Tax Policy Update

• European Commission launches public consultation on VAT for financial services
• European Parliament prepares position on European and international digital taxation
• Portuguese Council Presidency organises meetings on public CBCR and FTT
• OpenLux investigation emerges, European Parliament to organise Plenary hearing
• OECD Inclusive Framework holds public webcast on international tax reform work

European Commission

Commission claims court errors in bid to overturn €13 billion Apple tax judgment

The Commission argues that the EU General Court made legal errors when it rejected their order for Apple to pay EUR 13 billion in Irish back taxes, in a filing to have the verdict overturned at the Court of Justice of the EU (CJEU).

“The General Court’s failure to properly consider the structure and content of the decision and the explanations in the Commission’s written submissions on the functions performed by the head offices and the Irish branches is a breach of procedure”, the Commission argues in its filing. It blames the General Court of contradictory reasoning.

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Commission planning Communication on VAT gap in the EU

The Communication, scheduled for Q1 2021, will highlight measures and best practices taken by European countries’ tax administrations to reduce their national VAT gaps. The purpose is to facilitate an exchange of best practices and enable the national administrations to learn from each other’s approaches.

The Commission already published a short Roadmap outlining the main objectives and further details of the upcoming Communication. Stakeholders may submit feedback on the Roadmap until 3 March.

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Commission launches public consultation on VAT for financial and insurance services

The much-awaited consultation was launched on 8 February. The new revision comes after a 2017 ruling by the Court of Justice of the EU (CJEU) found provisions of the rules, such as cost-sharing arrangements used by financial and insurance operators, to be inadmissible. On top of this, the Commission finds the VAT treatment of financial and insurance services to be complex and difficult to apply in practice, and potentially not fit for new digital services in the financial industry.

Stakeholders have until 3 May to respond to the public consultation. The stakeholder input will feed into a Commission proposal, which is currently scheduled for Q4 2021.

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Commission publishes delegated regulation on the implementation of  VAT for e-commerce provisions

The special scheme for charging VAT for non-established taxable persons providing telecommunications, broadcasting or electronically supplied services to non-taxable persons has been enlarged to cover all services and distance sales of goods made to non-taxable persons. As a result, the Commission is amending its relevant regulation accordingly and lays down rules to audit transactions recorded on these special schemes.

Stakeholders can give feedback on the proposal until 18 March.

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Commission warns France and Sweden over tax rule breaches

As part of its February infringements package, the Commission announced that it has sent letters of formal notice to:

• France, asking it to change its withholding tax rules on dividends to insurance companies in other EEA member states
• Sweden, requesting it to amend its rules on taxation of dividends to non-resident public pension institutions

Both countries will have 2 months to comply, or face further consequences.

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European Parliament

FISC Committee discusses tax and Brexit with UK Task Force

FISC Committee was updated on the tax aspects of the EU-UK trade agreement by the European Commission’s Task Force for Relations with the UK on 26 January.

Paulina Dejmek-Hack, Director of the Task Force, explained that the agreement includes a good governance clause, with legally binding commitments on both parties. These include

• following OECD BEPS standards,
• the UK committing to maintain EU’s public CBCR rules for financial institutions (but not extractive industries),
• key elements of the EU’s ATAD (e.g. interest limitation, hybrid mismatches and control foreign companies rules).

DG TAXUD’s Benjamin Angel said at the hearing that the Commission would support addressing in the future the inclusion of zero tax jurisdictions in the EU list.

Full recording here

FISC holds hearing on tax impacts of Brexit

Several MEPs expressed concerns about the UK turning into a ‘tax haven’ at the EU’s doorstep post-Brexit during a FISC hearing on tax impacts of Brexit on the same day.

In response, Jeremy Green from University of Cambridge said the UK is more likely to be strategic about its tax policies, focusing on particular regions and sectors rather than a general slashing of corporate tax rates. Dr Pasquale Pistone from IBDF and Alex Cobham from Tax Justice Network underlined the importance of a EU minimum effective tax rate in helping to counter UK’s tax manoeuvres.

