Weekly Tax News - Monday 20 November 2023

November 20, 2023

The European Commission decided on Thursday 16 November to refer Belgium for a second time to the Court of Justice of the European Union for its failure to comply with the Treaty principle of free movement of workers, regarding taxation of non-resident taxpayers with modest income. In its judgment of 10 March 2022 (Case C-60/21), the Court found that Belgium infringed the Treaty by refusing non-resident taxpayers who earn less than 75% of their worldwide income in Belgium from deducting their alimony payments from their taxable income. In response to the 2022 judgment, Belgium broadened the personal scope of the tax deduction. However, as the new legislation introduces two conditions, it did not eliminate the infringement in its entirety, according to the Commission. First, the deduction cannot be carried forward to future tax years in the state of the taxpayer's residence. Second, the amending legislation refuses the tax deduction if the taxpayer's spouse could avail themselves of a similar benefit in another state in future periods. According to the Commission, those two conditions appear to unduly restrict the availability of the benefit for non-residents with modest income. If the Court finds that Belgium has not complied with its previous judgment, it may decide to impose financial sanctions.

Negotiations progress on the FASTER proposal

Negotiations in the Council of the EU are progressing on the Faster and Safer Relief of Excess Withholding Taxes (FASTER) proposal. The Spanish presidency has reportedly suggested exempting countries with a comprehensive relief-at-source system for withholding tax from certain provisions of the proposal. Some Member States, with already well-functioning and widely applicable relief at source system in place, would consider that the proposal represents for them additional burden without providing any added value. The Spanish presidency is therefore reportedly proposing that comprehensive relief-at-source systems could be exempted if they meet the following requirements: - effectively provide withholding tax relief in cases covered by the Directive; - not grant more exclusions than the directive; - not require more information from individuals or entities requesting the relief than the directive; - have a liability regime for all or part of the loss of the withholding tax revenue incurred by the Member State because of the relief; and - have effective, proportionate, and dissuasive penalties in case of infringements. The European Commission would be tasked to determine through implementing acts whether a Member State has a comprehensive regime or not. The proposal will be discussed again on 23 November at the High-Level Working Party on Tax questions with a view to submission to the December Ecofin meeting.

EP draft report on the Transfer Pricing Directive published

The European Parliament has started its work on the proposal for a Transfer Pricing Directive and published, on Tuesday 14 November, its draft opinion elaborated by MEP Kira Marie Peter-Hansen (Greens/EFA, Denmark). The rapporteur supports the objectives of the Directive but proposes to simplify it and align it as closely as possible to the latest OECD Transfer Pricing Guidelines. To this end, she notably suggests shortening the entry into force of the Directive to 1 January 2025 (instead of 2026), as most Member States already introduced the arm's length principle in domestic legislation. Ms Peter-Hansen also supports the idea of phasing out the application of the arm’s length principle and instead introduce group-wide consolidation and formulary apportionment. She therefore proposes to include a sunset clause in the Directive, stating that the Directive should first cease to apply for those companies in scope of the BEFIT Directive, as of 2035. Going further, she says that the directive should cease to exist for all multinational groups operating in the EU as of 2040, except for their transactions with third countries. Finally, the rapporteur defends a stronger role for the European Parliament, suggesting that it could act as an observer in the future Transfer Pricing negotiations at EU and OECD level. The vote in the ECON committee on this proposal is scheduled for 22 February 2024.

“Cyprus confidential” revelations

On Tuesday 14 November, the International Consortium of Investigative Journalists (ICIJ) published its new investigation“Cyprus confidential”, revealing how Cyprus-based financial services firms have helped Russian oligarchs and billionaires to hide their wealth abroad to avoid EU sanctions, following Russia’s invasion of Ukraine in 2022. ICIJ’s analysis of more than 3.6 million leaked documents found nearly 800 companies and trusts registered in secrecy jurisdictions that were owned or controlled by Russians who have been sanctioned by the EU. Those include more than 650 Cyprus companies and trusts. Among them are mother companies of Russian holdings; subsidiaries of Russian conglomerates, and opaque entities used to conceal investments in properties, yachts and world-famous artwork. Following these revelations, MEPs will discuss during their plenary session on 22 November with the Council and the Commission how to urgently and effectively plug all loopholes in the financial system and accelerate the ongoing negotiations with Member States on tighter anti-money laundering rules.

