Weekly Tax News - Monday 17 July 2023

July 17, 2023

Outcome Statement of 138 jurisdictions on the progress made on the OECD Two-Pillar solution

On Tuesday 11 July, 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) - out of the 143 members – agreed on an Outcome Statement recognising the progress made on the implementation of the OECD Two-Pillar solution. In particular, the Inclusive Framework announced that it has finalized the text of a multilateral convention (MLC) that will allow signatories to reallocate and exercise a domestic taxing right over a portion of MNE residual profits (Amount A of Pillar One). The text sets out the “substantive features” necessary to prepare the signature process, including the scope and operation of the permissible taxing right, the mechanisms for relieving double taxation, a process for ensuring tax certainty, the conditions for the removal of existing digital services taxes (DSTs) and relevant similar measures upon its entry into effect and the commitment as of the same time not to enact new DSTs and relevant similar measures. The text of the multilateral convention is not yet available as efforts are continuing to resolve a small number of specific items, the OECD explains. Once the last remaining issues will be solved, the MLC will be published and accompanied by an Explanatory Statement that will set out a common understanding. The MLC will be opened for signature in the second half of 2023 and a signing ceremony will be organised by year end, with the objective of enabling the MLC to enter into force in 2025. Not all the members of the Inclusive Framework signed this statement. Belarus, Canada, Pakistan, Russia, and Sri Lanka did not sign it. Belarus and Russia have been suspended from participating in OECD bodies because of Russia’s invasion of Ukraine and Canada’s refusal to sign would reportedly be linked to the DST standstill agreement that it would not support. The Outcome Statement will be delivered to G20 Finance Ministers and Central Bank Governors at their meeting in India on 17-18 July.

Pillar One’s efficiency depends on US ratification, the EU Tax Observatory says

The effective implementation of Pillar One will largely depend on which countries ratify the reform and especially if the US does it or not, the EU Tax Observatory explains in a note published on Thursday 13 July. To make sure that the amount of taxing rights distributed is large enough as only the companies that are headquartered in a jurisdiction that signs the multilateral agreement can be covered by the tax, the Outcome Statement foresees that at least 30 jurisdictions combining at least 60% of the companies covered by the reform would be necessary for the reform to enter into force globally. Building on previous work, the EU Tax Observatory shows that the global minimum thresholds require the ratification of the US for the reform to go ahead globally. US companies represent 46% of the companies covered in Pillar One and 58% of redistributed profits. Without the US, the number of covered groups would decrease to 37 and the Amount A profits available for redistribution to 38bn€, according to the EU Tax Observatory. Gross tax revenues derived from Amount A would respectively decrease by 40.6% for developed countries, 52.3% for developing countries and 28% for the least developed countries. No other countries than the US could block the global implementation of the reform on their own, the researchers found. The ratification of the Pillar One reform by the US is of particular interest for the European Union as the EU Commission has proposed that Pillar One revenues become part of the next generation of EU’s own resources. The absence of Pillar One could represent a shortfall ranging from 7.5 to 15% of the total revenues needed to fund the EU recovery package. EU institutions will therefore have to carefully weigh between expecting the US to pass the reform – for which the current Congress is opposed – or resorting to alternatives, the researchers concluded.

Finance Ministers debate the adjusted package of EU new own resources for the first time

On Friday 14 July, the European Commission presented to Finance Ministers during the Ecofin meeting the “adjusted” package of new EU own resources. It includes some adjustments to the own resources proposals based on the ETS and CBAM, to reflect the changes brought by co-legislators in their recent agreements on these proposals, as well as a new temporary statistical own resource based on company profits, until the Business in Europe: Framework for Income Taxation (BEFIT) proposal is presented and agreed by Member States. The European Commission explained that this temporary own resource is not a tax on companies and will not increase their compliance costs. It comes with a 0.5% call rate to the gross operating surplus statistics recorded for the sector of financial and non-financial corporations of each Member States under the European system of accounts (ESA). Many Member States said that the package presented by the Commission is overall not balanced in terms of contributions from Member States. A large majority of them were especially not convinced by the proposal for a temporary statistical own resource, some even saying that we should rather wait for BEFIT and the OECD Pillar One.

The Spanish Presidency aims at reaching an agreement on the UNSHELL Directive

On Wednesday 12 July, the European Parliament heard Council and the European Commission representatives regarding the need to adopt the UNSHELL Directive on rules to prevent the misuse of shell entities for tax purposes. All the speakers that took the floor underlined the need to ensure fair taxation and a good functioning of the single market. Many MEPs criticised the Council for blocking the file, in spite of the overwhelming support that this directive got from the Parliament. Many MEPs also called for the Council sessions on this matter to be livestreamed so as to see which Member States are against this proposal. Pascual Navarro Ríos, Spanish State Secretary for the European Union, said that the Council has taken a due note of the EP's request to move forward on this matter and that they will try to reach an agreement on this file at the ECOFIN council in November. The overall assessment is that the Member States do support the objectives of the proposal, but there are complex technical and legal issues that need to be resolved before they reach a deal, he said. They had substantial debates in the Council on the tax consequences which have to be legally valid. They also looked at the minimum substance indicators, in order to make sure they are stringent but also easy to explain and apply, he further said. Mr Navarro Ríos explained that some of the Member States pointed out that the UNSHELL directive would lead to too much red tape and administrative burden for the tax authorities and businesses.

