Recent EC announcements on a financial support package and tax fairness

Fri 24 Jul 2020

The European Commission (EC) has announced two initiatives:

• A new tax package for fair and simple taxation.  This consists of three elements:
  • Action Plan of 25 initiatives for fair and simple taxation supporting the recovery;
  • A revision of the directive on administrative cooperation (DAC7) for automatic exchange information on income generated by sellers on digital platforms;
  • A communication on tax good governance in the EU and beyond
• A recommendation of 14 July (see here) on making State financial support to undertakings in the Union conditional on the absence of links to non-cooperative jurisdictions.

Further detail on both these initiatives is covered below.  Businesses should be considering the potential impact of these developments on their operations.  For further information, please get in touch with a member of the Mazars international tax team.

Tax package for fair and simple taxation

The 25 point action plan to be delivered between 2020-2023, covers:

• An amendment of the VAT directive to move towards a single registration system (for 2022);
• Modernisation of the VAT rules to take account of the on-line platform economy;
• Updating of the VAT rules for financial services to take account of the digital economy;
• Clarification of tax residency rules for cross border EU workers;
• Improvement of technology and information sharing between fiscal authorities to fight VAT fraud.

Amongst the initiatives are:

• A Charter on taxpayer’s rights (in 2021 Q3);
• setting up a transfer pricing expert group (in 2021 Q1) to elaborate pragmatic, non-legislative solutions to practical problems posed by transfer pricing practices in the EU;
• Implementation of Standing Committee for dispute resolution. (in 2021 Q3);
• Digital solutions to levy tax at source, with an impact assessment possibly leading to a legislative initiative in the form of a Commission proposal for a Council directive introducing a system of withholding tax relief at source (2022);
• An update of the VAT special scheme for travel agents and a review of passenger transport to ensure compliance with tax policy developed under the green deal (2022);
• Reinforcement of verifications of cross-border transactions by switching from exchanging to sharing of tax-related data (2023);
• VAT administrative cooperation between the EU and relevant third countries (2023).

The revision to administrative cooperation (DAC 7) will extend EU tax transparency rules to digital platforms. Member States will automatically exchange information on income generated by sellers on digital platforms.  This will cover relevant activities, which include:

1. the rental of immovable property;
2. a Personal Service;
3. the sale of goods;
4. the rental of any mode of transport.
5. investing and lending in the context of crowdfunding, as defined in Union financial markets legal framework.

The scope of digital sellers will include non-EU tax resident sellers that have commercial activity in the Union.

The communication on tax good governance includes reform of the code of conduct on business tax.  The communication notes that the current code “…looks at specific tax measures and regimes. However, increasingly, countries are using the general structures of their tax systems to engage in tax competition, for instance by providing particular tax residency rules which can lead to double non-taxation or tax exemptions for foreign income, which may favour harmful tax practices without appropriate safeguards. In addition, the Code does not cover special citizenship schemes or measures to attract expatriates or wealthy individuals, even though these are often a back door to unfairly attracting business and investment from other countries.”

It also includes a review of the EU list of non-cooperative jurisdictions, and improved measures for tax good governance such as, extending the EU requirement for EU funding and assistance not to be channelled to entities with links to jurisdictions listed as non-cooperative, to national funding and assistance.  There is also an aim to strengthen support for developing countries in implementing tax good governance principles.

EC Recommendation on making state financial support conditional on absence of links to non-cooperative jurisdictions

The Recommendation sets out a coordinated approach to making the granting of financial support by Member States conditional on the absence of links between the recipient undertaking and jurisdictions which feature on the EU list of non-cooperative jurisdictions.  Under the recommendation the undertakings that receive the financial support should not:

1. be resident for tax purposes in, or incorporated under the laws of, jurisdictions that feature on the EU list of non-cooperative jurisdictions;
2. be controlled, directly or indirectly, by shareholders in jurisdictions that feature on the EU list of non-cooperative jurisdictions, up to the beneficial owner, as defined in Article 3 point 6 of Directive 2015/849;
3. control, directly or indirectly, subsidiaries or own permanent establishments in jurisdictions that feature on the EU list of non-cooperative jurisdictions; and
4. share ownership with undertakings in jurisdictions that feature on the EU list of non-cooperative jurisdictions.

Member States may disregard the existence of links to the listed non-cooperative jurisdictions, when the undertaking provides evidence that one of the following circumstances is met:

1. Where the level of the tax liability in the Member State granting the support over a given period of time (e.g. the last three years) is considered adequate when compared to the overall turnover or level of activities of the undertaking receiving the support, at domestic and group level, over the same period.
2. Where the undertaking makes legally binding commitments to remove its ties to EU listed non-cooperative jurisdictions within a short timeframe, subject to appropriate follow-up and sanctions in case of non-compliance.