COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Business Taxation for the 21st Century
Date: 2021-05-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU action, European tax cooperation, business tax, digital economy, digital economy taxation, economic recovery, international cooperation, international tax law, tax reform, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 18.5.2021  COM(2021) 251 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Business Taxation for the 21st Century  
 
 
1. EU Tax Policy framework  

1.1 Context  

The  context  for  EU  business  taxation  policy  has  changed  radically  in  the  past  year.  The 
coronavirus has deeply affected societies and economies in Europe and globally. The public 
health  challenge  turned  into  the  most  drastic  economic  crisis  in  the  EU’s  history  with  deep 
social impacts and rising inequalities.  

The  pandemic  occurred  against  a  background  of  ongoing  major  trends  that  are  shaping  our 
economies  and  societies,  including  population  ageing,  climate  change,  environmental 
degradation,  globalisation  and  the  transformation  of  the  labour  market.  The  pandemic 
has  also  accelerated  pre-existing  trends  towards  digitalisation,  with  increasing  numbers  of 
people  and  businesses  making  purchases,  working,  interacting  and  doing  business  online. 
These trends have major impacts on existing tax bases and require reflection on the shape of 
efficient, sustainable  and fair tax frameworks in the future, including through consideration 
of the overall tax mix (see Box 1). 

Moreover, there is now consensus that the fundamental concepts of tax residence and source 
on  which  the  international  tax  system  has  been  based  for  the  last  century  are  outdated. 
Business practices now regularly involve carrying out activity in a state without maintaining a 
physical  presence,  a  situation  that  the  current  rules  are  unfit  to  cope  with,  while  the 
digitalisation  of  the  economy  has  also  led  to  new  opportunities  to  manipulate  the  existing 
principles through tax planning schemes.  

In  response,  governments  have  increasingly  engaged  in  adopting  a  patchwork  of  anti-tax 
avoidance  and  evasion  measures.  While  these  have  been  successful  in  addressing  specific 
problems, they have introduced even further complexity. Triggered by multiple tax scandals, 
rigorous enforcement of State aid rules, and the need to finance public expenditure after the 
financial  crisis,  discussions  on  the  reform  of  the  international  corporate  tax  framework 
accelerated  in  the  early  2010s,  leading  to  the  Base  Erosion  and  Profit  Shifting  (BEPS) 
project1, led by the OECD and G20. This process delivered its initial set of outcomes in 2015, 
which were implemented in  the EU, including through the Anti-Tax Avoidance Directives2. 
International discussions are now progressing towards a global solution to reform the outdated 
international  corporate  tax  system,  with  action  on  the  reallocation  of  taxing  rights  and 
minimum  effective  taxation.  The  substance  of  these  discussions  will  influence  the  shape  of 
the EU business tax agenda going forward, regardless of whether a concrete global agreement 
is reached. 

At the same time, international partners, like the US, have already announced plans to shape 
their business tax agenda for the coming years, going beyond or building on the international 
discussions.  These  actions  recognise  that  revenue  is  needed  to  finance  public  investment  in 

1 This project now brings together 139 jurisdictions around the globe. 
2  Council  Directive  (EU)  2016/1164  of  12  July  2016  laying  down  rules  against  tax  avoidance  practices  that 
directly affect the functioning of the internal market, OJ L 193, 19.7.2016, p. 1. 

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order to build back better and to support and sustain an inclusive economic recovery. Other 
countries, such as the UK, have also announced measures on corporate taxation post-COVID-
19.  

In  this  context,  the  EU  needs  a  robust,  efficient  and  fair  tax  framework  that  meets  public 
financing  needs,  while also  supporting  the  recovery  and  the  green  and  digital  transition  by 
creating  an  environment  conducive  to  fair,  sustainable  and  job  rich  growth  and 
investment.  

1.2 EU Tax Policy Agenda 

EU action on business taxation must be embedded in a comprehensive EU tax agenda. 
At  its  heart  is  the  need  for  a  balanced  tax  revenue  mix,  and  a  tax  system  guided  by  the 
principles of fairness, efficiency and simplicity.  

The following priorities will be vital in achieving this vision:  

(i) 

Enabling fair and sustainable growth 

The  EU’s  tax  agenda  contribute  to  the  overall  objective  of  enabling  fair  and  sustainable 
growth by supporting wider EU policies such as the European Green Deal3, the Commission’s 
digital  agenda,  the  New  Industrial  Strategy  for  Europe4  and  the  Capital  Markets  Union5.  It 
should  also  contribute  to  supporting  an  inclusive  recovery  in  line  with  the  principles  of  the 
European Pillar of Social Rights.  

A tax system that supports the green transition will be a vital tool to achieve the objectives of 
the  European  Green  Deal.  Tax  measures  will  have  to  go  hand  in  hand  with  other 
environmental pricing instruments as well as regulatory measures, while taking distributional 
impacts into due account to ensure a just transition. 