DG TAXUD’s Benjamin Angel underlined that the UK will remain an important partner for the EU in OECD discussions. He was also confident that tax advisors would not be able to avoid DAC6 provisions as most of them have offices in the EU.

Read more (full recording here)

Draft report on digital taxation published

The report was prepared by MEPs Andreas Schwab (EPP/Germany) and Martin Hlaváček (RE/Czechia). It will set out the Parliament’s position on international and European digital taxation.

The MEPs, for example, call for the following:

• Include a virtual element in permanent establishment
• Cover not only highly digital business models but also, more broadly, large consumer facing businesses
• Create a new ‘tax nexus’ model, which is predominantly based on sales instead of physical presence
• Have the Commission and Council prioritise tax matters in their dealings with the new US administration

ECON Committee is currently scheduled to vote on the draft report on 23 March. It will be a legally non-binding position.

ECON Committee calls for stronger tax provisions in EU-UK trade agreement

The ECON Committee adopted its position on the EU-UK trade agreement with 47 votes in favour, 4 votes against and 8 abstentions on 1 February. As expected, the MEPs criticise the deal for what they see as too weak tax provisions. The ECON resolution notably regrets the absence of tax measures in any dispute resolution and rebalancing mechanism, including a non-regression clause in corporate taxation.

The MEPs urge EU member states to use the anti-tax avoidance tools at their disposal, in particular CFC rules, to protect their tax revenues. They also call on the EU to integrate “in relevant areas” “robust commitments” on anti-tax evasion and avoidance regarding the UK’s different tax jurisdictions and its overseas territories.

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ECON approves draft resolution on exchange of tax information

ECON adopted the resolution with 49 votes in favour, 4 against and 6 abstentions on 4 February. It was prepared by the MEP Sven Giegold (Greens-EFA/Germany).

The resolution is about the Commission proposal on exchanging tax information of online sellers and platforms (DAC 7).

As a next step, EP Plenary is scheduled to vote on the final resolution on 8 March. The Parliament’s position is non-binding, but EU member states already reached an agreement in December and the Parliament’s opinion is needed before the file can become EU law.

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FISC hearing on taxation of the digital economy

EP’s FISC Committee held a workshop on digital taxation to help inform MEPs’ work on their draft report (see article above) on 12 February.

At the hearing, Jeffrey Owens from Vienna University said it is impossible to say whether an international agreement can be found by July 2021. He also underlined that the EU should not be content with any global agreement, but assess whether an agreement is aligned with its priorities.

Professor Anne Van De Vijver, for her part, reflected on Article 116 and argued that it might be justifiably used for digital taxation. She referred to EU case law according to which at least the predecessor of Article 116 could be used to eliminate generic, not only specific, distortions to competition.

Read more (full recording here)

MEP Questions and Replies

European Data Protection Board is assessing FATCA compatibility with EU data protection rules

• Question by MEP Engin Eroglu (RE/Germany)
• Reply by Commissioner

Council

EU member states close to agreement on public tax transparency

The Portuguese Council Presidency has brought the public country by country reporting (CBCR) file onto the agenda of the 25 February meeting of European ministers of economic affairs and competitiveness. The ministers will debate the file in a public webstream. Ahead of the meeting, the Portuguese Presidency also published a discussion document.

With Austria having shifted from opposing to in favour, many observers now expect that the Council can adopt its position. This seems to have been confirmed at a 17 February meeting of EU ambassadors, where apparently a sufficient qualified majority was achieved.

Even if the Council manages to agree on its position, it will then have to find a compromise with the European Parliament, whose own position is more far reaching than that of the Council.

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Turkey avoids getting blacklisted by EU with new deadlines given

EU member states decided to grant Turkey another four months to comply with tax information exchange requirements, and not be blacklisted on the EU list of non-cooperative jurisdictions at the 16 February ECOFIN meeting.

