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 the 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 this has been finalised.

Current state of play

The OECD published a revised schedule for implementation on 11 July 2022, which delayed the planned reforms by 12 months to 2024. In July 2022, the OECD also produced a public consultation on ‘Amount A rules’ and held a public consultation meeting in September 2022 in Paris. After the consultation on draft Amount A rules, the OECD published another public consultation document on draft administration rules and tax certainty aspects of Amount A and issues related to Amount A. That consultation closed on 11 November 2022.

Failure to achieve progress in Pillar One negotiations at the OECD/Inclusive Framework level by the end of 2023 could lead to the adoption of an EU digital levy or a similar measure. The EU Council mandated to the EU Commission in November 2022 to submit a legislative proposal in case Pillar One fails. 

Pillar Two

Overview

The goal of Pillar Two is to ensure that multinational enterprises (MNEs) with global revenues over EUR 750 million pay at least a minimum level of corporation tax – at an effective rate of 15% – on the income arising in each of the jurisdictions in which they operate. For the collection of these taxes, jurisdictions may apply domestic minimum top-up taxes if they comply with GloBE rules .i.e. qualifying domestic minimum top-up taxes (QDMTTs).

On 22 December 2021 the European Commission issued a proposal for a Council directive to ensure a global minimum level of taxation for MNEs in the EU broadly reflecting the OECD GloBE rules. This was adopted on 2 December 2022.

EU Member States have until 31 December 2023 to transpose the EU’s Minimum Tax Directive into domestic law. The Pillar Two rules are expected to be in force across the EU by 2024. Businesses need to carry out risk assessments to determine if their business fall within the scope of the Directive. If this is the case, businesses need to assess the potential impact that this proposal will have on their business operations.

Current State of Play

Across the EU, Pillar Two legislation is still being drafted and debated by many Member States in various forms including draft legislation, feedback statements and proposals in circulation. Each jurisdiction will need to implement the EU’s 2022 Directive into domestic law, while also being aware of the continuing guidance being issued at OECD level around reporting frameworks and other key areas. Some EU jurisdictions are drafting their own legislation aligned with the above, while others are considering implementing legislation that refers back to the Directive and OECD guidance for adoption. It will be challenging for multinationals in scope given the short timeframe between legislation being drafted and being effective given the lack of lead time. However, the delayed reporting on the initial 2024 period to June 2026 is a welcome addition. 

Public Country-by-Country Reporting (CbCR)

Overview

Multinationals in which consolidated group income, or the income of the stand-alone company, over two consecutive financial years exceeds €750 million must now disclose how much Corporate Income Tax (CIT) they pay in each EU country.

In addition, these multinationals are obliged to disclose the corporate tax they pay in countries that:

• appear on the EU list of non-cooperative jurisdictions for tax purposes (the "EU black list"), or
• have been included for two consecutive years on the list of jurisdictions that do not yet meet all international tax standards but intend to implement reforms (the "EU grey list").

Current state of play

This EU Directive was published on 21 December 2021 and was required to be implemented by 22 June 2023 by EU Member States, applying to financial years beginning on or after 22 June 2024. Whilst large multinational groups have been required to file CbCR reports with tax authorities since 2016, the new Directive requires certain information to be made publicly available. Companies will have to disclose the information separately for each EU Member State, as well as non-cooperative jurisdictions and countries that have been included for two consecutive years on the EU “grey list”.

Unshell Directive (ATAD 3)

Overview

ATAD3 aims to combat 'shell companies' and includes a so-called 'filtering' system for EU companies, which will have to pass three gateways. These gateways relate to income, staff and premises. The aim of this proposal is 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 will be presumed to be 'shell companies'. Consequently, if the presumed shell is unable to rebut this presumption or cannot obtain an exemption, they will lose any certain tax advantages granted through bilateral tax treaties or EU directives. 

Current state of play

The European Parliament approved the draft version of ATAD3, with proposed amendments, on 17 January 2023. The effective date of implementation for the directive is currently 1 January 2025, with a two-year look-back period.