At  EU  level,  the  forthcoming  proposal  to  reform  the  Energy  Taxation  Directive6  will  be  a 
critical step forward in this regard. Its revision will complement other initiatives in the ‘Fit for 
55’ package, by rationalising the system of minimum rates and removing outdated exemptions 
and  reduced  rates.  As  part  of  the  same  package,  the  Commission  will  propose  new  and 
reformed  pricing  mechanisms  to  support  EU  climate  objectives,  notably  a  Carbon  Border 
Adjustment Mechanism (CBAM), and a proposal for a revised EU Emissions Trading System 
(ETS). At national level, the Member States should step up their efforts in putting a price on 
externalities7  with  due  regard  to  any  adverse  social  impacts,  and  in  phasing  out  harmful 
subsidies, including as part of broader tax reforms.8 

3 COM(2019) 640 final. 
4 COM(2020) 102 final.  
5 See, for instance, COM(2020) 590 final.  
6 Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of 
energy products and electricity, OJ L 283, 31.10.2003, p. 51.  
7 Art. 191(2) of the TFEU calls for pricing the negative externalities of polluting or other damaging activities, 
while the Annual Sustainable Growth Strategy 2021 encourages Member States to include in their Recovery and 

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In the Digital Decade Communication9, the Commission set out the EU’s targets in the digital 
transition until 2030. Taxation needs to facilitate this transition, by providing an environment 
where digital businesses can thrive. At the same time, the tax framework needs to be adapted 
to better match the realities of a digitalised economy. This also entails the digitalisation of tax 
administration. 

The  EU  tax  framework  must  be  designed  to  contribute  to  a  stronger  Single  Market  for 
Europe's recovery, in line with the the 2020 New Industrial Strategy and its update adopted in 
May  202110.  It  should  reduce  compliance  costs  for  businesses,  facilitate  cross-border 
investment, and provide the right environment for SMEs and larger enterprises alike to thrive 
in a green and digital Europe. 

The  EU  tax  framework  also  has  a  key  role  to  play  in  supporting  the  development  of  the 
Capital  Markets  Union  (CMU)11,  in  particular  by  removing  tax  barriers  to  cross-border 
investment and addressing the debt bias in corporate taxation.  

(ii) 

Ensuring effective taxation 

Ensuring the effective collection of tax revenue is vital to fund quality public services, and is 
a precondition for a fair sharing of the tax burden between taxpayers. It also contributes to a 
level playing field for firms, improving EU competitiveness. Billions of Euros are lost in the 
EU  each  year  to  tax  fraud,  evasion  and  avoidance12.  Tax  provisions  of  individual  Member 
States  can  also  result  in  revenue  losses  for  other  EU  Member  States,  for  example,  where 
royalties and interest payments can be paid to recipients in low or no-tax jurisdictions without 
taxes having been paid in the EU.  

Box 1: The EU tax mix on the road to 2050 

Tax systems will need to be modernised to better reflect ongoing and future economic and 
social developments. Member States’ budgets rely heavily on labour taxes, including social 
contributions, which provide more than 50% of the overall tax revenue in the EU-27. VAT 
accounts  for  more  than  15%  of  total  tax  revenue,  while  other  tax  bases,  such  as 

Resilience Plans structural reforms, including ‘reforms of tax system, for example by shifting the tax burden 
from labour to taxes that are less distortive’ (COM(2020) 575). 
8 To support this process, the Commission will adopt recommendations on how to further promote relevant 
instruments and incentives to better implement the polluter pays principle and thus complete the phasing out of 
the ‘pollution for free’ era, following up on the upcoming European Court of Auditors report. (COM(2021) 400). 
9 COM(2021) 118 final 
10 COM(2021) 350 final. 
11 COM(2020) 590 final. 
12 International tax evasion by individuals results in a tax revenue loss of EUR 46 billion/year for EU Member 
States. See ECOPA and CASE (2019) Estimating International Tax Evasion by Individuals,Taxation Papers 76. 
Moreover,  it  is  estimated  that  EUR  35-70  billion  is  lost  each  year  in  corporate  tax  avoidance  in  the  EU.  See 
Dover,  R.,  Ferrett,  B.,  Gravino,  D.,  Jones,  E.,  &  Merler,  S.  (2015)  Bringing  transparency,  coordination  and 
convergence  to  corporate  tax  policies  in  the  European  Union,  European  Parliamentary  Research  Service,  PE 
558.773;  Álvarez-Martínez,  M.,  Barrios,  S.,  d’Andria,  D.,  Gesualdo,  M.,  Nicodème,  G.,  &  Pycroft,  J.  (2018) 
How  Large  is  the  Corporate  Tax  Base  Erosion  and  Profit  Shifting?  A  General  Equilibrium  Approach,  CEPR 
Discussion  Papers  12637;  and  Tørsløv,  T.,  Wier,  L.,  &  Zucman,  G.  (2018)  The  Missing  Profits  of  Nations, 
NBER Working Paper 24701. 

