ECOFIN Report on Tax Issues

On 20 June 2025, the Economic and Financial Affairs Council (“ECOFIN”) published a report providing an overview of progress in the area of taxation under the Polish Presidency (the “Report”). The Report included updates on:

Unshell Directive Proposal (ATAD 3): This directive sought to address the use of legal entities with minimal substance that do not perform any economic activities and are used for the purposes of tax avoidance and evasion. In addition to proposing new monitoring and reporting requirements for shell companies within the EU, such entities would be denied access to withholding tax relief. Member States have struggled to agree on the terms of the proposal since it was first initiated in December 2021. The Report confirms that the Council will not continue with this directive and that the aims of the proposal could be achieved with clarifications or amendments to the hallmarks in DAC6.

Transfer Pricing Directive Proposal: This proposal seeks to harmonise transfer pricing rules in the EU by incorporating the arm's length principle into EU law; establishing a basic framework for applying transfer pricing rules under EU law; and clarifying the role and status of the OECD transfer pricing guidelines for Multinational Enterprises and Tax Administrations. The Report notes that a large majority of Member States did not previously see the possibility of further progress on the Transfer Pricing Directive proposal in its current form. However, Member States are ‘positively predisposed’ to the proposal for a consensus-based non-legally binding transfer pricing platform with the aim of reducing complexity, costs and administrative burdens. This is expected to operate in a similar way to the EU Joint Transfer Pricing Forum which was disbanded in 2019.

Proposal for a Directive on Business in Europe: Framework for Income Taxation (BEFIT): This proposal seeks to introduce a common set of rules to calculate the corporate tax base for multinational groups operating in the EU. The Report notes that it was decided to focus on a number of other priorities during the Polish Presidency and that from the prior Council report further technical work on the proposal would be required to progress this directive.

Directive on Administrative Cooperation in the Field of Taxation (DAC 9): It was noted that this directive was adopted on 14 April 2025. DAC 9 facilitates the filing of a single Pillar Two tax return in the EU and permits Member States to share the return, and in some cases, parts of the return with other EU Member States. DAC 9 must be implemented by 31 December 2025 and will apply to 2024 Pillar Two returns.

ViDA: It was noted that in March 2025 the Council adopted its package on the VAT rules for the digital age (“ViDA”) which seeks to (i) modernise the VAT reporting obligations by introducing digital reporting requirements; (ii) address the challenges of the platform economy by updating the applicable VAT rules; and (iii) address the administrative burden by moving towards a single VAT registration. The adoption of measures under ViDA will take place on a phased basis to 2035.

Conclusions on Tax Decluttering and Simplification: The Council also highlighted its conclusions on the need for a “simplification revolution, ensuring a clear, simple and smart regulatory framework for businesses and drastically reducing administrative, regulatory and reporting burdens”. The conclusions on tax decluttering and simplification were approved by the Council in March 2025 and the aim is to improve the EU’s competitiveness and reduce administrative, regulatory and reporting burdens in the field of taxation.

OECD/G20 Inclusive Framework on BEPS: With regard to the global implementation of Pillar Two, the Report notes that constructive discussions at technical and political level will continue in order to achieve the objective of securing certainty and stability in the international tax system.

From 1 July 2025, Denmark will hold the Presidency of the Council, followed by Cyprus in the first half of 2026 and Ireland in the second half of 2026.

EU Response to Tariffs

As mentioned in our April update, the US announced a ninety day suspension of all ‘reciprocal’ tariffs on 9 April 2025 (including the EU tariff initially set at 20% but currently reduced to 10%) and that suspension is due to expire on 9 July 2025. While negotiations with the US are still ongoing, EU countermeasures will also begin to come into force on 15 July 2025 if the negotiations with the US fail.

Matheson LLP’s dedicated Customs and Trade Law team are monitoring developments closely in this area and assisting businesses to navigate the on-going uncertainty and potential impact of new US and EU tariffs. In an environment that up to now was considered to be ‘low tariff’, businesses may not have paid attention to the minutiae of EU customs rules. In a move to a potentially higher tariff environment, greater focus on those rules is required to ensure that businesses are accurately applying them.

Pillar Two Negotiations

On 28 June 2025, the G7 issued a joint statement on global minimum taxes to confirm that there is a shared understanding to allow US tax laws to sit “side-by-side” with the Pillar Two rules. The statement outlines that a “side-by-side system would fully exclude U.S. parented groups from the UTPR and the IIR in respect of both their domestic and foreign profits”.

As a result of this agreement, it was also announced that the proposed Section 899 (which was proposed, in part, as a response to the under taxed profits rule under Pillar Two) will be removed from the US One Big Beautiful Bill Act.

Work to implement this agreement on Pillar Two, together with material simplification to the overall Pillar Two administration and compliance framework, will continue over the coming months. We would also expect that any resulting impact on the EU Pillar Two Directive will need to be assessed.

Tax Controversy and Dispute Resolution Update

TAC Determination on Deductibility of Foreign Withholding Tax on Royalties

The Tax Appeals Commission (“TAC”) issued another determination which considered whether foreign withholding tax (“WHT”) on royalties should be available as a deduction. This follows a number of prior TAC determinations over recent years that considered this issue.

The Commissioner, Claire Millrine, found in favour of the taxpayer confirming that WHT imposed on royalties received by an Irish taxpayer should be deductible under section 81 of the Taxes Consolidation Act 1997 (“TCA”) as it was a final cost of doing business in the jurisdictions where it was imposed on the basis that:

• The taxpayer was not entitled to avail of relief for double taxation under Schedule 24 TCA;
• The tax was calculated prior to the ascertainment of profit and was applied to gross royalty income;
• The tax was calculated irrespective of whether the taxpayer makes a profit or a loss;
• There was a nexus between the expense of WHT and the earning of profits for deductibility. The taxpayer suffered WHT, for the purpose of enabling it to carry on and earn profits in the trade (as per Lord Davey in Strong & Co.); and
• The sequencing or the timing of when the liability is incurred was irrelevant, as was the absence of volition, to the test for deductibility under section 81 of the TCA.

The decision is being appealed to the High Court by way of case stated.

It should be noted that the law on the deductibility of taxes on income has changed following the introduction of section 81(2)(p) TCA under the Finance Act 2019. That provision now expressly provides that with effect from 1 January 2020 taxes on income are not deductible in calculating taxable profits. The year under assessment in this case pre-dated that change and the Commissioner was satisfied that an amending provision cannot be used to interpret pre-existing statutory provisions.