European Union measures

Last week the UK, Austria, France, Italy, Spain and the US announced the terms of an agreement, referred to as the “Unilateral Measures Compromise” on the transition from existing Digital Services Taxes (DSTs) to the new multilateral solution on Pillar One agreed by the OECD/G20 Inclusive Framework on 8 October 2021. The joint statement notes under the Unilateral Measures Compromise, the UK, Austria, France, Italy, Spain and countries which have all enacted Unilateral Measures before 8 October 2021, are not required to withdraw their Unilateral Measures until Pillar One takes effect. The statement continues to explain that to the extent that taxes that accrue to Austria, France, Italy, Spain, and the United Kingdom with respect to existing unilateral measures during a defined period after political agreement is reached, and before Pillar One takes effect, exceed an amount equivalent to the tax due under Pillar One in the first full year of Pillar One implementation (as prorated), such excess amount of tax collected will be creditable against the portion of the corporate income tax liability.  As part of this compromise, the United States has agreed to terminate certain proposed trade actions and commits to not impose further trade actions against Austria, France, Italy, Spain, and the United Kingdom with respect to their existing digital services taxes until the end of an interim period. 

This week the European Commission published its Communication “Business Taxation for the 21st Century”. The document sets out the Commission’s vision for EU corporate tax policy leveraging off the OECD’s BEPS 2.0 project. The Communication also makes tax policy proposals going beyond the issues currently under review at OECD level.  These proposals include mandatory publication of effective tax rates paid by large companies, rules to counter the misuse of shell entities for tax purposes, recommendation on the domestic treatment of losses, tax rules to encourage equity investment over debt and a common tax rulebook to determine the allocation of taxing rights between Member States called the Business in Europe: Framework for Income Taxation (BEFIT). The Commission plans to issue two Directives which will implement the two Pillars under BEPS 2.0 and cover interactions with the EU’s Anti-Tax Avoidance Directive (ATAD).  The Directives will also address interactions with the EU’s proposed recast of the Interest and Royalties Directive, and the EU’s list of non-cooperative jurisdictions for tax purposes.  The Communication resurrects the Commissions long-held goal to introduce a common corporate tax system within the EU in the guise of a new framework for income taxation for businesses in Europe called BEFIT.  The Commission will put forward its proposals for BEFIT by 2023.  BEFIT proposes common rules for determining the corporate tax base and for the allocation of profits between Member States based on a pre-defined formula and will be compatible with BEPS 2.0 outcomes.  Ireland is among several EU states who oppose measures promoted by the European Commission which erode the tax sovereignty of Member States. 

The Court of Justice of the European Union (CJEU) will this week hear an appeal by the Irish Government against a decision of the European Commission requiring car manufacturer Fiat Chrysler to repay approximately €30 million to Luxembourg on the grounds of State aid.  According to reports in the Irish Times and Irish Independent, the Irish Government is appealing on a third party basis against the finding of  the General Court of the European Union in September 2019 because the General Court’s judgement has relevance to Ireland’s State aid Apple case. According to media reports, the Department of Finance says that Ireland has joined the appeal against the General Courts decision because several novel legal principles invoked by the European Commission in fiscal State aid cases will be heard by the CJEU as part of the Fiat Chrysler case.  The Irish Government believes that the CJEU’s lower court erred in law and misapplied legislation governing state aid in its approach to the arm’s-length principle.  It claims the ruling breached the principle of legal certainty by agreeing that the Commission could review decisions of national tax administrations by referring to the Commission’s version of the arm’s-length principle which it argues is unpredictable and whose content is unknown. The Government also claims the ruling on Fiat Chrysler impermissibly used State-aid rules to harmonise direct taxation rules in EU member states.   See the Irish Times article and the Irish Independent article for further details.