What is the future of taxation in Europe: questioning the usefulness of all anti-avoidance measures

Pillar 2, which is the Global Anti-Base Erosion Rules (GloBE) minimum tax project, and the BEFIT initiatives are considered likely to reduce some tax planning opportunities respectively at worldwide and EU levels, and thus reduce the need to address them through anti-avoidance rules. Therefore, it may be reasonable to consider whether all these anti-avoidance rules need to remain should the BEFIT and DEBRA initiatives be implemented.

For example, the existing anti-avoidance measures may complicate the application of BEFIT and DEBRA. Indeed, the tax community already recognises the complex relationship between DEBRA’s new limit and the one from ATAD. On the one hand, the DEBRA regime’s excess, which is the portion of additional borrowing costs in excess of 85% of net financial expenses, cannot be carried forward.  On the other hand, the difference computed under the conditions applicable to the limitations arising from ATAD may be carried forward.

This will affect the calculation of deferred tax and companies’ ETR, impacting Pillar 2’s ETR, since ATAD interest carry forward can lead to a deferred tax asset for Pillar 2 purposes. While a DEBRA limitation on interest excess, together with the thin capitalisation rules, will directly impact the ETR, with the permanent item increasing the ETR.

Moreover, Pillar 2 or BEFIT may render all or parts of some initiatives meaningless. For example, in terms of DEBRA, the EU Parliamentary Research Service explicitly states that “it is likely that the proposal will be reconsidered in the context of the upcoming BEFIT initiative”¹.

In parallel, the implementation of Pillar 2 and BEFIT calls into question the continuing effectiveness of certain hallmarks from the Economic and Financial Affairs Council of the European Union’s (ECOFIN) 6th Directive on Administrative Co-operation, adopted on 25 May 2018. This Directive, commonly known as DAC6, aims to provide revenue authorities with an early warning of aggressive tax planning.  It also increases the compliance burden on taxpayers and their advisers.

However, Pillar 2 and BEFIT could limit the range of situations requiring disclosure under DAC6. Indeed, the rules for the computation of GloBE Income or Loss or the Qualified Domestic Minimum Top-up Tax (QDMTT), which most countries will introduce in their legislation, will limit the situations that fall under DAC6, especially those linked to the main benefit test. In the same manner, and depending on the final decision about transfer pricing, implementing BEFIT in the EU would limit the application of the hallmarks related to transfer pricing, including hallmarks C and E.

In addition, the BEFIT allocation of profit methodology differs from the regular arm’s length approach currently used and on which Pillar 2 calculations should be based.
This may trigger various sets of accounts, such as consolidated reporting, local GAAPs and Pillar 2 balance sheets to be prepared by the groups, significantly increasing the compliance burden of groups operating in the EU. 

To date, there has been no communication from the European Parliament or the Commission discussing abolishing or easing the anti-avoidance rules already in place.

What’s next?

While Pillar 2 and some initiatives mentioned above will realistically happen, the Commission may find it challenging to obtain unanimous approval from all 27 Member States for BEFIT and DEBRA. In fact, many Member States will likely see implementation of the Pillar 2 minimum corporate tax Directive as a priority for 2023.

Moreover, it seems premature to proceed with BEFIT given that the OECD’s Pillar 1 initiative provides a formulary approach for profit allocation and clearly has a certain amount of overlap with BEFIT.

In its fight against tax avoidance in the EU, the Commission is clearly focusing on harmonising the tax base in the EU and will limit the deduction of certain expenses, such as financial expenses, that are considered risky from a tax point of view. If the EU wants to perfect its fight against tax avoidance, it will have to proceed with the harmonisation of the tax rates and should abolish overlapping Directives for the sake of simplification.

Nonetheless, even if it seems unlikely that the Commission would implement all initiatives currently on the table, tax directors should be aware of the potential impact these compliance costs would have on the business. As a result, multinational companies may need to consider investing in additional resources and technology, as well as introducing plans to update tax reporting processes and controls that are able to cope with adopted initiatives that could potentially change the future of tax law in Europe.

In the next article, Mazars will address the action plans to face these new developments.

^{1  Briefing paper on DEBRA proposal, March 2023)}