How to boost EU competitiveness: a summary of the tax proposals in Draghi’s report
December 2024 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
December 2024 Issue
On 9 September 2024, the European Commission (EC) published a strategic report on the future of the single market and Europe’s competitiveness: ‘The future of European competitiveness – A competitive strategy for Europe’.
The report was prepared by Mario Draghi, former president of the European Central Bank, at the request of the EC, with the aim of guiding the next mandate of Ursula von der Leyen, president of the EC.
The report aims to provide a comprehensive and ambitious strategy to enhance the competitiveness of the European Union (EU) in the global economy (as the EU lags behind the US and China), in light of the challenges and opportunities posed by the green and digital transitions and the changing geopolitical landscape.
The report identifies key sectors and policies that are critical for the EU’s future prosperity and proposes concrete actions and reforms to boost innovation, investment, productivity and sustainability across the EU.
Some of the proposed actions are specifically aimed at certain sectors (with particular emphasis on the energy sector), while others are part of horizontal policies applicable to all productive sectors in the EU.
This article will only focus on the main tax proposals set out in the report.
Tax proposals for strategic sectors
The report highlights the need to adopt certain sectoral policies in strategic sectors such as energy, critical raw materials, digitalisation and advanced technologies, clean technologies, automotive, pharmaceuticals and transport, among others. Some of the measures proposed in these sectoral policies are of a fiscal nature.
Energy sector: reducing taxes and harmonising policies. Energy taxation plays a crucial role in determining the price of energy, as it has a direct impact on the retail price and represents a substantial part of the final cost paid by consumers. In this respect, it has been observed that energy taxes in the EU are higher than in other regions (such as the US where there are no federal taxes on electricity or natural gas consumption) and are not unified, with large disparities between member states. The current situation is that industrial retail prices for electricity in the EU are more than two times higher than those in the US and in China.
Therefore, the proposed tax measures in the energy sector aim to reduce the cost of energy for end consumers, especially for industries exposed to international competition. Thus, the report proposes a reduction of energy taxes as well as a common maximum level of surcharges (including various taxes, levies and network charges) across the EU.
Harmonisation of energy taxation is also proposed. It is recommended that price exemptions at the EU level be harmonised to ensure a level playing field among member states and to avoid distortions in the single market. National interventions in energy markets should be limited. During the energy crisis, all member states introduced national measures to support their citizens and the economy and mitigate supply security risks. The EC should develop state aid guidelines that harmonise the type of support allowed through state-aid, so it does not distort the single market.
Critical raw materials sector: supporting the value chain with financial solutions. The EU is facing several challenges regarding the supply and demand of critical raw materials, such as lithium, cobalt, nickel and rare earths, among others, which are essential for the green and digital transitions, as well as for strategic sectors. Some of these challenges are: (i) the rapid growth of global demand for critical minerals, which is putting pressure on the supply-demand balance and the availability and quality of products; (ii) the high concentration and limited diversification of the supply chain of critical raw materials, which makes the EU highly dependent on a few countries, notably China, and vulnerable to supply disruptions, export restrictions, price volatility and geopolitical risks; (iii) the lack of a comprehensive and coordinated strategy at the EU level to secure competitive and stable access to critical raw materials; and (iv) the low level of investment and financing in the critical raw materials sector in the EU, compared to other world regions.
In response to this situation, it is proposed to develop financial solutions, such as venture capital and syndication or blended instruments, to support the critical raw materials value chain. These financial solutions could be fostered through targeted tax incentives that could increase the attractiveness of public investment in critical raw materials.
Digitalisation and advanced technologies sector: boosting the semiconductor industry. The EU’s semiconductor industry is investing below the scale needed to sustain expected demand. Both investment and financing for semiconductor production remains below that of the US. It is therefore proposed to launch a new ‘EU Semiconductor Strategy’, including research and development tax incentives for fabless companies active in chips design.
Other sectors: temporary fiscal measures and harmonised tax policies. The report proposes fiscal measures for other sectors, such as the automotive sector (for which it proposes a temporary reduction in tax rates to support the transition to electric vehicles and low-emission mobility), the pharmaceutical sector (for which it recommends harmonised fiscal policies at EU level to support research and development) and transport (for which it recommends tax reductions in exchange for developing digitalisation to enhance efficiency, and tax incentives for shipowners buying EU-manufactured ships).
Tax proposals for horizontal policies
The EC report also contains a number of tax proposals, outlined below, that are part of horizontal policies that affect all productive sectors in the EU.
