Subcommittee on Tax Matters Ordinary meeting Public hearing on “Tackling tax obstacles in the Single Market”
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FISC European Parliament
Follow its sittingsSpeaker 2
If you place yourself from the point of view of free movement of persons, by definition, an exit tax is not something you would like to see too often. And the ECJ itself, while not prohibiting the exit tax, has set a few conditions to be met in order to be able to defer payments. But let me dwell more on companies because this is probably the heart of the topic and where we have more difficulties. So let me take 6 examples. The first one is the obvious one: the extreme variety and complexity of the rules.
If you're a company that operates in several member states, you need to know the rules in each member state. And in most cases, this is a daunting tax, whether positively or negatively. Positively, because sometimes you have many tax credits, many tax expenditures, but some states have such complexity in the framework of tax expenditure. For instance, we have 700 different tax expenditures in Portugal, 600 different in Italy, and close to 500 in France. That makes it difficult to actually identify what benefits you're entitled to.
Second, and this is the one on which we have been struggling the longest, the tax base is not harmonized. We have tried to address it via the CCTP, then we made the BFIT proposal, for which a discussion has not even started yet. As long as the tax base is not harmonized, it is clear that it is more complicated for companies to operate within the single market. And it also makes it more difficult to make your decision on where you want to operate because when you compare tax rates, you end up comparing pears and apples, basically. You have some countries which, on paper, have taxation, but not in reality.
And some papers in some countries, which on the opposite have a very neat tax system with very few tax expenditures and where the tax rate is very close to the theoretical one. Third, it's a problem for SMEs. We have to keep in mind that SMEs represent the backbone of the EU economy; around 95% of businesses are SMEs. You have some studies, which have been conducted by our colleagues from DigiGrow, which conclude that SMEs on average spend 1% to 2% of their turnover on tax rate tape. That's a lot of money.
Going transnational is clearly a a very significant burden for SMEs. We try to address it via the proposal HOT, Head Office Taxation, which came with a very simple principle: the SME was allowed to operate under the home rule for some time to facilitate their cross-border extension, but it didn't get any traction with member states. We got very little support despite repeated efforts and engagement, also with the tax administration. Fourth, transfer pricing. I see that you have a transfer pricing expert.
It's good. That's also an area that is highly problematic. And I must say that I was probably the most frustrated last year. There is a booming number of disputes between member states. Actually, the vast majority of disputes for EU businesses are disputes between member states.
A few years ago, you may remember that we tabled a proposal which was relatively empty, but that can be summarized in one sentence. Let's bring member states around the table, and each time they agree on a common definition or interpretation of the OECD transfer pricing guidelines, that becomes binding so as to provide certainty and clarity to businesses. He didn't get much traction from the member states. I think in the last meeting, we were really supported by only one country, which was Germany. And that is really a pity, because we do have major differences even on basic sync, not only on the specifics of a case.
For instance, the definition of an associated enterprise, which is a very important element to determine whether you're in scope or not of the transfer pricing, varies as far as the threshold of concern depending on the member state, between 0% and 70%. To give you another example, which was told to me recently, it is more anecdotal but gives you an idea of the sometimes weird interpretations that we may face. There is one member state which has considered that a train driver crossing for one and a half hours per country does create a permanent establishment for the train company and a tax due for the income tax for the train driver. He's just crossing the country without any stop for 90 minutes. So that's the kind of thing that sounds a bit silly, but it shows that there is a real need to come together and try to agree on a common interpretation of the rule.
Fifth example: withholding taxes. That's a difficult topic. Theoretically, there is no withholding tax for intra-group transactions in the European Union. But in practice, we have 13 member states which mandated interest payment, 19 for royalties, 18 for dividends, and then you can get a repayment. That is difficult and cumbersome.
We have tried with Faster, which was adopted to speed up the treatment of the resulting tax, but that also begs the question of whether we could consider, at some point, rather than asking to pay a resulting tax and having a complex procedure to refund it, whether we need resulting taxes in the internal market. Is it really something that is indispensable? And last, no harmonization of the tools. Let me take, for instance, an Italian example, since I have an honorable Italian member of the European Parliament on my right. You know that Faster is creating an electronic tax resident certificate. In Italy, the tax residence certificate was not harmonized.
So, depending on the region where you are, it's a different tax resident certificate within the same country. And I'm not even talking about the extreme variety of tools, forms, and procedures that you can have sometimes in federal member states, Germany for instance, a 16 lender with very complex tools and sometimes IT tools, which are not even interoperable among themselves. So clearly, overall, and not to speak for too long, we are not where we should be. We can do better. We should do better, but it proves difficult because member states are reluctant to make progress in this field.
Thank you.
Speaker 1
Thank you, Benjamin. Very interesting. When theory comes across to example, it makes it even more significant to tell us that there is a lot more to do in order to complete the single market. Now, we move to Professor Joanna Hay. Joanna, the floor is yours for 7 minutes.
Speaker 3
Well, thank you very much, Mr. Chairman. Members of the FIS committee, thank you for the opportunity to contribute to this hearing. I will focus on one central proposition. Competitiveness in the single market today depends less on new harmonization initiatives and more on simplification, legal coherence, and regulatory abstinence in order to foster cross-border investment.
And I will focus on decluttering and simplification of the existing EU tax legislation, not the member states' legislation. In addition, I also want to advocate, as the male mentioned it, for the removal of tax barriers in the area of cross-border labor mobility. So, corporate taxation in the European Union continues to differ significantly between member states. Heard that tax basis structures and effective tax burdens. However, this diversity will not disappear in the foreseeable future.
While the idea of a single corporate tax area with a uniform tax base, as outlined in the BFET plan, is economically appealing. It lacks a solid basis in the European treaties and also political feasibility. However, over the past decade, instead of removing tax barriers, EU tax law has expanded rapidly, particularly in response to BEPS and tax avoidance strategies. This expansion has produced a highly complex regulatory environment characterized by overlapping instruments, parallel rule systems, and fragmented implementation. So this is really a problem: it increases legal uncertainty and raises compliance and enforcement costs.
For that reason, simplification, which is often called decluttering, is, in my opinion, really the most important. And this has to be understood not only as a technical clarification, but it must be understood as deregulation. So every legal measure, even those intended to simplify, generates implementation costs for national legislatures, tax administrations, as well as taxpayers. So, a pure refinement of the existing directives would not really help simplification. And therefore, it needs, first of all, identification of overlapping rules, and then repealing instruments if they are not of a genuine internal market benefit.
So, not only redesigning them. I will concentrate on the global minimum tax directive as well as on the ATA directive. The problems of far-reaching detailed regulations at the European level are particularly evident in the implementation of the OECD Pillar Two recommendations by the global minimum tax directive. There's growing evidence that compliance and enforcement costs are disproportionate to the expected revenue effects. Administrative capacity constraints in tax authorities further raise questions about long-term enforceability.
Furthermore, the dispute with the US has shown that the system is not mature yet. Now, the OECD, with its side-by-side solution for the US and the package of extended safe harbors, presents an attempt to stabilize the system. However, these adjustments also reveal a structural problem. The need for contentious technical modifications undermines legal certainty and regulatory coherence. From a legal perspective, the commission's position that these changes now presented by the OECD could be transposed into EU law without formal amendment of the directive raises serious rule of law concerns.
Binding AU tax law must be approved through a legislative procedure at the council. It must be transparent and subject to judicial review. Uniform interpretation by the Court of Justice requires a stable normative framework. If unanimity constraints prevent necessary adaptation, this raises a fundamental question about the long-term viability of this latter model for complex global tax coordination instruments. A second structural issue is the unresolved relationship between the global minimum tax directive and the anti-tax avoidance directive, the ATAD.
