Explanatory Memorandum to COM(2023)528 - Head Office Tax system for micro, small and medium sized enterprises - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2023)528 - Head Office Tax system for micro, small and medium sized enterprises. |
|---|---|
| source | COM(2023)528 |
| date | 12-09-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
In her 2022 State of the European Union Address, Commission President Ursula von der Leyen acknowledged the importance of taking further action for making it easier for small and medium-sized enterprises (SME) to do business in the internal market and announced an SME ‘Relief Package’. The SME Relief Package, which the Commission adopted today, delivers much-needed support for SMEs to secure cash flow, to simplify and to invest and grow. The present initiative is part of the package.
The current systems of business taxation in the EU give rise to a significant degree of complexity. This translates into businesses facing high compliance costs, barriers to cross-border operations, risks of double and/or over-taxation leading to tax uncertainty and frequent, time-consuming legal disputes. These setbacks constitute a proportionately higher burden for SMEs than they do for large groups of companies. SMEs spend approximately 2.5% of their turnover on compliance with their tax obligations (e.g. CIT, VAT, and income taxes) while large enterprises spend 0.7%, as the latter are able to leverage economies of scale1. If SMEs wish to operate cross-border, they become taxable in more than one Member State as soon as their activity abroad creates a permanent establishment (PE). Compliance with those obligations comes with fixed costs, which creates a barrier that can prevent SMEs from developing their business cross-border. This is especially the case at the inception stage of expansion, when the extent of activities carried out abroad would mainly be ancillary to the primary business operations in the state of origin.
It is thus important that SMEs, which envisage to grow and expand across the border, through PEs, can continue to apply the tax rules that they are familiar with to calculate the taxable result of their PEs in other Member States. This will give these SMEs the opportunity to take a business decision that suits best, either to continue applying different sets of tax rules to their business operations or opt in for the head office taxation rules, after having taken into account the size of the compliance costs and administrative complexity that can arise from dealing with distinct tax rules.
• Consistency with existing policy provisions in the policy area
In 2005, the European Commission adopted a Communication that set out a possible solution to the compliance costs and other tax obstacles faced by SMEs2. It presented a ‘Home State Taxation’ system based on the idea of voluntary mutual recognition and acceptance of tax rules by EU Member States. The system was designed to be voluntary for both Member States and companies and would have run for a five-year pilot phase. Its scope was wider. It covered both PEs and subsidiaries and provided for a more complex tax framework, such as consolidated tax base and allocation of the tax base based on objective factors. Yet, Member States never implemented the recommended solutions of the pilot project.
• Consistency with other Union policies
The proposal is fully consistent with the Commission’s policy to support SMEs. In 2020, the Commission launched an SME Strategy for a sustainable and digital Europe3, which put forward actions based on three pillars: ·capacity-building and support for the transition to sustainability and digitalisation; reducing regulatory burden and improving market access; and ·improving access to financing.
In September 2022, the Commission President Ursula von der Leyen announced in her State of the European Union Address additional actions, such as the SME Relief Package4, which the Commission adopted today and of which this initiative is part. This should deliver much-needed support for SMEs to securing cash flow, complying with regulatory obligations and investing and growing. The Communication on the SME Relief package also addresses access for SMEs to finance and skills and the enabling regulatory framework. Finally, the Package includes the reviewed rules on late payments5 aimed at improving the payment discipline and protecting companies from the negative effects of payment delays in commercial transactions.
The proposed Directive, through its centralised filing, assessment and tax collection procedures and one-stop-shop, is also fully in line with the Commission's objective to rationalise and simplify reporting requirements for companies and administration, as outlined in the Communication on the long-term competitiveness of the EU of March 2023 (COM(2023) 168 final).
In addition, the Capital Markets Union mobilises cross-border private investment in companies of all sizes, complementing public support and leading to reduced dependency of SMEs on single sources or single providers of funding.
Last but not least, in order to allow SME businesses to directly enjoy the benefits of the internal market without incurring an unnecessary additional administrative burden, Regulation (EU) 2018/1724 of the European Parliament and the Council6, which established the Single Digital Gateway, provides for general rules for the online provision of information, procedures and assistance services relevant to the functioning of the internal market. Information on the tax provisions set out in this Directive should also be made accessible to cross-border users through the Single Digital Gateway in accordance with Regulation (EU) 2018/1724, under category L.5.
Thus, the proposed Directive is consistent with this approach, as it encourages SMEs to expand across borders and aims to achieve that tax compliance costs do not hinder SMEs from fully taking advantage of the internal market, while making public and accessible useful information.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal falls within the ambit of Article 115 of the Treaty on the Functioning of the EU (TFEU). The rules of the proposal aim to approximate the laws, regulations or administrative practices of the Member States as these directly affect the establishment or functioning of the internal market. It shall therefore be adopted under a special legislative procedure in accordance with this article and in the form of a Directive. The competence of the Union in this area is shared with the Member States.