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environmental  taxes  (~6%),  property  taxes  (~5%)  or  corporate  income  taxes  (~7%) 
contribute relatively little13. Although the overall composition of tax revenue in the EU has 
remained relatively stable over the last two decades14, megatrends such as climate change 
and  the  digital  transformation  of  the  labour  market  are  likely  to  have  an  impact  on  the 
future tax mix in EU Member States. 

Population  ageing and  an increase in  non-standard work may reduce the  ability of labour 
taxation to generate the same revenues as today. Building on the Green Paper on Ageing15 
and the 2021 Ageing Report16, this will require us to rethink how labour is taxed and the 
implications for other tax bases, taking into account the need for sustainable revenues and 
intergenerational  fairness,  and  to  contribute  to  the  sustainability  of  social  protection 
systems. The traditionally high labour tax burden within the EU, also as compared to other 
advanced  economies,  will  have  to  be  further  reduced  to  support  competitiveness, 
employment and job creation post-crisis17.  

At the same time, consumption tax rates are already at a historic high, as VAT rates were 
increased in the years following the financial crisis. Priority should be given to limiting the 
inefficient use of reduced VAT  rates  and  exemptions,  which often fail to deliver on their 
presumed policy objective.  

Behavioural  taxes,  such  as  environmental  and  health  taxes,  continue  to  be  of  growing 
importance  for  EU  tax  policies.  Well-designed  environmental  taxes  help  to  support  the 
green transition by sending the right price signals, as well as implementing the polluter pays 
principle18. They also  generate revenue that could  compensate some of the needed labour 
tax  cuts.  Similarly,  health  taxes,  for  example  on  tobacco  or  alcohol,  can  improve  public 
health and save lives, while reducing the pressure on public health systems. 

Finally, a future-proof tax mix will require the fair and effective taxation of capital income, 
both  from  individuals  and  corporations.  At  the  same  time,  simplification  and  other 
measures  to  reduce administrative complexity  will be needed.  In  addition,  recurrent  taxes 
on immovable property can be a relatively efficient way of raising tax revenue. However, 
distributional and administrative challenges related to the valuation of property need to be 
properly addressed.  

On  the  basis  of  these  considerations,  the  Commission  will  launch  a  broader  reflection, 
which should conclude in  a Tax Symposium on  the ‘EU tax mix on the  road to  2050’ in 
2022.  This  reflection  will  take  into  account  the  principles  set  out  above,  as  well  as  the 
distributional  impact  of  possible  changes  to  the  tax  mix,  including  their  effect  on  low-

13 https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation/data-taxation_en 
14 European Commission, Annual Review of Taxation – 2021 Edition, forthcoming. 
15 COM(2021) 50 final, 27.1.2021. 
16 The 2021 Ageing Report. Economic & Budgetary Projections for the EU Member States (2019-2070). 
Institutional Paper 148. May 2021. 
17 Between 2012 and 2020, the average  tax  wedge in the EU-27 for a  single person earning  the average  wage 
reduced by more than 2 percentage points.  
18 Art. 191(2) TFEU. 

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income households. 

The  principles  outlined  in  this  section  should  also  apply  to  the  system  of  own  resources 
financing  the  EU  budget.  In  line  with  the  mandate  from  the  European  Council  and  the 
commitments taken in the inter-institutional agreement19 accompanying the new multiannual 
financial  framework,  the  Commission  will  also  bring  forward  proposals  for  new  Own 
Resources that will contribute to the repayments of the NextGenerationEU. After an initial set 
of  proposals  in  July  2021,  which  will  include  proposals  for  a  CBAM,  a  digital  levy  and  a 
revision of the EU ETS, the Commission will propose additional new own resources, which 
could include a Financial Transaction Tax and an own resource linked to the corporate sector.  

The  CBAM  proposal  will  form  part  of  the  forthcoming  ‘Fit  for  55  package’.  It  will  aim  to 
reduce  the  risk  of  carbon  leakage  by  ensuring  that  the  price  of  imports  more  accurately 
reflects their carbon content if third countries do not have similarly ambitious climate policies 
in place. It will also contribute to achieving climate objectives by incentivising third country 
producers  and  EU  importers  to  adopt  low  carbon  technologies.  The  CBAM  will  be  fully 
compatible with WTO and other international obligations. 

Digital companies tend to pay less taxes than other companies and the taxes they pay do 
not  always  benefit  the  countries  where  their  activities  take  place.  The  digital  levy  will 
ensure a fair contribution of the digital sector to the financing of the recovery in EU and to 
society  at  large.  It will  be designed in  such  a way that  it is  independent of the  forthcoming 
global agreement on international corporate tax reform and is compatible with WTO and other 
international  obligations20.  This  levy  will  be  compatible  with  the  key  policy  objective  of 
supporting and accelerating the digital transition. After its establishment, it will coexist with 
the  implementation  of  an  OECD  agreement  on  sharing  a  fraction  of  the  taxable  base  of  the 
largest multinational enterprises, once the latter is ratified and transposed in EU law. 

