Not so quiet on the European Front
Author:
Gerald Murphy
At the meetings of the Federation of European Accountants (FEE), there are regular interchanges with officials from the tax directorates. These interchanges highlight the state of play in relation to existing tax projects of the Commission as well as its plans for the future. The following points are drawn from those discussions. They happen to be concerned only with direct tax matters.
It is probably true to say that the main aim of the European Commission has been to achieve harmonisation in taxation. This was and is a target more easily approached in indirect taxes simply because, for most States, VAT is an EU tax. Ireland for example abandoned its existing turnover taxes on accession to the EEC.
While tax harmonisation is far from complete in relation to VAT, it is much further along the road than direct taxes and understandably so as the history of direct taxes is rooted in older national structures. In our case, for example, we inherited an income tax structured essentially from the cost of financing the Napoleonic Wars. So, while our direct taxes have a European flavour, they are not an EU product.
It is not surprising that political obstacles constantly surface to frustrate the Commission's long term aims, such obstructions being intensified by the restrictions imposed by the European monetary union
Directives
The Commission has no plans for future directives. Work on the existing directives is largely confined to negotiating with Member States. Their structures are largely complete. But their implementation often is not.
Interest & royalties June 2003/49
Implemented only in Belgium, France, Luxembourg, Sweden and UK. The Commission is considering taking action against some Member States for their non-implementation.
Savings directive June 2003/48
Already implemented in 2004, but not yet in force. The target date was 1 July 2005. Austria Belgium and Luxembourg will be operating withholding taxes, as will Switzerland. It is expected that the US will participate on information exchange. Discussions continue with Hong Kong and Singapore.
Mergers Directive 1990/434
Amendments to the mergers directive mainly deal with:tax neutrality for the transfer of an SE (the European company) registered office; fiscally transparent entities ;elimination of double taxation. The Council (Ecofin) is proposing publication of the draft with a new cut-out option for some Member States who have objections to aspects of the Directive, yet a further example of obstacles to harmonisation. In the Commission's view, agreement will certainly be achieved on the Inclusion of a new title for transfer of registration office of SE. The Directive is silent in relation to other assets. In the past they could be taxed directly, but after Laysterie du Saillant (ECJ) Case the situation is not clear (see notes on ECJ below).
On fiscally transparent entities (extending the scope including other entities) ,an option has been provided to Member States to have the right to tax in their own country. There will be elimination thresholds as with the Parent Subsidiary Directive.
An EU model convention on double Taxation is still an ongoing project of the Commission, but is not considered a priority.
The Directive is as vague as possible on a permanent establishment (PE) definition in order to allow flexibility for Member States within general principles.
Parent / Subsidiary 1990/435
Amendment Directive 462/2003 has been approved.
ECJ recent cases
In its 2001 Communication and study, the Commission launched the idea of a project to promote tax law consistent with ECJ rulings. FEE is undertaking a parallel project and the Consultative Committee of Accountancy Bodies in Ireland (CCAB-I) is represented on the study group.
The European Commission is considering the ECJ impact in its technical Working Group. Member States have expressed major concerns about the direction of some decisions, the resulting budgetary difficulties of some decisions (the Marks and Spencer case might be one), and the cohesion of national tax law.
Amongst the issues arising from ECJ cases the Commission is considering both exit taxes and ways around ECJ decisions. The Commission will first review the position of individuals but will later extend the project to corporations. At the time of writing, no decision had been given on the Marks and Spencer case so comment there is premature.
The case of de Lasteyrie du Saillant deals specifically with exit taxes but only in the context of individuals. Under French law, and using the English translation used in the English case report, "taxpayers normally resident for tax purposes in France for at least six of the last ten previous years are taxable at the date of the transfer of their residence from France " effectively on an unrealized gain.
According to evidence given to the ECJ by M. de Lasteyrie, he moved from France to Belgium in order to carry on his profession there. There was no apparent evidence of an avoidance motive and no argument that he was avoiding tax.
Interestingly, among those arguing for the French State's right to tax and submitting supporting arguments were France of course along with Denmark, Germany and the Netherlands. On the other side arguing for the taxpayer were the Portuguese government - presumably a low tax State in this context - and the Commission.
The French argued that the law was necessary to prevent avoidance. The difficulty for the Court was that the law was not restricted to so-called avoidance and in this case none was adduced anyway. But the meaning of "avoidance" may have been muddied in the process.
The Commission itself may have contributed in claiming that the "automatic presumption of avoidance [within the law] has effects that go well beyond what is necessary in order effectively to combat tax evasion or avoidance". But nobody said that tax evasion was an issue. The juxtaposition of evasion and avoidance is perhaps unfortunate and may possibly reflect a view which is evidently adhered to by the Irish Revenue. The Court also may have implicitly made the connection ; "Tax evasion or tax fraud cannot be inferred generally from the fact that the tax residence of a person has been transferred". A moment's thought will show that this was a totally unnecessary and irrelevant comment from the Court.
The main point of the case seems however to lie in the Court's comment that "diminution of tax receipts cannot be regarded as a matter of overriding general interest which may be relied upon to justify a measure which is in contrary to a fundamental freedom."
One wonders what solution the Commission may arrive at for finding ways around the ECJ decision? Or do they argue yet again for harmonized tax rates both at individual and corporate level. That would seem to resolve the exit tax problem. Pending that, one also wonders what view the ECJ might take of Ireland's corporate exit charge. Indeed, one wonders what view the Court might have taken of section 133 Finance Bill 2005 as introduced given the Court's concerns for fundamental freedoms.
Common Consolidated Tax Base (CCTB)
Around 20 Member States support the idea of forming a CCTB Working Group (WG). Five States are resolutely opposed to CCTB - possibly including Ireland. But the others who support a common tax base do not necessarily accept a consolidated system. Nevertheless, all are participating in the discussions. WG is essentially a European Commission Working Group with Member States representatives. It is not agreed yet to what extent external experts will be allowed to participate. The European Commission is very much in favour of "industry" groups such as accountants but the Member States are opposed. There is an irony here because of the acceptance by governments of the need for a tax base using IAS. As it will be the accountancy profession which will be drafting accounting practices and as these standards will have a significant impact on governments’ tax take one would have thought it in the interest of governments to access the thinking of the profession.
Significantly, this involvement is being recognised in Ireland in the light of proposals in the wake of the current Finance Bill to structure a continuing consultation process on IAS with interested parties including accountants.
Particular points for consideration by the WG include:
- Tax base elements;
- Consolidation problems including the formula for allocating profits of a consolidated group return to member States;
- 3rd country issues;
- Whether CCTB is to apply to all companies or whether there is an opt out;
- Legal form of consolidation;
- Depreciation of tangible assets;
- Intangibles;
- Liabilities, reserves, and provisions;
- Level of detail - local variations
Transfer pricing
The Council is expected to approve the prolongation of the joint Transfer Price Forum for another two years. The following issues were tackled:
- Measures to prevent double taxation by introducing a consultation between Member States
- Exchange of best practices
- Interest payments and penalties
The transfer price forum is expected to agree early this year on documentation requirements and standardization. Once it is done a European. Commission communication will be issued. The group will also be seeking ways of avoiding taxpayer disputes.
Double tax convention
This has slipped back on the Commission's agenda but has not been dropped. It will be picked up again next year and the Commission's wish is to involve accountants (perhaps through FEE) and other interested parties as well as the member States.