Given the pandemic time of COVID-19 and the new challenges – both in private and business areas – the European Commission has adopted a Communication on Business Taxation for the 21st Century, which is extremely important for companies in the European Union whose context of tax policy is radically changed.
The vision of supporting Europe’s recovery and securing competent public revenues in the coming period is emphasized.
It is about promoting a taxation system that is strong, efficient, and fair. The main goal of this program is to encourage sustainable growth, strengthen open strategic autonomy, but also create jobs in the European Union.
Every year, billions of euros are lost in the European Union due to tax fraud, evasion, and payment evasion. Therefore, the tax system needs to be modernized to better influence current and future economic and social development.
EU member states’ budgets rely heavily on labor taxes, including social security contributions that provide more than 50% of total EU tax revenue. VAT as such accounts for more than 15% of total tax revenues, and other tax bases, such as environmental tax, are 6%, property tax 5%, and, for example, profit tax 7%, which contributes very little to total tax revenue.
The total tax revenues of the European Union have been relatively stable over the last two decades, but large and influential trends such as climate change and the digital transformation of the labor market are likely to affect the change in the tax business.
The Commission will set out a new framework for the taxation of EU companies by 2023, which it plans to reduce the burden on the administration by removing tax obstacles and creating an environment that is more favorable for doing business in the market.
Such a framework, entitled “Business in Europe: Framework for Income Taxation“, abbreviated BEFIT, will adopt uniform tax rules that will more fairly distribute tax rights that apply to members of the European Union.
The main features of BEFIT are:
- reducing the alignment of costs and bureaucracy;
• reducing the possibility of tax evasion;
• job creation; and
• investing in the EU single market.
It is important to say that the existing proposal for a common consolidated corporate tax base will be withdrawn and replaced by the new, mentioned, BEFIT.
The new program sets out a tax program for the next two years that includes measures on productive investment and entrepreneurship as well as better income protection at the national level, but also support for green and digital transition.
The measures relate to greater public transparency with a proposal for individual EU companies to publish real tax rates, which will contribute to combating tax evasion and combating the abuse of fictitious companies.
Also, the measures include recovery with changes in preferential treatment of debt in the current corporate taxation systems – corporate financing by borrowing is more tax-friendly, and the goal is to encourage companies to finance their operations with equity rather than debt.
It is extremely important to remove cross-border tax obstacles as well as to ensure the effective collection of tax revenues, which is crucial for financing quality public services. All this would contribute to a level playing field for all companies, thus improving their competitiveness.
In addition to new measures, the Recommendation on National Treatment of Loss was adopted. The members of the European Union are encouraged to transfer losses to companies in the previous period, at least for the previous year. Simpler – companies that were profitable in the period before the pandemic would be able to compensate for the losses from 2020 and 2021 with taxes they paid before the pandemic, before 2020.
According to the current Income Tax Act, corporate taxpayers who made a loss last year and made a tax loss (accounting adjusted for items that reduce and/or increase the tax base) are entitled to a reduction in the tax base in the next five years (until 2025. years) unless otherwise provided by law.
Whether the tax loss can be consumed “today” instead of the right to reduce future tax liabilities, the Ministry of Finance has no information yet. Minister Zdravko Marić says that “solutions are still being worked on” which means that we will have to wait for more concrete information for some time.
Communication on taxation and measures are part of a more complex European Union’s tax reform agenda.
In addition to tax reforms, the European Commission will present measures related to fair taxation in the growing digital economy. A digital fee has been announced, which will be used as a source of EU own resources, as well as a revision of the Energy Taxation Directive and a mechanism for adjusting carbon emissions at borders.
All the above contributes to the modern and current development of companies in the European Union as well as progress in the field of taxation, which is an integral part of every business activity.