1.3 What does this mean for EU Business taxation? 

Business taxation should ensure the tax burden is fairly shared across businesses and that 
taxable  revenue  is  fairly  shared  between  different  jurisdictions.  The  overall  system 
should be simple, in order to reduce compliance costs, and should facilitate investment and 
growth,  thus  reinforcing  the  Single  Market.  Despite  progress  in  removing  barriers  to  the 
Single Market in other areas, companies doing business in the EU still need to grapple with up 
to 27 different national tax systems. This patchwork of national tax rules creates unnecessary 
compliance costs for businesses, which discourages cross-border investment in the Single 
Market. This is the case both for larger businesses, but also for SMEs, start-ups and other 

19 Interinstitutional Agreement between the European Parliament, the Council of the European Union and the 
European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial 
management, as well as on new own resources, including a roadmap towards the introduction of new own 
resources, OJ L 433I , 22.12.2020, p. 28–46. 
20 This proposal will differ from the 2018 proposals for a Digital Services Tax (COM(2018) 148 final) and for a 
Significant Digital Presence (COM(2018) 147 final), which will be withdrawn. 

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businesses  looking  to  grow,  expand  and  trade  cross-border,  for  which  the  costs  are 
proportionately  greater21.  It  also  leads  to  loopholes  and  complexities  that  can  leave  open 
opportunities  for  aggressive  tax  planning,  hampering  the  level  playing  field.  It  hurts 
investment  and  growth,  as  well  as  the  EU’s  competitiveness  in  comparison  to  other 
international  partners. Policy choices in  the  area of business  taxation also  influence to  what 
extent  the  tax  system  is  supportive  of  investment.  Finally,  the  tax  system  should  minimise 
unintended  distortions  of  business  decisions,  for  example  towards  debt  rather  than  equity 
financing,  thus  supporting  sustainable  and  long-term  corporate  financing  and  the  re-
equitisation of companies that have accumulated a dangerously high level of debt, including 
as a result of the COVID-19 crisis. 

In  line  with  the  principle  of  subsidiarity,  EU  action  on  business  taxation  should  look  at 
challenges with a clear cross-border dimension. This includes removing barriers to the smooth 
operation of the Single Market and to cross-border investment created by differences between 
national tax systems.  

Progress  at  EU  level  should  be  complemented  by  supporting  national  action  in  areas 
where  Member  States  may  be  best  placed  to  judge  the  needs  of  their  economy  and  society. 
This includes setting the level of the corporate income tax rate above the minimum levels to 
be agreed internationally (see section 2), which will remain a national competence in the EU, 
as  well  as  domestic  measures  to  improve  tax  administration  and  facilitate  tax  compliance. 
Where  appropriate,  it  may  include  more  targeted  measures,  such  as  well-designed  and 
efficient tax incentives, to support wider policy goals. In these areas, the EU can also have an 
agenda-shaping and information-sharing role, as well as providing financial support for 
national reforms and investment.  The Recovery and Resilience Facility (RRF), which lies 
at  the  heart  of  the  EU’s  recovery  agenda,  and  the  Technical  Support  Instrument  (TSI)  can 
tax 
the  modernisation  and  digital 
provide  essential  funding  for 
administrations, while also supporting important tax policy reforms. 

transformation  of 

The  EU  has  taken  important  steps  forward  in  recent  years,  for  instance,  by  adopting  and 
starting  to  implement  the  Anti-tax  Avoidance  Directives  (ATAD)  and  the  Directive  on 
Administrative  Cooperation  (DAC)22.  Under  the  Code  of  Conduct  Group  on  Business 
Taxation, Member States continue to peer review each others’ tax regimes to ensure that they 
comply with the principles of fair tax competition. In addition, the European Parliament has 
been  very  active  in  the  area  of  taxation  in  general,  and  business  taxation  in  particular. 
Moreover,  in  July  2020  the  Commission  adopted  an  ambitious  Action  Plan23  to  make 
the 
taxation  fairer,  simpler  and  more  adapted  to  modern  technologies  and 
Communication  on  Tax  Good  Governance  in  the  EU  and  beyond,24  which  aims  to  further 

21 Estimated tax compliance costs for large companies amount to about 2% of taxes paid, while for SMEs the 
estimate is about 30% of taxes paid.  
https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/tax_survey.pdf  
22 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, OJ 
L 64, 11.3.2011, p. 1. 
23 COM(2020) 312 final. 
24 COM(2020) 313 final. 

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strengthen the EU’s promotion of transparency and fair taxation both at European and 
global level.  

