Tax Policy Update

• European Commission proposes new rules for crypto info exchange and digital VAT
• Hungary continues to block minimum tax on 6 December ECOFIN, work for agreement continues
• European Parliament’s ECON Committee adopts position on Unshell Directive
• EU Court of Justice rules against the Commission’s Fiat tax decision

European Commission proposes new rules on VAT in the digital age and exchange of tax info

European Commission (EC) published on 8 December two long-awaited proposals: to include crypto-assets and e-money in the scope of the Directive on administrative cooperation (DAC 8) and update VAT rules for the realities of the digitalised economy.

On DAC 8, the proposal puts forward changes to existing provisions on exchanges of information and administrative cooperation. It extends the Directive’s scope to the automatic exchange of information documented by reporting crypto-asset service providers. The rules on due diligence procedures, reporting requirements and other rules applicable to reporting crypto-asset service providers are based on the OECD crypto-asset reporting framework.

The proposal extends the exchange of advanced cross-border rulings and advanced pricing agreements to high-net-worth individuals who hold a minimum of EUR 1 000 000 in financial or investable wealth or assets under management, excluding that individual’s main private residence.

Finally, the proposal introduces more specific penalties for breaches of the DAC rules in Article 25a.

The VAT in the digital age proposal introduces at least three key changes:

• A move to real-time digital reporting based on e-invoicing for businesses that operate cross-border in the EU and a harmonised framework for domestic transactions
• Updated VAT rules for passenger transport and short-term accommodation platforms. Under the new rules, platform economy operators themselves will be deemed responsible for collecting VAT when service providers do not and for remitting this VAT to tax authorities
• The introduction of a single VAT registration across the EU

Both proposals will need to be unanimously adopted by the Council of the EU.

European Commission

EU Court of Justice rules against Commission’s Fiat tax decision

The EU Court of Justice annulled the European Commission’s (EC) 2015 decision that Luxembourg granted selective tax advantages to Fiat through a transfer pricing ruling, in breach of EU State aid rules, on 8 November.

EC’s decision concerned a tax ruling by Luxembourg to Fiat in 2012, which determined the methodology for calculating the taxable profit of Fiat’s financing company. As a result of the tax ruling, Fiat has reduced its tax burden by up to EUR 30 million since 2012.

After the ruling, EC stated that even if its decision was annulled, the judgment gives important guidance on the application of EU State aid rules in taxation. The Court confirmed that action by Member States in areas that are not subject to harmonisation by EU law is not excluded from the scope of the Treaty provisions on the monitoring of State aid.

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European Parliament

Parliament’s draft report on debt-equity bias reduction allowance published

The draft report, published in early December, was prepared by MEP Luděk Niedermayer (EPP/Czech Republic). Despite some reservations about the proposal, Niedermayer believes there is a solid economic reason to positively consider the debt-equity bias reduction allowance (DEBRA) proposal. To address some concerns, the option to roll out the rules gradually provides a good response in his view.

The rapporteur also introduces minor changes to the EC text, which aim to assist SMEs, such as only a gradual introduction of the limitation to interest deduction’s rule and the permanent full deduction of interests for small loans.

ECON vote on the draft opinion is currently scheduled for 21 March 2023. European Parliament only provides its non-binding opinion.

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FISC Committee public hearing with the Cayman Islands

André Ebanks, Cayman Islands Minister of Financial Services and Commerce, defended his country’s tax policy on Monday, 14 November. Ebanks denied the label ‘tax haven’ during his hearing at the European Parliament’s FISC Committee.

“We are an investment hub, meaning a jurisdiction that facilitates the transit of investment through favourable fiscal conditions, including a stable legal environment and political regime”, he said, using definitions from the 2015 United Nations Conference on Trade and Development report.

FISC Committee chair Paul Tang (S&D/Netherlands) felt that Ebanks was refusing to face the truth. Tang pointed to the Cayman Islands’ poor rankings in various NGO lists, including the Tax Justice Network’s Financial Secrecy Index.

The Minister contested this list, considering the methodology behind the ranking does not follow any agreed international standards. “The mere fact that a country has a system of indirect taxation is enough to give it a high secrecy index”, he argued.

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MEPs discuss with Czech MPs on EU tax initiatives

A delegation of Members of the Budget Committee of the Czech Parliament’s Chamber of Deputies travelled to Brussels to exchange views with Members of the FISC Committee on 14 November. The delegation was led by the Vice Chair, Vojtěch Munzar. They discussed tax policies in EC’s work programmes for 2022 and 2023, the OECD/G20 Inclusive Framework agreement on global tax reform, including a minimum tax rate for multinational companies (Pillar 2), the Unshell Directive and the priorities of the Czech Presidency.

The meeting took place in the context of the FISC Subcommittee’s endeavour to enhance the cooperation and interaction between the European Parliament and national parliaments.

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ECON adopts position on shell entities proposal

MEPs adopted their opinion by 55 votes in favour, 1 against and no abstentions to EC’s Unshell Directive on 30 November.

In their opinion, MEPs amend EC’s proposal by slightly lowering the thresholds below which a company is exempt from the reporting requirements of the directive and by providing for penalties to be also levied on companies with zero or low revenue. Companies subject to the reporting requirements should be obliged to provide more detailed information according to MEPs.

MEPs also amended the information sharing requirements between member states to allow a better distinction between legitimate shell companies and those existing for tax purposes and to ensure better quality and completeness of exchanged data.

MEP Lidia Pereira (EPP/Portugal) prepared the Parliament’s draft opinion, which is legally non-binding. The final vote in the Plenary is currently scheduled for 16 January.

