Speaking at the recent Tax Day, hosted by Accountancy Europe, EU Commissioner Pierre Moscovici remarked that he could remember a time when they worked for seven years and failed to manage a tax directive; now it took only seven months to agree on one.
The catalyst behind this change of pace, has of course been the series of leaks and whistleblowing that have brought scrutiny on the tax regimes of dozens of countries and many companies, from Apple to Panama. With this, a wave of momentum has emerged, as a first step, to understand the extent of the perceived unfair dealings – indeed, at the same time as the Commissioner was delivering his remarks, Jean-Claude Juncker was facing a hearing of the PANA committee, concerning Luxembourg’s cooperation on tax matters during Juncker’s time as Prime Minister. As a second step, public appetite to see tax applied fairly has grown: several MEPs who participated in Tax Day mentioned the need to see a level playing field in the field of tax, with much vitriol being directed against both tax havens and sweet-heart deals. Nor should this be seen as a limited issue; as Jeppe Kofod, a Danish MEP who sits on the PANA committee pointed out, the first batch of off-shore leaks covered 120.000 accounts, while the documents released as part of the ‘Swiss leaks’ pointed towards facilitation of terrorism funding and illegal political contributions.
In a broad sense, the EU has been successful at translating this public discontent into legislative action. The pipeline of new or amending directives which address taxation is very full, with some historical initiatives – such as the Common Corporate Tax Base – which may now have been given renewed impetus. Furthermore, an overarching strategy has emerged, centred on transparency, avoiding opportunities to avoid taxation by cross border capital transfers and generally adopting a more robust approach to aggressive corporate tax avoidance
While tax competition between member states may remain a legitimate strategy – in answer to a recent question from Nessa Childers MEP, Commissioner Moscovici reiterated that “the rate at which corporate profits are taxed is a sovereign decision for Member States” – the EU is reducing the opportunities to ‘hide’ corporate income via the use of tax havens, and also to avoid taxation by artificial – ie, non-business driven – steps. As one financial report, recently quoted in the Financial Times said; “Wealth managers will lose $13bn of annual revenue as a result of the outflows linked to the tax crackdown, which will make it harder for the wealthy to use offshore accounts to avoid paying tax”
The following initiatives, in various stages of the legislative process represent the most important ongoing work in this area.
1) Common (Consolidated) Corporate Tax Base (CCCTB)
An idea dating back at least to 1982, the two legislative proposals dealing with a Common Corporate Tax Base, and a Common Consolidated Corporate Tax Base are the most recent attempt to legislate a pan-European tax system. Part of the March 2015 Transparency Package, two of the key deliverables announced in the June 2015 ‘Action Plan on Corporate Taxation’ the Common (Consolidated) Tax Base would provide a single set of rules for calculation of the corporate tax base across the EU, with the intent of meeting the goal of “fairer and more efficient taxation” and “to effectively tackle corporate tax avoidance”. The two pieces of legislation aim to do this by;
1. Re-establishing the link between taxation and where economic activity takes place.
2. Ensuring that Member States can correctly value corporate activity in their jurisdiction.
3. Creating a competitive and growth-friendly corporate tax environment for the EU, resulting in a more resilient corporate sector, in line with the recommendations in the European Semester.
4. Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including measures to implement OECD BEPS, to deal with non-cooperative tax jurisdictions and to increase tax transparency.
A proposed Directive was released on 25th October 2016, and is available here. On 23rd May, Ministers held an orientation debate, and were broadly supportive of the aims, albeit in some cases with serious doubts regarding the flexibility each member state would be allowed. In addition, two key aspects of the current proposal are causing difficulty for the proposal in Parliament. The first concerns the threshold at which the new regime would apply. The current proposal takes €750million of annual revenue as the mandatory threshold; certain civil society actors, however, such as the European Trade Union Confederation have argued that the threshold should be lowered to €40million.
A second point of concern centres on the blacklisting of foreign tax havens. An aim of the CCCTB proposals are to maintain an EU list of non-cooperating states, rather than relying on multiple national lists. A methodology for the scoreboard to be used to assess potential tax havens is available, but discussions are ongoing as to whether this would affect, for example, UK overseas territories or potentially even the USA, given the . A measure of the controversy the methodology is posing in the Parliament can be seen in a question tabled on 31st May by 14 S&D MEPs, expressing concern that regimes with a 0% corporate tax regimes are not per se being included in the list, as well as urging the Council to greater transparency.
The proposals currently sit with the ECON committee, with a report expected in July 2017; a Plenary vote is expected in early 2018. A more extensive briefing sheet, including links to the relevant impact assessments can be found here.
2) Country by Country Reporting
(Disclosure of income tax information by certain undertakings and branches)
Addressing estimates that the EU loses 50-70 billion each year due to tax avoidance on corporate tax this initiative – amending Accounting Directive 2013/34 – is part of a broader strategy for a Fair and Efficient Corporate Tax System in the EU. On the principle that public scrutiny can help to ensure that profits are effectively taxed where they are generated, this proposed directive requires that Multi-National Enterprises (MNEs) disclose publicly in a specific report the income tax they pay together with other relevant tax-related information on a country by country basis.
The current proposal would require MNEs, whether headquartered in the EU or outside, with turnover of more than €750m will need to comply with these additional transparency requirements. This threshold is being challenged, with socialist MEPs arguing that the threshold should be lowered to €40million.
The type of information to be disclosed includes income tax paid and accrued as well as the necessary contextual information.
A more detailed briefing can be found here; the proposed directive is jointly under the responsibility of JURI and ECON. A vote is scheduled in committee on 12th June.
3) Hybrid Mismatches with third countries
Aiming to avoid instances of ‘double non-taxation’ across the EU, the proposed directive has its genesis in the 2016 directive on rules against tax-avoidance practices (Council Directive (EU) 2016/1164). That instrument included provisions addressing mismatches within the EU – such as where “income received by a parent company is not considered as taxable income in the country of the parent company while the related expense from the subsidiary is deductible in the country of the subsidiary”. The new directive extends those provisions to cover instances where at least one of the parties is a corporate taxpayer in a Member State, and others are tax residents in non-EU countries.
The proposed Directive was agreed in Council on 21st February 2017, decided by Parliament on 27th April, and was adopted by Council on 30th May.
Few would fail to welcome the vigour by which the Institutions are responding to revelations of leaks, but concerns do remain; on the one hand, as mentioned above, there is pressure from the left to expand the range of companies affected by the new initiatives. On the other, there is concern from professional bodies that the new rules targeting tax-havens risk conflating legitimate off-shore holdings and tax avoidance, and thus lumping privacy together with secrecy.
A further point of disagreement is the role of intermediaries; a recent study by the Parliament highlighted that “Law firms, accountants, trust companies and banks are the most prevalent types of intermediaries” administering off-shore structures. Thus there is concern that new measures to combat tax avoidance may inadvertently throw the baby of legal privilege away along with the bathwater of tax avoidance. This week, new proposals were issued by the Commission addressing potentially aggressive tax planning arrangements; it will be interesting to examine further the impact of these proposals on the legal profession.