Key takeaways for business from the 2023 EU Tax Symposium

January 2024 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

January 2024 Issue

The 2023 EU Tax Symposium, co-hosted by the European Commission (EC) and the European Parliament (EP), focused on the ‘Future of Taxation in the EU’. Gerassimos Thomas, the director-general of taxation and customs union at the EC, opened the symposium by saying the aim was to “discuss today how to deal with the challenges of tomorrow”. Speakers from the EC, the EP, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), national tax administrations, business, academics and other stakeholders shared their insights on where the EU tax mix should be by 2050.

Addressing global megatrends

Mr Thomas highlighted the need to look longer term, beyond dealing with the legacy of recent crises, and adjust the tax system to deal with global mega trends shaping the economy and society, such as globalisation, digitalisation and sustainability. These pose both challenges and opportunities for taxation, as they impact consumption patterns and the way people work and do business, which, in turn, impact tax revenues and budgetary requirements. A consistent message that emerged from the symposium was a need to move away from an overreliance on labour taxation, which currently accounts for the majority of EU tax revenues, particularly given demographic changes such as an ageing population. However, views were mixed as to where the focus should shift; should the tax base look instead to corporates, wealth, pollution or something else?

Where next for the business taxation framework?

Pascal Saint-Amans, formerly of the OECD, Fabrizia Lapecorella of the OECD and Vitor Gaspar of the IMF applauded the achievement of the OECD/G20 Inclusive Framework in reaching multilateral agreement on substantive tax rules in the form of the two pillars of global tax reform in relation to multinational enterprises. However, there were still those, such as Jayati Ghosh of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), who felt the reforms did not go far enough. Georg Geberth of BusinessEurope noted that despite business being supportive of the global minimum tax and hoping this would restore trust in the tax system, the political rhetoric has not changed and still revolves around companies not paying enough taxes.

The EC’s Business in Europe: Framework for Income Taxation (BEFIT) proposal for a common EU corporate tax base builds on the OECD’s two pillars. There was recognition that this proposal to harmonise tax rules could potentially reduce administrative burdens for businesses. However, there were concerns about the details of the proposals, such as their non-alignment with the rules under the two pillars, plus the member state discretion contained within BEFIT that threatens to undermine aspirations of simplification. Mr Geberth noted that this could result in “one stop more” instead of the desired “one stop shop”.

More optimism was shown in relation to the EC’s other recent proposal for harmonisation. The Head Office Tax (HOT) System for small and medium-sized enterprises (SMEs) aims to ease compliance for smaller businesses that operate through permanent establishments across EU member states. Ben Butters of Eurochambres noted that there had been very positive feedback from business on these proposals which tackle a “very practical and acute issue” that currently discourages smaller businesses from doing business across borders. Various speakers spoke of the importance of helping SMEs, which make up the majority of EU businesses, to cut through complexity and administrative burdens, to grow and create more jobs.

Keeping the EU competitive

Fredrik Persson, president of BusinessEurope, voiced concerns that Europe was falling behind the US and Asia in terms of competitiveness. He mentioned high levels of EU regulation pushing production out of the EU, while the US Inflation Reduction Act pulls it toward the US. Kerstin Jorna of the EC noted that the US and Chinese models supported companies to react and adapt to new challenges and asked how the EU could use its scale to do the same.

Gilles Boyer, member of the EP, noted that the complexity that arises from having a patchwork of 27 systems creates loopholes for tax abuse, as well as uncertainty and instability for honest companies. However, he queried whether this could be tackled without member states giving up the requirement of unanimity in the context of tax matters. And this was a recurring theme throughout the symposium, with a number of speakers expressing their frustration with the unanimity requirement. Paulo Gentiloni of the EC noted that this was “too often holding us back”. In his view “moving to a qualified majority in the Council must be a priority for the future”.

