What to expect from EU tax policies in 2023?

With the Pillar Two Directive now adopted, one would be mistaken to assume there is little more work left for the European Commission in the next months to come. But 2023 is proving to be like any other year for this and several other past Commission terms – full of ambitious initiatives that aim to address potential shortcomings in the European tax system.

For starters, the Commission is provisionally aiming to publish two new legislative proposals on 7 June: one on tax enablers (SAFE), the other on introducing a pan-European system for withholding tax on dividend or interest payments. SAFE, in particular, could prove to be a difficult task, and its aim in the Commission’s publicly issued words is to curtail the provision of ‘aggressive tax planning’ advice by extra-EU tax advisers.

Around June/July, the Commission will take stock of the OECD’s progress on Pillar One. If sufficient progress, especially in the form of agreement on a multilateral convention and model rules, is achieved, the Commission intends to swiftly implement this agreement into EU law as it did with Pillar Two. If, however, OECD progress stalls and fails to deliver results by summer, the Commission together with the EU member states may return to considering EU only solutions such as a pan-European digital services tax (DST).

In the autumn, the Commission plans a major tax reform titled Business in Europe: Framework for Income Taxation (BEFIT). A public consultation on the initiative is still running, with a deadline of 26 January.

BEFIT is intended to replace the common consolidated corporate tax base (CCCTB) proposal, which was never adopted by EU member states in the Council due to strong disagreements. BEFIT would introduce a common set of rules for EU companies to calculate their taxable base while introducing a formula apportionment for allocating taxing rights on corporate profits between EU countries. BEFIT’s criteria for tax base calculation and formula apportionment would be based on relevant provisions from the OECD’s Pillars One and Two. The Commission seems to hope that with international agreement on these pillars, EU member states would be more inclined to agree to adopt the pillars’ principles into the EU’s overall corporate tax system as well. Time will tell whether their hopes are well placed.

The above is just a snapshot of the main expected initiatives for this year, and certainly not a fully exhaustive list. For example, the Commission is reportedly planning revisions to the Directive on administrative cooperation (DAC) to render it into an additional tool in the fight against VAT fraud.

Moreover, the Commission at least in early-2022 still had the intention to propose mandatory public disclosure of companies’ effective tax rates (ETRs) on a country-by-country basis, using the Pillar Two definitions. This proposal was supposed to come soon after EU agreement on Pillar Two, which was achieved in December. It is yet to be confirmed whether the Commission still intends to proceed with an ETR disclosures proposal this year, and the continued radio silence on this proposal is markedly loud.