Parallel application of ATAD and the Pillar Two directive duplicates responsibilities and creates legal uncertainty. And it's especially true for the cumulative application of CFC rules by the ATAD and the Pillar Two directive. So, in my view, it really needs a recast or even repeal of the anti-tax avoidance directive because the evaluation of the ATAD reveals that there is uneven national implementation, limited simplification effects of the anti-avoidance directive, and also enforceability challenges. And for that reason, if the ADAT should be kept, then it needs generous SME carve-outs, in particular because BEPS actions are normally seen only by big MNEs. A word on the recast of the DAC.
So, administrative cooperation remains absolutely essential for enforcement. However, due to several DAC amendments over the last years, we really need a recast of the directive of cooperation, of administrative cooperation, to make it clearer. And then also, it should be clear that the administrative law has to follow the material tax law, and that means that regulatory obligations which do not lead to real tax for the member states should be abolished, and that is particularly true in regard to DAC 6. To also mention something more positive, where it would be really worthwhile to go for more coordination, I would point out that cross-border labor taxation is really a high problem in the single market, and it is an obstacle to cross-border recruitment and work organization in the EU. Unlike social security coordination, which is effectively coordinated through Regulation 883/2004, an asset of the European Union, income taxation of cross-border employment remains governed by fragmented bilateral conventions.
And the result is legal uncertainty. We heard that already from unrelieved double taxation and reduced labor mobility. So, a pragmatic solution would be the development of an EU model framework for employment income taxation, aligned with social security coordination rules. And this would not require income tax harmonization but would significantly reduce complexity and friction in the single labor market. The ongoing OECD initiative on cross-border mobility is helpful, but there is no need to wait for it to be completed.
So, just to sum up, I do think that the main task at the moment should be simplification and decluttering, instead of new far-reaching harmonization initiatives. And as I said, cross-border labor mobility is also a very important topic. Thanks.
Speaker 1
Thank you. Thank you very much, Joanna, for your very interesting talk. Now, we move to Mr. Christos Teofilo. He's connected online, I think.
Christos, can you hear us? Can you hear me? Otherwise, we move to Rita Della Ferre. Rita, are you connected? She's muted.
She's muted. You are on mute, Rita. You should switch on your microphone. Okay. I
Speaker 5
Thank you very much. Honorable Chair and members of the committee, good afternoon from Cyprus, and thank you for inviting me. Today, I would like to discuss a simple reality that we see in practice about tax obstacles that are still a real friction in the single market. And let me give a few examples like duplicate compliance, uncertainty, and too often, these result in double taxation risk, especially in the area of transfer pricing. And this issue is often because, in practice, companies face different documentation expectations, different approaches, different timelines, and different interpretations, broadly on similar principles.
So often, the issue here is not only what the rules are, but also how they're administered and whether taxpayers can obtain tax certainty and predictable outcomes across borders. So today, I will focus my presentation on 4 practical recommendations. The first recommendation is proportionality compliance for small enterprises. Now, the compliance requirements should be proportional and aligned, my suggestion, with the EU company size classification. Put simply, the suggestion is that we should not apply large groups like M and E's complexity to small enterprises as if they have the same capacity and risk profile.
As already mentioned, we know that the backbone of the EU economy is the SMEs, like 95-99%, that support the EU business. However, many of the complexities that we have built since the BEPS project expanded over the domestic tax law of the EU member states by many layers of avoidance provisions and transparency rules that, many times, were applied in practice across the board irrespective of size. So just not to get me wrong here, I'm not arguing for weaker enforcement. What I'm arguing here is for scalable compliance, which will be risk-based, materiality-driven, and realistic for smaller taxpayers. So the suggestion here will be, if I can name it, an SME compliance lane for cross-border activity with simple templates, sensible thresholds, practical safe harbor for routine transactions, and the like, in order not to discourage cross-border expansion by simply making it administrative and workable.
So the message here is that if we want more businesses to operate across borders in the single market, I believe that we should remove the compliance barriers that stop them before they begin. Let me move on to my second suggestion, which is proactive certainty by using tax rulings and advanced pricing arrangements. By reducing disputes proactively through these tools, we can strengthen mutual relations and outcomes across member states. So we all know that advanced pricing arrangements and tax rules provide tax certainty, which is the word investors and, of course, taxpayers seek. And this is because they reduce the risk of double taxation and allow businesses to invest with confidence. But access for taxpayers is uneven, and the process can be, I will say, too heavy, especially for mid-market groups.
So, I will support, if I can name it, an SME-friendly tax ruling track. And what this could be is something like a tax ruling process with specific requirements, light reformation requirements, clear timelines, and a focus on common transaction types or routine distribution activities or group services. So the main aim of this suggestion is effectively how we can turn certainty in one jurisdiction into certainty in a cross-border reality. The third suggestion that I would like to point out here is for joint audits. If we can have joint audits and resolve these agreements during the audits.
So joint audits, we all know that this is in a positive direction, but it will be even better if we have an in-audit resolution mechanism, like a dispute resolution mechanism that we see in the BEPS project. So my recommendation here is to build a structural escalation step inside the joint audits while the facts are still live, and we can find the solution based on these live facts. So, for example, a suggestion is that we can have, in this joint audit, a mandatory one or two months escalation window once the audit team effectively comes to a deadlock. And, of course, how we can resolve this is by having, for example, a technical panel of senior officials, maybe chaired by an independent person, that will reach an outcome, and that outcome should normally be binding or at least complied with and explained. The main issue here that we are trying to resolve is that we need to resolve these agreements before they become multiyear disputes and a heavy burden in tax litigations.
And my final, my fourth suggestion is, as it is also already mentioned, the EU transfer pricing guidance. We need to enhance the EU transfer pricing guidance, and we need to make the EU Joint Transfer Pricing Forum more operational. I understand that there is no appetite for the hard law to change the transfer pricing rules within the EU, but maybe we can do it via soft law, for example. So, transfer pricing, I agree. It remains a central issue in the single market, a friction point, and we need to see how we can drive operational convergence.
So, the issue here is that the friction doesn't typically come from the ARMOR principle itself because the ARMOR principle is widely accepted, but the issue here is how it is applied in practice. And we see the different documentation review intensity, different approaches, different time matches, corresponding adjustments, or even the practice from tax authorities. So it will be very helpful if we expand the role of the EU Joint Trusted Pricing Forum to produce more practical tools for both tax administration and taxpayers that they can actually use in practice and reduce the trusted pricing disputes, which are already mentioned as a big issue within the EU. So, some suggestions will be, for example, guidance on audit conduct or guidance on evidential expectations with emphasis on consistency and, of course, as I mentioned earlier, proportionality; maybe safe harbor on routine transactions, especially for SMEs and mid-market groups. We can also have more guidance on corresponding adjustments, timing mismatches, or documentation requirements in order to reduce unrelieved double taxation.
And, of course, the APAs will also assist with this, because APAs are effectively a tool to reduce tax disputes. So, to summarize, should we want to have a single market that works for businesses of all sizes? Proportionality is important for smaller enterprises, so as not to be blocked by complexity. Prevention with tax rulings and APIs to create certainty before the dispute starts. We need to have a resolution process if we have a dispute, and join audits with an escalation channel for resolving, like an arbitration clause, such disputes. It will also be very helpful.
And, of course, we need convergence, in particular in transfer pricing, using the intelligence of the EU Joint Transfer Pricing Forum as a soft law in order to enhance coherence within the EU when it comes to transfer pricing. Thank you once again, honorable members, and I look forward to the questions and the discussion afterward.
Speaker 1
Thank you very much, Christos. Very clear. Very straightforward as well, your speech. Now we go to Professor Rita Dela Ferreira. If she's connected, I know that she probably has some issues with the connection.