According to a compromise text agreed between the ministers, Turkey must politically commit by 31 May 2021, and to set up by 30 June automatic information exchange system with Austria, Belgium, Cyprus, France, Germany and the Netherlands. If Turkey fails to deliver, ECOFIN will reconsider at its October meeting whether to blacklist it.

Turkey had already missed an earlier December 2020 deadline, and a group of member states called for it to be blacklisted as a result. Others wanted to grant it one more chance to deliver, mindful of the sensitive EU-Turkey dialogue going on in other areas.

EU finance ministers discuss FATCA

EU finance ministers also discussed FATCA at the request of the Netherlands at the same ECOFIN meeting. Reportedly, the discussion was short, but the Commission and the Council underlined the importance of initiating discussions with the new US administration on the topic.

Commissioner Dombrovskis remindedthat although FATCA is a matter of bilateral agreements between EU countries and the US,the Commission is happy to play a facilitating role.

In a note prepared for the meeting, the Netherlands proposed a possible exemption for accidental Americans from FATCA. The only other country to take the floor at the meeting was Belgium, calling for a practical and cost-effective solution.

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Council to continue discussions on financial transactions tax (FTT)

The Council’s working party on taxation will discuss the long-standing FTT file on 24 February. The Portuguese Presidency is holding the discussion between all 27 EU member states, not just the 10 who have been working on FTT under ‘enhanced cooperation’ until now.

The Presidency’s objective is to explore possible ways forward for consensus on the design of FTT. Other touchy topics such as using FTT as an EU own-resource are postponed for later.

In a note prepared for the meeting, Portugal proposes a gradual approach with minimum level of harmonisation at first, and using lessons learned from the existing Italian and French domestic FTTs.

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Gaps in the exchange of tax data in the EU may encourage tax avoidance and evasion

The European Court of Auditors (ECA) has published a report on the EU exchange of tax information framework.

ECA reports that there is still insufficient sharing of tax information between EU member states to ensure fair and effective taxation throughout the Single Market. The problems are not only with the EU’s legislative framework (Directive on administrative cooperation – DAC), but also with its implementation and monitoring, ECA argues. In particular, the information exchanged is often of limited quality or underused.

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Inclusive Framework discusses international tax reform

The OECD Inclusive Framework (IF) held a webstreamed meeting to discuss international tax reform under Pillars 1 and 2 on 27-28 January. Several G20 finance ministers expressed their views on the matter.

Germany’s Olaf Scholz said it seems that the US might be willing to find a solution – in contrast to the previous administration. Canada’s Chrystia Freeland underlined that in the absence of a global agreement, Canada would opt for a “national solution”. Indonesia’s Sri Mulyani Indrawati wished for a global agreement in 2021, so that Indonesia can focus on implementation during its 2022 G20 Presidency. Italy’s (now former finance minister) Roberto Gualtieri spoke about Italy’s G20 Presidency priorities, and argued that the alternative to not finding an international agreement is not status quo, but a mix of national initiatives.

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‘Open Lux’ scandal emerges as Luxembourg accused of continued aggressive tax practices

Le Monde together with 16 other media outlets published their investigation on Luxembourg’s tax practices on 8 February. The investigation revealed the presence of 55,000 offshore companies managing assets worth at least EUR 6 trillion in Luxembourg.

The investigators argue that Luxembourg remains a ‘hot spot’ for tax planning and potentially fraudulent transactions despite progress on transparency.

The investigation used public beneficial ownership registers set up by the EU’s 2018 AML Directive, and found that despite information being public, the Luxembourgish registers were reportedly difficult to access.

The revelations have renewed calls for more public tax transparency, minimum effective tax rates and blacklisting ‘European tax havens’.

European Parliament Plenary will hold a hearing on 11 March to discuss the revelations.