Is taxation a poisoned chalice?

Is taxation a poisoned chalice?

Sun 15 Nov 2015

“Is the taxation a poisoned chalice?” That is what many told to Commissionaire Pierre Moscovici when he found out that President Juncker had given him the taxation portfolio. In the last eighteen months, the European Commission’s and OECD’s strong commitment has reshaped the international taxation landscape, has challenged the existing structures and transaction, and it is undeniable that it has reshaped the future of “tax planning”.  

Commissionaire Moscovici pointed out in his Tax Transparency Revolution blog article that “Numerous Commission proposals languish on the table before Member States, the unanimity rule can lead to crippling paralysis, unlikely and unholy pacts are made to protect various special interests. This hasn’t held me back, however: when political necessity is at stake, even unanimity can be overcome.”

With his leadership, today we have a new area and progress has been made. This blog article follows Pierre Moscovici’s analysis and focuses on the concrete steps of last 6 months within the European Union:

Tax Rulings – Council deal on automatic exchange of tax rulings is a “missed opportunity”

The Economic and Finance (ECOFIN) Council deal watered down the Commission’s proposal for more transparency and exchange of information of their tax rulings for MNEs automatically, on 6 October, before Parliament’s Economic and Monetary Affairs Committee voted its position, on 13 October.

Commenting on the Council deal, Parliament’s rapporteur Markus Ferber commented: “If this is the final text, MSs will have missed a great opportunity to create more transparency in taxation. National budgets will continue to suffer. We need an EU-wide systematic and mandatory procedure. For the moment, MSs’ tax authorities would not realise that tax ruling deals forged in other member states are undermining their own tax bases. Tax authorities should be obliged to exchange information on tax rulings and make them available to a central database at the European Commission”.  It is expected that the new rules are to apply from 1 January 2017. Until then, any existing obligations to exchange information among member states will stay in place. See below what MEPs suggest, compared to what the Council agreed:

  • Limited scope – MEPs would prefer the directive to apply to all tax rulings, not just “cross border rulings and advance pricing arrangements”, given that purely national transactions can also have cross-border effects. The Council made the directive’s scope “cross-border only”.
  • Commission sidelined – The Council ensured that the Commission is explicitly not allowed to do anything with the information – to which the Commission only has very limited access – other than overseeing that the directive is properly applied.
  • No retroactive effect – The Council agreed that the directive would apply only to rulings, amendments or renewals of rulings after 31 December 2016, with some exceptions for those issued, amended or renewed between 2012 and 2016.

Additionally, on 5 November 2015, the European Parliament published a Report on tax rulings and other measured similar in nature or effect

Financial Transaction Tax (FTT)

Commissioner Moscovici described the work on FTT as a long-running saga since 2010 and said that they took a decisive step forward in September. Today there is a renewed political approach and discussions amongst the 11 Member States that have chosen to cooperate on this project had finally resulted in a body of common principles.
Following a meeting of European Finance Ministers on 9 November 2015, participating MSs have failed to reach a consensus on the introduction of the FTT. There is still more questions than answers and major disagreements on the scope of the tax and how it should be levied. Next step is the EU Finance Ministers meet on 8 December and the outcome depends on the consensus. If there is consensus, the expected commencement would be the date of second quarter of 2017.

Common Consolidated Corporate Tax Base (CCCTB)

EU Commission released a public consultation on the Re-launch of the CCCTB on 8 October 2015 and seeks the views of all interested parties on how the current rules of the CCCTB Proposal for a Directive can be revised to better reflect the current policy priorities in international taxation.

On 17th June 2015, the Commission published an Action Plan for a Fairer and Efficient Corporate Tax System and proposed 5 key areas for action in the coming months. The re-launch of the CCCTB lies at the heart of the Action Plan. It is presented as an overarching objective which could be an extremely effective tool for meeting the objectives of fairer and more efficient taxation. It features as the main tool for fighting against aggressive tax planning, incorporating recent international developments, attributing income where the value is created.

