Subcommittee on Tax Matters Ordinary meeting
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FISC European Parliament
Ihren Sitzungen folgenRedner 3
And I'd like to identify two problems. One, in terms of economic efficiency, clearly creates a bias for firms to use debt finance rather than equity finance. That, in turn, increases the financial fragility of firms generally. And there's a substantial academic literature on trying to estimate the scale of this effect, and there's quite a wide range of estimates. So broadly, the estimates of the impact of the bias on leverage ratios of firms vary, but they're typically in the range of 5 to 10 percentage points.
So, if you put that in the context of a typical average corporate leverage ratio being maybe 30%. So that's a relatively significant effect. So, that's really the issue of economic efficiency. But I think there's a second important problem, which is often actually overlooked in the policy debate: the cost of administering and complying with the existing systems that seek to differentiate debt and equity. And the key problem here is really that it is extremely difficult to identify each of those in legislation.
Or to put it another way, it's actually too easy for practitioners to design financial instruments that have some elements of debt, some elements of equity, and to do this in such a way as to provide a tax benefit. So, across countries, a key aim for practitioners would be for the instrument to be treated as debt when the payment is made, so the interest is deductible, but as equity in the hands of the recipients, so that no tax is due on the receipt. There are lots of ways that policymakers have tried to close those loopholes, but closing them typically creates new opportunities, resulting in a highly complex system that becomes ever more difficult and expensive to administer. So, my answer to the first question is yes. There is a problem.
So, the second question was: in what direction should reform proceed, in principle? And I'm going to make a case for moving in the direction of giving an allowance for equity, or the allowance for corporate equity. And I want to do that in relation to these three criteria: economic efficiency, fairness, and ease of administration. So, first, on the grounds of economic efficiency. So, under existing systems, tax on equity finance investment tends to depress that investment.
By contrast, it's generally acknowledged that the tax system that gives relief to both the cost of equity and the cost of debt finance results in the tax base being economic rent, or we could think of it as being excess profit. That is the profit over and above the minimum required rate of return on that investment. So, taxing only economic rent has the attractive property that it does not distort business investment decisions, and that's an important improvement in terms of economic efficiency over existing taxes. By contrast, simply removing interest deductibility would move us in the other direction and worsen the bias against investment. Second, on the grounds of fairness.
So identifying what a fair tax system is is hazardous, especially in the case of taxes on business profit. And it's particularly difficult because, when we're thinking about taxes on business, we need to look through the business to think about which individuals are worse off as a result of that tax being levied. And, in general, that depends on markets and market conditions, so it can vary. The tax may be passed on in higher prices to consumers, lower wages to workers, or lower profits to shareholders. That makes it extremely difficult to judge how fair it is.
But there is one special case, and that is the case of a tax on economic rent. And in that case, there is no incentive for businesses to change their behavior or their prices. And consequently, we can expect the tax to be borne by shareholders, and that's likely to be consistent with having a progressive tax. Third, on the grounds of administration. So here, there's a problem with removing the deductibility of interest payments when we think about the tax systems as a whole.
So, under existing systems, if a bank lends to a business, then the resulting interest is not taxed in the hands of the borrower, but it is taxed on receipt by the bank. So, if interest deductibility is removed at the business level, then there's a strong case for also removing the tax on the bank. But that gets us into redesigning the taxation of banks, and that's a much more major undertaking than simply giving additional relief for equity at the company level. Of course, if we give additional relief for equity at the business level, then we have to think about revenues. And given tax rates, adding a new relief would reduce the tax revenue from this source.
So, one possible offsetting factor here is the implementation of a global minimum tax, which should have the effect of reducing tax competition between countries and thereby possibly enabling higher tax rates on profit. Another possibility is to give relief for equity, but then limit both the relief that we give for equity finance and for debt finance. My only hope was that when we would do that, we would do it in a symmetric way so that we give similar treatment to both debt and equity. And I think it's notable that the existing Deborah proposal actually does not have that symmetric treatment of debt and equity. Let me stop there.
Redner 1
Thank you. Thank you very much, Michael, for your excellent presentation. Now we move to Mr. Paulo Dovici. I have already introduced you. You have, Paulo, 7 minutes for your introduction.
Thank you very much.
