Weekly Tax News – 10 January 2022

France kicks off its Presidency of the EU Council

France took over the Presidency of the EU Council on the 1st of January for six months and published its programme (in English) as well as a provisional calendar (in French) of its meetings. The programme states that France will “advance” work on the implementing Directive for Pillar II, with a view to implementation from 1 January 2023. According to the provisional calendar, France intends to have a first policy debate on this file during the Ecofin Council meeting on 18 January and to make a possible state of play on 15 March. France also wants to continue the work on the revision of the Energy Taxation Directive, with a possible policy debate at the Ecofin Council of June, as well as on the Carbon Border Adjustment Mechanism (CBAM), with a possible agreement already in March. The provisional calendar also mentions a possible adoption of the revised EU Code of Conduct on Business Taxation as well as a possible agreement on the whole AML package. The French Presidency will organize a ministerial conference on AML on 21 January.

EU launches the implementation process of the OECD Pillar II

Two days after the publication of the OECD model rules, the European Commission unveiled on 22 December 2021 a proposal for a Directive implementing the minimum 15% effective tax rate (so-called Pillar II) within the EU. The proposal stays close to the OECD tax deal of 8 October and the OECD model rules. One of the main differences between the EU directive and the OECD agreement is that the minimum top-up tax will also apply to purely domestic companies that pass the threshold of €750 million turnover, in order to be in conformity with EU law. The proposal of Directive also allows EU Member States to exercise the option offered by the OECD model rules to apply a domestic top-up tax to low taxed domestic subsidiaries. During a press conference, EU Commissioner for Taxation Paolo Gentiloni said that he was confident that all EU Member States will back this proposal – which needs to be adopted at unanimity – as the Commission didn’t do any “gold plating”. He also said he was confident that the US will manage to implement Pillar II despite the recent difficulties in its legislative process.

European Commission proposes new rules to go after shell companies

On 22 December 2021, the European Commission presented a proposal for a Directive to better fight the misuse of shell companies within the EU. The proposal seeks to create a new “economic substance” test to help Member States to identify undertakings that do not perform any actual economic activity, even if they are presumably engaged with one, and that can be misused for tax avoidance or evasion purposes. According to the rules proposed, being declared as a shell company would have consequences for the tax treatment of the transactions and assets of the entity. The Directive is clearly organised in 7 steps. It first differentiates between risky and non-risky entities. Risky entities will have to report a “substance” declaration which seeks information on premises, directors and bank account. If one of these requirements is not respected the risky entity will be presumed a shell company. A mechanism is nevertheless foreseen to allow a company to fight this presumption. Moreover, the Member States will need to share all information to a central depository and penalties can be imposed to companies not respecting their obligations under the Directive.

European Commission proposes three new own resources for EU budget

The European Commission also presented on 22 December 2021 a basket of new own resources for the EU budget, to help repaying the €750 billion of financing for the EU Economic Recovery Plan. The three new own resources consist in: - 25% of the revenue from the EU Emissions Trading System (ETS); - 75% of the revenues generated by the Carbon Border Adjustment Mechanism (CBAM); and - 15% of the share of residual profits from multinationals that will be re-allocated to EU Member States under the Pillar I of the OECD tax deal. These three new own resources are expected to generate a total of around €17 billion per year for the EU budget over the period 2026-2030. The European Commission estimates that the own resource based on Pillar I would generate between €2,5 and €4 billion per year. The Commission also announced that it will propose by the end of 2023 additional new own resources, which could include a Financial Transaction Tax (FTT) and an own resource linked to the corporate sector. This second package would build on the upcoming ’Business in Europe: Framework for Income Taxation (BEFIT)’ proposal.

Commission extends customs and VAT waiver for imports of Covid-19 medical equipment

The European Commission adopted on 22 December 2021 a decision extending for 23 EU Member States (at their request) the temporary waiver of customs duties and VAT on imports from non-EU countries of medical devices and protective equipment used in the fight against Covid-19. Taken in April 2020 at the height of the pandemic, the measure has been extended several times and expired in December 2021. The new decision, which took effect on 1st January 2022, prolongs until 30 June 2022 the customs duties and VAT relief available under the already existing exemption for the Member States concerned.

MEP Mohammed Chahim wants a more ambitious CBAM

The Dutch MEP Mohammed Chahim (S&D) submitted, on Wednesday 5 January 2022, his draft report on the Carbon Border Adjustment Mechanism (CBAM) to the other political groups in the European Parliament. His report calls for a more ambitious mechanism than the European Commission’s proposal. The rapporteur wishes to extend the sectors covered by CBAM to organic compounds, hydrogen and polymers. In addition, the report calls for the so-called integrated emissions of products to include indirect emissions from electricity consumed in the production of goods, heating or cooling. The report also envisages bringing forward the phase-in of CBAM for the system to become fully operational by the 1st of January 2029. Moreover, Mr Chahim wants to scrap the gradual phase-out period for free allowances for the cement sector entirely. To ensure the system is implemented coherently across the bloc, he also suggests creating a CBAM authority in the place of national authorities. Revenue generated by the sale of CBAM certificates should, according to the report, fund the CBAM authority, and any revenue left should then go to the EU budget. Political groups have until 10 February to submit their amendments to the text, before voting in ENVI committee in May and possibly in plenary in June.