Currently, discussions have been ongoing in the Council of the European Union under the Swedish presidency, but it is unclear given the change of EU presidency to Spain how this will affect the timeline for adoption of this Directive. However, tackling tax evasion has been referenced by the Spanish President in his June address as being the focus of the Social Pillar and ‘Need to adopt the Unshell Directive’ is now on the draft agenda for the Plenary Session of European Parliament for 12th July 2023. It appears that following consultation there may be a redrafting of some elements but the extent of this is still unclear.

The two-year look back period is a cause for concern for companies because if the legislation is passed, relevant entities will be in scope from 1 January 2023. This element of retrospective legislation can cause concern and uncertainty for businesses. It remains to be seen if the two-year look back element will be retained in the final version of Unshell or if the effective date post-implementation could be delayed beyond 2025.

Business in Europe: Framework for Income Taxation (BEFIT)

Overview

BEFIT aims to introduce a common corporate income tax system across the EU. BEFIT includes multinational groups with consolidated global revenues exceeding EUR 750 million. The allocation of profits to different EU countries would be formula driven. The BEFIT proposal  recommends a set of allocation factors: tangible assets (excluding financial assets), labor (potentially split between personnel and salaries) and sales by destination, to apportion profits between tax jurisdictions. The draft proposal also mentions intangible assets as a fourth allocation factor.

BEFIT builds on earlier failed proposals of the Commission: the Common (Consolidated) Corporate Tax Base (CCCTB) in 2011 and Common Corporate Tax Base (CCTB) in 2016. 

Current state of play

The feedback and consultation period was open until 26 January 2023 and a summary report was published on 8 May 2023. The adoption of the proposal as a Directive by the European Commission is expected in the third quarter of 2023.

BEFIT is on the European Commission agenda for discussion on 12 September, but the direction of travel is still somewhat unclear. It is possible it will be compulsory for large businesses with a formula-based apportionment for profits. It remains to be seen how this will align with Pillar One. Whilst SMEs were not originally included in the proposal, they will now be included with a possible opt out. There are concerns around the interaction with BEFIT and Transfer Pricing. Given the timing of BEFIT being considered by the EU and the pressure to get Pillar Two into effect by 2024, one wonders how much time Member States can focus on this proposal in 2023.

Debt Equity Bias Reduction Allowance (DEBRA)

Overview

The proposal is to introduce a tax allowance on increases in company equity and a limitation of 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 that 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

This proposal is still in draft version, and the public consultation ended on 29 July 2022. This proposal is currently on hold until there is more clarity about the interaction with other corporate tax legislative initiatives. For DEBRA to move forward, unanimity from all 27 EU Member States is required. It is unclear if DEBRA will fall away or return to the agenda when some of the other impending initiatives have been adopted and implemented.

Faster and Safer Tax Excess Refund for Withholding Taxes (FASTER)

Overview

The aim of FASTER is to introduce a common EU-wide system for withholding tax (WHT) on dividend and interest payments and to increase efficiency of WHT procedures. It will also assist tax authorities in identifying and targeting the abuse of rights under tax treaties.

A public consultation was launched in April 2022, and in August 2022 a summary report on the consultation was shared. Issues outlined in the report include that the current withholding tax refund procedures hinder cross-border investment in the EU as the procedures are lengthy, costly and not user friendly. Businesses highlighted that the current system results in delays in receiving excessive refunds and high compliance costs associated with the refund process.

Current state of play

On Monday 19 June 2023, the European Commission unexpectedly published FASTER. The proposed new rules are up for public consultation. The deadline for comments is in August, but it  may be extended.  The main proposals are:

• a common EU digital tax residence certificate to be issued within one working day after the submission of a request;
• a choice for Member States between  the relief at source or quick refund procedures (or a combination of the two); and
• national registers of EU certified financial intermediaries that will be able to facilitate the fast track relief processes and will be subject to a standardised reporting obligation. The register will be open to non-EU intermediaries as well.

