In June 2024, the EU Council approved a report to the European Council on tax issues. The report provides an overview of the progress achieved in the Council during the term of the Belgian Presidency, held from 1 January to June 2024, as well as an overview of the state of play of the most important items under negotiation in the area of taxation.
Hungary has now been holding the Presidency of the Council of the European Union since 1 July (and until 31 December 2024). For its presidency, the Hungarian Presidency published a programme setting out the priorities and directions during the term of its rotating presidency. According to this document, the objective of the Presidency for its term in the area of taxation is to “effectively advance the discussions on the taxation files and international issues currently on the agenda, achieving progress which responds to the needs posed by new business models, international cooperation, and fiscal revenues”. The high priorities in the area of taxation for the Presidency are the fight against tax evasion, ensuring legal certainty for taxpayers and supporting international engagement of the European Union.
The Council also reaffirmed its priorities focusing on enhancing the European Union’s competitiveness.
We explain hereafter the progress of the various tax initiatives at EU level during the past few months, from the ones that are the most likely to be adopted in the short term to the ones that have, currently, the least chances to succeed in the near future.
FASTER Proposal
On 19 June 2023, the European Commission published the proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes, the “FASTER Proposal”. With this new initiative, the Commission aims to tackle the current particularly burdensome withholding tax (“WHT”). In our previous Insights, we explained the chances of having this directive proposal formally adopted soon were rather high.
For a presentation of the initial FASTER Proposal, please read our ATOZ Alert: “European Commission releases FASTER Directive Proposal”.
According to the report, the Belgian Presidency pursued the work on key files, and more specifically, the Council reached a general approach on the Council Directive on Faster and Safer Relief of Excess Withholding Taxes.
On 14 May 2024, the EU Council reached an agreement (general approach) on the compromise text providing for new rules for WHT procedures which presents substantial differences compared to the original text of the proposal published in June 2023.
The European Parliament was consulted and delivered its opinion on the initial text of the Proposal on 28 February 2024. However, due to the changes the Council made to the Proposal during the negotiations, the European Parliament will be consulted again on the agreed text. Following this re-consultation with the European Parliament, the Proposal will need to be formally adopted by the Council (unanimity required) before being published in the EU’s Official Journal and entering into force. In this respect, the Council is currently expected to adopt the Proposal in early 2025. Member states will then have to transpose the directive into national legislation by 31 December 2028, but the national rules will, in principle, become applicable only as from 1 January 2030.
To read more about the general approach agreed upon by the Council, please read our ATOZ alert: “The Council reached an agreement (general approach) on new rules for withholding tax procedures (FASTER)”.
Directive 2011/16/EU on administrative cooperation
On 7 May 2024, the European Commission launched a public consultation on Directive 2011/16/EU, Directive on Administrative Cooperation (“DAC”). As previously announced by the Commission, this consultation aims at assessing the effectiveness, efficiency and continued relevance of DAC, as well as its coherence with other policy initiatives and priorities and EU added value. The consultation ended on 30 July 2024 and focused on the functioning of DAC in 2018-2022. Therefore, DAC7, applicable to digital platforms operators, and DAC8, applicable to crypto-asset service providers, are not covered. The evaluation report of the Commission has no yet been published.
In the meantime, on 28 October 2024, the EU Commission put forward a new directive proposal, called the “DAC9 Proposal”, amending the DAC for the ninth time with the aim of making it easier for companies to fulfil their filing obligations under the 2022 Pillar Two Directive which aims to ensure a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU.
For once, the DAC is not amended by the addition of new reporting obligations. The DAC9 Proposal rather supports the practical implementation of the reporting obligations under the Pillar Two Directive. This proposal is consistent with and contributes to the Commission’s efforts to rationalise and simplify reporting obligations, as well as to reduce the administrative burden for businesses, which is set out as a priority in the Commission work programme 2024.
The DAC9 Proposal introduces a standard form, in line with the one developed by the Inclusive Framework of the OECD, which multinational enterprise groups and large- scale domestic groups will have to use to report certain tax-related information in a centralised manner and sets up a system for tax authorities to exchange information with each other.
However, this new proposal raises various practical questions as it seems it will not prevent entities from filing local Pillar Two tax returns for their own assessment. In addition, the proposal seems to ignore the potential disputes between Member States or between taxpayers and Member States it could create, without addressing them.
To find out more about the DAC9 Proposal, please read our ATOZ Alert: “EU Commission adopted a DAC9 proposal to ease filing obligations under the Pillar Two directive”.
Transfer Pricing directive proposal
On 12 September 2023, the European Commission released the Transfer Pricing (“TP”) proposal as part of the package that includes the directive proposal on BEFIT. The TP proposal aims at integrating key TP principles into EU law with the objective of putting forward common approaches for Member States. If adopted, the new rules would apply as from 1 January 2026.
So far, the discussions in the “Working Party on Tax Questions” have shown that the TP proposal cannot be supported by Member States in its current form. Member States raised serious concerns about the risk of possibly creatingadoublestandardinthefieldofTP,aswellasabout the loss of flexibility that they currently have in negotiating and applying the OECD TP Guidelines. Therefore, further work is required to prepare the basis for possible headway.