This  Communication  sets  out  further  measures  in  the  area  of  business  taxation  in  both  the 
short and longer term. The Commission will act swiftly to implement the forthcoming global 
agreement on the reallocation of taxing rights and minimum effective taxation (see section 2). 
It will also take action over the next two years to address the most immediate challenges (see 
section  3).  Moreover,  the  Communication  sets  out  a  plan  for  a  holistic  EU  business  tax 
framework fit for the decades to come (see section 4).  

2. Reform of the international corporate tax framework 

2.1 On-going global discussions 

Mandated  by  the  G20,  the  OECD  Inclusive  Framework  is  working  on  a  global  consensus-
based solution to reform the international corporate tax framework. The discussions focus on 
two broad work streams: Pillar 1 (partial re-allocation of taxing rights) and Pillar 2 (minimum 
effective  taxation  of  multinationals’  profits).  The  two  pillars  aim  to  address  different  but 
related issues linked to the increasing globalisation and digitalisation of the economy.  

The  EU  has  consistently  promoted  ambitious  reforms  at  international  level,  and  the  global 
discussions can now also build on the positive engagement of the new US administration. The 
withdrawal  of  the  previous  “safe  harbour”  proposal25  and  the  tabling  of  concrete  and 
constructive proposals on Pillar 1 is an important step and offers a promising opportunity to 
make  real  progress  towards  a  global  agreement  on  sharing  part  of  the  taxable  base  of 
multinational  enterprises  (MNEs).  The  recent  announcements  of  the  US  administration  on 
their intentions for domestic corporate tax reform are an ambitious milestone and an important 
step towards an agreement on Pillar 2, which will put an end to the race to the bottom. G20 
Finance  Ministers  have  recently  reaffirmed  their  commitment  to  reaching  a  global  and 
consensus-based solution by mid-202126.  

Pillar 1 aims to adapt the international rules on the taxation of corporate profits to reflect the 
changing nature of business models, including the ability of companies to do business without 
a physical presence. It will give market jurisdictions a right to tax part of the profits of certain 
non-resident  businesses  by  providing  for  a  reallocation  of  a  portion  of  these  global  profits 
among  the  jurisdictions  where  the  group  has  customers  or  users,  using  an  agreed  formula. 
Pillar  1  discussions  initially  focused  primarily  on  companies  active  in  the  digital  sector. 
However,  the  proposed  solution  could  now  be  simplified  with  a  lower  number  of  MNEs  in 

25 Which would have essentially made the application of Pillar 1 optional for businesses. 
26 https://www.g20.org/wp-content/uploads/2021/04/Communique-Second-G20-Finance-Ministers-and-
Central-Bank-Governors-Meeting-7-April-2021.pdf.  

7 

 
 
 
                                                           
scope and at the same time broadened to cover the largest and most profitable multinational 
companies, regardless of their business sector.  

Pillar 2 will set a floor to excessive tax competition by ensuring that multinational businesses 
are  subject  to  a  certain  minimum  level  of  tax  on  all  of  their  profits  each  year.  The 
globalisation of economies and intensification of the use of intangible assets in global value 
chains have enabled certain multinational companies to shift profits to low-tax jurisdictions. 
Pillar 2 will enable jurisdictions to top up the amount of tax paid by large multinationals to a 
minimum effective level, while leaving individual countries free to decide on the features of 
their own tax systems. Such a minimum effective taxation of businesses profit will limit tax 
avoidance opportunities.  

Both  pillars  of  the  future  global  agreement  are  in  line  with  the  Commission’s  vision  for  a 
business  taxation  framework  for  the  21st  century,  as  outlined  in  Section  4.  Their  objectives 
are complementary and a solution on both is needed as part of the global discussions. They 
mark steps towards the important principles of formulary apportionment (through the use of a 
formula for the partial reallocation of taxing rights under Pillar 1) and a common definition of 
the tax base. The Commission is playing an active part in the international discussions, and is 
working with Member States to ensure that issues of common concern for the EU  – such as 
Single  Market  compatibility  and  minimising  administrative  complexity  –  are  taken  into 
account, and that the solutions are beneficial to the EU. In its conclusions of 25 March 2021, 
the  European  Council  also  reiterated  “its  strong  preference  for  and  commitment  to  a  global 
solution”,  and  stated  that  it  would  strive  to  reach  a  consensus-based  solution  by  mid-2021 
within the framework of the OECD27. 

2.2 How the global agreement will be implemented in the EU  

Once agreed and translated into a multilateral convention, the application of Pillar 1 will be 
mandatory for participating countries. In order to ensure its consistent implementation in 
all  EU  Member  States,  including  those  that  are  not  Members  of  the  OECD  and  do  not 
participate  in  the  Inclusive  Framework,  the  Commission  will  propose  a  Directive  for  the 
implementation of Pillar 1 in the EU. 