She's not connected. She's not connected. Okay. In the meantime, we can try to solve the issue, but I would go, Mikaelis, if you are ready, to the question of our colleague, to our members. By the way, Mikaelis did report on tax amplification.
So, I think this is really your field. Michael, it's your first.
Speaker 6
Thank you, Chair. I'd like to thank all the speakers for their very comprehensive analysis. My question will be specific to the doctor. Angel of the European Commission. I am breathing before I say it.
In this room, and especially in this committee, all the time we mention, we have to do things. We have to do two things. We have to simplify. We are in another meeting where this has come from the committee. When are we going to achieve all these things that we are discussing in all these meetings, shows, and reports that we are preparing?
Because the parliament, without your executive powers, cannot do them. And to be more specific on tax on transfer pricing, we implemented a transfer pricing policy that, like you said, is sometimes not clear. And we are asking European businesses to pay a lot of fees for doing these studies, but I don't know if there is a positive outcome, either in revenues or in other positive outcomes, or the reason why we see so much in transfer pricing since we cannot see the benefits of this. So, this is my question. But most importantly, I would like to listen to a plan where all these things that were discussed today have a roadmap to implement them, and not in six months' time to have the same meeting and hear the same things again.
Speaker 1
Thank you, Michael. So, we do not have a connection with Rita yet. So, I will give the floor to you, Ben. Actually, the question was probably directed to the commission.
Speaker 2
Indeed. Well, first, on simplification in general, which Joanna pointed out as an important priority. We will table a far-reaching proposal in June. So I just ask for a little patience. It's coming.
We are revisiting 15 directives. So it's a big work. And it explains why it takes some time. Now, on transfer pricing specifically, I don't know what I can say apart from that I'm very frustrated, just like you are. We have been trying again and again.
I've mentioned the transfer pricing directive, but you have to know that at the end of the discussion, when it was clear that there was no willingness of member states to adopt hard law, we mentioned the possibility of recreating the forum. It's just a small piece of information for Crystal. So, the Joint Transfer Pricing Forum doesn't exist anymore. It stopped seven years ago. We offered the possibility to create a forum and to proceed via soft law on the condition that member states commit politically to take the result of this forum into account, knowing that this forum would take its decisions unanimously.
So the only thing that we were asking them is when you decide something, please walk the talk. They were not even willing to commit politically to follow the conclusion that they themselves would have drawn. So we decided that it was not going anywhere, and we cut our losses, pulled the plug, and withdrew the proposal. It is a pity. It's a missed opportunity for the single market.
But what we do not want to have is very much what you were describing: endless discussion leading nowhere. If we bring everyone around the table, there should be a purpose and effect, something that brings clarity to the companies, but we have been unable to deliver.
Speaker 1
Yes. Thank you. We are going to speak about that exactly as well at the coordinator meeting on the withdrawal of the work program from the commission. I have learned that Rita is connected. So I will give it a try and give the floor to you, Rita, for 7 minutes, please.
Hello. Can everyone hear me okay?
Yes. Go ahead.
Speaker 7
So first of all, sincere apologies for the technical problems. I'm actually at the OECD at this moment. So, it turns out there was some incompatibility of devices between the OECD and the Parliament. Okay. So what I'm going to talk about a little bit is the trade-offs that are implied in our EU tax system and how they can create new obstacles.
Next slide, please. So, in essence, the obstacles are as they are. This is not so much about the details of each obstacle, but a different way of looking at obstacles. And not the removal of obstacles, but how some of our policies, some of our options, have created new obstacles. And the key message here is that there are no free lunches. We have taken some options that have led to the creation of new tax obstacles to the internal market.
The first one that I wanted to talk about is the tax amortization versus tax sovereignty discussion. And then, the second issue is the combat against tax avoidance. So, I'll start with the first issue. So the treaty allows us to harmonize taxes subject to union entity. And because of that, sometimes we have opted not to harmonize.
Speaker 8
So there are constraints, obviously, with qualified majority voting or without qualified majority voting. And therefore, there are areas that we could have harmonized but haven't. And there are areas where we have relied on soft law or the interventions of the European Court with case law. This is the case, for example, with increased disparities in consumption taxation, such as on excise duties, but also on VAT. But I wanted to talk specifically about the effects of relying, as we have been relying, on the case law of the court and the effects of opting not to harmonize on the issue of personal income taxes.
Speaker 7
Next slide. Thank you. So, on the impact of the case law, we have basically relied on the court to remove some of the obstacles to the internal market so far because, to a large extent, income taxes, whether corporate or personal, haven't been harmonized. Now, we have opted for that on the basis that we want to maintain tax sovereignty for our member states. Now, what you see there, these two graphs, is part of a study that I carried out with a colleague who is an economist and maybe MEPs who are German will know who he is: Clemens Fuest.
Clemens Fust and I, who is the President of SIFO, have done a study on the effects of the harmonizing attempts from the European Court. So the effect is, in essence, the court taking upon itself to remove restrictions to the completion of the internal market because there is no hard law legislation. And what you see there is what happens once the court intervenes, how member states react, and the effect that the intervention of the European Court has on the internal market. Now it uses a couple of case studies: the removal of some anti-avoidance rules that the court deemed to be incompatible with the internal market, in particular, rules regarding thin capitalization and loss carry-forward of losses. And what you see is that the intervention of the court led the member states to remove the rules that were regarded as discriminatory.
But it also led member states to react to that decision asymmetrically, meaning some member states became stricter, while others became less strict than the existing rules they had until then. As a result, what you see is that the capital costs increased, and the welfare levels of all member states decreased. Meaning, what does this mean in layman's terms? It means that the intervention of the European Court to remove a restriction on the internal market actually resulted in a lower level of integration. Integration.
So it resulted in lower welfare levels and an increase in capital costs across the European Union. So in essence, relying on the court to remove harmonization hasn't worked out for us very well because, in some cases, it has led to an increase in tax obstacles to the internal market. Next slide, please. The other example I wanted to talk about is the effects of opting for tax sovereignty instead of tax harmonization in the case of personal income taxes. And what you see here are the results of another project that I have carried out very recently on taxation and inequalities.
And what it shows in a sample of 33 countries, which includes the majority of member states and some non-member states, is that, in essence, almost everyone—two thirds of our sample—had some kind of preferential tax regime adopted for personal income taxes. What this means, in essence, is that personal income tax competition has been intensifying significantly in the last 5 to 7 years. Many regimes are old. So, for example, the Irish non-DOM regime is quite old, but you also have very recent personal income tax preferential regimes in the case of Portugal, Spain, Croatia, Greece, etc. So the objectives of these schemes are similar: to attract high-income individuals.
A lot of countries are also dealing with aging populations, so they want more people who are of working age as well. But this, again, creates more obstacles to the internal market. So the option that we made years ago to prioritize tax sovereignty instead of tax harmonization has led, in the end, to some decrease in tax sovereignty itself because now we are engaging in a race to the bottom on personal income taxes, in which member states will progressively feel more pressured to compete. And because even the reliance on the European Court to help us out and to remove some of the restrictions to the internal market has backfired. Two slides before, please.
Before. So, backwards. Going backwards, two slides. Yes. One more.
Yes, that one. So, the other problem I wanted to talk about is the prioritization of combating tax avoidance without having completely thought through the way they interact with each other. So, this is the case with anti-avoidance rules in general, but it is also the case regarding Pillar Two implementation. So if we can now go back to where we were in the slides, yes, here. So what we see now is that we have anti-avoidance rules at every level of governance.
So, we have national domestic anti-avoidance rules. We have European ones, and we have international ones. We have various types of anti-avoidance rules. We have general anti-avoidance rules, targeted anti-avoidance rules, and special anti-avoidance rules. This is literally a nightmare for businesses, and even for tax administrations, to know which ones to apply, which ones should apply first, and how they interact with each other.