Alternatives to the principle of unanimity. The report stresses the urgency of gaining competitiveness at EU level, which must necessarily be accompanied by an accelerated legislative procedure. For this reason, it proposes an enhanced cooperation procedure, rather than unanimity (where this is not possible), in tax matters. This would allow a group of at least nine member states to implement common tax measures, subject to certain conditions and safeguards.
More incentives for business angels and seed capital investors. To foster a more favourable environment for start-ups, the report proposes to defer taxation of capital gains from the sale of their shares, provided they are reinvested in innovative early-stage companies. This would encourage more private investment in the EU’s entrepreneurial ecosystem.
Creation of a new type of company. The report proposes the creation of a new type of company, the ‘Innovative European Company’, which would benefit from harmonised regulation at EU level in the field of taxation, among others. This would reduce the barriers and costs for innovative companies to operate across the EU and access the single market.
Closing the skills gap and attracting talent. The report acknowledges that new skills are required due to the reorientation of the economy caused by the green and digital transition. Adult learning has become very important in this respect. The report proposes granting tax benefits to companies that allocate resources to training. To attract talent from outside the EU, tax incentives for students, graduates and researchers could also be considered. Moreover, the report suggests removing barriers to accessing the labour market (especially for women) by providing financial assistance to families to cover childcare costs (e.g., through tax credits).
Capital market integration. Europe is faced with an unprecedented need to raise investment at both massive scale and rapid speed. In its current state, the European financial system is unlikely to succeed in meeting these investment needs. The key objectives for the EU are, therefore, to reduce fragmentation of the capital market, reduce dependence on bank financing and make more effective use of the EU budget. These high-level objectives are translated into concrete tax proposals set out in the report, which aim to create a more competitive, innovative and sustainable EU economy.
The capital market in the EU is fragmented: there are differences in the tax treatment of different securities and different sets of investors. There has recently been some progress toward capital market integration, in particular in the introduction of a common withholding tax system, through the FASTER Directive, which is important for facilitating cross-border investments. This system will allow faster and easier reclaiming of excess withholding taxes and tackle certain abusive schemes.
The report also proposes to reduce the dependence on bank financing in Europe by accelerating the development of the Capital Markets Union, as well as increasing flows into capital markets by encouraging increased enrolment in private pension plans. The EU must better channel households’ savings to productive investments. The easiest and most efficient way to do so is via long-term saving products (such as pensions). The report suggests that a fixed share of pension contribution should be tax-exempt to make it financially attractive.
Possible reform of the EU budget. Required investments in Europe are not constrained only by capital market fragmentation, but also by the limitations of the EU budget and by the planned repayment of NextGenerationEU (NGEU) bonds (i.e., the loans the EU took out to finance its recovery plan after the pandemic).
The EU’s annual budget is small. The political agreement reached in 2020 envisaged that the repayment of both interest and principal on the grant component of NGEU borrowing would be financed by new own resources. The EC tabled a proposal to this end in June 2023. However, in the absence of a decision on new own resources, effective spending power at the EU level would be mechanically reduced by interest and principal payments. Member states would have to increase their contributions to maintain current levels of spending or spending cuts would have to be applied. However, any possible increase in resources or delay in repayment should be accompanied by the reform of the EU budget.
Reduction of the tax compliance burden. European companies bear an excessive regulatory and administrative burden (including tax compliance). The report points out that digital tools and especially artificial intelligence (AI) could reduce the compliance burden by simplifying and automating tax procedures and reporting.
Reduction of taxation on low and medium wages. In response to an ageing society in which the EU counts fewer and fewer active working people, the report proposes a coordinated reduction of taxes on low and medium wages at EU level.
Final remarks
Mr Draghi’s report reveals, in open and clear terms, the current scenario in which the EU finds itself in terms of productivity. The picture is devastating: European productivity is low and growth is weak. In view of this situation, rapid actions and changes in current EU policies are proposed.
In light of the report, it can be concluded that the proposed tax measures consist mainly of applying the US model of providing tax incentives to encourage desirable actions and investments, and of harmonising member states’ tax policies.
The way to be followed in tax matters seems clear: after decades of fighting for a more level playing field and enhancing tax cooperation among EU member states, the Draghi report bets on using taxation as another tool to enhance the competitiveness of EU member states against third countries.
Eduardo Gracia is tax practice group head and Lorena Viñas is a senior expertise lawyer at Ashurst. Mr Gracia can be contacted on +34 91 364 9854 or by email: eduardo.gracia@ashurst.com. Ms Viñas can be contacted on +34 91 364 9417 or by email: lorena.vinas@ashurst.com.
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Eduardo Gracia and Lorena Viñas
Ashurst