Tax Policy Update

• European Commission tax package planned for 7 June, and two new VAT initiatives expected for 2023 
• Commission tells PETI Committee it will discuss FATCA with US officials in February 
• Council reaches milestone agreement on Pillar 2, CBAM 

European Commission

EU tax package expected on 7 June

The next big date for EU tax policy enthusiasts is 7 June, when the European Commission (EC) plans to launch two new legislative proposals. The first is an initiative to tackle the provision of ‘aggressive tax planning’ by so-called “tax enablers” (SAFE initiative). The second initiative aims to set up a pan-European withholding tax framework. The date, 7 June, is tentative and may yet change. 

Two new VAT initiatives in the pipeline

Following EC’s VAT in the digital age proposal from the end of 2022, at least two additional VAT initiatives should be expected in 2023. 

EC is planning a public consultation on extending the Directive on administrative cooperation (DAC) for VAT in the first quarter of 2023. The plan is to enable tax administrations better fight against VAT fraud. A legislative proposal would follow in the fourth quarter of 2023. 

EC is also working on a VAT package for travel and tourism. A public consultation is expected imminently, and a legislative proposal for the fourth quarter of 2023. 

Commission considers tax credits in response to US IRA subsidies 

EC launched a Communication with several options for measures to respond to the US’s $369bn Inflation Reduction Act (IRA) on 1 February. Among EC’s proposed measures is supporting green investments through tax benefits. EC flaunts the possibility of tax breaks or other forms of support for green net-zero technologies investments undertaken by businesses, taking the form of either a tax credit, an accelerated depreciation or a subsidy linked to the acquisition or improvement of green investment assets. 

The Communication is not a legislative proposal. However, EC will be using it to sound out member states for what kinds of policy measures to respond to the IRA they might be willing to go for.

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Commission publishes summary report on tax enablers consultation

The report was published on 31 January, indicating the main EC’s takeaways from the stakeholder feedback. The legislative initiative is currently expected on 7 June. 

According to the report, stakeholders frequently split in their answers. For example, an equal number of respondents chose ‘soft’ or legislative measures, whilst a majority opted for “Other”. Views were split on a mandatory register for enablers. Likewise, 26 out of 59 respondents did not consider enablers’ due diligence procedures effective, with the rest offering varied views for alternatives.

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European Parliament

FISC Committee discusses draft report on Pandora Papers

FISC Committee MEPs discussed the draft report on Pandora Papers on 9 January. MEP Niels Fuglsang (S&D/Denmark) prepared the draft. 183 amendments have been tabled to the draft report, and the political Groups have been in active negotiations to find compromises. 

“The important thing is that we get a compromise supported by preferably a broad majority of this house where we come with some recommendations and some strong ideas for how we can fight this tax haven structure”, outlined MEP Fuglsang at the hearing. MEPs from the other political Groups wished for stronger information exchange provisions to avoid ‘naming and shaming’. 

The vote in ECON Committee was initially scheduled for 31 January but has been postponed to 1 March.

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FISC hears from experts on Single Market distortions linked to personal income tax 

FISC hosted a group of experts to discuss potential distortions to the Single Market due to personal income tax (PIT), challenges for SMEs, and risks of harmful tax competition at the hearing on 9 January. 

Achim Pross, Acting Deputy Director of the OECD Centre for Tax Policy and Administration, acknowledged the long-lasting neglect of the PIT issue in favour of corporate taxation. However, PIT also impacts the territory’s attractiveness, especially nowadays with the mobility of workers and remote working. 

Sarah Godar, a researcher at the EU Tax Observatory, stated that since 1995 the number of preferential PIT regimes targeting foreigners has increased from 5 to 29 in the EU. These regimes consist of tax deductions. 

200,000 people in the EU benefit from preferential tax regimes. “This is problematic because it undermines tax collection on revenue as a whole in the EU,” she explained. Ms Godar estimated this loss at EUR 4.5 billion per year. She noted tax regimes became more aggressive after the 2008 financial crisis.

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Strong disagreements on DEBRA proposal in ECON

ECON Committee hearing on 12 January demonstrated a large variety of views from MEPs on EC’s proposal for a debt-equity bias reduction allowance (DEBRA). MEP Ludek Niedermayer (EPP/Czech Republic) prepared the Parliament’s opinion. 

While the EPP and Renew Europe groups are in favour, the Greens group does not support it. “This asymmetry and tax treatment is one of the factors favouring the use of debt over equity for the financing of investment,” said Mr Niedermayer. 

He referred to two studies claiming many companies relying on debt financing experience difficulties when faced with unexpected losses created by prices, particularly SMEs. 

Evelyn Regner (S&D/Austria), represented by Spain’s Jonás Fernández, expressed concern about the measure’s cost, estimated by the European Commission at EUR 167 billion.

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Parliament adopts position on shell entities proposal

With 637 votes in favour, 2 against and 6 abstentions, the European Parliament approved the opinion on the ‘UNSHELL’ Directive in a plenary session on 17 January. MEP Lidia Pereira (EPP/Portugal) prepared the adopted opinion. 

European Parliament does not have co-legislative powers on this or any other tax files. Still, its non-binding opinion is needed for the proposal to become EU law. EU member states in the Council are still negotiating with no immediate agreement.

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PETI Committee hearing: EC to discuss FATCA with US officials in February 

European Parliament’s PETI (petitions) Committee made a 4-day mission to the US in July 2022. The purpose was to meet with local officials and policy-makers to discuss the impact of the US Foreign Account Tax Compliance Act (FATCA) on EU citizens. The PETI delegation published its report from the trip on 17 January 2023.  