So this is part of a new project that is not yet out, which is a book that I'm working on with a coauthor and will be published later this year with Oxford University Press. And in that book, we basically tried to give some explanation and tried to understand how all these rules interact, but it is not straightforward. So, if you have to have a book about the specific topic, it's because there is some problem in the system; otherwise, for businesses, it should be intuitive how to comply. Next slide, please. So all of that I have been saying here, including the question of Pillar Two, which I haven't gone into, but it's also part of this issue of prioritizing anti-avoidance versus compliance costs, is in papers that members can access.
The links are here, but I'm happy to discuss any of the issues I just highlighted. So, thank you very much for your attention.
Speaker 1
Thank you, Rita. So yes, members will ask questions, and you will hopefully be available with your connection. Now we move to the question by Ludovit Odon. Please, Ludovit.
Speaker 9
Thank you very much. Thank you for all the presentations. This is quite a wide range of topics. I would like to talk about two issues. The first one is, and the goal of both questions is to try to find ways forward, to proceed in a situation where, also politically, it's not so easy to have, much less, obstacles on the single market in the area of taxation.
And the first potential area is the so-called 28 regime that basically one can imagine like Mr. Draghi said in his report that if we choose a small segment of companies where they are not paying a lot of taxes because they are startups and scale-ups, maybe also politically it is much easier to harmonize at least some aspects of taxation for a special segment of companies. The second area of harmonization is that, actually, if the court cases are not convincing, and also the sovereignty sometimes goes in the other direction. So, what are the areas? What are the areas where you also see a politically realistic way of harmonization?
Of course, I buy the argument that we can do a lot in simplifying the European tax measures, but it will still not solve all our problems. We will still not be competitive vis-à-vis some other jurisdictions where there are far fewer obstacles in the taxation area. So the two questions are: the first one is, what do you think about the '28 regime? And what do you think are the most probable areas for tax harmonization, not only from an economic perspective but also from a political perspective? Do you see any?
So, thank you very much.
Speaker 3
Well, regarding the 28th regime, what is, of course, very important is simplification for SMEs, and that is what it is supposed to address. However, it needs a full new design of such a twenty-eighth regime, which also has to fit into the member states' different regimes. And I think this is a project which needs a lot of agreement from the member states. I don't see at the moment that they would unanimously agree on that. But what you said is that the court case law is a problem. No.
I don't think that the case before the court is a problem. The problem is the reaction of the member states because member states tend to, as Rita LaFaire said, worsen the tax situation for both cross-border and domestic investment. And I think there's really no way to change that because it's good that the court is still, well, in favor of the fundamental freedoms. It's really about the member states. And what I do think is that it needs a policy change.
It's a policy change of the member states, and that is basically also what Rita talked about: that we have these different layers of anti-tax avoidance rules at the moment, and we also have the European layer. We have the national layer. We have the international layer. And it needs member states to agree unanimously on the simplification.
Speaker 2
Thank you. On the '28 regime, the forthcoming initiative will focus primarily on company law. On taxation, there will be relatively limited development. The reason is that we still have on the table the Befit and Befit proposal for companies with a turnover below €750,000,000 as an opting-in, which is by definition a 28 regime. Since this discussion has not started yet because everyone was very busy and still is with the discussion on the OECD pillars, we didn't want to duplicate it.
So the only tax element that you will have in the 28th regime, as announced by the President, is something related to the deferral of taxation for stock options, which is very important for startups, and which is not part of the general 2018 regime harmonization because we still have to discuss the one which is on the table. Now, what would be needed to make progress? So I've been in this job for 6 years now. Before, I was not in taxation. My conclusion is that the one thing we are still struggling with is trust.
Member States do not trust each other in the tax field. Let me give you an example. When we were discussing the hot proposal for SMEs, the SMEs were staying under their own rule, and the member States were collecting the tax also for the other member States. We have plenty of member states that raise their fingers and say, "But how can I be sure that the other member states will give me the money that they have collected for me?" And when you have such basic questions, the only conclusion you can draw is that it takes time to build trust.
We're trying different avenues by developing the coordination. We also created, a couple of years ago, a network that gathers the heads of tax administration so that they know each other, exchange best practices, and, more importantly, know whom to call when there is a problem rather than have disputes and try to sort things out and build trust. It's progressing, not as quickly as I would like, but it's progressing. But as long as member states don't trust each other and we keep this unanimity requirement, the progress will be very limited.
Speaker 1
Thank you, Benjamin, for highlighting this issue well. Now, we try with Christophe Teofilo. If you want to add something to the question of Mr., Odor? Christophe, can you hear me?
Yes, please.
I can hear you.
Please. Yes.
Speaker 5
I think that the question has already been answered. And I think that what Doctor Benjamin already mentioned, I mean, if we are missing trust, it means that we cannot cooperate on a single decision. And what is more, I will say, frustrating is that even if it's that difficult, I mean, within the union, not to agree on a hard law, but also to agree on a soft law. We cannot work on our talk. I think that makes the work of the commission to agree on certain principles. I mean, even if it makes it even more difficult to do that.
That's why I have suggested my suggestions are based not exactly on changing hard load because I see the difficulty within the union, but the suggestions are based on other principles that indirectly can relax the burden to the taxpayers without doing it directly, I mean, changing our tax code. So it's a good question, but the key issue here is how you will do it if we are missing trust. And this is something that actually makes me wonder after hearing Doctor Benjamin.
Speaker 7
Yes, please. So I'll say the following. I do see a way forward. But just let me take a step back and mention something that the commission said about trust. For a long time in VAT, member states did not trust each other.
And then they basically let all the e-commerce go and tax, etc., with very serious risks of evasion. And then, the digital economy just took over. And member states saw no other option because it was an emergency but had to trust each other. And today, we have the one-stop shop for VAT because member states felt obliged to trust each other. And they felt obliged because there was a sense of urgency.
And what I'm trying to say by giving that example is that there is an urgency now regarding income taxation. We are really at a crossroads. The issue of personal and corporate might get all the headlines. But the issue of personal income taxation is very serious for the large majority of member states. If we start eroding our tax base and engaging in tax competition on personal income taxes, it is a slippery slope.
The majority of member states is very highly dependent on personal income taxes. So, there is an emergency situation. So the way forward, as I see it, is to acknowledge that the tax sovereignty we thought we were clinging to is an illusion. We are no longer in an integrated globalized economy; we no longer have tax sovereignty, really. And therefore, we have to accept that and basically agree amongst ourselves so that at least among ourselves, we can have some semblance of coordination, a coordinated response. Because if we leave it for isolated member states to deal with this global challenge, everyone will lose.
So, in essence, I think my appeal is to frame this as an emergency situation so that we can get some level of trust, like we did in VAT, to make members understand that we are really at the crossroads. And the second issue that I would like to highlight on ways forward is the issue of anti-avoidance versus understanding the costs for businesses. At this moment in time, we really need to be competitive and to grow as much as we can within the union. And therefore, we need to take into account the impact that some of this multiplication of anti-avoidance rules is having on our businesses. We do not want to put ourselves in a position where we are damaging ourselves, like shooting ourselves in the foot and harming our own growth when others are not.
So, on that score, my appeal and the way forward, as I see it, is to take more into account not just avoidance per se, but avoidance in the context of the impact that it will have on businesses and compliance costs, and to take a balanced view. Is it worth it? So, if the revenues are very significant and equity will be massively impacted, maybe it is worth it. But if that is not the case, then we have to rethink. And I want to strongly talk against path dependency. Just because we have been doing the same things for the last several years doesn't mean that they are going to work as a way forward.