One of the areas where unanimity is causing issues for the EU is in relation to the ‘Unshell’ proposal, an initiative to address the misuse of shell companies for improper tax purposes. There is widespread support for the concept, but member states have been unable to reach agreement on the details. Mr Gentiloni noted that “we need Unshell to become unstuck”. But perhaps this demonstrates a wider issue within the EU, namely political pressure to be seen to be doing more to “clamp down on tax abuse and evasion”. Could the aims of Unshell be better served by making better use of existing anti-abuse rules and the huge amount of information already being collected under steadily mounting reporting obligations? Rather than continually adding to the catalogue of tax measures, should the EU instead turn its focus to rationalising and maximising the use of its existing rules?

A greater role for behavioural taxes?

The symposium considered behavioural taxes that aim to incentivise or nudge behaviour, in particular those that help advance social or environmental objectives, such as reducing smoking or pollution. One of the challenges with such taxes is that if the aim is to change behaviour, then, by definition, if the measure is successful, little or no revenue will be raised. This makes it difficult to rely on such taxes as a long-term source of tax revenues. Mr Thomas stressed that even though individual taxes in this area may well be volatile, the EC expects behavioural taxes as a group to grow as part of the total tax mix. Manal Corwin of the OECD emphasised the need for constant evaluation. Does the measure have a disproportionate distributional impact on low-income households or, in an international context, on developing nations? How elastic is the market; are there viable alternatives? Do the policies need to be adapted over time? Crucially, how does tax interact with other tools such as regulation, education and communication? In some cases, changing attitudes may be more effective than new taxes. For instance, when certain behaviours carry reputational risk, Ms Corwin noted that transparency can drive behaviour more impactfully than taxes.

The future of VAT

Value added tax (VAT) is a major source of revenue in the EU, but remains complex and burdensome for businesses and consumers. Recent EU initiatives to modernise and simplify the VAT system, such as the e-commerce VAT package and the VAT in the Digital Age (ViDA) project were warmly welcomed at the symposium. Looking ahead, speakers highlighted the potential for new technology, such as artificial intelligence (AI) and deep learning, to improve the efficiency of the VAT system and to help combat fraud. Ferenc Vagujhelyi of the Hungarian tax administration noted that the VAT Directive was drafted in 2006 when many of the current ways of delivering goods and services, and paying for them, did not exist. Mario Nava of the EC noted that new ways of doing business are blurring borders, with younger generations banking online and becoming indifferent to where the bank is based geographically. Is the EU VAT system flexible enough to adapt? Helena Alves Borges of the Portuguese tax authority advocated a collaborative approach with a focus on business and citizens achieving benefits from compliance. If businesses use technology to organise and share high-quality information then, in her view, tax administrations should be giving back by making better use of the information collected not just to control VAT, but to reduce audits and deliver certainty.

Wealth taxes continue to be discussed but remain controversial

A panel discussed the role that wealth taxes should take in the tax mix for 2050, with some advocating for their inclusion to help tackle inequality and to generate revenue, while others were concerned about their potential impact on growth and innovation. Helen Miller of the Institute for Fiscal Studies noted that wealth taxes do not raise a huge amount of revenue and need to be carefully designed to ensure they do not discourage investment. The tax base should be kept simple to minimise opportunities for avoidance, but the appropriate design of such a tax depends greatly on who is in scope. Mr Thomas concluded the symposium by noting that the EU’s wealthiest 1 percent hold a quarter of the union’s wealth, so we can expect this to be an area of focus for the EC in the years ahead.

International collaboration

A theme evident throughout the symposium was the potential for the EU to use its scale as a competitive advantage, for instance to embrace new ways of working, making the tax system easier to navigate for individuals and businesses who want to work cross-border. And coordination does not necessarily mean introducing new taxes into the tax mix. Matthias Cormann of the OECD noted that future improvements to the tax system may involve simplification and removing rules that are redundant. Collaboration was seen as the key to improving compliance, growing tax revenues, increasing trust and preventing avoidance across almost all areas of taxation. It is perhaps unsurprising that as the challenges society faces become more global in nature, the solutions may also require a more international approach.

Brin Rajathurai is knowledge counsel Europe at Allen & Overy LLP. She can be contacted on +44 (0)20 3088 3752 or by email: brin.rajathurai@allenovery.com.

Brin Rajathurai

Allen & Overy LLP