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Weekly Tax News – 21 March 2022

Fourth round of EU sanctions against Russia

On Tuesday 15 March, the European Union adopted a fourth package of sanctions against Russia in response to its invasion of Ukraine. In particular, the EU Council decided on a total ban on all transactions with certain Russian state-owned companies, a prohibition of the provision of any credit rating services, a ban on new investments in the Russian energy sector and an overall export restriction on equipment, technology and services for the energy industry. Further trade restrictions have also been introduced concerning iron and steel, as well as luxury goods. Furthermore, the Council decided to sanction additional key oligarchs, lobbyists and propagandists pushing the Kremlin’s narrative on the situation in Ukraine as well as key companies in the aviation, military and dual use, shipbuilding and machine building sectors.


Poland, Sweden, Malta and Estonia not ready to agree on the Implementing Directive for Pillar II

EU Finance Ministers failed, on Tuesday 15 March, to reach an agreement on the Implementing Directive for Pillar II, despite a new compromise proposal put forward by the French Presidency of the EU Council. Among other things, the new text postpones the deadline for the entry into force of the future rules to 31 December 2023 instead of 1 January 2023 and makes the Income Inclusion Rule (IIR) optional for 5 years for countries which have not more than 10 entities falling into the scope of Pillar II. Despite those major concessions, Poland, Sweden, Malta and Estonia did not support the text. During the debate, Poland reiterated its wish to have a legally binding safeguard that the implementation of Pillar II will be linked to the implementation of Pillar I (reallocation of taxing rights) of the OECD tax deal. The country said that the proposed statement annexed to the text to stress the attachment of EU Member States to Pillar I is not enough. France now hopes that an agreement can be reached by the unanimity of Member States at the next Ecofin meeting on 5 April.


MEP Aurore Lalucq publishes her draft report on minimum taxation

The French MEP Aurore Lalucq (S&D) published, on Monday 14 March, her draft report on the Implementing Directive for Pillar II. Among other changes, Ms Lalucq is proposing a minimum effective tax rate of 21% instead of 15% and says that flexibility should be provided for Member States who are willing to apply the new rules to smaller entities. The draft report introduces a review clause, after 5 years of entry into force, to assess and reconsider certain exemptions and derogations, in particular regarding distribution tax systems and substance-based income exclusion, the relevance of the threshold for MNE Group and large-scale domestic firms in scope and the impact on tax revenues on developing countries. A review clause would also be an opportunity to integrate further modification of the OECD Model rules into EU law if necessary, the text stresses. A delimitation clause has also been added to stipulate that this Directive shall not affect the application of domestic provisions on alternative forms of minimum taxation of domestic groups or companies. On this file, the European Parliament is only consulted for an opinion. The report is expected to be voted on 28 April.


ETAF positions itself on the Implementing Directive for Pillar II

 On Friday 18 March, the European Tax Adviser Federation (ETAF) sent its feedback to the European Commission on the Implementing Directive for Pillar II. ETAF members largely agree that a Directive is desirable to implement in a consistent and coordinated way the rules resulting from the OECD agreement within the EU and believe that the EU should strictly stick to the OECD model rules. In this regard, we would strongly urge the EU Council and the European Commission to take into account the remaining work of the OECD on Pillar II before finalising the text of the Directive. As 98% of our members typically represent SMEs, only a grip of ETAF members will have to implement the new rules for their clients meeting the threshold. However, as taxation is a matter of perpetual evolution and tax advisers should be open and prepared to any future development, including a lowering of the threshold and the event of an application of the new rules to smaller companies, it was important for ETAF to contribute to the debate. The feedback period is still open until 6 April.


OECD consults on Implementation Framework and releases Commentary to Pillar II

The OECD/G20 Inclusive Framework on BEPS opened, on Monday 14 March, a public consultation to collect input from stakeholders on the matters that need to be addressed in the Implementation Framework on Pillar II. The Implementation Framework, which has to be finalized before the end of 2022, aims at supporting tax authorities in the implementation of the minimum 15% effective tax rate for large multinational enterprises (MNE). The public consultation does not solicit further comment on the policy choices already made but rather focus on putting in place mechanisms that will ensure that tax administrations and MNEs can implement and apply the rules in a consistent and co-ordinated manner while minimising compliance costs, the OECD says. Interested parties are invited to send their comments before 11 April. On the same day, the OECD also released the Commentary to the Model Rules on Pillar II, which elaborates on the application and operation of the new rules and clarifies the meaning of certain terms. It also illustrates with examples the application of the rules to various fact patterns.