So in terms of what we can do ahead, it is to change the way we think, realize that we are in an emergency situation, take into account that our businesses need to grow, and hopefully, keeping our fingers crossed, that member states will listen and things will work out in the end. Thank you.
Speaker 1
Thank you very much. Rita, now we move to the second question by PPP. On, we have Ludek Niedermeyer.
Speaker 10
Please, Ludek. Thank you very much. I would probably have two questions. First of all, thanks for the presentation, but it was not terribly encouraging, I must say. So I would first probably like to turn to Autek's Director, Benjamin, because there are at least three areas of the tax debates.
The first is a kind of simplification of the existing rules, like VAT, for example. And as we have seen in an EPRS progress report, there is progress in certain areas, but in other areas, it is seen as the biggest obstacle. We also have some offensive ideas to modernize or harmonize some frameworks. I spent 2 years working on the actual Deborah proposal, but this was completely killed by the council. The council didn't even want to talk about it.
And concerning the second presentation, you know, I must say that there is nothing more difficult than simplification. So it's easy to say we need to simplify the rules, but the rules are awfully complex. But the simplification is the least simple thing. So I wonder to what extent, especially Benjamin, but also the others, you think in which areas we can make some progress that we'll deliver quickly, and not deliver in twenty years. And the second question, which is also somehow associated with the last intervention, is that, as we know, quite a lot of member states have a problem with the budget balance.
They have an incredibly unsustainable deficit. And I think in some countries like mine, it's not because of expenditure overshoot, but because the political decision there was to cut the taxes much more than it would be reflected by the decline of the expenditures. You know? And it seems to me that we are now facing a kind of tax populism where basically no government is willing to do anything with the taxes, but they have to cut the taxes and increase the revenues. So, there is clearly a deficit bias.
So I wonder to which extent there should not be a focus on not just fixing some things in the tax framework, but rather to significantly reset the tax regime in order, first of all, to at least better close the fiscal gap and at the same time to focus on the taxes that are easier to collect and that are less subject to possible tax avoidance or tax evasion. Thank you.
Speaker 2
Thank you, Rudek. First, on the simplification of those existing rules, you mentioned the VAT. I think, to be fair, some progress has been made in VAT. A couple of years ago, we had the directive on VAT rates. Now, we have Vida, which is a major development.
And Ritin was also right to nuance my gloomy presentation by recalling that there is progress in the one-stop shop in the VAT field, which you can interpret in different ways. If you want to keep the gloomy mood, you would say, yes, we have harmonized VAT for decades, and it has taken decades to get there, but at least we are there. So, let's enjoy the moment. We need to make progress in other fields. In the VAT, some parts, the complexity is not at the European level.
Very often, the complexity is at the national level. I remember a couple of years ago, for instance, in a member state, which I will not name, there was a different rate for bread depending on whether the bread was packed or not packed, cut or not cut, etc. You had 6 or 7 different VAT rates depending on the kind of bread. So that's the kind of self-inflicted harm, which does not come from EU legislation, but comes from an excessive enthusiasm for complexity at a national level. On Deborah, we share your frustration.
I must say Deborah was supported by the community of economists. Very clearly, this question of debt-equity bias has been high on the agenda of economists for years. The treasuries themselves were relatively supportive. The tax community is unfortunately less. So, we failed to gather the necessary support.
On the simplification, I think there is a willingness of Member States to make progress in this field. They all got the message, and I'm confident that we are not in a scenario where we run the risk of not having the directive adopted. The question is more about how ambitious the directive will be and how far-reaching. We will table a far-reaching proposal, which will cover the deck, for which we'll also do a recast. We will look systematically at the need for clarification, but also at the possibility to cut reporting where the information is not really used. We will look at the two anti-tax avoidance directives, the parent-subsidiary directive, the interest and royalty directive, and the dispute regulation mechanisms.
But we will also, and this is one of the points that Joanna mentioned, spend some time looking more specifically at Pillar Two companies. Because clearly, with Pillar Two, we have this global safety net that ensures that no matter what, we have an effective tax rate of 15%. So maybe we can go a bit lighter on the requirement for Pillar Two companies, precisely because we have this general guarantee that we don't have for the others. And that is something we are looking into. And we had this morning a meeting of the Council High-Level Working Party, and a number of member states have intervened in the same direction, saying it's time to take a comprehensive approach and to look also at whether we can go lighter for PLR2 companies.
On your last question, and on member states not paying enough attention to tax gaps that they have created by their own decisions. I agree. And the commission has tried to invest more in this topic. You certainly know that we released, in December, which was probably not an ideal moment, the first Mind the Gap report, which focuses precisely on the tax gap. And not only on tax compliance, something that the European Union has been working on for a very long time, but also on the policy gap, which is precisely what you are aiming at: the decision of the member state to grant tax credits or VAT reduced rates, etc., or to cut taxes. Well, it was a tax credit and reduced rate, which, as a side effect, created a tax shortfall.
And it is our experience that too often, not systematically, but too often the decisions are taken, but they're never revisited. And sometimes there can be a very solid narrative behind the decision, but maybe this narrative is no longer there five, ten, or fifteen years later. So the main message that we are trying to pass to member states is to check NHLs regularly to make sure that there is still real purpose and efficiency for these measures. And also try to reduce complexity. I've mentioned in my preliminary intervention that some countries have around 500 to 600 different tax expenditures.
It's hard to imagine when you have so many, but they are all very effective. So clearly, when you try to do too much, you achieve in the end not as much as you want to do. But if we had at least this regular evaluation in Elstek, we would already achieve something. Just one figure to tell you that it is not anecdotal. We have one member state, for instance, for which the annual tax expenditures represent 15% of GDP, just in the tax expenditure.
So we're saying to evaluate regularly; the impact is serious and real.
Speaker 3
Well, I fully agree that simplification is extremely difficult. And what I learned from twenty years of research on that is that simplification really needs to be deregulation in tax law. That means that you have to cut off or really abolish rules, and not only refine them and make them a little bit less complex, because this always has to be implemented. This has to be followed. So, it sounded promising what Benjamin told us: the commission is really thinking about making progress in this simplification because it was also mentioned that if you are not able to really abolish rules, a generous SME safe harvest would also help quite a bit.
And then from that point, one could think about what is about the M and Es, which are covered by pillar two, which are also, by now, covered by the ATAD. And then, one can think, do we really need these two rule systems? To answer your question about Deborah, I think that, from the outside, if you follow that, Deborah had two proposals. There was one allowance for equity, and the other was a ban on interest deduction. And, to finance it.
Reducing. Reducing, not bad.
Speaker 3
Yeah, a reduction. Okay. But this was just mean; it is a proposal which was so far-reaching that I don't think this is something which, well, one could accept or expect that member states would follow. So I do think that harmonization proposals, especially if they really change domestic law, have to be more moderate. And then, your point about tax expenditure.
Well, yes. You are right. And Benjamin said that they need to be evaluated. They need to be revisited. However, sometimes tax expenditures, and I think we see that in all member states, from the very first moment, they will not be effective.
It's just a question of, well, abusing tax law for all kinds of policy purposes, which do not contribute to revenue. But again, this is very good that it is watched by the commission, but it's a question of political discipline.
Speaker 1
Thank you very much. Thank you, Joanna. Now, we move to Evelyn from S&D. For your question, I'll be in Regnar. Please, Evelyn.
Speaker 13
Thank you very much. Should the European Union introduce a digital tax as part of the single market tax coordination to stop tax stamping and regulate digital giants? So, somehow, this aspect. Next one: I love taxes. As far as they contribute to making our societies more equal and just.
And therefore, to you, Madam Hai, how can we simplify, as you say, decluttering the tax system without opening the anti-tax avoidance rules? And in order to reach all the goals we have in articles two and three of the Treaty of the European Union. So somehow, it doesn't help us if there is nothing left anymore and there is a devastation of the whole society. And the third question to Mr. Angel, do you have some, I mean, I think that's the most important but also most difficult task: some nice proposals to ensure trust among member states, as we all have to work on trust when we're talking about taxes?
