Weekly Tax News - Monday 16 October 2023

October 16, 2023

Multilateral Convention on Pillar One published

The OECD published on Wednesday 11 October the text of the Multilateral Convention (MLC) providing for the reallocation of taxing rights to market jurisdictions over some of the profits of the largest multinational enterprises (MNEs) regardless of their physical presence (so-called Amount A of Pillar One). The members of the OECD Inclusive Framework on base erosion and profit shifting unanimously approved the release of the text but some details need resolution before countries can start signing it. Brazil, Colombia and India have indeed objected on several technical aspects of the MLC. Discussions are also still ongoing on the territorial application of the MLC. As expected, the text foresees that jurisdictions must agree to a rollback and standstill provision, which would require them to withdraw existing digital services taxes (DSTs) and other similar measures and refrain from introducing new ones. It provides with a positive list of DSTs to remove, which includes Austria, France, Italy, Spain, Tunisia, Turkey, India and UK ones.  For the MLC to enter into force, it needs to be ratified by at least 30 jurisdictions including the headquarters jurisdictions of at least 60% of MNEs currently expected to be within Amount A’s scope. Once enough jurisdictions ratify the MLC, they will decide the MLC’s entry into force date. The text was delivered to G20 Finance Ministers and Central Bank Governors during their meeting in Morocco on 11-13 October. An explanatory statement, an understanding on the application of certainty of amount A, an overview of the text as well as an updated economic impact assessment of Pillar One were also published. Furthermore, on the same day, the OECD released a new minimum tax implementation handbook, to assist governments as they consider moving forward with the global minimum tax under Pillar Two.

EU Finance Ministers meet in Luxembourg

EU Finance Ministers will meet in Luxembourg on Tuesday 17 October to discuss current financial and tax matters. In particular, they will discuss the proposed reform of the economic governance framework and the state of play of the implementation of the Recovery and Resilience Facility (RRF). Although the initial programme of the Spanish Presidency of the Council of the EU foresaw a discussion on the Business in Europe: Framework for Income Taxation (BEFIT) during this Ecofin meeting, this point has disappeared from the agenda and the only tax item will be the revision of the EU list of non-cooperative jurisdictions for tax purposes. EU Finance Ministers will reportedly add Antigua and Barbuda, Belize, and the Seychelles on the EU blacklist. The Global Forum on Transparency and Exchange of Information for Tax Purposes concluded in a July report that these jurisdictions have been only partially compliant with the OECD standard on exchange of information on request. EU Finance Ministers should also reportedly decide to remove the British Virgin Islands, Costa Rica and the Marshall Islands from the EU blacklist. These jurisdictions were added in February 2023.

EP draft opinion on FASTER

The European Parliament released on Monday 9 October 2023 its draft opinion, written by MEP Herbert Dorfmann (EPP, Italy), on the European Commission's proposal for Faster and Safer Relief of Excess Withholding Taxes (FASTER). In his draft report, the rapporteur welcomes the effort to introduce a common EU-wide system for withholding tax on dividend or interest payments. Still, in his view, the success of the FASTER initiative depends on the commitment of Member States to speed up their efforts in providing digitalized, automated and better-coordinated key features. In particular, Mr Dorfmann sees room for improvement of the Commission’s proposal regarding the application of the advantages of the proposals towards investors and taxpayers, which should, in his view, be further explored in a comprehensive review procedure. He also recommended a closer examination of a universal application of a relief at source system in all Member States. Furthermore, the rapporteur argues that the rules should be more precise when clarifying the interaction between the FASTER and the UNSHELL Directives. The vote in the ECON committee on this report is scheduled for 23 January 2024.

ECJ invalidates Portugal’s preferential tax rate for interest payments

A Portuguese law that provides a preferential tax rate for interest payments issued by Portuguese agents violates the EU principle of free movement of capital, the European Court of Justice (ECJ) held in a judgment on Thursday 12 October (Case C-312/22). The Portuguese personal income tax code provides for a 20 % tax rate on a resident’s interest income if the payments are issued by an entity established in Portugal. However, if the payments are from an entity established in another Member State or a third country, then the income is aggregated with the taxpayer’s other income and subject to personal income tax of up to 40 %. According to the Court, Portugal’s practice of providing a beneficial tax rate on investment income presents an unjustified barrier to the free movement of capital. For the Court, it is clear that interest income from bonds and debt instruments issued in a State other than the Portuguese Republic is placed at a disadvantage by comparison with interest income from bonds and debt instruments issued in that Member State. As a result, the effect of the national legislation is to dissuade Portuguese residents from investing their capital in another state, thus unjustifiably restricting the free movement of capital, the ECJ said. The ECJ also noted that neither the Portuguese government nor the referring court relied on the existence of an overriding public interest.

ETAF statement on the recognition of qualifications of non-EU nationals

On Thursday 12 October, ETAF replied to the European Commission's public consultation on the EU recommendation on the recognition of qualifications of third country nationals, expected for the 15 November 2023. ETAF acknowledged the potential of this initiative to address labour and skills shortages in general, even if, in the tax area, it pointed out that there is only limited room for improvement because of the differences in tax laws, which constitute a de facto barrier to professional mobility. Our statement is outlining some specificities of the regulated tax profession to be taken into account in the context of the discussion on the recognition of qualifications of third country nationals. In particular, we warned that, for the tax profession, lowering the qualification standards would lead to legal uncertainty for companies, to increased auditing costs for the States and ultimately to less secured tax revenues. We also recalled that, in the area of tax advice, a complete lack of formal recognition of qualifications would simply be unthinkable and that an examination remains necessary in any case, not least to avoid discrimination against EU nationals. We could agree with a possible recommendation to Member States to better align their national recognition processes for the qualifications of non-EU nationals with the system set out in Directive 2005/36/EC for the recognition of professional qualifications within the EU at the strict condition that third country nationals may in no case have a more favourable treatment than EU citizens. In any case, we believe that the final decision on the recognition of qualifications of third country nationals must remain in the hands of the competent authorities in the Member States.

Save the date: ETAF Conference on the OECD Two-Pillar solution on 29 November 2023

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