Taxation in enlarged Europe

Summer school ISEO 2004

July, 2

Raffaele Rizzardi

We pay taxes for public services

army and police foreign policy justice interest on bonds

We pay taxes for welfare

Healthcare School Housing Cheap transport Unfunded pensions Aids to industry Unemployment subsidies

Level of public services = level of taxation

Stability pact: deficit <= 3% of GDP4 Tax competition Fair - Unfair or harmful (EU – OCDE): taxation

to incoming foreign corporations lower than for national ones

The Irish case The Primarolo report (code of conduct)

Corporate tax burden

= tax base * tax rate Harmonization of tax base- 1988 – first proposal of directive- 1992 – Ruding report- 2002 – revamping of Ruding report- 2004 – corporate tax conference in Rome

Harmonization of tax base

SE - Societas Europea - EC Regulation 2157/2001 since October 2004

HST – Home State Taxation – tax base of each subsidiary according to taxation rules of the Head office’s State - Small Medium Sized Enterprises

CCTB – Common Consolidated Tax Base – Assessment of a global tax base – Splitting according to multiple keys: turnover, cost of staff, value of plants, etc.

Common rules in tax base

Thin capitalization - Debt (granted or guaranteed by stockholders) to Equity ratio

Participation exemption Limited taxation on dividends – No more tax

credit Consolidated group tax base (national or

worldwide)

Tax credit on dividends

TAX CREDIT Corporate tax base

1.000

Corporate tax (360) Dividend 640 Tax credit 360 Shareholder’s tax base

1.000 Prepaid tax 360

PRESENT SYSTEM Corporate tax base

1.000 Corporate tax (360) Dividend 640

__________________ Additional tax base for

shareholder 5% or 40% of dividend (0% in fiscal consolidation)

Localization of business profits

National tax law for foreign activities:

1) Exemption rule

2) Imputation rule with foreign tax credit

Branch or subsidiary?

1) Branch – imputation of revenue or loss taxed at head office rate – foreign tax credit – matching credit

2) Subsidiary – imputation of incoming revenue (dividend) – Parent/subsidiary directives

3) CFC legislation – subsidiaries in tax heavens treated as branch (carry over of losses abroad)

Transfer price

Risk of profit transfer by excess payment of costs to a foreign corporation in the group or reduced selling price

OCDE guidelines – 1979 – Revised 1995 Arm’s length rule – comparable transactions

between independent corporations

Information on inter-group transactions

Special auditing (Ireland) New restrictive German law Documentation on services rendered, on

comparable costs for foreign purchase, on effective use for subsidiary

No shareholder’s costs

Transfer price auditDouble taxation

Corresponding adjustments OCDE model – article 25 – mutual agreement EU arbitration convention Burdensome procedure APA – Advance Price Agreements

Model tax conventions

First agreements in 1930 Production and sales mainly local Few international exchanges (custom duties

between each country – risk of currency fluctuation)

25 States in EU = 25 x 12 = 300 different treaties >> one multilateral treaty?

Model tax conventions (2)

“may be taxed” – in both States – foreign tax credit (e.g. dividends – interest – directors’ fees)

“shall be taxable only” – in one State (e.g. royalties, excepted limited withholding tax; capital gains on stocks)

Deviations from general rules in each agreement

Place of effective managementPermanent establishment (PE)

International tools for taxation are obsolete and do not fit a globalized economy

E-commerce: is a computer server a PE? Subsidiary: is it a PE of parent company? Hidden PE (the Philip Morris case in Italy)

European Court of JusticeImpact on direct taxation

No specific power by EU treaty Judgments mainly based on:- article 43 – freedom of establishment – case C-9/02 de

Lasteyrie du Saillant – exit tax on unrealized capital gains – case C-324/00 – Lankhorst-Hohorst – thin capitalization

- article 56 – freedom in movement of capital – case 334/02 – Comm. vs. France – exclusion of fixed levy for foreigners

Taxation of savings

Present rule: a resident of one State is not taxed if the paying agent is in another State – Interest income should be declared in resident State

Directive 2003/48/EC – withholding tax for Belgium, Luxembourg, Austria – negotiations with non EC countries – rate 15% - 20% - 35%- “transitional period”

Exchange of information for other countries and for all after “transitional period”

Directive 2003/49/EC – associated companies - interest and royalties (+ code of conduct = “Monti package”)

Definition of interest payment

Current accounts, bonds including premiums and prizes attaching to securities

Zero coupon bonds NO: penalty charges for late payment – capital-

gains on bonds (taxed in Italy)

Value Added Tax

National laws complying with directives No majority voting – Missing agreement:

options Consumption tax – (should be) neutral in

business activities Deduction of input VAT from VAT due for

supply of goods or services

LIST of Standard VAT rates applied in the Member StatesBelow is a table brought up to date until Febrary 02, 2004, illustrating the standard VAT rate applied in the Member States of the European Union.

Member state Ordinary rate

Austria 20 %

Austria ( Communes of Jungholz and Mittelberg) 16 %

Belgium 21 %

Cyprus 15%

Czech Republic 19%

Denmark 25%

Estonia 18%

Finland 22 %

France 19,6 %

Germany 16 %

Greece 18 %

Hungary 25%

Ireland (Eire) 21 %

Italy 20 %

Latvia 18%

Lithuania 18%

Luxembourg 15 %

Malta 18%

Netherland 19 %

Poland 22%

Portugal  19 %

Slovak Republic 19%

Slovenia 20%

Spain 16 %

Sweden 25 %

United-Kingdom 17,5%

VAT RATES

Financial and insurance services

VAT exemption Input VAT non deductible Higher costs for outsourcing Impact on structure: branches rather than

subsidiaries – Group taxation in some countries

Proposed “cash flow method”

“Transitional period” – supply of goods and related services

VAT due at customer’s country (“reverse charge”)

Listings to check compliance Identification number of customer – Full

disclosure now starting on internet Audit to check that goods have left the country

of origin

Place of supply of services

Present rules (article 9 – directive 77/388/EEC)

1) Physical identification – place of immovable property – physically carrying out of some services – distances covered

2) Place of customer (plus effective use and enjoyment)

3) Place of supplier

Refund of foreign VAT

8th and 13th directive – EC and non-EC countries (reciprocity)

Application for refund to each of the central national authorities

Refund if tax is locally deductible The case of car lease (Netherlands and

Luxembourg)

New proposal

General rule: reverse charge if customer is a taxable person

Including car lease over 30 days No need for refund Listing for services Local VAT for tangible services, supplied for

immediate consumption (restaurants)

E-commerce - goods

Private customers pay VAT in the country of purchase if they take care of transport

Suppliers shall identify and pay destination VAT over a yearly threshold (€ 35.000 or € 100.000)

New project: One-stop shop – ID only in head office’s country – VAT paid to local tax authority with rates and details of destination

From outside EC: custom rules

E-commerce – services

Directive 2002/38/EC De-materialized goods (files) = services Reverse charge if customer is a VAT taxpayer VAT due by supplier for private customers From outside EC (private customers): ID in a single

country – VAT paid to local tax authority with rates and details of destination

Audit of compliance and enforcement ??? Where is customer really located ???