PwC looks at the implications for the Channel Islands of the European Commission's plans for taxation
On 18 May, the European Commission presented its highly anticipated vision Business Taxation for the 21st Century, setting out an ambitious tax agenda for the next two years. This includes proposals to:
• Introduce a digital levy, which would co-exist with Pillar 1 (mid-2021)
• Require annual publication by certain large companies of their effective corporate tax rates (2022)
• Tackle the use of companies with limited substance (by end of 2021)
• Introduce a revamped Common Consolidated Corporate Tax Base (CCCTB), rebranded as Business in Europe Framework for Income Taxation (BEFIT).This would seek to introduce common rules for corporate tax base calculations and also a form of apportionment of that base between member states (2023).
Channel Islands impact
Of greatest relevance to some Channel Island businesses is confirmation that global agreements on Pillar 1 and 2 – or BEPS 2.0, which is expected to be achieved by mid-2021 – will be implemented through two EU Directives.
In particular, the Commission notes that Pillar 2 participation may become a criterion for assessing third countries in the EU listing process identifying non-cooperative jurisdictions for tax purposes.
The governments of Guernsey and Jersey have been in dialogue with the European Commission on international tax matters for several years and are active members of the OECD’s Inclusive Framework, the driving force behind the Pillar 1 and Pillar 2 proposals, so the latest developments will have been anticipated.
At the time of writing, no formal commitments had been made by either government on BEPS 2.0 and we may not expect anything detailed until the final rules are clearer and they have had the opportunity to consider the appropriate course of action.
The Pillar 2 rules are extremely complex but, in short, seek to ensure that certain multinational entities are subject to a minimum effective tax rate, irrespective of the jurisdictions in which they operate.
A threshold test is likely to apply to the definition of affected multinational entities, aligned with the country-by-country reporting consolidated gross income threshold of €750m. Exemptions were envisaged in an earlier draft in relation to inter alia certain investment funds, pension funds and government entities.
Clients should continue to monitor the development of Pillar 2 at the OECD level and its implementation by the EU.