Thank you. So, Joanna, do you want to start?
Speaker 3
Yes. On digital taxes. Well, the problem with digital taxes is not only that they would immediately bring us back to the discussion with the U.S. S. On excise taxation.
Okay, we can maybe deal with that, but also, digital taxes are somehow hybrid taxes. They are between direct taxes and indirect taxes. And in the end, they will probably be considered bad by the consumers. So we can talk about that, but it's not that retail said there is no free lunch. So it's really a question of how these taxes work, and they are totally outside the network of double tax treaties.
So, I don't think that they are a very good option for raising additional tax revenue outside of the systems we have. The fair share you mentioned, I would say that the BEPS policy of the OECD had, of course, good effects. And talking about tax avoidance and tax abuse was helpful. And also, there is empirical evidence that Bep's actions are not gone, but they are diminished. So I don't advocate repeating all of it.
I would just say that these different layers, especially anti-avoidance rules, and not only anti-avoidance rules but BEPS rules, for example the anti-hybrid rules, really don't show the effect. We do not see that they contribute to additional revenue. They are a high burden, especially on SMEs, because there is no threshold for this. So I do think that, and this is done by the commission, that we have to go very deeply into the evidence of what they really contribute to, the goals they were, when they were implemented, these rules. So what I want to say is that maybe we just overdid it a bit.
Thank you.
Speaker 2
You. On digital tax, the topic was mentioned last week at the meeting of the CFA in Paris. And when the agreement was found on Pillar Two on January 5, the statement from the United States had, for the very last sentence, a commitment to restart the discussion on digital taxation. And last week, the U. S.
The representative has expressed our eagerness to restart this discussion. It begs the question of what the content should be. I think we first need to try to agree collectively on what the objective is that we are trying to address and see where we go from there. I think it is no secret that the development will probably be different from the multilateral convention for Pillar One, as was discussed last year. But at least it is positive that there is still willingness from all jurisdictions, which are engaged in the inclusive framework, and we're talking about more than 150 countries, to try to resume this discussion.
I cannot judge the outcomes. That's the only honest answer I can give. On your other question on trust between member states, I think it needs several things beyond those which are already mentioned, such as favoring more social occasions to know each other, which we do for the tax administration. It clearly takes more coordination. Too often, the Europeans have been weak in international fora because they came with a divided front.
We have now started to have a more systematic coordination ex ante in the OECD. It's not ideal, but at least it is progressing in the right direction. Same for the United Nations, where there is also coordination. Coming from other fields, I see this coordination to be natural and taking place all the time. If you go to the IMF, for instance, all discussions of the IMF are prepared by a special committee in which you have all EU representatives to make sure that we speak with the same voice and express the same view.
It's more painful in the tax field, but the experience of the last few years shows that there has been significant progress. I can tell you that last year, for all key discussions in the OECD in the tax field, we had a discussion between Europeans, which was not the case before. But we also need more transparency, and I come to a more sensitive and difficult topic. We need member states to refrain from having beggar-thy-neighbor approaches. As long as some member states are tempted to have very aggressive policies to the detriment of other member states, and the case of some aggressive schemes for attracting individuals has been mentioned by Rita in her intervention.
It affects trust inevitably because you end up seeing your counterpart, the person you're supposed to work with, as someone you cannot fully rely on because that someone has designed something which is too aggressive. And it's hard to draw an exact line between what should be the normal competition between states to attract talent and what is really an aggressive and unfair game. In the field of corporate taxation, member states established a long time ago a code of conduct for business taxation. There is no code of conduct for personal income tax, to take what Rital was mentioning. And sometimes we feel that it might not be a bad idea if member states could show a little more self-discipline.
Speaker 1
Thank you, Benjamin. We have consumed all our time for this hearing. It was very interesting. It is also good news to hear, actually, as you mentioned before, that there will be an open discussion with the United Nations as well as with the United States on Pillar One and on digital tax. So, thank you.
Thank you very much. Thank you to all of you. Thank you to our speaker. Thank you as well to Christophe Tefilo and Professor Rita Delafeira for the online intervention. Now we have a five-minute break before starting with the presentation of the study: the cost to non-Europe due to the non-harmonization of tax policy.
This is also a very interesting team, I will say. Thank you.
The single market with tax policy harmonization, in order to see whether a cost of non-Europe is emerging and not boosting tax policy harmonization. I stop here because I really want to listen to our researcher.
Our professor here, starting with Apostolos Tomadaches, Sercifello, and head of the Financial Market and Institution Unit at the Center for European Policy Study. Then we have Katarina Pantazzatu, associate professor in tax law at the University of Luxembourg, and then we have Mr. Marco Ciotrone, European Added Value Unit of DG APRS, European Parliament.
We will have the opening remark, starting with Marco. And then we will go to our member asking a question with the usual rules. Up to two minutes for the question, then back to our researcher for three minutes. Answer.
Speaker 12
Marco, the floor is yours for 7 minutes. Thank you. Dear Chair, honorable members, I'm here today on behalf of the European Added Value Unit.
Of DG Paris. Our mission is to support the work of the committees by providing evidence of the added value of European action. The study to be presented today was launched following the request of the Fisk Support Meeting at the beginning of last year to conduct the study. EPRS entrusted an external consortium composed of experts from the Center for European Policy Studies, the University of Luxembourg, the Norwegian School of Economics, and the London School of Economics. Dorepart was published in November 2024 and was sent to the members of the Fisk subcommittee after the publication. The main objective of this study is to assess the economic and administrative consequences of divergences in national tax policies within the EU. The study quantifies the economic and administrative cost of fermentation and explores targeted forms of coordination in four areas. Wealth taxation, crypto asset taxation, digitalization of tax administration, and the tax compliance burden. During the past months, we have maintained a constructive dialogue with the committee secretariat. As part of quality control, the study underwent a double-blind peer review process by an independent and renowned expert. This was done to guarantee the highest objectivity and quality of the study.
We presented the key findings in a Natagland's body that you can find at the entrance of the room. And we invite those interested in the full study to contact the committee secretary. We are confident that this study will contribute to and will continue to facilitate further discussion on the topic.
Thank you, Chair, for the opportunity to present the study to the committee today.
Speaker 15
Thank you very much for the invitation. Thank you very much also to the Value Unit for giving us the opportunity to do this study together with colleagues from different universities: Katerina from Luxembourg, and the others from Norway and LSE.
I mean, Marco, you mentioned very well a bit about what a study is, but let's see why it's urgent now, why we need to act now. Of course, we also had in the previous public hearing that tax systems are national, but business models and taxpayers operate across borders. And this mismatch creates some costs in terms of legal uncertainty, in particular when they have to operate across jurisdictions, which imply different rules or different requirements. Duplicate compliance across jurisdictions, of course, also creates incentives for tax arbitrage and jurisdiction shopping. And also, the enforcement is uneven, as we saw across member states.
So, it is also important to clarify, I think, that the EU treaty provides a legal basis for, let's say, some sort of harmonization in terms of indirect taxation, VAT, or other distortions across borders. But not when it comes to corporate or personal income tax. So the view is not to try to harmonize tax regimes and tax rates across the EU, but to see what is the cost of non-harmonization, let's say, of non-coordination. We focus on four main areas, as Marco said.
So I'll skip that, and I'll start straight with the first one, which was wealth taxation. So the first step was to go back and evaluate what is the current situation across member states. We see that wealth taxes differ significantly across countries in terms of scope, design, and type. So, we have net wealth taxes that are quite rare across countries. The same or a bit more for inheritance and gift taxes. They're widespread, but there is still large variation. And the real estate taxes are, apart from the fact that they are fixed and fiscally significant, also much more widespread across the member states.
