The ECOFIN report details progress made in the area of direct taxation at ECOFIN level during the first half of 2024, as follows:
FASTER: Council reaches agreement (general approach) on the proposal
On June 19, 2023, the EC issued a proposal for a Council Directive providing for the “Faster and Safer Relief of Excess Withholding Taxes (FASTER)”, which aims to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries, and local tax authorities.
The ECOFIN report notes that a compromise text (general approach) in relation to the Council Directive for a “Faster and Safer Relief of Excess Withholding Taxes” was agreed at ECOFIN levelon May 14, 2024, with a view to adopting the Directive following re-consultation with the European Parliament and legal-linguistic revision.
Unshell: Council presents a new approach to move forward
On December 22, 2021, the EC issued a proposal for a Directive aimed at fighting the use of shell entities and arrangements for tax purposes (Unshell). The initial proposal set out a list of indicators to filter entities at risk of being misused for tax purposes. High-risk entities would then be required to report on a series of substance indicators through their annual tax return. Companies failing to meet the substance indicators would be deemed to be ‘shell’ entities, potentially triggering tax consequences.
Since then, the text of the Directive has been subject to discussions in the Council working groups. As previously reported, several compromise texts were submitted but Member States were not able to reach consensus on the initiative.
The report notes that, in principle, most delegations have supported the objectives of the proposal, but were of the view that further important technical work was necessary before an agreement could be feasible. Among the most discussed issues, the report lists tax consequences, links with domestic anti-abuse legislation, excluded entities, minimum substance, rebuttal of the presumption and reduction of administrative burden, tax residency certificate and exchange of information.
According to the report, the Belgian Presidency presented a possible way forward at the High Level Working Party (HLWP) on June 11, 2024, which will be subject to further discussions to find compromise solutions on outstanding issues.
Transfer Pricing proposal: Member States reject proposal in its current form
The ECOFIN report provides a status update on the Transfer Pricing Directive proposal, which was released by the European Commission in September 2023. The proposal aims at implementing common TP rules into EU law including the incorporation of the OECD arm’s length principle and a reference to the ‘OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ into EU law.
According to the ECOFIN report, while the initial discussions on the Commission proposal showed that Member States generally support the objectives of the proposal, some raised general concerns about the inclusion of transfer pricing rules into an EU Directive. The report also notes that specific concerns were raised about the risk of possibly creating a double standard in the field of transfer pricing (i.e., at the OECD level and at the EU level), as well as about the loss of flexibility available to Member States in negotiating and applying the OECD Transfer Pricing Guidelines.
In addition, the report indicates that discussions on this file at the level of the Working Party on Tax Question (WPTQ) showed that the Directive proposal will not be supported by Member States in its current form. Finally, the ECOFIN report notes that Member States have expressed interest in establishing a new EU Transfer Pricing Platform, which would be (to a certain degree) comparable with the Joint Transfer Pricing Forum (JTPF)1.
According to the report, further work would be required on such a “soft law” approach, including decisions on the composition of the Platform (membership), its institutional set-up (in relation to Member States and Council), its mandate (scope, duration, competence, deliverables), its governance (chairmanship chair function (elected or appointed), voting rules and secretariat services), as well as other relevant aspects of substance and/or process (such as public access to documents.
BEFIT proposal: Council highlights the need for political and technical discussions
The ECOFIN report provides a status update on the BEFIT proposal, which was released by the European Commission in September 2023 and provides common rules for determining the corporate tax base for EU-based entities that are part of a group with global consolidated revenues above a certain threshold. BEFIT would also include provisions for the allocation of profits to relevant Member States. Once allocated, profits would be subject to the corporate income tax rate of the respective Member State.
The ECOFIN report notes that, while the overall objectives of simplifying corporate taxation rules in the EU and reducing the administrative burden for businesses and tax authorities were supported by Member States, multiple concerns were expressed on whether the Directive, as proposed by the Commission, would successfully achieve these goals. According to the report, the concerns focus on the interplay of the BEFIT rules with existing tax legislation (including national corporate tax rules, Pillar Two rules, EU anti-abuse measures) and also on the scope and determination of the preliminary tax result of in-scope groups.
Finally, the report mentions that some Member States called for a political discussion (which was then removed from the ECOFIN meeting agenda) and acknowledges that further reflection and technical work will be required to determine the next steps in these negotiations during the Hungarian Presidency (second half of 2024).
Head Office Tax System (HOT): political discussion to take place before any further technical work
The ECOFIN report provides a status update on the HOT proposal, which was released by the European Commission in September 2023. The Directive would allow certain EU-based standalone SMEs that operate in other EU Member States only through permanent establishments (PEs) to make a five-year election to determine the taxable results of the PEs according to the rules of the Member State of their head office.
According to the report, several Member States raised serious concerns as regards several aspects of the proposal, such as the administrative challenges that the current proposal may create for tax authorities, concerns about the potential effect on tax revenues and tax sovereignty of Member States as well as risks linked to competitiveness of the domestic markets.
It is further noted that a number of Member States are of the view that a more general discussion on this file should take place before any further technical progress can be made. The ECOFIN report also mentions that additional work on this file could continue with the objective of preparing a high-level discussion on the policy choices that would need to be made.
United Nations (UN) resolution on promoting inclusiveand effective international tax cooperation
On December 22, 2023, the General Assembly of the United Nations (UN) approved a resolution which establishes a newly created intergovernmental Committee for the purpose of drafting terms of reference for a UN framework convention on international tax cooperation.
In this regard, the ECOFIN report notes that the Belgian Presidency continued to update the HLWP on the state of play of the ongoing discussions at the UN and facilitated the adoption of a common position on behalf of the European Union and its Member States that was delivered during the first substantive session of the UN Ad Hoc Committee on April 26, 2024.
The Belgian Presidency informed(PDF 188 KB) the ECOFIN Council on the outcome of the first session of the Ad Hoc Committee. According to the Presidency, the Ad Hoc Committee Chair proposed a timeline for the next steps, including the circulation of a zero-draft of the terms of reference and opportunities for written submissions from UN Member States and stakeholders in the lead-up to the second substantive session. The Presidency also reported that the session highlighted the existence of notable differences in the positions of various UN Member States and groups, particularly between developed and developing countries and the need for further work to make progress with the aim of achieving consensus on some of the issues, whilst ensuring that the framework effectively addresses the needs of all countries.
