Analytics, Economics, EU – Baltic States, Financial Services, Modern EU, Taxation

As to double taxation and dispute resolution, the Council agreed on a new system for resolving double taxation disputes between member states. The proposal sets out to improve the mechanisms used when disputes arise from the interpretation of agreements on the elimination of double taxation.

Proposed draft directive is an important part of the EU’s plan for strengthening tax certainty and improving the business environment in Europe. It builds on convention 90/436/EEC on the elimination of double taxation in connection with the adjustments of profits of associated enterprises. Situations where different member states tax the same income or capital twice can create serious obstacles to doing business across borders. They create an excessive tax burden, can cause economic distortions and have a negative impact on cross-border investment.

The draft requires dispute resolution mechanisms to be mandatory and binding, with clear time limits and an obligation to reach results. It will thereby enhance tax certainty and the environment in which businesses operate.

The text allows for a ‘mutual agreement procedure’ to be initiated by the taxpayer, under which member states must reach an agreement within two years. If the procedure fails, an arbitration procedure is launched to resolve the dispute within specified timelines. For this, an advisory panel of three to five independent arbitrators is appointed together with up to two representatives of each member state. The panel ('advisory commission') issues an opinion for eliminating the double taxation in the disputed case, which is binding on the member states involved unless they agree on an alternative solution. See: http://www.consilium.europa.eu/en/meetings/ecofin/2017/05/23/.  

The Council will require unanimity to adopt the directive, after consulting the European Parliament. (The legal basis: article 115 of the Treaty on the Functioning of the European Union.) The Parliament's opinion is still pending.

Common corporate tax base, CCTB

The Council discussed a proposal for a common corporate tax base (CCTB) in the EU, aimed at reducing the administrative burden of multinational companies. The text revamps a 2011 proposal that was withdrawn and replaced by proposals for a two-step corporate tax reform.

It establishes a single rulebook for calculating companies' corporate tax liability.

The Council confirmed its intention to continue discussions on new elements of the proposal, and that an appropriate degree of flexibility should be provided for. A separate proposal on tax consolidation (CCCTB) will be considered shortly, once the CCTB rulebook has been agreed.

In December 2016, the Council agreed that tax consolidation should be considered without delay once the elements of a common tax base have been agreed. Some member states have misgivings about the CCCTB project as a whole, but have agreed to pursue work in line with 2016 conclusions.

The main changes in the 2016 proposal (compared to the 2011 proposal) are the following:

 - the scheme would be mandatory for large companies;

 - to support innovation, a super-deduction would be allowed for research and development;

 - a new allowance for growth and investment is provided for to address the current bias towards debt financing over equity financing; and 

- a temporary loss relief is provided for, pending agreement on the CCCTB. The Commission aimed at concluding discussions on the new CCCTB’s elements by the end of June 2017, with the already proposed amendments.

In order to adopt the directive, the Council will require unanimity, after consulting the European Parliament. (Legal basis: article 115 of the Treaty on the Functioning of the European Union.) 

Movement of capital

The Council discussed Commission report on accelerating the EU's capital markets union and addressing national barriers to the free movement of capital. Capital markets have expanded over recent decades in Europe, but remain fragmented. Bank financing remains the predominant source of financing for businesses. According to the Commission, medium-sized companies in the United States receive five times more funding from capital markets than their EU counterparts.

The capital markets union initiative was launched in 2015 with a view to completion by the end of 2019. Since then the Commission has worked with member state experts to identify national barriers to cross-border capital flows, and to find the best way of addressing them.

The expert group has identified five types of national barriers to be addressed:

- burdensome withholding tax relief procedures;

- barriers to the cross-border distribution of investment funds;

- residence requirements for the managers of financial institutions;

- possible restrictions to cross-border investment by pension funds;

- lack of financial literacy amongst consumers and SMEs.

The report is the outcome of work by the Commission and the group of experts. It proposes next steps at the national level to secure a stable environment that will encourage the financing of business and infrastructure. The Council will be called on to endorse those next steps.

Ministers of finances, economy and national development from all EU-28 member states were present.  

Transposition of the Fiscal Compact: balanced budget in the EU states

It has to be reminded that at the European Semester Winter Package’s review the member states were required to make progress towards economic and social priorities. Therefore, among the next steps under the European Semester (according to the Commission's Country Reports and the results of the In-Depth Reviews), the Commission will hold bilateral meetings with the EU states. Besides, the Vice-Presidents and Commissioners will visit the member states to meet the governments, national parliaments, social partners and other stakeholders. These discussions follow the EU states' increased involvement before the publication of the Country Reports and should continue in the run-up to the preparation of their National Reform Programmes and Stability or Convergence Programmes.

The Commission proposes that the EU states should involve national parliaments and social partners closely and ensure the ownership of the reform process by a wider range of stakeholders. In particular, Member States will be invited to explain how regional and local authorities are involved in the preparation of the Programme, as the success of implementation also relies on various levels of government.

The Commission also adopted Communication and a report on the transposition of the Fiscal Compact into national law. The Fiscal Compact is a central aspect of the inter-governmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). It binds 22 EU states (the euro area plus Bulgaria, Denmark and Romania) to the principles of strengthened fiscal discipline and a balanced budget rule with a correction mechanism. The Fiscal Compact was designed as part of the EU's policy response to the economic and financial crisis. Some of its elements were since then incorporated in EU legislation.

The report shows that all EU states that are party to the Fiscal Compact have by now introduced the substance of the Fiscal Compact in their national fiscal frameworks. National designs vary but it is a natural consequence of the framework set by the Treaty, which only lays out principles and relatively broad requirements, the rest is up to the member states.

At the time of the agreement on the Fiscal Compact, it was not possible to conclude the Treaty within the EU legal order, therefore the route of an intergovernmental treaty was chosen. However, steps towards incorporating the TSCG into EU law are foreseen in order to increase democratic accountability and legitimacy across the Union.

See: http://europa.eu/rapid/press-release_IP-17-308_en.htm

Reference: Economic and Financial Affairs Council, 23.05. 2017, in:  https://ec.europa.eu/info/publications/fiscal-compact-taking-stock_en

Note: The Treaty on Stability, Coordination and Governance (TSCG) in the Economic and Monetary Union was formally concluded on 2 March 2012, and entered into force on 1 January 2013. The TSCG’s main provision is the requirement to have a balanced budget rule in domestic legal orders (the Fiscal Compact).  Out of the 25 Contracting Parties to the TSCG, 22 are formally bound by the Fiscal Compact (the 19 euro area states plus Bulgaria, Denmark and Romania). The Treaty invited the Commission to report on the measures adopted by the Contracting Parties in that regard (Art. 8 TSCG).