Now moving to the next one, I mean, this matters because of the cross-border friction for taxpayers and tax administrations, the risk of double taxation or even non-taxation in many issues, arbitrage opportunities, and also the consistent valuation methods, consistent definitions, and the rules that apply. Now, what is the way forward? I mean, it's coordination. We had it before as well. Rather than tax the organization. I mean, the previous academic put it as a dilemma: tax sovereignty versus tax organization, but before going to tax organization, we should first explore tax coordination as much as possible. So, to preserve national tax sovereignty while easing cross-border distortion, EU coordination should focus on common definitions of taxable wealth and valuation rules for higher-value assets. And common standards for cross-border reporting of foreign health and wealth. So the goal, the aim is to have lower admin costs, improve compliance, but also to reduce arbitrage.
Now, moving to the second pillar, which is crypto assets taxation. I mean, here we call it a stress test in terms of tax. Because of the nature of crypto assets, They are decentralized. They are cross-border in nature. And this complicates taxation. Challenges for tax authorities in terms of ownership and reporting.
Innovation is also evolving very fast. So it sometimes outpaces legal definitions. So, the key issues and the key differences that we observed across member states are on what is taxed. Some member states tax crypto-to-crypto swaps, others only crypto-to-fiat. How is it classified: as capital gains, personal income, or business income? What are the rates, the reliefs, and also the reporting requirements? So there is a substantial variation. For the same transaction, the end result could be that it faces different tax rules and different tax bills. Depending on the member state.
Now, how to move forward on that? I mean, we have the Directive on Administrative Cooperation Group Assets, DAC 8, which mandates cross-border reporting via crypto service providers. The aim is to harmonize also before going to the DAC. Mean, of course, DAC came into force early this year. But by itself, we'll just solve the information problem, but without greater harmonization or greater coordination, it will not solve the problem of what is taxed, where it is taxed, how, and so on and so forth. That's why we say that we need some core definitions, some agreement on how to move forward, and how to build shared enforcement tools. So, DACA is a good start, but coordination must go beyond information sharing that will bring transparency.
Now, on the next step of digitalization, again, there is quite a different approach. First of all, we focus on the full spectrum of available tools: e-filing, e-payment, taxpayer ID registration, prefilled forms, third-party reporting, real-time reporting, and so on, but also AI tools that could really provide solutions.
What is the core issue that digitalization is progressing, but very unevenly across member states? Some of them are quite advanced. Some others are lagging behind. Now we look at different measures in terms of government fees, transparency tools, availability to tax administrations, and so on.
Into different e-fillings across the EU. So, for some things, there is convergence. So the feeling is widespread. For VAT and corporate income tax, but not as much for personal income tax. Previewing returns is common for PIT, but again, very rare for VAT and CIT. So some basic tools are converging again. You know, there is room to do much more and coordinate much better. And that should be the focus.
Of course, we have the value in the digital area. The Vida, which is a great step. But again, we've also been there since 2015. If I'm not mistaken. We again observed some variation in implementation and enforcement across member states.
So the units baseline digital standards for all tax administrations. So we need to provide the tax administrations with the tools that they need in order to implement and do their work. Now, I'll stop here and pass the floor back to the Chair for my colleague to continue.
Speaker 16
So, I can continue immediately. I extend my thanks also very much to the Honorable Chair, to the members, and to the added value units. So, thank you very much for the invitation. I continue immediately with the fourth pillar we examined. And that was the compliance burden, and we found out that the cost of compliance does not translate only to the taxes taxpayers pay, but it also translates to the time they spend complying, the administrative effort, the opportunity costs, and other indirect costs. So the time you spend complying with the tax requirements, you could have been doing something else. And the burden we found is heavier on SMEs and startups. They have to pay higher per-euro costs. The reason is that usually they do not have big in-house services. And the same happens with administrative and compliance burdens, which are very high also with cross-border firms. They operate cross-border, thus they have to face duplicated rules and procedures. The same happens with mobile, self-employed, or platform workers who have to operate in multiple states; the guidance is usually unclear. And they are subject to multiple risks.
So, why does that matter? Because, as you can see, the same activities with different taxpayers may face different tax compliance risks. So, we found that this is a real issue, a fairness and growth issue, not just a technical one. Now, what does the evidence show? I think it's quite telling to see how this compliance burden translates. So we found that the time to comply with the annual requirements varied across member states. So, for example, we observed huge variations among medium-sized firms. For instance, in Estonia, such firms needed less than 60 hours per year to comply, whereas in Bulgaria, they needed more than 400 hours per year just to meet the tax compliance burden.
What are the key drivers behind this burden? Well, the tax code complexity, the complexity of the rules themselves, and second, the administrative complexity, or in other words, the complexity of the processes and procedures across member states. The forms that have to be filled out, the different schedules, and the different audit rules. So, in this respect, our main takeaway is that simplifying procedures is particularly important for taxpayers. Because currently, as we discussed before, we shouldn't focus only on tax rules, but also on the procedural aspect in terms of compliance.
Moving on. So what did we find? What can work in respect of compliance? First of all, we found that digital tools that have been expanding can be of help. But they should be paired with simplified processes.
And what do we mean by that? The administrative design across member states does matter. So, for example, if you have a single window to submit everything, one data submission is particularly helpful for taxpayers. Vida, we already talked about this. It streamlines VAT and expands invoicing, but as Apostolos just said, rollout gaps remain.
We showed that cross-border firms operating across borders face a compliance penalty. They have much higher compliance costs. And what is the challenge? The challenge is that there is no EU baseline for administrative efficiency. What does that mean? We do not have a minimum. Procedures and how well the administration works are matters for member states. It is very difficult to make this a matter of the European Union. At the same time, another challenge we found was that very few member states were keeping track of or benchmarking the taxpayer burden. So the bottom line is that one recommendation we have is that the EU can lead by setting benchmarks and promoting best practices. As I just explained, it is very difficult to harmonize administrative practices.
Okay. So we already spoke about the cost of non-European taxation, which is the main theme of this study. But just to repeat, we are looking at the economic and fiscal losses from the fragmentation of the national tax systems due to the lack of EU coordination.
And what does this lack of EU coordination translate into? It translates into lost revenue. Why? Because the taxpayer shifts their tax base, or it may altogether escape taxation. Member States and taxation in the European Union. They are faced with higher compliance costs. We already explained which taxpayers are affected most by this. We also explain how the same taxpayers, for example, engaging in cross-border transactions, may be treated unequally exactly because of this cross-border element. And we also showed how we observe weaker enforcement in some member states due to different capacities and data availability across member states. So all these divergent rules may lead to arbitrage and distortions within the internal market, which obviously undermine the internal market.
Altogether. Now, moving on to some numbers. So, we tried to illustrate mostly with model-based scenarios what greater EU-level coordination or convergence could yield across wealth taxation, crypto, digitalization of the tax administration, and compliance simplification. So, we start with the wealth taxation to show how much revenue is lost, based on our calculation, due to this fragmentation exactly. So what we did is focus on real estate wealth, taxation, and net taxation.
I will explain. So, first of all, we take individuals with real estate wealth above 1,000,000. This is a relatively small number of individuals with this kind of real estate wealth. So we calculated the revenue and the status quo in terms of how much revenue the real estate wealth yields, and it is approximately 12,900,000,000 per year at the EU level. So then we estimated that if all countries, all member states with below average tax rates were to converge to the mean tax rate, then we would have an increase of approximately 18%, and thus we could estimate that we would have a revenue of approximately 12,200,000,000. Then we did the same calculations and the same modeling.