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Amendments to Pandora Papers draft report published, ahead of January vote

FISC Committee’s amendments to the draft report on Pandora Papers: lessons learned were published in early December. MEP Niels Fuglsang (S&D/Denmark) prepared the draft report.

The 183 amendments mostly add to, rather than extensively modify, the draft report’s existing recommendations. ECON Committee is scheduled to vote on the draft report on 31 January 2023. This is a non-legislative procedure. Neither EC nor the member states are obligated to take legislative action based on the report’s recommendations.

Council

EU to revive digital levy plan if global tax deal fails, Czech minister warns

The EU will resurrect talks on a digital services levy if a global deal on the taxation of corporate giants fails, a senior European policymaker has warned.

Zbyněk Stanjura, the finance minister of the Czech Republic, which holds the rotating EU presidency, said several member states fear the US will not implement the global agreement agreed upon last year. This would force the world’s 100 biggest multinationals to declare profits and pay more tax in their business countries.

In such an eventuality, EU governments would return to shelved discussions to implement a digital services tax, Stanjura predicted. He argued that any such levy should be at a bloc-wide level.

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ECOFIN Council disagrees on minimum tax Directive

Despite high(‘ish) hopes, EU finance ministers failed to find agreement at their 6 December meeting on the EC’s pillar 2 Directive – again due to Hungary withholding its support. EC and the Czech Council Presidency are more explicitly arguing that Hungary is holding the file ‘hostage’ to gain access to EU post-COVID recovery funding. Hungary has been barred from funding due to the rule of law concerns.

The Czech Presidency will likely aim to reach a ‘package agreement’ in the coming days and weeks and ensure the minimum tax Directive’s approval before year-end. This may warrant another extraordinary ECOFIN meeting in December.

The finance ministers also failed to find agreement on the revision of the EU Energy Taxation Directive. However, this was not to be expected either.

On the other hand, the ministers did at least adopt Conclusions on the work of the EU Code of Conduct Group!

ECOFIN report on tax issues to EU heads of governments, DEBRA put on hold

At the ECOFIN meeting (see above), EU finance ministers approved a report to the European Council (Heads of EU governments) on progress achieved on tax files in the past 6 months.

Interestingly, the report states that work on the debt-equity bias reduction allowance (DEBRA) proposal “will be suspended and, if appropriate, it would be reassessed within a broader context only after other proposals in the area of corporate income taxation announced by the Commission have been put forward”.

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EC says it could consider reducing EUR 1500 threshold in mutual assistance for the recovery of claims Directive

• Question by MEP Bartosz Arłukowicz (EPP/Poland)
• Reply by Commissioner Gentiloni

G20 wants Pillar One of multinational tax reform to be agreed upon by July 2023

G20 countries reiterated their commitment to the swift implementation of the reform of the taxation of multinationals on 16 November. In their declaration adopted at the end of the Bali Summit, G20 calls for finalising the work on Pillar One. Thus, the drafted multilateral convention can be signed “in the first half of 2023”.

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New OECD data highlight multinational tax avoidance risks

New data from the OECD highlights continuing base erosion and profit shifting (BEPS) risks and the need to implement the two-pillar solution to ensure that large multinational enterprises (MNEs) pay a fair share of tax wherever they operate and earn their profits.

The OECD’s latest annual Corporate Tax Statistics, covering over 160 countries and jurisdictions, includes new aggregated Country-by-Country Report (CbCR) data on the activities of almost 7,000 MNEs, representing a major boost in tax transparency efforts.

The new CbCR data show that the median value of revenues per employee in jurisdictions with a corporate income tax (CIT) rate of zero is USD 2 million compared to USD 300,000 for jurisdictions with a CIT rate above zero. Moreover, in investment hubs, related party revenues account for 35% of total revenues, whereas the average share of related party revenues in high-, middle- and low-income jurisdictions is around 15%. While these effects could reflect some commercial considerations, they are also likely to indicate the existence of BEPS.

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UN agrees global tax rules resolution giving developing nations greater say

Developing nations could have a greater say over global tax rules after winning a diplomatic tussle at the United Nations in New York on 23 November.

A new resolution, agreed upon by UN members, gives the body a mandate to kickstart intergovernmental talks on tax. The Paris-headquartered Organisation for Economic Co-operation and Development (OECD), a body formed mainly of wealthy countries including the US, UK and Japan, has long dominated the policy area.

The resolution, presented by the African Group, ultimately paves the way for a UN convention on taxation and a new global tax body, according to campaigners.

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Tax revenues rebounded post COVID-19 pandemic, according to new OECD data

Tax revenues bounced back in 2021 as OECD economies recovered from the initial impact of the COVID-19 pandemic, according to new OECD data released on 30 November.

Revenue Statistics 2022, presenting tax revenue data for the second year of the COVID-19 pandemic, shows that the OECD average tax-to-GDP ratio rose by 0.6 percentage points (p.p.) in 2021, to 34.1%, the second-strongest year-on-year increase since 1990. The report shows tax-to-GDP ratios increased in 24 of the 36 OECD countries for which 2021 data on tax revenues was available, declined in 11 and remained unchanged in one.

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Positive findings by NAO regarding digital services tax implementation

The UK’s National Audit Office (NAO) confirmed that implementing the digital services tax (DST) has led most digital groups to pay significantly more tax in the UK, Accountancy Europe’s member body ICAEW reports. Receipts from DST are up by 30% on HMRC’s initial forecasts to £358m for 2020/21.

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