Specifically:

  • A set of common EU rules for the calculation of the corporate tax base would in practice decrease significantly aggressive tax planning opportunities within the EU dimension of the group.
  • Considering that the current transfer pricing (TP) rules have not proved very effective in tackling profit shifting over the last decades, a system of cross-border tax consolidation, as provided for in the CCCTB, would remove the benefits of profit shifting within the consolidated group across the Single Market.
  • The possibilities of shifting income towards the Member States (MSs) with the lowest tax rates would be more limited under the CCCTB than the current national principles for allocating and computing profits through methods largely based on TP. This is mainly due to the fact that the apportionment factors have been devised to reflect the real economy. On the same note, within a consolidated group, there is no risk of double taxation or double non-taxation caused by mismatches amongst national rules and through the interaction of tax treaties.
  • The existence of common rules for computing the tax base would render tax competition more transparent in the EU because this would inevitably focus on the levels of (statutory) tax rates. As a result, there would be less room for tax planning.
  • The CCCTB would contain its own defence against tax abuse (e.g. Controlled Foreign Company (CFC) legislation, General Anti-Avoidance Rule (GAAR), etc.). This is particularly important when it comes to protecting the group’s tax base against erosion in dealings with entities outside the consolidated group.
  • In defending the Single Market against aggressive tax planning, the CCCTB would allow MSs to implement a common approach vis-à-vis third countries.
  • While removing distortions caused by aggressive tax planning, the CCCTB would also improve the environment for businesses in the EU, as it would allow companies operating in the EU to deal with a single set of common corporate tax rules within the EU. This would represent a significant simplification and would reduce compliance costs as a whole.

The Action Plan calls for a renewed approach to the pending proposal whereby the main amendments will be the following: i) Firstly, the re-launched CCCTB will be a mandatory system, which should make it more robust against aggressive tax planning practices; and ii) Secondly, it will be deployed in 2 steps because the current proposal is too vast to agree in one go; efforts will first concentrate on agreeing the rules for a common tax base, and consolidation will be left to be adopted at a later stage.

In practical terms, the Commission is planning to table two new Proposals: the first instrument will lay down the provisions for a Common Corporate Tax Base (CCTB) whilst the second will add the elements related to consolidation (i.e. CCCTB). Once this new legislative framework (henceforth referred to as CCTB/CCCTB) has been adopted by the Commission, the currently pending proposal will be repealed.

There is no doubt that a fully-fledged CCCTB would make a major difference in reinforcing the link between taxation and the jurisdiction where profits are generated. Yet, it is clear that it would take time to reach agreement on such an extensive piece of legislation. Bearing this in mind, the Action Plan suggests that Member States continue working on some international aspects of the common base which are linked to OECD BEPS Project while the ‘re-launch’ proposals are under preparation. According to the Action Plan, agreement to convert these BEPS-related elements into legally binding provisions should be achieved within 12 months.

Interest and Royalty Directive

The work on agreeing anti-abuse rules in the Interest and Royalty Directive is one of the priorities for EU Commission.

Saving Directive

On 10 November 2015, the Council of the European Union announced that the EU Savings Directive (2003/48) has been repealed. The repeal was necessary to eliminate the overlap with other legislation developed in the field of measures to prevent tax evasion.

Directive 2003/48/EC required the automatic exchange of information between member states on private savings income. This enabled interest payments made in one member state to residents of other member states to be taxed in accordance with the laws of the state of tax residence. The directive was last amended in March 2014 to reflect changes to savings products and developments in investor behaviour since it came into force in 2005.

In December 2014, the Council adopted directive 2014/107/EU amending provisions on the mandatory automatic exchange of information between tax administrations. It extended the scope of that exchange to include interest, dividends and other types of income. Directive 2014/107/EU will enter into force on 1 January 2016. It implements a single global standard developed by the OECD for the automatic exchange of information. The OECD standard was endorsed by G20 finance ministers in September 2014.

EU agreements with Andorra, Liechtenstein, Monaco, San Marino and Switzerland, initially based on directive 2003/48/EC, are currently being revised to be aligned with directive 2014/107/EU and the new global standard.

