On Wednesday 6 April, the European Tax Adviser Federation (ETAF) sent a feedback to the European Commission on the Directive laying down rules to prevent the misuse of shell entities for tax purposes (UNSHELL) and amending Directive 2011/16/EU. The proposal seeks to create a new minimum economic substance test, organized in several steps, to help Member States identify undertakings that do not perform any actual economic activity and that can be misused for tax avoidance or evasion purposes. As parts of the new reporting process foreseen in the Directive will have to be carried out by the tax profession, ETAF formulated some comments about the complexity of the mechanism chosen and said that some criteria were too far reaching. For ETAF members, it is crucial that this new Directive can be used to effectively prevent the misuse of shell companies, while at the same time contributing to the simplification of tax law and reducing the administrative burden. To achieve this goal, a uniform and sufficiently concrete concept of minimum economic substance to which all Member States align their anti-abuse standards is an indispensable contribution to ensuring the legal certainty, ETAF said. The burden of proof must also be reconsidered throughout the text and particularly when it comes to the rebuttal mechanism and the exemption for lack of tax motives.
On Tuesday 5 April, EU Member States failed once again to agree on the Implementing Directive for Pillar II. While Estonia, Malta and Sweden were able to support the new compromise text from the French Presidency of the EU Council, Poland maintained its blockade. The new text foresees that Member States where no more than twelve ultimate parent entities of groups in scope are located may elect not to apply the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR) for six consecutive fiscal years. It also adds the possibility for the European Commission to assist small countries in the transposition of the Directive. During the debate, Poland said that it does not support the separation of the two Pillars of the OECD tax deal and wants a legally binding link of both Pillars directly in the Directive, although the legal service of the EU Council and the Commission said that it is not legally feasible. For some commentators, the country would be using this agreement as a mean of pressure to get its recovery plan approved by the European Commission. The French Presidency very much regretted Poland’s position and said that this file will be put again at the agenda of the next Ecofin meeting on 24 May.
The OECD opened on Monday 4 April a public consultation on the draft Model Rules for domestic legislation on the scope under Amount A of Pillar I (reallocating of taxing rights) of the OECD tax deal. The purpose of the rules is to determine whether a Group will be in scope of Amount A, i.e, the new taxing right introduced over a portion of the profit of large and highly profitable enterprises for jurisdictions in which goods or services are supplied or consumers are located. According to the draft rules, a Group will be in scope of Amount A if the Group’s Total Revenues exceed an absolute amount of EUR 20 billion (or equivalent) in a certain period and if the Group’s relative profitability as measured against its Total Revenues exceeds 10%.The Draft Rules for the exclusions for extractives and regulated financial services will be released for public consultation at a later date. Interested parties have until 20 April to send their comments.
The European Commission opened on Friday 1 April a new public consultation on improving withholding tax procedures on dividend or interest payments for non-resident investors. It is expected to present a proposal on this issue during Q4 2022. The problems the Commission aims to tackle are the particularly burdensome withholding tax refund procedures for cross-border investors in the EU and, at the same time, the risks they present in terms of tax abuse. The Commission wants to know if stakeholders agree that an EU action is needed and which option they would prefer among maintaining the current system with different national procedures in place, creating a harmonized system of relief at source, creating a harmonized system of improved refund procedures, or a combination of the above systems (relief at source and refund system). The Commission also asks stakeholders who should be held liable in case of any underreporting during withholding tax procedures in order to avoid tax abuse and loss of tax revenue. The deadline to reply to this public consultation is 26 June.
The Commission sent on Wednesday 6 April a letter of formal notice to Germany, requesting it to amend its legislation regarding taxation of dividends and interest paid to charitable organisations. Under German tax law, dividends and interest paid to charities having their legal seat or the place of management in Germany are either exempt from withholding tax, or withholding tax is refunded. However, dividends and interest paid to comparable charities established in other EU Member States and third countries are taxed at a rate of 25% unless a relevant Double Tax Agreement provides for a reduced rate. This difference in treatment of domestic and cross-border dividend and interest distributions to charities seems to constitute a restriction on the free movement of capital, according to the Commission. If Germany does not provide a satisfactory response within the next two months, the Commission may decide to move to the second step of the infringement procedure.
The European Commission published on Wednesday 6 April the final report of the study on tax compliance costs for SMEs. The study, which was conducted in all EU countries among more than 3.500 enterprises in 2019, focuses on the obligations SMEs face when complying with tax requirements. It concluded that SMEs face proportionally higher costs than larger enterprises and highlighted the impact that tax systems can have on companies’ decision-making and economic activity. The study also provides recommendations at national level and at EU level, which include the general simplification of tax obligations for companies, in particular for SMEs, and the adoption of one-stop-shop solutions, accompanied by increasing digitalisation of national fiscal systems.
On Tuesday 5 April, the EU Council definitely adopted the Council Directive amending Directive 2006/112/EC as regards rates of value added tax, after the European Parliament gave its green light. The text modifies the VAT Directive of 2006 to grant more flexibility to Member States in the setting of VAT rates and to ensure that they are all treated equally. Member States will now have the possibility to apply a maximum of two reduced rates of a minimum of 5 %, one super-reduced rate lower than the minimum of 5 % and one exemption with the right to deduct input VAT. Each Member State will be able to choose 24 items on a positive list of products and services to which a reduced rate could be applied and 7 items to which a super-reduced or a zero rate could be applied. Reduced VAT rates for environmentally harmful products will also be progressively phased out and the text allows Member States to better respond to exceptional circumstances like pandemics, humanitarian crises or natural disasters.
The European Commission published on Thursday 7 April its review and diagnostic report on the administration of Value Added Tax (VAT) in the EU, which contains a series of recommendations to help Member States improve VAT revenue collection, procedures and control processes. In particular, it recommends digitising VAT registration and administration, which would reduce the burden on businesses. In addition, the report highlights strategies that tax administrations could adopt in their internal organisation and interaction with taxpayers, which would improve processes for both tax authorities and businesses.
After two years of cooperation with payment services providers and the Member States, the European Commission adopted on Wednesday 6 April a Commission Implementing Regulation, which provides details for payment service providers on how to report the payment data in a harmonised format through the Central Electronic System of Payment information (CESOP), agreed in the context of the e-commerce VAT package in 2020. The Regulation also lays down the main functionalities of CESOP as well as the tasks of the Commission and Member States regarding the management of the system, access to the data, security and personal data protection. CESOP, where all the payment data collected will be stored and processed for the benefit of Member States, will go live on 1 January 2024.
The European Commission opened on Tuesday 5 April a public consultation on the creation of a digital euro, that could be introduced in 2026. It is asking stakeholders about their expectations and concerns regarding the digital euro, particularly in relation to privacy. Privacy will depend on the extent to which data on digital euro payments are stored and on the data storage model (centralised or decentralised), the Commission said. Other questions concern the role of this emerging digital currency for retail payments and financial stability, as well as aspects related to anti-money laundering rules. The deadline to participate is 14 June.