Member States agree on CBAM

On Tuesday 15 March, EU Member States reached an agreement (general approach) on the Carbon Border Adjustment Mechanism (CBAM). Only Poland did not support the compromise text proposed by the French Presidency of the EU Council. CBAM would function in parallel with the EU’s Emissions Trading System (EU ETS), to mirror and complement its functioning on imported goods. Initially, CBAM will cover direct emissions of selected sectors: iron and steel, cement, aluminium, fertilisers and electricity but could be extended in the future to cover also indirect emissions. The companies concerned will have to buy emission certificates according to the carbon intensity of the imported products. The agreed text is generally in line with the Commission’s initial proposal. One difference is that the Council opted for a greater centralisation of the CBAM governance. For example, the new registry of CBAM declarants is to be centralised at EU level. EU Finance Ministers also noted in a separate statement that further work will be needed on certain sensitive issues discussed in other legislative texts before negotiations with the European Parliament can start. This is notably the case for the phasing out of free allowances that EU companies get under the current EU ETS, the risk of carbon leakage linked to exports, the use of CBAM revenues to finance EU budget and the idea of an alliance on carbon pricing between international partners in a ‘climate club’, as suggested by Germany. The European Parliament is expected to adopt its position in June.


Council adopts conclusions on the implementation of the VAT e-commerce package

The EU Council adopted, on Tuesday 15 March, conclusions on the VAT e-commerce package, which entered into force on 1st July 2021. The text welcomes the preliminary results, presented by the Commission, of the evaluation at technical level of the correct application of the new EU VAT rules on e-commerce, which indicate that the package contributes to the digital transition, economic recovery and the sustainability of public finances across the EU. More importantly, it also looks forward to the “VAT for the Digital Age” package, expected later in 2022, and invites the Commission to ensure that all proposals it intends to present to the Council are fully assessed with regard to their economic, administrative and social costs and benefits for taxpayers and tax authorities, including their impact on EU and Member States' IT capacities and the corresponding implementation periods required, as well as on fundamental rights, such as personal data protection.


MEPs quiz the Chair of the Code of Conduct Group on business taxation

On Thursday 17 March, MEPs from the subcommittee of the European Parliament on tax matters (FISC) quizzed the Chair of the Code of Conduct Group on Business Taxation, Lyudmila Petkova. On this occasion, they expressed their deep disappointment for the failure of Member States, last December, to agree on the revision of the 1997 Code of Conduct, which aims to limit harmful business taxation practices in the European Union. MEPs asked Ms Petkova whether she saw any room for manoeuvre which would allow a reform to happen or whether the only option was to have a Treaty change to remove the unanimity rule. Ms Petkova assured that the negotiations will continue and said that some discussions still involve the impact of the Pillar II of the OECD tax deal. MEPs also asked her about how to better balance the need of controlling tax evasion and fraud with that of permitting healthy tax competition between Member States.


EU Tax Observatory advocates for a European Asset Registry

In a note published on Wednesday 16 March, the EU Tax Observatory provided data on wealth inequality in Russia and advocated for a European Asset Registry. Under the roof of a European Asset Registry, the already existing information could be gathered and this would result in better-targeted sanctions and effective tools to curb money laundering, corruption and tax evasion, it says. The EU Tax Observatory suggests that the EU sets up a Task Force for Asset Ownership, which could be supervised by the Eurogroup, to collect, crosscheck and analyse all available information on wealth and assets held in EU Member States by wealthy individuals, above a given threshold. The ultimate objective of the registry would be to record comprehensively the ownership and movement of assets. It should leave no gaps in the type of assets held and it should rely on automatic exchange of information procedures between the different sources, the EU Tax Observatory says. The European Commission already ordered a feasibility study on such a Registry last autumn. The results are expected in April 2023.