In order to ensure its consistent application within the EU and compatibility with EU law, the 
principal method for implementing Pillar 2 will be an EU Directive that will reflect the 
OECD  Model  Rules  with  the  necessary  adjustments.  The  implementation  of  a  global 
agreement on minimum effective taxation will also have implications for existing and pending 
EU Directives and initiatives (see box 2 below).  

Box  2:  Interactions  between  an  agreement  on  minimum  effective  taxation  and  existing 
EU initiatives 

Implementation  of  Pillar  2  will  have  implications  for  existing  rules  under  the  ATAD,  and 
specifically  for  the  Controlled  Foreign  Company  (CFC)  rules,  which  will  interact  with  the 

27 https://www.consilium.europa.eu/media/48976/250321-vtc-euco-statement-en.pdf (europa.eu) 

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primary  rule  under  Pillar  2  (the  Income  Inclusion  Rule  or  ‘IIR’).  When  the  IIR  is 
implemented  in  the  EU,  it  will  be  necessary  to  explore  how  to  best  accommodate  the 
interaction between the two rules. 

The  transposition  of  Pillar  2  should  pave  the  way  for  agreeing  the  pending  proposal  for 
recasting the Interest and Royalties Directive (IRD) 28, which has been in the Council since 
2011.  The  aim  of  the  recast  Directive  was  to  make  the  benefits  of  the  Directive  (which 
eliminates  withholding  tax  obstacles  to  cross-border  interest  and  royalty  payments  within  a 
group of companies) conditional on the interest being subject  to  tax in  the destination state. 
Some Member States held the view that the IRD should go further and set a minimum level of 
tax in the destination state as a condition for benefiting from the absence of withholding tax. 
Agreement on Pillar 2 will resolve this issue. 

As reflected in the recent Communication on Tax Good Governance in the EU and Beyond29, 
the  Commission  will  propose  to  introduce  Pillar  2  in  the  criteria  used  for  assessing  third 
countries  in  the  EU  listing  process,  so  as  to  incentivise  them  to  join  the  international 
agreement.  This  is  in  line  with  the  EU’s  existing  approach  to  use  the  listing  process  to 
promote internationally agreed good practices. 

3. Going beyond the OECD agreement – targeted solutions 

This section sets out the EU’s business tax agenda for the next two years, with measures that 
improve  the  current  system,  focusing  on  the  dual  priorities  of  ensuring  fair  and  effective 
taxation and promoting productive investment and entrepreneurship. 

3.1 Ensuring fair and effective taxation  

A first  step for a fairer tax system is  a  greater  public transparency on the  taxes paid by 
large  economic  actors.  There  is  a  growing  demand  from  citizens  and  civil  society 
organisations  to  ensure  both  more  transparency  and  fairness  regarding  business  taxation,  in 
particular corporate income taxation.  

The Commission will put forward a new proposal for the annual publication of the effective 
corporate  tax  rate  of  certain  large  companies  with  operations  in  the  EU,  using  the 
methodology  agreed  for  the  Pillar  2  calculations.  The  effective  corporate  tax  rate  provides 
information  regarding  the  proportion  of  corporate  tax  paid  by  companies  relative  to  the 
amount  of  profits  they  generate  rather  than  relative  to  their  ‘taxable  profits’,  which  can  be 
reduced  through  various  means  such  as  tax  allowances.  Hence,  the  proposal  will  improve 
public transparency around the real effective tax rate experienced by large EU companies. 

The EU will also further step up the fight against the abusive use of shell companies – i.e. 
companies  with  no  or  minimal  substantial  presence  and  real  economic  activity  –  through  a 

28 COM(2011) 714 final. 
29 COM(2020) 313 final. 

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new  legislative  initiative  to  neutralise  the  misuse  of  shell  entities  for  tax  purposes.  While 
several actions at EU and international level provide instruments to tackle the use of abusive 
tax  structures,  legal  entities  with  no  or  only  minimal  substance  and  economic  activity 
continue to pose a risk of being used for improper purposes, such as aggressive tax planning, 
tax evasion or money laundering. While there can be valid reasons for the use of such entities, 
there is a need for further action to tackle entities and structures created for the main purpose 
of  reducing  the  tax  liability  or  disguising  improper  conduct  of  the  group  or  operations  they 
belong  to,  without  substance  and  real  economic  activities  in  the  countries  where  they  are 
incorporated.  

The Commission proposal would encompass actions such as requiring companies to report to 
the  tax  administration  the  necessary  information  to  assess  whether  they  have  substantial 
presence and real economic activity, denying tax benefits linked to the existence or the use of 
abusive shell companies, and creating new tax information, monitoring and tax transparency 
requirements.  The  Commission  also  intends  to  take  further  steps  to  prevent  royalty  and 
interest payments leaving the EU from escaping taxation (so-called ‘double non-taxation’).  

In parallel, the Commission will continue to use all tools at its disposal to ensure companies 
pay their fair share of tax, including the enforcement of State aid rules. While direct taxation 
falls within the competence of Member States, Member States must exercise that competence 
consistently with Union law, including State aid rules.   

