On 15 February 2022 the European Parliament adopted a resolution relating to the impact of national reforms on the economy of the European Union. Resolutions of the European Parliament are not binding on other EU institutions, but they call for action on the relevant issues.

In the general remarks the resolution recalls that EU member states may determine their own tax policy within the requirements of the EU treaties. Although this can lead to fragmentation and an uneven playing field, it also allows free competition. The interdependency resulting from the single market means that the tax base and rates of each member country are sensitive to those in the other states and the effects of one country’s rules on other states can be magnified.

Compliance burden of SMEs

The European Parliament notes the effect of these national tax law differences on small and medium enterprises (SMEs). The differences can be a problem for SMEs operating across national borders. Unlike multinational enterprises, SMEs have fewer resources for tax compliance and optimisation; and the percentage of their expenditure required for tax compliance is higher than for multinational enterprises. The Resolution calls on the European Commission to speed up the adoption of the ‘Business in Europe: Framework for Income Taxation’ (BEFIT) which can reduce compliance costs for SMEs. It also calls on the Member States to speed up digitalisation and to start implementing strategic approaches to support SMEs in their tax compliance, by simplifying tax systems and reducing the administrative burden.

Tax treatment of debt and equity

The Resolution notes that the generous tax deductions for interest payments, compared to the treatment of equity finance costs which cannot be deducted, is a disadvantage for companies that rely on equity financing. To balance the position some member states have introduced allowances for corporate equity, but these can be exploited to create artificial deductions. The Resolution looks forward to the Commission’s proposal for a debt equity bias reduction allowance and calls for effective anti-avoidance provisions to avoid abuse of the allowance for purposes of base erosion and profit shifting.

Effective tax rates

Companies take into account the effective marginal tax rate (EMTR) in making investment decisions. The Resolution calls on the European Commission to investigate whether some Member States are artificially lowering their EMTR, for example by rules for accelerated depreciation or adjusting the tax deductibility of certain items, and thereby artificially distorting competition within the EU.

Tax incentives

The Resolution notes that tax incentives for research and development (R&D) in the form of tax credits, enhanced allowances or adjusted depreciation can raise R&D spending in an economy. However, it notes that patent box or IP box regimes may have little effect on R&D spending and may distort the internal market by providing opportunities for profit shifting.

The European Parliament therefore calls on the Commission to draw up guidelines on tax incentives that would not distort the single market. This could be done using incentives that are cost-based, limited in time, regularly assessed, and repealed if they have little impact. The incentives should be limited in geographical scope and should be partial rather than full exemptions.

The Resolution calls on the Commission to assess all ineffective tax incentives and subsidies, and to establish a screening framework for tax incentives within the EU. The Member States should be required to publish the cost of their tax incentives and should carry out annual public cost benefit analyses of each tax incentive on an annual basis.

Indirect tax

The Resolution calls for reform of indirect taxation, particularly value added tax, to reduce complexity and address tax evasion.