For real estate wealth for individuals, real estate wealth above 1,000,000. And, of course, the taxpayers with this kind of real estate wealth, there are many more. So in this case, we calculated the status quo to be $127,800,000,000.00. The revenue from this kind of taxation, and again the convergence if all countries below average tax rates converge to the mean, would be up to 1,513,000,000.
This is about real estate, wealth, and real estate taxation. And then we move on to the net wealth tax on financial and non-financial assets. So, what do we do here? We estimate what the revenue would be if all member states, with the exception of Spain, participated. Why? Because Spain already has a net wealth tax. So, with the exception of Spain, if all member states adopted a 1% rate on wealth above 1,000,000,000. I'm speaking again about the net wealth tax, excluding real estate this time. So, while calculating this, we accounted for two compliance variants. One is that we escaped a 20% capital flight. So in this case, we expected the produced revenue to be approximately 20,300,000,000.0 per year for 21 member states. And then we calculated a heterogeneous compliance rate, and the results varied significantly. So we found that, for example, for some countries, the revenue could be very much increased, whereas for others, not so much. On the basis of our calculations, we found that by 2035, the projected yield could be 30 to 35 billion per year, assuming, of course, a constant annual wealth growth. At the same time, we found that when it comes to the imposition of taxes here, enforcement does matter very much. So if we were faced with weak enforcement, then this amount could be reduced by up to 27%.
Now moving on to the crypto gains and the crypto asset taxation. Here, we extrapolated from Bitcoin data because it is very difficult, as we will show, to calculate the gains arising from crypto assets. So, we calculated that the crypto gains for 2024 amounted to approximately 16,000,000,000 across the EU twenty-seven. And for that, we calculated that the tax revenue they should yield, assuming full compliance, should be approximately 4,700,000,000. But at the same time, this full compliance assumption is very difficult.
Why? Because at the same time, we observed massive underreporting in the area of crypto assets. So, for example, just some percentages: 63% in Norway, 9% in Denmark. So, obviously, the possibility that crypto asset taxation could yield revenue depends largely on what kind of enforcement we could expect. So, what are the key coordination tools? Apostolos already talked about this. The DAC 8 reporting mandates include common taxable event definitions and aligned valuation and reporting formats. In other words, easy tax: who taxes it, at what point in time, and how valuation takes place. All these vary across different member states.
So what can the EU realistically do, and why? We already talked about tax being a national competence, and for harmonization to take place, we need to justify that it would happen on the basis of Article 115 TFEU, and we would need a justification based on the single market. So, luckily, we do not advocate for this, but instead, as Apostolo said, we advocate for coordination. So, at the same time, we found that the fragmentation costs are many. They lead to duplicated compliance, arbitrage, and weak enforcement. So, for that reason, we suggest that the EU focus should be on setting minimum standards, not full harmonization, targeting cross-border spillover areas like wealth and crypto. The more mobile the base, the easier it is to escape taxation and the more difficult it is for national tax systems to act independently, supporting interoperability and joint enforcement tools. So, have compatible definitions, reporting, valuations, and so on. And using benchmarking to scale what works and flag any outliers. So for wealth taxation, what we recommend is to set a minimum baseline for high-value property to ensure that there is at least some taxation of this high-value property. Align valuation methods. We have examples where the valuation of certain property in the cadastre is from the 1930s or the 1940s.
Develop guidance on inheritance and gifts. Why? Because they're very easy to fly away. Potentially, and I know there has been discussion on that, an optional EU framework for ultra-high net worth individuals, strengthening enforcement, expanding the DAC, for example, to art, yachts, and so on, and linking any potential registers with the anti-money laundering register.
And provide support for weaker tax administrations via technical assistance. And finally, my last slide: what can we do in terms of crypto? Enforce the DAC and the carve consistently. Consider a minimum tax floor for realized gains. I told you already that there is no tax on crypto in centric countries. Enable joint audits and shared data platforms. In terms of our last two pillars, digitalization, define a certain minimum of services, including APIs, interoperability, and standardized e-invoicing with real-time reporting to reduce friction. And finally, about the compliance burden, I have already talked about it before, so I want to mention our recommendation again.
With this, thank you very much for your attention, and we both look forward to questions and the discussion.
Speaker 1
You, Katrina. Very interesting. Now we move to a question from our member. Starting from S and D, Matthias Ek.
Yes. Thank you, Chair.
Speaker 17
Thank you for the presentation and for the very interesting insights you shared with us because I think this is definitely an overlooked aspect. We really lose benefits for the common good in the European Union because of the unrealized taxes that stem from non-coordination. These are fiscal, but I think it's also fine that you mentioned these are also economic losses. Because of inefficiencies. And the first thing to tackle, in my point of view, is that we really need comprehensive tax bases in many respects. I mean, we've been having this debate for a long time about corporate taxes. I am just looking at Evelyn Reagno, who has been working on that for a long time for corporate tax bases and others. But I think it's important that we have a comprehensive tax basis.
On crypto, I think it's also a question of financial market stability because if there's a relative privilege in taxation for crypto assets vis-à-vis other forms of portfolio investments, I think that the crypto market might be inflated, which also poses a threat to our prudential network. One thing I would like to ask is, because we are now also discussing the initiative report on financial market taxation, we see that due to the lack of value-added tax application on most financial services, there are also very different regimes in the European member states on how financial market taxes are applied, including what kinds of exceptions and options are used for the VAT problem.
So, would you consider that this is also a part of our taxation system, that one could apply the methods you used for a non-Europe cost of non-Europe in the field of taxation? Could that also be applied for taxation of capital income, also the financial sector in general? And do you have any idea to what degree we have unrealized gains there? Thank you, Thomas.
Apostles, please.
Speaker 15
Yes. No, I mean, agree on the things that you mentioned about agreement, let's say, on the common tax base or agree on that. But also in terms of crypto assets and the financial stability issue, I mean, I'm sure. I know there are a lot of pieces related to financial markets that they try to tackle this issue, even with a supervisory conveyor and integration in terms of crypto platforms. We need to know what is used, let's say, or what amount of capital goes there, money, what the gains are, and so on and so forth. So any tool or any direction towards more information, because this is a very niche area. This is a very significant area in which information is lacking. So that should be improved because, as you said, this is a financial stability concern. Yes, but also, it's something that can be applied to financial market taxation, as you mentioned, and the whole discussion about gains and so on. But again, I mean, we can only do as much work as possible given the information that we have available. And that's why I also have estimates for the crypto wealth tax based only on what is available, which is not a lot. And we have to, let's say, make several assumptions and consider several ways forward in terms of convergence.
This is also how it will be applied and enforced by each member state. So it's not to have a common base or common tax rates, but how we make sure that all 27 member states understand it, credit it, and enforce it in the same way.
Speaker 1
Thank you. Is it okay? Thank you. Now we go to Ludovic Rinov. Order, please.
Speaker 9
Thank you, and thank you for coming and presenting this study. I have a few questions. The first one is actually that when we see the title, "The Future of Tax Harmonization in the EU," not a lot of us would guess that you will deal with these four topics.
We have much more important topics on the agenda. So, these are not the most relevant ones from my perspective. But I guess that maybe these are the fewest. So I'm not quite sure that even digitalization is an issue because that is not a cost of non-Europe, since you can have a terrible system even if you have just one fully harmonized system, but a terrible one, with a lot of papers and no digitalization. That is not a benchmark. So we need to find out the benchmark. What is a benchmark for these kinds of studies? And I think that in that regard, we should also look at international best practices in order to figure out what is the real cost of not having an internationally competitive system in the EU. But having said that, I'm not dissatisfied with the report because I think all these aspects are very useful. Even the net wealth taxation it will be very important when we will or members that will try to go away from labor taxation because of the digitalization of the economy, and they were trying
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