MEPs request explanations from the Commission on its note on gold plating for the CbCR Directive

MEPs requested explanations on Thursday 13 July in the European Plenary session after the letter — in which the Commission told Member States they should refrain from adopting transposition measures that go beyond the requirements of the country-by-country reporting (CbCR) Directive — was leaked. Some political groups viewed the letter as an attempt to undermine Member States' efforts to increase transparency. Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union explained to MEPs that the objective of the letter was to prevent Member States from imposing unnecessary obligations that go beyond the legislation or create an unfair playing field. This excessive imposition of requirements is referred to as "gold plating”. The Commissioner stressed that gold plating negatively impacts the single market, which relies on the principle of a level playing field to ensure fair competition among businesses. The letter primarily addresses technical issues and underwent discussions with Member States during two workshops before its finalization, she said. In particular, it aims to draw Member States' attention to the difficulties that third country multinational companies may encounter when preparing their reports due to variations in national rules resulting from different transpositions of European rules, she added.

European Commission opens a series of tax infringement proceedings

The European Commission opened on Friday 14 July many tax infringement proceedings. It notably decided to open three new infringement procedures by sending a letter of formal notice to: -  Hungary (INFR(2023)2041) requesting it to align, on a number of points its corporate income tax rules with the Anti-Tax Avoidance Directive; - Belgium (INFR(2014)2191) for not properly complying with the ruling of the Court of Justice of the European Union of 10 March 2022 (Case C-60/21) on the free movement of workers; and - Sweden (INFR(2023)4007) drawing its attention to the potential incompatibility of its legislation on preliminary income taxation with EU law. On the same day, the European Commission also decided to send a reasoned opinion to Belgium (INFR(2023)003), Greece (INFR(2023)0014), Spain (INFR(2023)0016), Cyprus (INFR(2023)0006), Poland (INFR(2023)0031) and Portugal (INFR(2023)0033) for failure to communicate on time the national measures implementing Council Directive (EU) 2021/514 of 22 March 2021 (DAC7) amending Directive 2011/16/EU on administrative cooperation in the field of taxation, that were supposed to be transposed by 31 December 2022. Belgium also received a second reasoned opinion (INFR(2015)4212) for maintaining discriminatory conditions for tax exemption of remuneration received from savings deposits. Finally, the Commission decided to refer Luxembourg (INFR(2020)2183) to the Court of Justice of the European Union for failing to correctly transpose provisions of the Anti-Tax Avoidance Directive (ATAD1) Council Directive (EU) 2016/1164.

European Commission registers an ECI on taxing great wealth in the EU

On Tuesday 11 July, the European Commission decided to register a European Citizens' Initiative (ECI) entitled “Taxing great wealth to finance the ecological and social transition” as it fulfils all the formal conditions. The ECI was requested on 8 June by a group of economists, politicians and millionaires: László Andor (Hungary), Marlene Engelhorn, (Austria), Lars Koch (Denmark), Patrizio Laina (Finland), Aurore Lalucq (France), Paul Magnette (Belgium), Thomas Piketty (France), and Conny Reuter (Germany).  The organisers of the initiative call on the Commission to establish a European tax on great wealth, whose revenues would be used to combat climate change and inequality. Following today's registration, the organisers have six months to open the signature collection. If an ECI receives one million statements of support within one year from at least seven different Member States, the Commission will have to react. The Commission could decide either to take the request forward or not but will in any case required to explain its reasoning. On Wednesday 12 July, the European Parliament held a debate entitled “Tax the rich”, at the request of The Left, in a plenary session in Strasbourg. The debate divided MEPs along the traditional lines, with the right-wing groups opposed and the left-wing groups in favour.

New EP study reforming the EU blacklisting process

A newly published study provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the ECON committee of the European Parliament provides some guidance on how to enhance the effectiveness and how to “depoliticise” the EU list of high-risk third jurisdictions for anti-money laundering (AML) and counter-terrorism financing (CTF). The study covers a methodology for evaluating country listings, highlights shortcomings of the current EU list of high risk third countries, discusses criticism and recommendations from the European Court of Auditors, and explores alternatives. In particular, it explores the option of maintaining the current list but addressing the disparity between the EU and FATF lists. Another option would be introducing a grey list with fewer compliance requirements, according to the authors. Alternatively, the EU list could merge with the EU tax list, which is internationally more accepted than the FATF list, the authors suggested. Depoliticising the list by leaving rankings to academics and diverse NGOs in a transparent and reproducible way and evaluating countries based on their criminal behaviour rather than on their technical AML framework is also a possibility discussed in the paper.

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