PETI Committee held a hearing to discuss findings from the mission on 25 January. The MEPs who participated in the mission were unanimous: progress must be made. According to Andrea Liesenfeld, Deputy Head of Unit at EC’s DG FISMA, the issue will be discussed at the next Joint Financial Regulatory Forum with the US on 7 and 8 February.

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ECON hearing: Swedish Presidency aims for DAC 8 deal by the end of its term 

ECON Committee hosted Elisabeth Svantesson, ECOFIN President and Minister for Finance of Sweden, on 24 January. The minister presented Sweden’s priorities for the country’s 6-month Presidency (see article below), including taxation. 

The minister listed the main tax priorities. One focus is the Unshell Directive. The Council made progress on the technical analysis of the proposal last year and intended to continue that work. On VAT, they aim to take the newly presented VAT in the digital age package forward. Sweden considers this proposal crucial as the EU is estimated to lose EUR 93 billion annually, a significant part of it due to VAT fraud. 

Another vital file concerns DAC 8. This will be an essential step to stop tax evasion. Svantesson hopes they could conclude negotiations during their term by July. 

FISC discusses BEFIT with experts 

MEPs heard experts and stakeholders on the latest thinking on an EU common tax base for businesses, the so-called BEFIT initiative, on 25 January. 

The hearing, organised by FISC Committee, is the first such discussion on the initiative in the Parliament. EC’s legislative proposal is expected later this year (Q3-Q4). 

Opening the hearing, FISC Chair Paul Tang (S&D/Netherlands) argued BEFIT would be a win-win situation, providing a single rule book to reduce the tax burden on businesses while allowing for a fairer allocation of taxation rights across the member states. 

The stakeholder experts were Christian Kaeser, Chair of the Tax Committee of the Federation of German Industries, Gerhard Huemer, Director of Economic and Fiscal Policy of SMEunited, and Simon Loretz, Senior Economist at the Austrian Institute of Economic Research (WIFO).

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Council

Council reaches agreement on CBAM and minimum taxation 

EU member states agreed to implement the minimum taxation (Pillar 2) Directive at the EU level. The ambassadors of EU member states decided on 12 December to advise the Council to adopt the Pillar 2 directive. A written procedure for the formal adoption was concluded soon after. With the Parliament’s non-binding opinion finalised, EC added the agreed Directive to the EU Official Journal on 22 December. 

Moreover, negotiators of the Council and the European Parliament reached an agreement of a provisional and conditional nature on the Carbon Border Adjustment Mechanism (CBAM) on 13 December. The agreement must be confirmed by ambassadors of the EU member states and by the European Parliament and adopted by both institutions before it is final. Parliament’s Plenary vote is expected in the week of 17 April. 

Sweden takes over rotating 6-month Council presidency 

Sweden took over the Council’s 6-month rotating Presidency in January 2023 and will preside until July. For taxation, the Presidency’s priorities include: 

• continue discussions on energy tax Directive (ETD) 
• continue work on VAT in the digital age 
• progress on EU list of non-cooperative jurisdictions 
• advance the work on tax transparency (and, specifically, finalise DAC 8 as the Swedish minister stated in ECON, see above) 

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María José Garde elected as chair of the code of conduct group 

The Council preparatory body that oversees the implementation of the EU’s code of conduct on business taxation has elected a new chairperson. María José Garde (Spain) will take up the position on 5 February 2023 for two years. She was appointed at the group’s meeting on 1 February. Ms Garde replaces Lyudmila Petkova (Bulgaria), who has chaired the group since 2019. 

Ms Garde is the Director General of Taxation at the Ministry of Finance in Spain. She has extensive work experience in international taxation and chaired the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.

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Almost 50 000 exchanges of information on tax rulings under BEPS Action 5  

OECD/G20 Inclusive Framework on BEPS released the latest peer review assessments for 131 jurisdictions concerning the compulsory spontaneous exchange of information on tax rulings on 12 December. This is the sixth annual peer review implementing the BEPS Action 5 minimum standard on tax rulings. 

The 2021 Peer Review Reports on the Exchange of Information on Tax Rulings indicate that significant progress continues in countering harmful tax practices. Almost 50 000 exchanges of information have taken place to date regarding the 23 000 tax rulings that have been identified.

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Encouraging judicial step for ‘accidental Americans’ living in the EU 

The US State Department notified the US District Court for the District of Columbia of its intention to reduce the fee for renouncing US citizenship on 6 January. This will cost $450 instead of the $2,350 currently required.

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IASB proposes temporary relief from deferred tax accounting 

The International Accounting Standards Board (IASB) proposed amendments to the international accounting standard ‘IAS 12’ on corporate income tax on 9 January. IASB aims to provide temporary relief from accounting for deferred taxes arising from the imminent implementation of the OECD Pillar 2 rules. Stakeholders may provide input to the IASB by 10 March.

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OECD appoints Manal Corwin as Centre for Tax Policy & Administration Director 

Manal Corwin was appointed the next Director of the OECD Centre for Tax Policy and Administration on 3 April 2023. 

Manal will lead the work of the Centre across all areas, including the two-pillar solution to the tax challenges of digitalisation, the Base Erosion and Profit-Shifting Project, the tax transparency agenda, and the Centre’s participation in the OECD’s new Inclusive Forum on Carbon Mitigation Approaches.

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Revenue impact of international tax reform better than expected 

Revenue gains from implementing the agreement to reform the international tax system will be higher than previously expected, according to a new OECD analysis released on 18 January. 

For example, the global minimum tax is expected to result in annual global revenue gains of around USD 220 billion, or 9% of global corporate income tax revenues. This is a significant increase over the OECD’s previous estimate of USD 150 billion in additional annual tax revenues attributed to the minimum tax component of Pillar Two.

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