Actions to ensure fair and effective taxation: 

Action 1: Table a legislative proposal for the publication of effective tax rates paid by large 
companies,  based  on  the  methodology  under  discussion  in  Pillar  2  of  the  OECD 
negotiations (by 2022) 

Action  2:  Table  a  legislative  proposal  setting  out  union  rules  to  neutralise  the  misuse  of 
shell entities for tax purposes (by Q4 2021) 

3.2 Enabling productive investment and entrepreneurship  

Taxation  has  an  important  role  to  play  in  supporting  businesses  to  invest  and  grow  by 
encouraging  and  enabling  economic  decisions  by  entrepreneurs  that  are  socially  desirable. 
This ‘enabling’ side of tax policy is an especially important part of the twin transitions and the 
economic recovery from the COVID-19 pandemic.  

Because of more limited cash flow, SMEs are often less able to absorb or finance losses than 
larger  companies.  This  is  why  many  Member  States  have  acted  quickly  during  the  current 
crisis  to  relieve  the  immediate  tax  burden  on  SMEs,  for  example  via  deferral  of  tax 
obligations. However, the treatment of losses in Member States is still very different and there 
is  scope  to  improve  the  environment  for  investment  and  growth.  Alongside  this 
Communication, the Commission is adopting a recommendation to Member States on the 
domestic treatment of losses.  This will help to  ensure fair competition between companies 

10 

 
 
and better support businesses during the recovery. This is likely to be of particular benefit for 
SMEs.  The  Commission  services  will  also  investigate  more  generally  the  prospect  of  a 
coordinated treatment of cross-border loss relief to address challenges experienced by SMEs 
and other businesses in the initial stages of their European expansion.  

Given the current  tax framework allowing  for a tax deduction of interest  on debt,  there is  a 
persisting pro-debt bias of tax rules. This means that a company can deduct interests attached 
to  a  debt  financing  but  not  the  costs  related  to  an  equity  financing,  such  as  the  payment  of 
dividends,  thus  incentivising  it  to  finance  investments  through  debt  rather  than  equity.  This 
can contribute to an excessive accumulation of debts, with possible negative spill-over effects 
for the EU as a whole, should some countries face high waves of insolvency. The debt bias 
also  penalises  the  financing  of  innovation  through  equity.  This  issue  has  become  more 
pressing, as the stock of debts of companies has increased significantly due to the economic 
crisis following the COVID-19 pandemic. The Commission will therefore make a proposal to 
address  the  debt-equity  bias  in  corporate  taxation,  via  an  allowance  system  for  equity 
financing,  thus  contributing  to  the  re-equitisation  of  financially  vulnerable  companies.  The 
proposal will incorporate anti-abuse measures to ensure it is not used for unintended purposes. 

Actions to enable productive investment and entrepreneurship 

Action  3:  Adopt  a  recommendation  on  the  domestic  treatment  of  losses  (alongside  this 
Communication) 

Action  4:  Make  a  legislative  proposal  creating  a  Debt  Equity  Bias  Reduction  Allowance 
(DEBRA) (by Q1 2022) 

4. Going beyond the OECD agreement  - An EU Business taxation environment for the 
21st Century  

A consensus on the reform of international corporate tax rules will constitute a historic step 
forward towards the modernisation of global business tax rules. For good reasons, the global 
agreement  on  Pillar  1  will  apply  first  only  to  a  limited  number  of  companies.  For  such  a 
solution to work globally, it needs to be administrable for and between 139 jurisdictions, with 
diverse  economic  profiles  and  levels  of  administrative  capacity.  A  closely  integrated 
European Union with its Single Market, however, can and should go further.  

The  lack  of  a  common  corporate  tax  system  in  the  Single  Market  acts  as  a  drag  on 
competitiveness. This is a result of distortions of investment and financing decisions (where 
these  are  driven  by  tax  optimisation  strategies  rather  than  other  considerations),  and  higher 
compliance  costs  for  businesses  active  in  more  than  one  EU  Member  State.  This  creates  a 
competitive disadvantage compared to third country markets.  

The Commission will therefore propose a new framework for income taxation for businesses 
in Europe (Business in Europe: Framework for Income Taxation or BEFIT). BEFIT will be a 
single corporate tax rulebook for the EU, based on the key features of a common tax base and 

11 

 
 
the  allocation  of  profits  between  Member  States  based  on  a  formula  (formulary 
apportionment). It will build on progress in the global discussions, where these concepts are 
already present, through the use of a formula for the partial reallocation of profits under Pillar 
1, and common rules for calculating the tax base for the purposes of applying Pillar 2. BEFIT 
will ensure that businesses in the Single Market can operate without any undue tax barriers. 
At  the  same  time,  it  will  ensure  that  the  existence  of  mismatches  between  corporate  tax 
systems in the EU does not undermine the ability of Member States to raise revenue to fund 
national spending priorities.  

