During its plenary session of October 7, 2021, the European Parliament (EP) outlined its priorities for reforming EU policy on harmful tax practices as well as a blueprint for a new system to assess national tax policies. During this session the EP also adopted a resolution on reforming the EU policy on harmful tax practices (including the reform of the Code of Conduct Group).
MEPs make numerous proposals in the resolution to quickly improve policy on harmful tax practices, namely they:
· Request a definition of a ‘minimum level of economic substance’ - a threshold of economic activity within a country below which a company cannot be considered to be genuinely established there;
· Ask the Commission to issue guidelines on how to design fair and transparent tax incentives with fewer risks of distorting the Single Market;
· Demand that the Commission assesses the effectiveness of patent boxes and other intellectual property (IP) regimes;
· Call for the country-specific recommendations issued each year as part of the European Semester to be used to also tackle aggressive tax planning;
· Reform and replace the EU’s key tool to fight harmful tax practices; and
· Call for a complete reform of the Code of Conduct on Business Taxation (CoC).
A wholesale reform of the Code of Conduct on Business Taxation
Perhaps the most important call of MEPs is their call for a complete reform of the Code of Conduct on Business Taxation (CoC), a tool used to tackle harmful tax competition. The criteria, governance and scope of the Code of Conduct should all be revised, MEPs urge.
With its focus on preferential tax regimes, the CoC’s current criteria for judging a tax practice as harmful are outdated, the resolution says, arguing that such preferential regimes have been replaced by other systems. Instead, the reformed criteria and scope should be broader and include an effective tax rate criterion in line with the internationally agreed minimum effective tax rate, as well as clear economic substance requirements. The governance would also need to be reformed to make decisions binding and the decision-making process more transparent and efficient.
Members also laid out a detailed plan for developing a ‘Framework on Aggressive Tax Arrangements and Low Rates’ that would eventually replace the current CoC.
Text of the resolution adopted
In the text of the Resolution a.o. the following subjects are discussed:
· Current EU policies tackling harmful tax practices in the Union;
· Recommendations for future EU work on Harmful Tax Practices (FHTP);
o Calls on the Commission to come forward with an impact assessment of the future outcome of the international tax negotiations
o Calls for the adoption of a definition of ‘minimum level of economic substance’, compatible with the global standard of the OECD and subsequent work related to BEPS Action 5, preferably based on a formulaic approach, and which would evolve progressively as reported income increases
o Calls on the Commission to produce guidelines on how to design fair and transparent tax incentives with fewer risks of distorting the Single Market, and that ensure fair competition and favour job creation, notably by looking at the type (profit-based or costs-based), the temporal nature (temporary or permanent), the geographical limitation (economic zones) and the intensity (full or partial exemptions) of such incentives; takes note of a study commissioned by the European Economic and Social Committee on the reduction of corporate tax rates and its impact on revenues and growth;
o Recalls that the proposal to amend the Interest and Royalties Directive has remained blocked in the Council since 2012, notably due to a disagreement on a minimum withholding tax; calls on the Council and the Presidency to relaunch negotiations in this regard;
o Urges the Commission to adjust the timeline of the future BEFIT legislative proposal to the international tax agenda; is concerned by the lack of a clear strategy to ensure that the new framework for business taxation in the Union will achieve support from the Member States;
o Insists that the future implementation of new EU tools against HTP should prioritise the recourse to binding instruments and explore all possibilities offered by the TFEU allowing decision-making to be more efficient; recalls that the procedure laid down in Article 116 TFEU can be applied when harmful tax practices are distorting the condition of competition in the internal market and that this Treaty provision does not alter the distribution of competences between the Union and the Member States;
o Calls on the Commission to evaluate the effectiveness of patent boxes and other intellectual property (IP) regimes under the new nexus approach defined by Action 5 of the BEPS Action Plan on HTP, including the impact on revenue losses; calls on the Commission to come forward with proposals in the event that the evaluation establishes an absence of impact of IP regimes on real economic activities; notes that the US administration is proposing to repeal its Foreign-Derived Intangible Income (FDII);
o Highlights that Member States’ taxation policies are monitored through the European Semester; believes the European Semester could be further developed as a tool to support curbing aggressive tax planning within the EU via the dedicated country-specific recommendations;
· Reform of the Code of Conduct on Business Taxation.
The full text of the adopted resolution can be found here.
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