member States. It is felt it will bring uniformity to the procedures, and it is hoped that it will be a matter of priority.
At the request of certain Member States, the previous Spanish Presidency of the EU Council agreed to consider the possibility of exempting countries that have a comprehensive system for relief at source, from certain provisions of the FASTER proposal.
One of the issues in negotiation is a request by a number of EU Member States to keep the possibility of maintaining their current systems of relief at source from the withholding tax. In order to make further progress on this matter, Spain proposed to consider such a possibility, under specific conditions. Another topic raised by one EU Member State was that the establishment of the financial intermediary register and reporting obligations should be voluntary for Member States.
EU Member States broadly supported the provision regarding the electronic tax residence certificate. Nevertheless, further technical work is required before the Directive is submitted to the Council for approval.
The new Belgian Presidency of the EU Council has stated in its programme that it will aim to prioritise measures to curb tax evasion and avoidance, including tackling abuse related to withholding taxes.
On 23 January 2024, the European Parliament’s (EP) ECON Committee adopted its report on FASTER. Whilst broadly supporting the proposal, it recommends further review of certain aspects including the tax consequences resulting from interaction between the Unshell and FASTER proposals.
Once adopted by Member States, the draft directive should come into force on 1 January 2027.
Video - Faster directive revises the withholding tax regime in the EU: Monique Pisters outlines FASTER, a new directive to create a faster and simpler process for investors, financial intermediaries and tax authorities.
The DACs
The EC work programme, adopted on 17 October 2023, includes an evaluation of the Directive on administrative co-operation in the field of taxation. This evaluation will examine whether the Directive is fit for purpose, looking at potential rationalisation of the reporting obligations and informing potential proposals to reduce reporting burdens. The call for evidence ran from October to December 2023.
Reporting Obligation for Digital Platforms (DAC7)
Overview
DAC7 introduced a requirement for Digital Platform Operators to collect information on reportable sellers utilising their platforms for Relevant Activities, and to report annually such information to the competent tax authority, who will share this with other relevant Member States.
Platform operators allow sellers to provide for the sale of goods and services and the rental of property through the platform (websites, mobile apps etc.). In addition, platform operators must disclose to their sellers – that are active on their platform – what data they disclose to the local tax authorities.
Current state of play
The first reporting obligation for Platform Operators is due on 31 January 2024. However, certain member States have opted to provide short extensions to the reporting deadline under domestic transposition of DAC 7, to date these are Ireland, Cyprus, Italy, Luxembourg, Germany, Spain, and Greece.
Directive on Exchange of Information for Crypto-Assets and E-money (DAC8)
Overview
DAC8 implements new rules on reporting and exchange of information for tax purposes on e-money and crypto-assets and on exchange of information on cross-border rulings concerning high-net-worth individuals (HNWI). It also introduces penalties and compliance measures for the various reporting obligations under the DAC framework. This DAC8 Directive is based on the OECD publication of 10 October 2022, which contained the OECD Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standards (CRS).
Current state of play
DAC8 entered into force on 13 November 2023 and for the most part, will come into effect for all EU Member States from 1 January 2026. Member States have until 31 December 2025 to transpose DAC8 into national domestic law.
Video - DAC8: EU reporting requirements for crypto and digital asset service providers. Monique Pisters (Head of Tax) explains a bit more about the scope and key measures of DAC8.
Markets in Crypto-Assets Regulation (MiCA)
Overview
MiCA will introduce a new regulatory framework for European crypto-assets and will cover crypto-assets not already regulated by existing financial services legislation. The aim is to ensure consumers are informed on the risks, costs and charges linked to crypto-assets. It will also aim to provide measures against market manipulation, money laundering, terrorist financing and other criminal activities.
Current state of play
The new reporting requirements on crypto-assets, e-money and central bank digital currencies (MICA) was published in the Official Journal of the European Union on 9 June and entered into force on 29 June 2023. The regulation will apply from 30 December 2024.
Under the regulation, Crypto Asset Service Providers (CASP) will require authorisation from a Competent Authority to operate within the EU. This includes individuals or companies located outside the EU that promote or advertise their services to clients within the EU.
Transfer of Funds Regulation (TFR)
Overview
The TFR requires crypto companies (crypto-asset service providers and financial institutions providing crypto-asset services) to collect information from the buyer and seller in transactions and submit this information to local tax authorities. The TFR introduces traceability of transactions in crypto-assets.
The TFR introduces new rules on the information on originators and beneficiaries on transfers of Crypto-assets. The new rules are to prevent, detect and investigate money laundering and terrorist financing where at least one of the crypto-asset service providers involved in the transfer of Crypto-assets is established in the EU. The TFR obliges crypto-asset service providers to accompany transfers of Crypto-assets with information on the originator and the beneficiary to the local tax authorities.
Current state of play
Transfer of Funds Regulation (TFR) will apply from 30 December 2024.
How Can Grant Thornton Help?
Given the wide range of tax policy initiatives proposed and the complexity levels involved, we recommend that entities begin assessing their current corporate structures to understand the potential consequences of any relevant EU initiative that may affect their business.
Grant Thornton’s international tax specialists can collaborate with you to review your group’s current EU structures. We can provide you with the latest information and insights, and we can offer clear guidance on how to best address newly adopted and proposed EU legislation.
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