During a conference organized by the European Tax Adviser Federation (ETAF) on Wednesday 29 November in Brussels, tax advisers, together with representatives from the OECD, the European Commission, the Spanish Presidency of the Council of the EU and the EU Tax Observatory, took stock of the progress made on the implementation of the OECD Two-Pillar solution. The OECD estimates that 55 jurisdictions are now taking steps towards introducing Pillar Two i.e., a minimum 15% effective tax rate for large multinational enterprises. As for the EU, the Commission is currently optimistic that EU Member States will transpose the Directive in a comprehensive way by the end of the year. The conference was also the occasion to touch upon some practical challenges faced by tax advisers in the implementation of the new rules. Turning to Pillar One of the OECD agreement, which will reallocate taxing rights over multinational enterprises from their home countries to the markets where they generate profits, panellists largely recognized that the publication of the Multilateral Convention (MLC) on Amount A is a major step forward, even if some issues still need to be resolved. Speakers also addressed the elephant in the room i.e., the current uncertainty around the signature of the United States. Importantly, the Commission announced that it will not propose an EU Directive implementing Pillar One on top of the MLC and clarified the link between the OECD Pillar One and the recent Business in Europe: Framework for Income Taxation (BEFIT) proposal. Finally, the discussion also addressed the recent vote to start negotiations at the UN on a framework convention on international tax cooperation, the possible impact it could have on the work of the OECD on the Two-Pillar solution and the importance to have a common position of the EU on this. The conference can be watched again here and a summary of the discussion is available here.
ETAF statement on the rationalisation of EU reporting requirements in the tax area
On Monday 27 November, ETAF published its answer to the European Commission's public consultation on how to rationalise reporting requirements originating from EU legislation and weighing on companies. ETAF members see the DAC6 reporting requirements as the main problematic ones for the tax profession at the moment. However, our answer also shed light on other reporting requirements in recently adopted/implemented EU legislations which might reveal problematic. This is notably the case for the reporting obligations resulting from the EU’s Public CbCR Directive which, combined with the new filing obligations introduced by the Minimum Tax Directive, may in our view result in double reporting. In addition to the reporting obligations already enacted in existing EU legislation, we believe that the legal acts that are currently still in the EU legislative process, such as the proposal for a Directive against the misuse of shell entities (UNSHELL) or the Anti-Money Laundering (AML) package, should also be kept in mind in order to avoid gaps in the streamlining of reporting obligations. In general, ETAF sees the introduction of white lists, threshold values, categories, or gradual implementation to reduce the reporting burden for SMEs compared to MNEs, as good tools to rationalise reporting requirements.
EU Finance Ministers meet in Brussels on 8 December
EU Finance Ministers will meet on Friday 8 December in Brussels. Several progress reports will be presented but no agreement on any of the pending tax proposals is expected. The Spanish Presidency of the Council of the EU will notably present a progress report on the adjusted package for the next generation of own resources presented in June 2023, which included a new own resource based on statistics on company profits. The Ecofin Council will also approve its report to the European Council on tax issues. The report outlined that the Spanish Presidency gave a high-level priority and made good technical progress on the on Faster and Safer Relief of Excess Withholding Taxes (FASTER) proposal. Nevertheless, further technical work is required before the file can be submitted to the Council for approval of a general approach, it states. On the VAT in the digital age (ViDA) package, the work couldn’t be concluded and the Presidency has summarized the progress made in a separate report. The Spanish Presidency also started the analysis and the technical work on the BEFIT, Transfer Pricing and Head Office Tax System (HOT) proposals. Finally, EU Finance Ministers will also approve conclusions on the progress achieved by the Code of Conduct Group under the Spanish Presidency.
No white smoke on the UNSHELL proposal
The EU Council's high-level working party on tax questions met on Thursday 23 November to discuss, among other files, the proposal for a Directive laying down rules against the misuse of shell companies (UNSHELL). During the meeting, the Spanish Presidency reportedly tested the European Commission’s idea to make the substance criteria a minimum standard while maintaining some tax consequences in the Directive. However, this proposal reportedly didn’t receive the needed support from Member States and most of them still favour Germany’s idea to make the UNSHELL requirement an exchange of information only, possibly envisaging tax consequences in the future. The Commission reportedly told Member States that, if this two-step approach is retained, it will likely have to withdraw its proposal and present a new one, based on the right legal basis. The Spanish Presidency doesn’t intend to present a new compromise proposal to Member States before the end of its mandate. The negotiations on the UNSHELL Directive will therefore continue under the Belgian Presidency, which will start on 1 January 2024.