• Subsidiarity (for non-exclusive competence)
EU businesses increasingly operate across borders in the internal market, but the current tax framework in the EU consists of 27 different corporate tax systems. This multiplicity of rules results in fragmentation and presents a serious impediment to business activity. Indeed, cross-border businesses face high tax compliance costs in the internal market, as they must comply with various legal frameworks. This is particularly the case for SMEs, for whom these costs are proportionately much higher7. Moreover, the existing disparities between Member States create mismatches that can lead to double (non-)taxation.
These problems are common to all Member States and cannot be effectively addressed through individual national actions. As they are the result of operating different tax systems in the first place, national disparate action would produce insufficient and uncoordinated effects. Similarly, while better cooperation may also be beneficial, this approach has mainly been bilateral and is limited.
In this context, only an EU-wide initiative providing for simplification can be effective and is the only suitable legal instrument. The complexity and its consequences would be significantly reduced if there were a simplification framework for SMEs allowing them to apply one set of tax rules should they wish to develop abroad.
If action were taken at EU level, it would have a clear added value. For SMEs, simplification can only effectively work on the basis of the recognition that for the purpose of taxing permanent establishments, being only an extension of the legal personality of the head office, the taxation rules in the origin (headquarters) Member State can be applied for computing the tax base in the Member States of ‘expansion’, i.e. where the permanent establishments are situated. In addition, instead of filing in each Member State where an SME has a taxable presence by way of PE, SMEs would be able to comply with all requirements through the head office and only in the Member State of the head office (one-stop-shop). For tax administrations, which currently assess the tax liabilities of the same cross-border businesses separately but each only with their own resources, this is also more efficient.
This initiative is therefore in line with the principle of subsidiarity laid down in Article 5(3) TFEU, considering that the objectives cannot be sufficiently achieved through individual national action and that a common approach for all Member States would have the highest chances of achieving the intended objectives.
• Proportionality
The envisaged measures do not go beyond the minimum necessary to facilitate cross-border activities by the SMEs and thus ensure the proper functioning of the internal market. They are therefore compliant with the principles of proportionality. The scope of the proposed measure only concerns the computation of the taxable result in limited situations, without harmonising the taxation rules in the Member States. PEs do not have a separate legal personality from the Head Office itself. They are a taxable presence of an SME in another Member State which however creates taxing rights for the Member State where such PE is situated. The proposal does not prescribe harmonisation of corporate tax systems but only sets out a possibility for SMEs to use one single set of tax rules (i.e. rules of the Member State of the Head Office) for computing the taxable result in respect of activities performed through a PE. The system relies on a mutual recognition and acceptance among Member States of each other’s taxation rules for SMEs with PEs. Moreover, such simplification is optional for all eligible SMEs. The tax rate and enforcement policies will remain with the competence of the PEs’ Member States. Consequently, this initiative is also in line with the principle of proportionality laid down in Article 5(3) TFEU, as its content and form does not exceed what is necessary and commensurate with the intended objectives.
• Choice of the instrument
Contents
The proposal is for a Directive, which is the only permissible legal instrument under the legal basis (Article 115 TFEU).
3. RESULTS OF STAKEHOLDERS CONSULTATIONS AND IMPACT ASSESSMENT
• Results of stakeholders’ consultations
In the context of the wider Business in Europe: Framework for Income Taxation (BEFIT) package, the Commission services launched a public consultation that also covered aspects relevant to SMEs. All contributions received were duly considered, including with respect to SMEs.
SMEs stakeholders were consulted, and views were exchanged regarding the options envisaged specifically for SMEs operating cross-border during a meeting with the SME Envoy Network, which is an expert group consulted regularly by the Commission.
• Impact assessment
The impact assessment report accompanying this proposal is based on the draft impact assessment report that was scrutinised by the Regulatory Scrutiny Board and discussed in the relevant meeting on 24 May 2022. In the opinion dated 2605/2023, the Regulatory Scrutiny Board outlined recommendations.
It was found necessary that the initiatives assessed in the report that received the positive opinion with reservation from the Regulatory Scrutiny Board will be presented as separate proposals. For this reason, the said impact assessment report only assesses the impact of this proposal.
The impact assessment report to this proposal represents faithfully the analysis on SMEs contained in the scrutinised draft impact assessment and integrates the recommendations of the Regulatory Scrutiny Board in that regard.
The report examines the impact of the proposal on the basis of several policy options of which three are assessed:
Under the baseline option (status quo), the existing policy framework would be maintained. This means that the EU would continue with 27 different corporate tax systems and no administrative simplification offered for SMEs with taxable presence in (an)other Member State(s). This would result in continued barriers to the good functioning of the internal market, as SMEs will continue to be faced with disproportionately higher compliance costs and an uneven level playing field. Compared to the policy options, this would imply an economic loss due to continued under-participation of SMEs in the internal market.