Romania and Slovakia asked to correctly transpose the 4th and 5th AML Directives

The European Commission decided on Thursday 16 November to open an infringement procedure against Romania (INFR(2023)2152) and to send an additional letter of formal notice to Slovakia (INFR(2020)2227) for having incorrectly transposed the 4th and 5th Anti-Money Laundering (AML) Directives. The Commission has identified several instances of failure to correctly transpose the Directives into the national law of the two countries. In the case of Romania, the Commission considers that the country has failed to put in place an effective sanctions regime when incorrect data is introduced in the national Beneficial Ownership register. In the case of Slovakia, the incorrect transposition would concern the Beneficial Ownership register and the functioning of the Financial Intelligence Unit. Without satisfactory responses from Romania and Slovakia about these issues within two months, the Commission may decide to continue the infringement procedure and send a reasoned opinion.

The European Commission published on Wednesday 15 November a recommendation on the recognition of qualifications of third country nationals. The Commission is recommending to Member States a set of measures to simplify and speed up the recognition of skills and qualifications of third country nationals to help address labour shortages in the EU. Concerning the recognition of professional qualifications, the main recommendation is that Member States should facilitate the recognition of professional qualifications of third country nationals by aligning them more closely with the processes laid down in Directive 2005/36/EC for the recognition of professional qualifications within the EU, in particular regarding the documents required, the evidence of formal qualifications and the assessment of applications. In a separate communication published on the same day, the Commission said it will further explore the possibility of a broader reform of the EU system on the recognition of qualifications and validation of skills in the future, to ensure that the existing legal framework and tools are “future-proof, ambitious and contribute to a well-functioning Single Market”.

The European Commission decided on Thursday 16 November to open an infringement procedure against Belgium (INFR(2023)2155) for failing to correctly transpose the Directive on a Proportionality test (EU 2018/958), which requires Member States to assess if the regulation introduced for professions are “necessary and balanced”. The Commission said it has identified several issues with Belgium's transposition of the Directive, such as not ensuring that initiatives or amendments that originate from parliaments, as well as “rules from professional associations, effectively undergo a proportionality test, or failing to set up a mechanism that would allow professional bodies to conduct independent assessments”. Belgium now has two months to address these issues, otherwise the Commission may decide to go to the second step of the infringement procedure and send a reasoned opinion.

On Friday 10 November, 48 countries and jurisdictions collectively engaged, in a statement, to implement the Crypto Asset Reporting Framework (CARF), a key element of the international standards for the automatic exchange of information in tax matters developed by the OECD under a G20 mandate, by 2027. The CARF provides for the automatic exchange of tax information on crypto-assets and was set against the backdrop of rapid adoption of the use of crypto-assets for a wide range of investments and financial uses. The announcement was welcomed by the OECD Secretary-General Mathias Cormann, who said it is “a major step forward marking another important milestone towards the widespread and co-ordinated approach to combat tax evasion through greater transparency and exchange of information”. Since the finalisation of the legal and operational instruments of the CARF in June 2023, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes established a dedicated “CARF Group” to take the work forward. The crypto-asset reporting issue will be further discussed at the 16th plenary meeting of the Global Forum in Lisbon, from 29 November to 1 December 2023.

Kuwait has joined the OECD/G20 Inclusive Framework on BEPS, the OECD announced in a press release on Wednesday 15 November. Kuwait will consequently participate in the implementation of the 15 BEPS measures aimed at combating tax evasion, improving the consistency of international tax rules and ensuring a more transparent tax environment. The country also pledged to meet the tax challenges arising from the digitization of the economy. To this end, Kuwait assured itsparticipation in the Two-Pillar solution to reform international tax rules. With the publication on 11 October 2023 by the OECD of a multilateral Convention designed to implement Amount A of Pillar One, Kuwait will strive, along with the 140 member countries of the OECD/G20 Inclusive Framework on BEPS, to quickly complete the necessary steps for signature and ratification, the OECD said.

On Thursday 16 November, Fiji became the 169th member to join the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum is the leading multilateral body responsible for ensuring that jurisdictions around the world adhere to and effectively implement the exchange of information on request standard and the automatic exchange of information standard. Members of the Global Forum include all G20 countries, all OECD members, all international financial centres and a large share of developing countries. Like all other members, Fiji will participate in the decisions of the Global Forum on an equal footing and will commit to combating offshore tax evasion by implementing the internationally recognized standards of exchange of information on request (EOIR) and automatic exchange of financial account information (AEOI).

ETAF conference on 29 November

Register here: https://sweapevent.com/etafconferenceontheoecdtwopillarsolution

ETAF is a registered organisation in the EU Transparency Register, with the register identification number 760084520382-92.

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