Weekly Tax News – 28 January 2019

The Greens/EFA presented tax report

On 22 January 2019, the Greens/EFA group at the European Parliament presented a study highlighting the difference between nominal tax rates (NTRs) and effective tax rates (ETRs) of multinationals in most EU countries. The study points out that multinationals are taxed in the EU at an average ETR of only 15%, as opposite to the average NTR of 23%. The main concerns for the Greens/EFA are the differences between Member States: while Italy and Greece have ETRs for multinationals of 30.4% (NTR 31%) and 28.4% (NTR 24%) respectively, Luxembourg's is only 2.2% (with NTR of 29%). Furthermore, according to the report, the taxation of multinationals is negatively linked to their size: the larger the companies, the lower the ETR. In response to the study, the Greens/EFA group called on Member States to stop blocking two tax reforms in the EU Council: the Directive on the generalisation of Country-by-Country Report and the proposal for a common consolidated corporate tax base.

EESC on the definitive VAT system

On 21 January 2019 the European Economic and Social Committee (EESC) published its opinion on implementing the definite VAT-System proposed by the Commission. The EESC welcomed the Commission's proposal, believing that it is a crucial step to go beyond the transitional regime in order to complete the move to the definitive destination principle-based VAT system for taxing goods in B2B. It also highlighted that the proposed system will benefit from clear provisions laying down the rules for bad debt and refunds management within the One-Stop Shop (OSS). Nevertheless, the EESC urged the Commission to explore how a common system for both services and goods can be rolled out as quickly as possible and stressed the importance of continuing the work towards the second step, treating goods and services in the same way for VAT purposes. Amongst other recommendations, the EESC asked for clear and proportionate criteria regarding the concept of "certified taxable person" (CTP) to be implemented across Member States, in order to facilitate the broadest possible access to CTP status.

The Council still at a deadlock on Country-by-Country Report

On 24 January 2019, the meeting of national experts of the EU Council failed to make progresses on the proposal for country-by-country reporting, which would require companies to make certain accounting data public such as their turnover, profits or taxes paid. Several countries have reiterated their reservations over the legal base proposed by the Commission, which has opted for company law, giving the European Parliament involvement on an equal footing with the Council as co-legislator. However, these countries consider that the text should be negotiated as a tax text, unanimously and simply by consulting the European Parliament. It is worth noting that a change of legal basis should be agreed unanimously by the Member States.

Germany, Italy and the UK referred to the Court of Justice

The Commission in its role as the Guardian of the Treaties and with the intention to enforce EU rules referred three Member States to the Court of Justice of the EU.

In the case of Germany, the Commission criticizes a specific VAT refund practice where additional information is requested from the refund applicant in order to take a decision on the application. According to the Commission this situation leads to cases where VAT refunds are denied even though under EU law the applicant fulfils all requirements.

According to the Commission Italy has failed to change a law that provides a reduced tax rate for Italians who live abroad and buy their first home in Italy. They don’t need to fulfil the residence requirement while nationals of other Member States have to effectively live in Italy or do so within 18 months. Italy is being accused of discriminatory treatment based on nationality which is not allowed under the Treaty on the Functioning of the EU.

The United Kingdom has failed to comply with VAT rules for certain commodity markets. The Commission criticizes that the UK extended the scope of the commodities where a zero-rate VAT applies without notifying the EU. The Commission fears that this practice will lead to major distortions on other financial markets within the EU.

TAX3 hearing on Slovakia case and tax gap methodology

On 24 January 2019, the TAX3 committee of the European Parliament held two public hearings. The first, on financial crimes, tax evasion and tax avoidance in Slovakia, discussed the murder of the investigative journalist Jan Kuciak (27 at the time of the murder) and his partner Martina Kusnirova. Mr Kuciak had been investigating alleged financial crimes and tax frauds. Mr Ladislav Hanniker (General Director of the Fight against Frauds and Risk Analysis Section at the Financial Directorate of Slovakia) provided an overview of how the introduction of special measures by the Slovakian tax authority in 2012 has enhanced the fight against VAT frauds. Mr Maros Zilinka (Head of the Economic Criminality Department of the Special Prosecutor Office) and Mr Radovan Kajaba (Head of the Criminal Department of the General Prosecutor's Office) pointed out the fruitful work of the prosecutor’s office, with 77 people prosecuted for financial crimes against the EU (mainly for misuse of EU funds) only in 2018.

The second hearing discussed “The evaluation of the tax gap” analysing the methodologies used to assess the amount of tax evasion and avoidance within the EU. Gaetan Nicodeme (Head of Unit of economic analysis, evaluation and impact assessment support-DG TAXUD and Fiscalis tax gap project group representative) pointed out that the most common method used for evaluating the tax gap of corporate income tax is the “top down” approach, that gathers macroeconomic data to estimate the economic activity of a certain company and consequently the tax that should be paid by such company. Mr Nicodeme highlighted the limitation of available data and the scarce consensus between the tax authorities of the Member States on the methodology to apply. Ms Annette Alstadsæter (Professor-School of Economics and Business at Norwegian University of Life Sciences) explained the amount of tax avoided by wealthy individuals in the Scandinavian countries, highlighting the connection with hidden assets abroad, in particular in Switzerland. Mr Petr Janský (Assistant Professor in Economics at the University of Prague) provided various estimates of corporate tax avoidance worldwide, based on the various methodologies, explaining that they go from prudent estimates of around USD 150 billion to less conservative USD 600 billion. Furthermore, he pointed out that these estimates do not take into account the tax avoidance in developing countries because of the lack of data from the tax authorities in those countries.

€14 bn tax case against Dublin and Apple delayed

In 2016 the Commission filed a state aid case against Ireland, ordering the Member State to claim back €14bn in unpaid taxes from Apple. The iPhone maker and Dublin, however, appealed against that decision hoping to conclude their case before other state aid appeals involving tax affiars of Fiat in Luxembourg and Starbucks in the Netherlands. They fear that these cases could complicate the Ireland/Apple case by setting precedents to their disadvantage.

Poland now has intervened, siding with the Commission and thus delaying the conclusion of the case by several months. The court allows Member States to get involved without having to prove an interest. In this way Poland will gain access to confidential documents that will help the government find out whether it can claim a part of Apple’s unpaid taxes or not.

S&D tax priorities for the next election period

On Wednesday 23, the S&D group published five recommendations for the European Union to fight tax fraud and avoidance strategies. The recommendations will also be included in the electoral programme of the group: 1. set the minimum effective tax rate for corporations at 18%, instead of the current 15%; - 2. precisely analyse the gap between taxes due and income actually received ('tax gap'); - 3. propose rules to put an end to harmful tax practices; - 4. follow up on the recent proposal to phase out the unanimity requirement for tax decisions in the Council of the EU; - 5. improve the criteria for the European list of tax havens, including those with zero tax rates. Furthermore the S&D group presented a study,  conducted by Professor Murphy from the City University London, on the so-called tax gap. According to the report Italy, France and Germany are the most affected by this phenomenon in terms of absolute numbers.