A large number of Member States have, however, indicated that it could be useful to establish an “EU Transfer Pricing Platform” - a new “soft law” forum, such as (or to a certain degree similar to) the Joint Transfer Pricing Forum which ceased to exist in 2019. In this respect, Member States are reportedly discussing three options proposed by the Hungarian Presidency for establishing this new TP forum. During their discussions, Member States will have to decide on the exact mandate of such platform, its decision-making procedures and how to ensure the respect of its decisions.
The three options currently proposed by the Hungarian Presidency are not publicly available at this stage. However, the first option discussed would allegedly be like the Platform for Tax Good Governance or other Commission’s expert groups. The second option would include a mix of discussions with stakeholders and discussions in Council format. The last option would be shaped on the intergovernmental Code of Conduct on business taxation.
If ever established, this forum is likely to replace the TP proposal.
To read more about the implications of the TP proposal, read notably our ATOZ Alert: “European Commission releases Directive Proposal on Transfer Pricing: A trojan horse?”
Pillar One
On 18 December 2023, the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (the “Inclusive Framework”) issued a statement calling for a finalisation of the text of the Pillar One multilateral convention (“MLC”) by the end of March 2024 with a view to holding a signing ceremony by the end of June 2024.
On 15 February 2024, in light of the revised timeline for adoption and signature of the Pillar one MLC, the USA, Austria, France, Italy, Spain and the UK decided to extend the political agreement set forth in the joint statement issued on 21 October 2021 regarding their agreement that (as partofPillarOne)theywillwithdrawallunilateralmeasures concerning the imposition of digital services taxes (“DST”s) once Pillar One takes effect from 23 December 2023 until 30 June 2024. However, the OECD has missed the self- imposed 30 June 2024 deadline for the finalisation of the text of Pillar One and its subsequent opening for signature.
As a result, some countries may implement DSTs. Several countries, including for example the UK, the USA, France, Spain and Italy, already have unilateral DSTs and had committed to move away from them as part of the transition to an international solution. They might definitely enact their DSTs. Canada has already enacted their DST as of 28 June 2024 with retroactive effect to 1 January 2022.
As of today, the European Commission has not communicated on the consequence of the potential cancellation or postponement of the Pillar One MLC signing ceremony. We can, however, expect that in the first scenario, the Commission will most likely put its draft DST proposal back on the table.
Unshell proposal
On 22 December 2021, the European Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU, the “Unshell Proposal”. As of today, EU Member States have not managed to reach an agreement on various technical aspects of the proposal.
On 11 June 2024, the European Commission reportedly discussed a new approach for its proposal on the misuse of the shell entities with Member States during a meeting of the High-Level working party on tax questions.
The new approach would allegedly no longer contain an economic substance test and would limit reporting obligations to entities that present a high risk of being used in abusive tax schemes. Entities would have to self- assess whether they are considered as high-risk based on hallmarks. Hallmarks would relate, for example, to the management or the tax residency of the entity. A high-risk entity would then have to report the hallmarks it met and information about its shareholders and beneficial owners to the authorities.
The new approach would also reportedly no longer include common tax consequences, but it would create an obligation for Member States to use the exchanged information and take administrative measures, such as tax audits, to identify possible abuse schemes and apply their national anti-abuse rules accordingly.
Member States have seemingly agreed to relaunch technical talks based on this new approach. But some Member States having issues with the proposal are nevertheless willing to see a redrafted text before. At this stage, there is no official information published neither about the new approach nor about a potential draft text compromise available.
To read a presentation of the Unshell Proposal, please read the article “Using a Sledgehammer to Crack a Nut: The European Commission’s Draft Directive to Tackle Shell Entities”.
BEFIT Proposal
On 12 September 2023, the Commission tabled a proposal for a Council Directive on Business in Europe: Framework for Income Taxation (“BEFIT”), the core objective of which is to develop a common corporate tax framework for large multinationals in the EU.
Given the nature of the concerns raised, with some Member States also calling for a political discussion, it seems that at this stage, discussions relate more to the policy choices that would need to be made with regard to this Commission proposal rather than on the technical analysis of the proposal. Against this background, it is clear that further reflection and technical work are necessary, in order to determine the next steps in these negotiations and that the BEFIT proposal is far from ready to be approved by the Council.
To read more about the implications of the BEFIT proposal, read notably our ATOZ Alert: “Directive Proposal on BEFIT: A real necessity or just another layer of useless complexity?” or “A Critical Analysis of the European Commission’s BEFIT Proposal”.
Implications
Over the Hungarian presidency, most of the ongoing initiatives of the European Commission in corporate tax matters did not move forward at all and a single new directive proposal implementing a derogation allowed by the Pillar Two Directive was tabled. The fact that the pace of the adoption of new tax regulations at EU level is slowing down compared to the previous years is welcomed, especially in a time where EU businesses are facing important economic and competitiveness challenges due to the current global economic environment.
