Weekly Tax News - Monday 4 September 2023

September 4, 2023

The European Data Protection Supervisor publishes opinion on the FASTER proposal

On 8 August, the European Data Protection Supervisor (EDPS) published its opinion on the FASTER proposal. The EDPS states that the proposal would require processing of personal data, particularly personal data relating to taxpayers as natural persons entitled to receive dividend or interest income from securities subject to tax withheld at source in a Member State. Additionally, based on the proposal Member States would have to provide for an automated process to issue Digital Tax Residence Certificate (eTRC) for tax purposes. The EDPS welcomes the effort to address important data protection aspects as purpose limitation, data minimisation and storage limitation. According to the EDPS, however, any use of the eTRC for a purpose other than applying the WHT procedures would need its own legal basis under Union or Member State law. The recommendation of the EDPS is to delete Article 4(2)(g) or to specify the different purposes of the eTRC as well as the relevant categories of personal data. The EDPS also welcomes the circumscription of the extent to which data subject rights may be restricted. As a recommendation the EDPS suggests to include the phrase “in so far as the exercise of such rights may jeopardise investigations” in Article 20(1) to guarantee that the proposed restrictions do not extend longer than necessary and are only applied in justified cases.

EU regulators warn of financial risks from Andorra, Monaco and San Marino

The chairs of three EU regulators, which police Europe’s banks, financial markets and the insurance and pensions sectors, warned in a letter to the European Commission that deeper ties with Andorra, Monaco and San Marion could create a loophole for illegal money and to facilitate it for predatory financial firms to target people in the EU as the trio “historically maintained less rigorous financial regulations” and “may be prone to money laundering and other illicit activities”. Companies might be tempted to set up in the three countries in order to benefit from lighter financial rules which would create “significant risks to consumers”. This would undermine years of regulatory efforts to establish stricter supervision of financial firms and EU Member States which have a reputation to facilitate tax avoidance, yet Monaco is considered to be a tax haven. Paul Tang, MEP and Chair of the FISC subcommittee of the European Parliament said “proper scrutiny and safeguards are essential to ensure we don’t let any Trojan horse through our gates. When the European watchdogs issue a joint warning, we’d better listen”. Paul Tang is also a rapporteur of the 6th Anti-Money Laundering Directive. However, the three states have been negotiating since 2015 with the European Commission and creating a deeper economic relationship has been the Commission’s priority. A failure to reach an agreement before the European elections in June 2024 could lead to an end of the plans. A spokesperson for the Commission said it replied to “all letters in due course”.

EU Commission proposes adding Cameroon and Vietnam to AML list

According to the European Commission, Cameroon and Vietnam should be added to the list of high-risk third countries for anti-money-laundering purposes. On 18 August, the Commission published a proposed Delegated Regulation amending the Delegated Regulation (EU) 2016/1675 in order to add the two countries to the list. This step follows a decision by the Financial Action Task Force (FATF) in June to closer monitor both countries. The two nations have made efforts to address their deficits as Cameroon agreed to cooperate with the FATF and the Action Group Against Money Laundering in Central Africa. As Cameroon, Vietnam also cooperated with the FATF as well as with the Asia/Pacific Group on Money Laundering. Despite their progress however, both have not addressed all their issues.

European Commission adopts detailed reporting rules for CBAM transitional phase

On 17 August, the European Commission adopted the rules governing the implementation of the Carbon Border Adjustment Mechanism (CBAM) during its transitional phase. This phase will start on 1 October and runs until the end of 2025. The Regulation entails the transitional reporting obligations for EU importers of CBAM goods, as well as the transitional methodology for the calculation of embedded emissions released during the production process of CBAM goods. During the CBAM’s transitional phase, traders will only have to report their imports emissions, but will not have to pay any financial adjustment. This will ensure an adequate timeframe for businesses to adjust, while also allowing the definitive methodology to be improved by 2026. The first report will have to be submitted by 31 January 2024. In order to help importers as well as third country producers, the Commission also published guidance for EU importers and non-EU installations regarding the practical implementation of the new rules. CBAM is the EU’s landmark tool to fight carbon leakage and is one of the main pillars of the EU’s Fit for 55 Agenda.

OECD: "The taxation of labour vs. capital income: A focus on high earners”

On 28 August the OECD published its working paper with the title "The taxation of labour vs. capital income: A focus on high earners". This working paper presents an analysis comparing the tax treatment of labour and capital income across OECD countries, through stylised effective tax rates (ETRs). It demonstrates that dividend income and capital gains are generally subject to lower ETRs than wage income at the personal level. The paper highlights that in many countries, capital income is also tax-favoured even when considering taxes paid by both firms and individuals. However, the gap between labour and capital income taxation tends to be smaller than when considering only personal-level taxes. According to the paper the gap between ETRs on labour and capital income differs between countries and grows with income levels in some. The paper shows that different tax treatment of labour and capital income can influence the efficiency and equity of tax systems.

UN suggestions for inclusive global tax negotiations

On 8 August, an unedited draft report from the United Nations has been published, stating that the “most viable path” to ensure inclusivity and effectiveness regarding international tax cooperation is to improve the U.N.’s role in the field of taxation. The U.N. has developed three different systems in order to promote inclusivity for developing countries in international tax cooperation. The three proposed options are: a legally binding multilateral convention on tax, a legally binding framework convention on international tax cooperation, and a framework for international tax cooperation. The first option, the multilateral convention, would be a legally binding treaty which would cover a wide range tax issues and could entail such as tax information reporting and exchange rules; a monitoring mechanism to ensure rules are properly applied; and dispute resolution procedures. The second option – also legally binding – would be the establishment of a system of international tax governance and would outline the objectives, principles, and governance structure of tax cooperation. The third option would be a non-binding multilateral agenda for coordinated actions at the international, national, regional and bilateral levels and should be applied for problems that require a cohesive action, but a different approach. After deciding on an option, the following step would be the establishment of an U.N. member-state-led intergovernmental ad hoc advisory expert group or an intergovernmental ad hoc negotiating group.

IASB greenlights Pillar 2 revisions to SME Standard

On 23 August the International Accounting Standards Board has approved revisions to the international reporting standard for small and medium-sized enterprises accounting standards, giving SMEs a temporary break regarding the OECD global minimum tax rules. Those amendments are a response to pillar 2 of the OECS’s two-pillar tax reform deal. The IASB started considering revising the EFRS for SMEs accounting standard after stakeholders stated that the GLOBE rules could also have an effect on large private companies and MNE subsidiaries using the standard. After a public consultation, the IASB made a number of recommendations. The revisions would give a temporary break from recognizing deferred tax assets and liabilities concerning pillar 2 income taxes and from disclosing information that would otherwise be required in regard to those deferred tax assets and liabilities. The board, however, has not specified the duration of said break. The temporary exception and the disclosure requirements will come into force as soon as the final amendments are published, which will likely be at the end of September.

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