Redner 4
Thank you. Looking at this discussion, the point is that the underlying idea is that companies make funding decisions based on tax benefits rather than on some management considerations. Second, if we have debt instead of equity, basically, we have the issue of less resilience of the companies; therefore, the point is the re-equitization of the companies. So, in answering this question, I asked myself a number of sub-questions. The first point: is it true that companies incur debt only or mainly for tax purposes? I think this is the focus on intergroup debt dynamics.
When we have intergroup putting equity or debt for them, it is the same; it's their own funds. And normally, also from a corporate perspective, this is considered equity or quasi-equity. And therefore, I think it's quite neutral in terms of liquidation. Clearly, there is an advantage to putting debt instead of equity in a number of situations, but not just for interest deduction. Sometimes, it's also for the repatriation of capital and to avoid a longer term for the distribution of equity.
Clearly, the more private the company is, the more flexibility there is; the more public it is and the more shareholders we have, the more governance and rules limit the chances of flexibility. Second point: when we go to third-party debt dynamics with banks, honestly, we see a situation where debt is incurred for legal, regulatory, and commercial reasons. It is true that we have to look at whether interest expenses are deductible, but just to understand what the cash amount available to serve the debt is. One could say we want to have additional equity instead of additional debt, but this is not the same because not everybody wants to enter into the equity of private companies. Also, if we have new equity investors, the issue is what the value is.
Normally, there is a discount. What is governance? What is the exit strategy? And there are a number of non-tax issues that don't make fungible new debt or new equity. Third question: is it true that debt is treated more fairly than equity from a tax perspective?
And this is the point that we discussed before. Because if we look at the pure equity situation, without Deborah, the company has no interest deduction and pays full corporate income tax. And therefore, we have higher taxes for the company on a standalone basis. But when this company pays dividends to the shareholders, normally, when there is a participation exemption that works perfectly, there is no further taxation for the investors or the shareholders. So, higher taxes for the company, no taxes for the shareholders.
Where the participation exemption doesn't work perfectly, we have higher taxes for the company and higher taxes for the shareholders. In a full debt situation, we have deductions for the company, but we also have taxation for the lender. As was said before, banks and all third-party lenders have to pay taxes. This year, a standard objection, yes, but there are many ways to avoid taxation of interest income. And this is a core policy question that we all address in all countries.
Should laws be drafted with pathological cases in mind, or should we consider physiology and handle pathology with anti-abuse legislation? I tried to make an analysis also from an Italian perspective. And talking with the Italian Ministry of Finance, we found that this statistic shows an area of around 5,000,000,000 of interest expenses, 12% of which is not deducted. So how can we say that they borrow just to have a deduction of interest expenses when they cannot deduct interest expenses? And there is also a stock of EUR 42,000,000,000 in interest expenses not yet deducted by Italian companies at the overall level.
The additional point to the additional question is the debt-equity bias already addressed in existing tax laws. And, you know, we have the ATADAN, the 30% limitation, the 30% barrier that somebody may wish to reduce, but 30% is already important. Reducing the deductibility of interest expenses may cause a limitation for the company to borrow and, therefore, reduce the total value of the company. Transfer pricing rules apply intragroup, but this is a very important point because transfer pricing is not just about the amount of interest expenses, but whether the debt is true debt or should be treated, tax-wise, as equity. And also, anti-hybrid rules.
So, before, we talked about a situation where an instrument is debt in one country and equity in another, but this is handled by the anti-IB rules that work intra-group and not with third parties. So now it's impossible to have a situation where, in one country, the instrument is treated as debt, and in the other country's equity; we have no taxation. So the risk is also a risk of overregulation, and the risk of further regulation is very high, especially if we look at the international context. For instance, in pillar two documents, we don't have any interest barrier rule. So far, we said that I just described the picture, but what can be done? First, when we look at interest reduction, we always mention start-up companies, small companies, and how to put equity in these companies.
This is another perspective that, in each country, we face very heavily. The point is that limiting the analysis to the interest deduction is very restrictive. So, we have to look at a different perspective, and we also have to look at the investors. The investors especially want to put money in equity if they get a benefit. The tax credit in some situations and the incentive, especially for small and medium companies.
The other point is intergroup funding. We have a lot of flexibility if the company is not listed. So why don't we think of incentives to list companies and make them public? Third, there might be some soft lows, like, for instance, you are not allowed to enter into a corporate compliance program if you have a debt-equity ratio below a certain threshold. And you know that corporate compliance is a matter of reputation and, ultimately, the value of the company.
Thank you.
Redner 1
Thank you. Thank you, Paula. And now we move to Miss Tobe Maria Reiding for another 7 minutes. Maria, please.
