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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 ???