3. Taxation | Notion

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<aside> Pillar 3. TAXATION

This section outlines the current taxation framework, its potential challenges for the EU-Inc model and presents recommendations to enhance efficiency and offers recommendations to improve efficiency and establish the EU-Inc as a credible and globally recognized entity.

Powering the EU-Inc

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‣ Applicable Law and Current Dilemma

Tax systems rely on the concept of a "head office" or central management to determine a company's tax residency and liability. However, this model may present challenges for the EU-Inc, which is designed for seamless cross-border operations. Multiple jurisdictions may claim tax rights over the profits of an EU-Inc company, leading to potential double taxation, which creates uncertainty and could undermine the model's credibility.

Existing options for companies operating in multiple jurisdictions, such as establishing a Permanent Establishment (the “PE”) or forming a local subsidiary, each have their own complexities. Defining a PE involves navigating detailed rules on activity duration, agents, and profit allocation, often leading to ambiguity. Managing multiple subsidiaries offers legal separation but introduces administrative burdens and increases compliance challenges, particularly in relation to diverse tax regulations and double taxation treaties.

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The EU-Inc

The introduction of the EU-Inc entity is a step towards promoting more efficient cross-border business within the EU. This new entity type presents an opportunity to develop a system that is specifically tailored to the needs of businesses operating across multiple EU jurisdictions. While the "28th regime," could theoretically allow the EU-Inc to adopt a standard EU-level approach to taxation, the sovereignty of individual Member States over choosing their own tax rates, tax collection and enforcement remains intact. Whatever the approach, the tax framework should uphold the key principles of fairness, simplicity, and centralization to ensure predictability and growth while ensuring efficient revenue collection across multiple EU jurisdictions. This is achieved through the following:

Exploring tailored tax incentives and allowances for EU-Inc entities, potentially including allowances for equity increases such as the one proposed in the DEBRA Directive.
Implementing a more transparent and simplified withholding tax relief procedure, potentially by expanding the scope of the FASTER Directive to these entities or adopting a similar framework tailored to their needs.
Financial Advantages:
- Revisiting thresholds (e.g., ATAD CIT deductibility) creates an EU-wide standard, promoting centralized incentives.
VAT One-Stop Shop, which allows businesses selling digital services across the EU to file a single VAT return with their local tax authority, which then forwards the data to the relevant member states, reducing cross-border VAT compliance complexity.
Centralized reporting: A single reporting channel for tax obligations, which will allow the EU-Inc to share information with other relevant jurisdictions, reducing administrative complexity. Examples of successful centralized reporting systems include:
- BEFIT proposal, which aims to simplify cross-border taxation by allowing businesses to report taxes in one EU member state;
Fair allocation of profits: A transparent and consistent methodology for allocating profits based on where an EU-Inc entity conducts its business will ensure transparent, equitable taxation across jurisdictions. This could involve considering factors like headcount, assets, and sales in each jurisdiction, preventing disputes and ensuring fairness in taxation across Member States.
Predictable tax system: A predictable tax system that encourages investment, reduces unexpected liabilities, and ensures clear communication, efficient dispute resolution, and specialized tax courts.
Standardisation: Existing EU-level directives and initiatives including Directive (EU) 2016/1164, commonly referred to as the Anti-Tax Avoidance Directive (“ATAD Directive”), Council Directive (EU) 2022/2523, and the Framework for Income Taxation (BEFIT) should be seen as best practice with respect to taxation frameworks. These initiatives are designed to simplify and standardise taxation within the European Union, promoting consistency and predictability, thereby establishing a level playing field across Member States.

Next: 4. Employment

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