17 February 2022

MEPs adopt proposals for addressing harmful tax schemes and reducing the EU VAT gap

MEPs adopted two reports on taxation, the first on the impact of national tax schemes on the EU economy and the second on reducing the EU VAT gap.

The report on the effect of national taxation on the EU economy, drafted by Markus Ferber (EPP, DE) was adopted Tuesday by 469 votes in favour, 94 against, and 137 abstentions.

The report on legislative changes to reduce the VAT gap, drafted by Olivier Chastel (Renew, BE) and adopted on Wednesday by 510 votes in favour, 74 against and 108 abstentions.

Effect of national tax measures on the EU economy

The report argues that the single market requires harmonisation and coordination in tax policy-making in order to increase the integration of the single market and prevent base erosion.

Impact on SMEs

While the costs of compliance with tax obligations are estimated for large multinationals to be around 2% of taxes paid, for SMEs this is estimated around 30%. Moreover, the report points out that differences in national tax regimes can act as barriers to SMEs trying to operate across borders.

MEPs consider that harmonisation of the tax base, such as the common corporate tax base, could reduce compliance costs for SMEs operating in more than one Member State. They reiterate that taxing profits in the country where the economic activities take place would enable governments to offer a level playing field to their SMEs.

Members also stress the need to tax companies using a fair and effective formula for allocating taxing rights between countries, taking into account factors such as the workforce and the existence of tangible assets. They call on Member States to rapidly agree on a proposal for a European corporate tax code.

Harmonisation and coordination of tax policies

The report points out that the EU tax coordination mechanisms such as peer review procedures within the Code of Conduct Group (CoC) and country-specific recommendations in the context of the European Semester need to be improved.

MEPs note the limits of the current decision-making process in Council when it comes to improving coordination and tackling harmful tax practices. They call for the full potential of the EU Treaty to be explored. They also stress that the ideal level of coordination of tax policies to ensure maximum impact is the international arena.

Specific areas for reform

MEPs say specific reforms should focus on the following key areas:

• reducing the debt equity bias in corporate taxation which makes equity financing less interesting
• the Commission should investigate whether some Member States are distorting competition by artificially lowering their marginal effective tax rates
• address the abuse of tax incentives for research and development where such activities have little to do with increasing spending on research or development and instead are about profit shifting and aggressive tax planning.

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