Despite a clear lack of support from certain Member States, the Danish Presidency of the EU’s Council of Ministers has been giving priority in its working group sessions to discussions on the Commission’s three major 2011 tax initiatives: the proposals for a common consolidated corporate tax base, a Financial Transaction Tax and the revision of the Energy Tax Directive.

On 19 April 2012, the European Parliament approved an amended version of the draft Common Consolidated Corporate Tax Base (CCCTB) Directive and asked the European Commission to alter its original proposal accordingly.

Compared to the original draft Directive, the proposed amendments included points on mandatory opt-in, SMEs, formula apportionment, net operating losses and income from a third country.

This is a particularly interesting development given that on 6 February the French and German finance ministries published a joint green paper setting out the conclusions of a joint working group assembled in 2011 to study how the French and German corporate tax systems could be more closely aligned.

The German Federal Ministry at the time stated that this green paper was to set the direction for greater tax convergence in the EU and to support the European Commission proposal on the In this context it is noteworthy that, in its recent opinion on the Commission’s proposal, the European Parliament has also suggested that the Directive be adopted in the Euro Member States through the ‘enhanced cooperation’ procedure, if unanimity on the CCCTB introduction cannot be obtained among all Member States.

Financial Transaction Tax

A similar scenario is emerging in respect of the Financial Transaction Tax (FTT).

In a joint letter to the Presidency, dated 7 February 2012, nine Member States (including France, Germany and Italy) confirmed that they “firmly believe in the need for an FTT” and expressed the wish that the analysis and negotiation process on the current FTT proposal be accelerated.

At the same time, France announced that it would introduce a national FTT from
1 August 2012. The proposed tax has two basic components. The first is a tax on the purchase of shares, designed primarily to make sure that the financial services sector contributes to fiscal consolidation.

The second component is made up of two taxes on highly speculative activities, one on high-frequency trading and the other on certain credit default swaps on sovereign debt. The tax will be applied at a rate of 0.1%.

In response, the Presidency reported to the ECOFIN Council on 13 March that a first technical examination of the text had been completed in the Council working group and that work will continue to allow the ECOFIN Council to hold a political debate at its meeting on 21 June.

The Presidency has asked the Commission to provide further economic analysis, while also indicating that it is open to examining alternative routes to taxing the financial sector. In the latest development at the time of this article, the Presidency tabled the issue for discussion at an informal ECOFIN meeting in Copenhagen on 30–31 March.

At this meeting, the German Finance Minister acknowledged that it would take time to reach a compromise on the Commission’s proposal and therefore suggested an intermediate step toward the introduction of an FTT based on the UK stamp duty and the proposed French FTT.

It would consist of a tax payable on all transactions involving shares of corporations listed on a stock exchange, with the tax levied according to where the corporation has its registered office. The idea would be to introduce such a tax rapidly while negotiations on a comprehensive FTT continued.

Energy taxation

The third issue being pushed hard by the Presidency is the energy tax proposal. Denmark, along with other Nordic countries, strongly supports the general thrust of the Commission’s proposal, particularly a compulsory CO: tax element.

This enthusiasm is not shared by many other Member States, however. It seems unlikely that there will be agreement on any radical changes because unanimity is required and there is no question of using enhanced cooperation in an area where there is already an established body of EU law.

VAT “one-stop shop”

In addition to these three issues, the Danish presidency has started working on the Commission’s proposals for a VAT “one-stop shop,” which has to be in place on
1 January 2015 introduction of the agreed changes in the place of supply of business-to-consumer (B2C) telecoms, broadcasting and e-commerce.

Although this is a much less politically sensitive matter, it could potentially have a profound impact on the future evolution of the EU VAT system because such a mechanism, if successful, could well be used in other areas, notably business-to-business intra-community supplies of goods.

Tax policy under a common currency

At the European Council level, heads of state and government in the European Council are increasingly emphasizing tax policy as an ingredient in the post-crisis strategy for fiscal consolidation and growth.

At the March European Council meeting, Algirdas Šemeta, EU Commissioner for Taxation, invited Member States “to review their tax systems with the aim of making them more effective and efficient, removing unjustified exemptions, broadening the tax base, shifting taxes away from labour, improving tax collection and strengthening the fight against tax fraud and evasion.”

Stronger coordination through enhanced dialogue on taxation at the EU level has also been highlighted in the Euro Plus pact as an element of the reinforced economic governance.

Later this spring, as the next step in the 2012 European Semester process of economic governance, the Commission will issue country-specific recommendations that will undoubtedly encourage Member States to reflect these orientations in their national reform programs while accounting for their particular macroeconomic environments.

This process may well result in Member States, particularly within the Eurozone, increasingly coming under pressure to carry out structural reforms to their tax systems.

European Commission: active on VAT

The Commission, for its part, continues to be active. In December 2011 it published a Communication on the future of VAT, “Towards a simpler, more robust and efficient VAT system tailored to the single market.”

This was a follow-up to its green paper, to which there were more than 1,700 submissions. In line with many of these, the Commission is planning a pragmatic action program that emphasizes practical and administrative reforms.

This plan has three main components and has been discussed in the Council working group, where it received broad support.

Firstly, it is intended to make the VAT system more business-friendly by, inter alia, expanding the one-stop-shop approach for cross-border transactions, standardizing VAT declarations, and providing clear and easy access to the details of all national VAT regimes through a central web portal.

Secondly, the Commission will seek to make VAT more efficient in supporting Member States’ fiscal consolidation efforts and in generating economic growth.

This goal may not necessarily involve proposals at the European level, but it may well consist of encouraging individual Member States, within the context of the 2012 European Semester process, to broaden their tax bases by reducing the use of reduced rates and exemptions.

Thirdly, the Commission intends to try to help Member States combat VAT fraud by proposing a quick reaction mechanism to help ensure they can respond better to suspected frauds. It also will explore the possibility of a cross-border audit team to facilitate multilateral controls.

The first initiatives under this plan are expected in the near future. It is also possible that the long-awaited proposal on the VAT treatment of vouchers and advance payments will finally see the light of day in the coming weeks.

This is to be welcomed as clarity in this area will be a prerequisite for the successful implementation of the 2015 changes in the rules governing the place of supply of B2C services.

Paper on double non-taxation

In the direct tax area, the Commission has recently launched a public consultation on double non-taxation in order to tackle harmful practices and allow Member States to secure additional tax revenues. A report published by the Commission is covered in more detail in an article on page 34.

As the EU continues to react to the financial crisis, the potential for changes in tax policy remain high. Many of these changes will be at the Member State level, but there may also be significant changes at the EU or sub-EU level.

France and Germany remain active in leading the drive for more harmonization in the corporate tax area and in the taxation of financial institutions through an FTT.

In both these areas, if unanimous agreement cannot be reached, there is the potential for action by a reduced number of Member States through enhanced cooperation.

Contact

• Steve Bill OBE, +44 20 7951 7069, sbill@uk.ey.com

This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing which can be accessed using the link below:

• Global Tax Policy and Controversy Briefing, Issue 10, June 2012 (pdf 12.98 MB)