Redner 7
Thank you so much, and thank you for the invitation to come and speak today. As Michael mentioned, the issue of the debt-equity bias has been a very long-standing discussion. I don't go as far back as the nineties, but over 10 years ago, when the first package on base erosion and profit shifting, or BEPS, was negotiated, the debt-equity bias was one of many arguments in favor of introducing strong limitations on interest deductions. Another important argument for doing that was the fact that interest payments were seemingly used by multinational corporations to shift their profits to low-tax jurisdictions. However, as a civil society network, we were disappointed with BEPS because, in our view, the rules that were introduced were quite weak.
Redner 5
Basically, it was a cap for interest deductibility of between 10% and 30% of earnings before interest, taxes, depreciation, and amortization, or EBITDA. We had hoped for stronger rules, including a limit on the overall deductibility of interest costs that a multinational group can have as a whole, and it should be limited to the net consolidated interest expenses. Basically, the company should not have more interest expenses internally in the group compared to what it pays externally to third parties. And we were even more disappointed with the EU implementation of BEPS, the so-called anti-tax avoidance directives, because the EU opted for the higher end of the scale and limited interest deductibility to only 30% of EBITDA. In our view, the immediate way to address the debt-equity bias is to tighten the rules for interest deductions.
Redner 6
That would also bring the benefit of closing a loophole that multinational corporations can use to avoid taxes. But ultimately, we believe that the entire transfer pricing system should be replaced by a system based on formulary apportionment, as the EU has actually previously tried to do. However, the level of ambition in Brussels seems to have dropped dramatically over the last few years, and we now see that the weak rules on limiting interest deductions are being used as an argument for introducing deductions related to equity too. This includes different types of notional interest deductions and practices that allow multinational corporations to deduct fictional expenses, bogus expenses that they haven't actually had. In our view, this is what the race to the bottom in corporate taxation looks like.
And we feel that one loophole in the system is being used to argue for the introduction of another loophole. We also feel that their description of the problem is wrong. It's often said that debt equity buyers will lead to higher levels of corporate debt. And yet, we can see that corporate debt in Europe is currently at very low levels. We also hear the argument about competitiveness, but we feel that the discussion often fails to include the fact that small and medium enterprises risk being outcompeted when multinational corporations use transfer pricing rules to shift their profits to low-tax jurisdictions.
And there are also other very important problems that we are forgetting. The FIS committee was preceded by several other committees that were set up in response to major international tax scandals, including Lux Leaks and the Paradise Papers. Among other things, these scandals exposed large-scale corporate profit shifting and showed that multinational corporations were paying very low levels of tax. These corporate tax exposures were not about illegalities. Rather, they showed how multinational corporations could use the transfer pricing system.
This was actually not very surprising to the tax world, but it was a shock to the public. And I would claim that a similar scandal could actually break open again today, because the problem has not been fixed. The public has now been told that multinational corporations will be paying a minimum of 15% in corporate tax because of the so-called Pillar Two. But I think most people in this room are aware that there are loopholes in these rules, and multinational corporations can still pay much less than that. And we also now know that US multinational corporations will be exempt from the rules.
So, the bottom line is that large-scale corporate tax avoidance is still a very real problem, and some of the world's largest profit-shifting destinations are EU member states. At the same time, some of the biggest losers in this game are also EU member states. This is a very serious problem for the EU. The failure to ensure effective taxation of multinational corporations is directly related to another problem, which is the escalation of inequalities both within and between countries. While citizens struggle with the cost of living and governments continue to impose austerity, we will soon see the first individual become a trillionaire.
The level of inequality is highly damaging for sustainable development, for our economies, and for our democracies. And yet, rather than tackling this problem, the debate in Brussels seemed to be stuck in a discussion on debt-equity biases and decluttering. The last thing I'll say is that, luckily, the global tax debate is moving forward very quickly. And right now, the UN is negotiating a framework convention on international corporate tax. The mandate for this convention includes the objective of establishing an international tax system for sustainable development.
It's also clear from the mandate that the new convention will include commitments from multinational corporations, effective taxation of high-net-worth individuals, and new measures to address harmful tax practices and international tax avoidance. In our view, the UN tax convention negotiation is a historic opportunity to create a much more coherent, fair, and effective international tax system. We very much welcome that the FIS committee is considering attending the UN tax convention negotiations, and we hope we will also have time to discuss this very encouraging development. I thank you.