Option 1: Optional Head Office Tax system for SMEs with PEs
An option is to include only SMEs with PEs in other Member States within the scope of the proposal, and not SMEs with subsidiaries. Such SMEs would have a taxable presence in one or more other Member States through PEs. This option proposes that the taxable results of each PE of the SME would be calculated in accordance with the applicable rules of the state of the head office if the SME chooses to opt for this system. SMEs would have to explicitly opt-in. In order to prevent circumvention, the rules would be coupled with the requirement that an opting-in SME would be under the obligation to apply the rules of the state of the head office for a minimum period of time, for example five years. In addition, SMEs will be entitled to renew their choice every five years without limit as long as they continue to meet the eligibility requirements. The eligibility, but also the termination provisions are designed to discourage abuse and potential tax planning practices, such as the deliberate transfer of the Head Office to a low-tax country.
Option 2: Optional Head Office Tax system for SMEs with PEs and subsidiaries
Alternatively, a second option is to allow eligible SMEs to apply the same set of rules to computing the taxable results of both PEs and subsidiaries. Similarly, this would then be computed using the rules that are applicable in the Member State of its head office or headquarter. This would extend the scope of the proposal to also include groups of entities. The analysis of the technical elements is the same as under the first option, but the implications are different, depending on whether the common rules are applied to subsidiaries or PEs, as the former are separate legal persons whilst PEs are part of the same legal entity as the head office.
The impact assessment concludes that option 1 is the preferred one. It not only proves effective in achieving the specific objectives of the initiative, but in addition, demonstrates efficiency, as its limited scope is delineated to include solely those SMEs with PEs in another Member State, which effectively are at their initial stage of expansion.
For SMEs that may be planning to expand across the border and may have been held back by the perspective of high compliance costs, the simplification would broadly address the objectives. The rules are optional for the SMEs in scope and therefore, can be used by those who can benefit, which should bring effectiveness for those SMEs.
It can be expected that SMEs wishing to expand across borders would most likely do so in first instance through PE, rather than by already setting up a separate legal entity under the company laws of the other Member States. The latter would also come with an additional compliance cost. For this reason, this option would also be efficient in encouraging cross-border expansion and specifically, removing tax obstacles that may hinder SMEs from fully participating in the internal market.
The impact assessment includes a cost-benefit analysis of the initiative, which is expected to be positive. Among the benefits for SMEs under this option, the simplifications that the initiative would introduce have the potential to reduce current tax compliance costs per firm and it is expected that they stimulate investment and growth through more cross-border activities. Benefits are also expected on the tax administration side, first by dealing with the tax returns, tax assessments and collection through a one-stop-shop, and second, by reducing risks of fraud or abuse through the existence of a single system. At the moment, the possibility of irregularities and fraud for a taxpayer with PEs in several Member States is higher than if that taxpayer were to deal with one single tax administration; audits and controls would be easier and tighter.
The costs of the proposal cannot be estimated with precision because the proposal does not have a precedent and there is no dedicated data that can be used reliably to produce precise estimates. Nonetheless, the report describes the potential costs for SMEs and tax administrations and indicates some estimates. The costs are estimated to be small compared to the estimated benefits derived from the simplification. These estimates can be found in Annex 3 to the impact assessment report.
• Regulatory fitness and simplification
The proposal is aimed at reducing regulatory burdens for both taxpayers and tax administrations. Thus, tax compliance costs are a burden for SMEs and their reduction will be a major advantage in the implementation of the initiative. The estimated reduction in compliance costs features in the impact assessment report.
To meet the objectives of the initiative in a proportionate manner, the preferred option of the initiative is option 1. SMEs with PEs in (an)other Member State(s) will have the option to apply their Head Office tax rules to compute the taxable result of their PEs. This discretion which is left to the taxpayer should effectively reduce regulatory burdens. SMEs are likely to opt in when they can benefit from the simplification that the rules offer. If this is not the case, they will continue to apply the existing rules. In this way, the scope of the proposal ensures that compliance costs for SMEs are kept low. Finally, as the proposal is primarily aimed to address the needs for cross-border businesses which have taxable presence in more than one Member State, many micro-enterprises will, effectively, be out of scope.
Tax administrations, in particular of the host Member States, should also benefit from the expected decrease in workload, as the filing, assessment and tax collection will be centralised in the head office Member State. This additional workload for the latter will to some extent be compensated by a reduced number of disputes and procedures which currently arise from the application of different sets of rules to the same income or transactions.