Once adopted by Member States, the draft directive should come into force on 1 January 2027.

The draft directive aims to make reclaim processes speedier for investors by avoiding the need to issue multiple certificates of residence where an investor has a diversified EU portfolio. It will also be of assistance to tax authorities as they will have full visibility on the financial transactions of investors, thereby assisting in preventing withholding tax abuse. The standardisation of reporting obligations and refunds and automation of processes intends to reduce any administrative burden on financial intermediaries as well as making procedures more secure.

Securing the Activity Framework of Enablers (SAFE)

Overview

The European Commission is proposing a new measure with regard to intermediaries that provide tax advisory services (the 'enablers') on complex structures that could lead to tax evasion or an aggressive tax structure.

The European Commission is considering a range of options in this respect, including:

• a requirement for all enablers to carry out dedicated due diligence procedures;
• a prohibition on facilitating tax evasion and aggressive tax planning combined with due diligence procedures and a requirement for enablers to register in the European Union; and
• a code of conduct for all enablers (like tax advisors). 

A public consultation was launched in July 2022 in the form of a survey questionnaire, and the commission published a summary report on the consultation in January 2023.

Current state of play

The adoption of the legislative proposal at the European Commission level was planned for 7 June 2023. However, it is not on the current European Commission agenda, so it is unclear if it will still be published before the end of 2023.

It is now thought that the approach is likely to be a “light touch” with self-registration at local Member State level. The definition of “Aggressive Tax Planning” is eagerly anticipated to see what form it takes. There are also concerns about who will police the register and what forms sanctions may take. There have also been some suggestions that rather than introducing a new system to facilitate SAFE that the existing DAC6 structures could be expanded and leveraged as an alternative.

Businesses providing any element of tax advice are likely to be within the scope of SAFE, not just accountancy and legal firms. 

Directive on Cross Border Tax Arrangements (DAC6)

Overview

DAC6 obliges EU taxpayers and intermediaries to disclose certain cross-border arrangements to local tax authorities.

A disclosure obligation may arise if one or more elements of a cross-border arrangement meet certain criteria (hallmarks). Certain hallmarks are subject to meeting a main benefit test (“MBT’’).

The MBT entails that the main benefit or one of the main benefits, which a taxpayer may reasonably expect to derive from an arrangement, is to obtain a tax advantage.

Current state of play

EU Member States have transposed DAC6 into domestic laws – with most of the EU countries applying DAC6 on arrangements from 1 July 2020 onwards. There is currently a review being carried out of the DAC system at EU level with DAC6 also in focus as part of this review. 

Reporting Obligation for digital Platforms (DAC7)

Overview

DAC7 consists of a reporting obligation for platform operators. Platform operators will have to report to the local tax authorities the amount of income earned through the platform.

The income in question is derived from the sale of goods and services and the rental of property through the platform. 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

From 1 January 2023, platform operators in scope of DAC7 will be required to maintain and report information about certain sellers on their digital platform to the local tax authority of an EU Member State annually.

It is anticipated that at some point there will be a review to understand how well DAC7 is achieving its aims. DAC7 does not just apply to large selling platforms but can apply to any organisation offering a platform to those offering products or services and those availing of them. Businesses will need to consider carefully if any of their activities are in scope of DAC7. 

Directive on Exchange of Information for Crypto-Assets and E-money (DAC8)

Overview

DAC8 aims to implement 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 aims to introduce penalties and compliance measures for the various reporting obligations under the DAC framework.

Current state of play

The proposed directive is subject to a special legislative procedure, requiring unanimous support in the Council, following consultation of the European Parliament and the European Economic and Social Committee. The Council reached an agreement on draft amendments to DAC8 on 16 May 2023. ee. . Following the formal adoption, Member States will have until 31 December 2025 to transpose the main rules into national law, with provisions applying as of 1 January 2026, with some exceptions.

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.

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.