Common  rules  for  determining  the  corporate  tax  base  will  deliver  substantial  simplification 
for groups of companies operating in the Single Market. Instead of having to comply with up 
to 27 different sets of corporate tax rules, a group will be able to determine its tax liability in 
each EU Member State according to one single set of rules. This will also pave the way for 
even  further  administrative  simplifications,  such  as  the  possibility  of  a  single  EU  corporate 
tax return for a group.  

This new proposal will replace the pending proposals for a Common Consolidated Corporate 
Tax Base (CCCTB)30, which will be withdrawn.  

BEFIT will…  

  …create a common rulebook for groups of companies operating in the Single Market in 

more than one Member State, reducing barriers to cross-border investment; 

  …reduce red tape and cut compliance costs in the Single Market, thereby lessening the 

administrative burden on tax authorities and taxpayers; 

  …combat tax avoidance, and support job creation, growth, and investment; 

  …provide a simpler and fairer way to allocate taxing rights between Member States;  

  …ensure reliable and predictable corporate tax revenues for Member States.  

BEFIT will consolidate the profits of the EU members of a multinational group into a single 
tax  base,  which  will  then  be  allocated  to  Member  States  using  a  formula,  to  be  taxed  at 
national corporate income tax rates. Key considerations will include how to give appropriate 
weight to sales by destination, to reflect the importance of the market where a multinational 
group does business, as well as how assets (including intangibles) and labour (personnel and 
salaries) should be reflected, to ensure a balanced distribution of corporate tax revenue across 
EU Member States with different economic profiles.  

The use of a formula to allocate profits will remove the need for the application of complex 
transfer  pricing  rules  within  the  EU  for  the  companies  within  scope.  Different  types  of 

30 COM(2016) 685 final and COM(2016) 683 final. 

12 

 
 
                                                           
formulary  apportionment  are  already  used  in  various  countries.  For  example  in  the  US, 
Canada and Switzerland, a formula is used to compute the tax base at regional or subnational 
level. By contrast, transfer pricing requires entities to price transactions between members of 
the same multinational  group in  the same way  as a comparable transaction would be priced 
between  two  non-related  entities  (‘Arm’s  Length  Principle’).  The  OECD  BEPS  actions  on 
Transfer  Pricing  updated  the  international  guidelines  but  nonetheless  these  principles  are 
difficult to apply and enforce in a modern economy relying on intangible and non-marketed 
assets.  The  work  on  Pillar  1  has  demonstrated  an  interest  in  a  different  approach  to  the 
allocation of taxing rights through its use of a formula for the reallocation of a small part of 
the taxable base. BEFIT will build on this step, and take it further to create a simpler system 
within the Single Market. In contrast to Pillar 1, where the current rules and the reallocation 
of  profit  according  to  a  formula  would  operate  in  parallel,  under  BEFIT,  formulary 
apportionment  would  replace  the  current  rules  for  the  allocation  of  taxable  base  within  the 
Single Market for the companies within scope. 

Through a combination of formulary apportionment with a common rulebook for the tax base, 
BEFIT will mark important step in building a more robust business tax system in the Single 
Market. While the principles of a common tax base and of formulary apportionment already 
featured  in  the  previous  CCCTB  proposal,  the  new  proposal  will  reflect  the  significant 
changes  in  the  economy  and  in  the  international  framework  since  March  2011  when  the 
CCCTB  was  originally  proposed.  Most  notably,  it  will  build  on  the  approach  taken  in  the 
forthcoming  global  agreement in  its  proposals  for the definition of the tax base.  It  will also 
feature  a  different  apportionment  formula,  which  will  better  reflect  the  realities  of  today’s 
economy and global developments, in particular by taking better account of digitalisation. 

The  Commission  will  work  closely  with  Member  States  in  the  preparation  of  this  proposal, 
also  taking into account  the views of the European Parliament,  and in  consultation  with  the 
business sector and civil society groups.  

Action for a longer-term business taxation framework 

Action  5:  Table  a  proposal  for  BEFIT  (Business  in  Europe:  Framework  for  Income 
Taxation), moving towards  a common tax  rulebook and providing for fairer allocation of 
taxing rights between Member States (2023)  

5. Conclusion 

The  forthcoming  global  agreement  will  mark  a  decisive  step  forward  in  the  reform  of  the 
international corporate tax system, addressing important challenges related to the allocation of 
taxing rights and minimum effective taxation at global level. At EU level, we must build on 
this progress and take forward a similarly ambitious business taxation agenda that ensures fair 
and  effective  taxation  and  that  supports  productive  investment  and  entrepreneurship.  The 
measures announced in this Communication, together with work already underway, will take 

13 

 
 
the EU forward and fulfil this vision for an EU business tax framework that is fit to meet the 
challenges of the 21st century and geared towards a well-functioning Single Market.  

14