Presidency of the EU and Council of Europe: Czech Presidency

July 1st, the Czech Republic assumed the rotating presidency of the Council of the EU in place of France. The country will chair Council meetings and represent the Council in relations with the other institutions of the European Union until the end of 2022. Many tax files remain in the legislative pipeline of the French presidency that Czechia will have to manage, notably ;

  • the European Pillar 2 Directive implementing part of the 2021 Organization for Economic Co-operation and Development (OECD) Inclusive Framework Agreement,
  • the possible introduction of the directive implementing the first pillar of the EU,
  • the reform of the emissions trading system (ETS) and the complementary carbon border adjustment mechanism (CBAM),
  • tax compliance issues,
  • the Debt-to-Equity Bias Reduction Proposal (DEBRA), and
  • the management of the economic impacts of REPower EU.

At the Economic and Financial Affairs Council (ECOFIN) meeting in June, Poland lifted its reservation on the European directive on Pillar 2 after receiving assurances that there will be a link between Pillar 1 and Pillar 2. 2. However, the directive was not adopted unanimously because Hungary blocked it, citing problems with the first pillar calendar and the effect of the war in Ukraine on inflation.

Under the Czech Presidency, the directive will probably be discussed again in the Council. If the Hungarians withdraw their objection, the directive will likely become law. The current proposal stipulates that Member States must transpose the provisions of the directive by 31 December 2023 at the latest and apply these provisions for financial years starting on or after 31 December 2023. or after December 31, 2024.

However, if unanimous agreement is not reached, the other 26 member states could start considering other legislative avenues.

On the one hand, there is a debate in the EU about changing the EU treaties to remove the unanimity rule on tax records. The presidency has so far insisted on more debate before making changes in this direction.

Another option proposed by the Greens/EFA Members of the European Parliament (although the Parliament has no legislative role in this directive) would be to use a mechanism called “enhanced cooperation” which requires that at least nine Member States agree on a proposal from Avance. While this strategy may circumvent the Hungarian objection, it is unclear whether all 26 countries would remain supportive of the directive without being uniformly implemented.

A third option would be for member states to implement their own second pillar laws at national level without EU coordination. This process could complicate compliance and cross-border investment decisions.

For the first pillar, the inclusive framework anticipated changes to begin in 2023. However, due to ongoing technical discussions at the OECD, it is likely that implementation will not begin globally until at least 2024. For the EU’s first pillar implementing directive, the Commission was supposed to publish its proposal on July 27 but postponed it indefinitely.

Given this postponement, the Czech Presidency may not directly manage the first pillar dossier. However, presidency officials could contribute to the EU’s plan for a proposal timetable based on the results of the US midterm elections in November and the likelihood that other countries will implement the first pillar. The question for EU leaders is whether to implement the first pillar at national level without the implementation of another major country. A Council discussion on the first pillar is scheduled for December.

In addition to the first pillar, the reform of the ETS and the CBAM are proposed as new own resources for the EU budget. The additional files will be negotiated between the EU institutions from September. The current proposals indicate that the notification phase of the CBAM should start in 2023 if a compromise text is adopted. A separate Council discussion on whether these policies should earmark revenue for the EU budget is scheduled for December.

During the six-month presidency, the Unshell Directive faces an uncertain path as Czechia, as well as the next presidency, Sweden, questioned the need for and design of the directive. In addition, an agreement on the Sixth Anti-Money Laundering Directive faces difficult negotiation between member states.

The DEBRA proposal aims to encourage companies to finance their investments through equity injections rather than debt financing from January 1, 2024. The presidency will face resistance from some countries due to potential revenue losses taxes and limits on loan interest deductions. The proposal will have to be supported unanimously within the Council to become law.

Another uncertainty for the Czechs is the war in Ukraine. The EU presented its REPower EU plan to break the decoupling of dependence on Russian energy. The EU and Member States are discussing how best to support those citizens most affected by rising energy costs due to war. The presidency may also have to negotiate defense funding plans and a possible EU windfall tax.

The Czechs also said that there are various tax-related issues they would like to discuss. These measures include a plan to fund an “EU Marshall Plan” for Ukraine, stalled trade deals with the EU focused on lowering taxes and barriers, sanctions against Russia and an industrial policy policy called EU Chips Act.

As the Czech Presidency considers a plan to manage these tax-related issues, it would be wise to consider a principles-based tax policy that broadens the tax base and reduces the tax wedge on strategic investments. Closing the VAT gap and implementing full business investment accounting would be two options to increase government revenue while supporting economic growth and other policy goals.

Mary I. Bruner