European Commission answers to the EP resolution on the Pandora Papers
The European Commission recently answered to the resolution adopted in June 2023 by the European Parliament on the lessons learnt from the Pandora Papers’ revelations. The resolution focused on the role of intermediaries in facilitating tax evasion and tax avoidance, on harmful competition in income and wealth taxation and on the use of shell companies for abusive tax purposes. One of the MEPs’ demands was to carry out a study on the tax advisory market to have up-to-date information on the market share of the major accountancy firms. The Commission replied that it is currently considering the possibility to compile market concentration ratios at the EU level based on information contained in the EuroGroups Register. The Commission also said it has been working on possible additional tools for Member States to tackle tax arrangements in non-EU countries that lead to tax evasion or aggressive tax planning with the SAFE initiative. However, it recalled that, before adopting and tabling a proposal on this matter, it is key that Member States reach a political agreement in the Council on the UNSHELL Directive, which is dealing with the misuse of shell entities in the EU. The Commission also said it is currently discussing the impact of teleworking for cross-border workers on the allocation of personal income tax rights and tax residence in the EU with Member States and other stakeholders in order to find solutions that remove distortions to the Internal Market.
The European Parliament recently published its draft opinion on the Business in Europe: Framework for Income Taxation (BEFIT) proposal, elaborated by MEP Evelyn Regner (S&D, Austria). The main change proposed by the rapporteur is the introduction of an allocation formula based on material factors at the end of the transition period. This formula should provide for an equally weighted allocation between the factors of labour, wealth and sales. The rapporteur is of the opinion that only a factor-based formula can fully exploit the potential for harmonizing the tax base by eliminating the need for transfer pricing for transactions within a BEFIT group. Ms Regner also proposes to lower the annual revenue threshold (to EUR 40 000 000) for multinational enterprise groups after the transitional period, so that all large groups, as defined in the Accounting Directive (Directive 2013/34/EU), fall within the scope of the proposal. Finally, the report suggests introducing stricter rules on Controlled Foreign Company and to limit tax incentives. The vote in the ECON committee of this non-binding opinion is scheduled for 22 February 2024.
MEPs from the ECON committee adopted on Tuesday 28 November their non-binding opinion on the proposal for a debt-equity bias reduction allowance (DEBRA). MEPs reportedly have added proportionality to capital allowances based on company size, contrary to the initial text. The agreed text would state that the equity allowance is deductible, for ten consecutive tax periods, from the tax base of any small or medium-sized enterprise (SME) or ‘medium-sized group’ subject to corporation tax, up to a maximum of 30% of earnings before interest, tax, depreciation and amortisation (‘EBITDA’). For large companies, the number of consecutive tax periods would be limited to seven. Moreover, MEPs call on Member States to ensure that taxpayers can defer, for up to three tax periods, the part of the capital allowance that exceeds the above-mentioned percentages of EBITDA in a tax period, compared to five in the original text. The opinion will now be voted in Plenary session in January 2024. The DEBRA proposal was presented in May 2022 but Member States decided to put on hold the discussions on the proposal until more is known about the Commission’s plan for a new framework for income taxation (BEFIT).
On Thursday 30 November, the FISC subcommittee of the European Parliament had an exchange of views with María José Garde, Chair of the Code of Conduct Group on Business Taxation. The Code of Conduct Group is tasked with identifying preferential tax regimes that could undermine the competitiveness of the internal market. Since the Group was set up, 480 preferential regimes from EU Member States and their dependent territories have been assessed. One hundred and thirty other schemes were deemed to be harmful and were therefore abolished. As for non-EU jurisdictions, the Group lists those that are non-cooperative for tax purposes, as well as those that have made commitments on good tax governance. The meeting was the opportunity to discuss the efficiency of the Code of Conduct, revised the 8 November 2022, which broadens the scope of application to include not only preferential tax measures but also tax features of general application. The discussion focused on the practical impact of the 2022 reform and the group's future assessment of the minimum taxation criteria. In particular, she said that jurisdictions are in the process of implementing Pillar Two and that the issue of making it a criterion for the blacklisting process might come up only after the OECD peer review process has been completed. The Code of Conduct Group is currently focusing its discussions on the design of the future criteria for disclosing information on beneficial owners, she also said.
59 searches and other investigative measures were carried out in eight countries, in an action targeting criminal groups under investigation for an €85 million VAT fraud, the European Public Prosecutor’s Office (EPPO) announced on Monday 27 November. Members of a criminal organisation, active in the international trade of consumer electronics (mainly AirPods), are suspected of evading tax by means of a VAT carousel fraud, with estimated losses to the EU and national budgets of at least €85 million. The suspects established companies in Germany and other EU Member States, as well as in non-EU countries, in order to trade the goods through a fraudulent chain of missing traders – who would vanish without fulfilling their tax obligations. Other companies in the fraudulent chain would subsequently claim VAT reimbursements from the national tax authorities. The investigation, code-named ‘Goliath’, involved Europol, German tax agencies and several national police forces from Denmark, France, Germany, Hungary, Lithuania, the Netherlands, Sweden and Switzerland. One of the alleged ringleaders of the criminal groups under investigation was arrested on 22 November.