On 18 May 2021 the European Union (EU) published the Annual Report on Taxation 2021 assessing progress made by EU Member States in aligning their tax policies with the EU’s tax priorities to promote innovation and productivity, encourage environmental sustainability and health, fight tax fraud and evasion; and contribute to social fairness.

EU Member States have continued to introduce new tax measures to support innovation, address the corporate debt bias and reduce compliance time. The European Commission has helped Member States through initiatives such as the MABIS project (Measurement and Analysis of Business Innovation Government Support Policies); the Code of Conduct on Withholding Tax; and TADEUS (the Tax Administration EU Summit).

Environmental tax

Environmental taxation can help the economy as by shifting from labour taxation to environmental taxes countries can stimulate employment and encourage more sustainable consumption. The report notes that environmental taxation is still underused in many Member States, even though it could help the transition to a greener economy.

Health taxes

Tax rate increases have been introduced by EU Member States in relation to taxes on tobacco, alcohol, and soft drinks. The Commission is looking at how certain EU tax directives might achieve more ambitious public health objectives.

Anti-avoidance measures

Most Member States have introduced some measures to tackle aggressive tax planning, but data still shows financial flows to and from certain Member States that are high relative to the size of the country’s GDP. Such indicators may be an indicator that a country is being used for tax avoidance purposes. The economic crisis has made the fight against tax abuse even more urgent as countries face lower tax revenues and higher spending.

Measures during the pandemic

In 2020 the pandemic took hold, and the EU economy was therefore forecast to contract by 7.4% in 2020 before recovering with economic growth of 4.1% in 2021 and 3% in 2022. Growth projections are subject to a high degree of uncertainty and risks, depending on the deployment of vaccines and more effective treatment.

Measures introduced during the crisis have included tax measures and direct support for households and businesses. Many measures aimed to provide more liquidity to businesses and households. Tax measures have included tax deferrals for corporate income tax, personal income tax, property tax, value-added tax (VAT) and social security contributions in addition to favourable tax treatment of losses, extension of the tax-filing deadlines or in some cases tax cuts for business.

The European Commission published a decision to temporarily suspend customs duties and VAT on protective equipment, testing kits and medical devices such as ventilators; adopted a temporary framework for State aid measures to support the economy; and deferred certain deadlines for filing and exchanging information under the Directive on Administrative Cooperation (DAC). The Commission also encouraged Member States to introduce targeted taxation support measures and adopted a tax package to support economic recovery and growth.

The report finds that Member States should take the opportunity to reform their fiscal framework and to implement measures to deal with the challenges of climate change, environmental degradation, population ageing, digitalisation and globalisation. The tax policy response could promote innovation and productivity and help restore a more solid capital structure.