• Fundamental rights
It is not expected that this proposal has a considerable effect on fundamental rights. The proposed measures are compatible with the rights, freedoms and principles in the Charter of fundamental rights of the EU.15 Article 18 of the proposal will specifically ensure that personal data be protected. By levelling the playing field, removing cross-border barriers, and providing more tax certainty, the proposal will also contribute to preventing any discrimination or unjustified restrictions on the freedoms related to conducting a business.
4. BUDGETARY IMPLICATIONS
For details, see the Legislative Financial Statement accompanying the proposal. Please note that there are no major budgetary implications anticipated to be incurred as a result of this proposal, as these implications are limited to exchanges of information between the head office and host Member States.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will review the situation in the Member States 5 years after the rules of the Directive start to apply and publish a report.
For the purpose of monitoring and evaluating the implementation of the Directive, it will initially be necessary to give Member States time and all necessary assistance, in order to properly implement the EU rules. The Commission will evaluate the application of the Directive five years after its entry into force and report to Council on its operation. If appropriate, such report may eventually be accompanied by a proposal to amend the Directive. Member States should provide the Commission with any relevant information they have which may be required for evaluation purposes.
In addition to an evaluation, the effectiveness and efficiency of the initiative will be regularly and continuously monitored using the following pre-defined indicators: compliance costs for SMEs, relative to their turnover and to comparable SMEs that do not apply the proposed simplification; number of SMEs that opted in ; number of SMEs that expanded cross-border by setting up a PE ; number of SMEs leaving the scope by setting up a subsidiary; turnover of SMEs that are in scope, relative to comparable SMEs that do not apply the proposed simplification.
• Detailed explanation of the specific provisions of the proposal
Subject matter
The Directive provides for a simplified approach to subjecting standalone SMEs operating cross-border in the EU to taxation in respect of their PE(s) in other Member States. This simplified approach is referred to as ’Head Office Taxation’ (Article 1). Such solution is limited to the taxation rules for the computation of the taxable result of PEs and does not touch upon the social security rules applied in the Member State of the PE, nor does it affect the existing bilateral conventions on the avoidance of double taxation.
Scope
The scope of the rules is limited to standalone SMEs that operate exclusively through PEs in one or more Member State (Article 2).
Eligibility requirements, option and exclusions
Eligible SMEs will have the option to calculate the taxable result(s) of their PE(s) based only on the taxation rules of the Member State of their head office, while the applicable tax rate(s) will remain that/those of the Member State(s) where the PE(s) is/are located. The option, and its renewal, are however strictly confined by eligibility requirements aimed to address potential risks of circumvention of the rules (Articles 3 and 9). Such option shall last for five years (Article 7), unless the Head Office changes residence in the meantime or the joint turnover of the PEs becomes at least triple of the head office’s turnover (Article 8), in which case the HOT rules will cease to apply.
At the end of each five-year period, SMEs will be entitled to renew their choice for another five years without limit as long as they continue to meet the eligibility requirements (Article 9).
The eligibility and termination provisions are designed to discourage abuse and potential tax planning practices, such as the deliberate transfer of the Head Office to a Member State with attractive features in its tax system that ensure low taxation. When a standalone SME decides to set up a subsidiary, or the joint turnover of its PEs becomes at least double of the head office’s turnover, or when it ceases to qualify as an SME altogether, it cannot renew the HOT rules when the five-year period expires (Article 10).
Centralized procedures
A one-stop shop will enable in-scope SMEs to interact only with the tax administration of the Member State of their head office both for the procedure to opt in and for filing obligations and paying taxes (Articles 6, 9, 11 and 14). The ‘filing entity’ for all PEs will be the head office of the SME. SMEs will thus file one single tax return with the tax administration of their head office (the ‘filing authority’) (Article 11). This tax administration will then transfer the resulting tax revenues¨ to each Member State where the SME maintains a PE (Article 14). Such an approach will eliminate the complexities and related costs of having to deal with multiple tax systems and tax administrations.
The Member State of the head office will apply the rates applicable in the Member State(s) where the SME maintains PEs and subsequently, transfer the resulting tax revenues to the latter (Article 12).
Timely and streamlined exchange of information between the concerned tax authorities is provided for (Articles 11 and 14), in particular by using the existing framework set up by the Directive on administrative cooperation in the field of taxation8. Such exchange shall be tailored so that it answers the needs and the simplification purpose aimed by this Directive.
Audits, appeals and disputes
Each Member State remains competent for audits of PEs in their jurisdiction and can also request joint audits which create an obligation to engage for the addressee Member State (Article 13).
Finally, it is inherent that such an optional application of the rules may, in limited instances, create risks for the distortion of competition because comparable businesses may end up being subject to different taxation rules. However, the benefits will clearly outweigh those risks, and in particular, the system compensates for the additional and significant tax compliance costs that those SMEs with PE would otherwise have incurred.