Country by country Reporting

EU Parliament’s Special Committee on Tax Rulings recommended measures to make corporate taxes in the EU fairer and more transparent. MEPs base their recommendations on the principle that multinational companies should pay their taxes where they make their profits. They feel that today’s corporate tax competition – prompting aggressive tax planning and evasion, without any agreed framework – is harmful.

Apart from the loss of public income, it is considered unfair that big companies pay hardly any taxes on their profits, whereas citizens and small and medium-sized firms have to pay their full share. Therefore, Committee members recommend introducing country-by-country reporting for multinational companies on financial data including profits made, taxes paid and subsidies received. They also advocate introducing clear definitions of “economic substance” and other determining factors of corporate tax bills.

Country by country reporting would require European multinationals to publicly disclose their profits and the taxes they pay in each country where they operate. Many see it as a good way to fight against corruption and against tax evasion. The European Commission finished a public consultation on this subject released on 17 June 2015 and intends to complete an impact assessment in the coming months.

Greater Tax Transparency

The Action Plan sets out the next steps for greater tax transparency – within the EU and vis-à-vis third countries. This builds on the measures already envisaged in the Tax Transparency Package, adopted in March.

To launch a more open and uniform EU approach to non-cooperative tax jurisdictions, the Commission has published a pan-EU list of third countries and territories blacklisted by Member States. This can be used to screen non-cooperative tax jurisdictions and develop a common EU strategy to deal with them. As such, it will reinforce Member States’ collective defence system against external threats to their revenues.

Fair tax competition and MNEs

Multinational companies which have so far refused to cooperate with the Members of Parliament’s Special Committee on Tax Rulings is given one more chance to reconsider their stance on 16 November.  Committee chair Alain Lamassoure (EPP, FR) stated that “MEP has an obligation to deliver results” and hoped for a higher turn-out than on previous occasions: “I hope that, this time, multinational companies will seize the opportunity to share their views with us on current developments in the corporate tax world. The OECD has presented its action plan against BEPS and the Commission consultation on Common Consolidated Corporate Tax Base (CCCTB) has now started. We are very keen to hear their take on these issues.”

As a result of the final invitation, eleven out of 13 multinational companies which initially refused invitations to appear before Parliament’s Special Committee on Tax Rulings have accepted a ‘last chance invitation’ to share their views with committee members. This is the last meeting before the 25 November final vote on Parliament’s recommendations for fairer tax competition in the EU.

Better protection for whistle-blowers

In the EU Parliament press release, it was pointed out that “whistle-blowers whose revelations promote the public interest should be better protected (…) noting that the “Luxleaks” revelations were made by investigative journalists, based on information provided by former ‘Big Four’ employee who now faces court charges in Luxembourg.”

Source: EU Parliament website and http://www.pierremoscovici.fr/2015/09/18/the-transparency-revolution/

Comments

One response to “Is taxation a poisoned chalice?”

  1. The Conference of Presidents of political groups has decided on 26 November 2015, with the vote in favour of all political groups, to set up a temporary committee to follow up on the work done by the Special Committee on Tax Rulings, which looked into the tax rulings practised by various EU member states. The new committee will last six months.

    Its precise mandate will be decided at a special meeting of the Conference of Presidents next Wednesday, following negotiations between the experts of the political groups, and submitted for approval by the plenary on the very same day. It should be based on that of the previous tax rulings committee. The group leaders also recommended that the composition of the new committee should be the same as that of the old one.

    The tax rulings committee’s final report was approved by Parliament as a whole on Wednesday 25 November. In the resolution which went with the report, Parliament set out its ideas on how to make corporate taxes fairer across Europe and urged EU member states to agree on mandatory country-by-country reporting by multinationals of profits and taxes, a common consolidated corporate tax base, common definitions for tax terms and more transparency and accountability with regard to their – so far secret – national tax “rulings” for companies. Source: http://www.europarl.europa.eu/news/en/news-room/content/20151126IPR04899/html/Successor-to-Special-Committee-on-Tax-Rulings

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