Redner 1
Thank you, Maria. Thank you very much. And now, I would like to open the floor for a debate with our members, starting with EVP Fernando Navarreta. Please, Fernando.
Redner 8
Thank you, Chair, and thank you to the speakers. A fairly general comment, first. I don't know how we ended up talking or discussing again and again about tax avoidance and profit shifting. Sorry, this was not the subject, at least, I think, in my view, as of today. Debt-equity bias, in my mind, has more to do with incentives to innovate, to create, and to grow.
I mean, that's the topic as of today, although there might be an angle of profit shift eventually, but it's just a minor thing that's not the core of the subject. So, let me go back to what I consider to be the core of the subject. So I've heard Professor Deverro mentioning an impact of 5 to 10 percentage points in terms of the balancing between equity and debt from the optimal decision. But my question is, given the experience even within Europe, I think we have in the European Union five countries that have established some sort of adjustments there. They are different in each way.
If the counterbalancing effects of these tax measures are enough to fully counterbalance this original imbalance of 5 to 10 percentage points. So, first of all, if measures work, okay, on the scale they are designed for. The second one is on the cap of the equity allowance on this 30% of EBITDA, and the idea that you cannot have a negative fiscal effect, so you have to carry forward any allowance. Don't you think that it will substantially increase the impact of any measure if this can be a refundable tax credit? And the third one is in terms of complexity that you mentioned: is it feasible to do these corrections in an efficient way so that we are not creating extra complexity?
So, because we are trying to do some simplification at the same time. So, these are my three points. Thank you very much.
Redner 3
Thank you very much for those questions. The academic literature, which I was referring to, really works on the basis of comparing the use of debt and equity in places where there is a distortion and where there isn't a distortion. So, I think my main answer to your first question is that the measures work to the extent to which I've just referred, that is, the 5 to 10 percentage points. They're actually giving similar treatment to debt and equity; we might expect leverage ratios to be 5 to 10 percentage points lower. That's kind of based on its evidence in a number of different settings, but I think it would include the fact that some countries have such policies and others don't.
A general remark on the capital and the equity allowance. You know, in my view, the capital and the debt allowance and the capital and the equity allowance are probably the wrong way to go. If we're thinking in terms, as you say, what is the basic system that we're looking at? And in my view, rather than seeing it as an anti-avoidance device, we should be seeing it as, what do we think the right way of taxing business profit is, and how do we define business profit for those purposes? My main concern is to try and treat debt and equity the same way.
If there is to be a restriction for revenue purposes, then we can consider other ways of implementing such a restriction rather than just a cap. So, for example, instead of getting relief for all of your interest, you get relief for 50% or 85% of your interest because I think it was in Deborah. But you could do the same for equity, and that would be treated in the same way. And I think that links in with the complexity point in a way. I think, you know, a large part of the complexity is simply because we have different rules for dent and neckwear.
So it's always important that the legislation defines what debt is and what equity is. And that turns out to be, you know, extraordinarily difficult. And that's because a kind of plain vanilla debt is different from plain vanilla equity in lots of different ways, like the rate of return that's earned, whether the providers of finance have voting rights, and all of those kinds of things. And it's quite possible to design systems where we have hybrid financial instruments where it's really not clear which kind of treatment we should give. So, I think that the more these two things are treated differently in the tax system, the more complex it will be.
And so, I think my main answer on complexity is that we should treat them as similarly as possible, and that reduces the need to actually define what debt and equity are. And the closer we can make it, the less important it is, and the less those kinds of differences will be exploited by taxpayers and their advisers.
Redner 4
Yes. On the refund of the excess, this goes in the direction of facilitating borrowing. I think that we have to make a distinction because the company, in any year, does not pay taxes. I don't think there is a reason for the refund. The reason for the refund might be that the company is paying taxes because not all interest is deductible.
But I think that the refund of the excess is something very difficult, especially in a situation where there is no refund of tax losses, for instance. I don't see that this is the way to address the debt-equity bias. Yes.
Redner 7
I think on the point that there is an angle of profit shifting; of course, if there is, we don't consider it a minor thing. And it goes for both the interest deductions, but also, for example, the issue of notional interest deductions, and that's what's being discussed in relation to tax benefits related to equity. There is a risk. It's generally a more fundamental concern that we tend to focus too much on minor things in tax discussions, and it's a very unstable political environment. I was here in a hearing in the Tax Attitude Committee, and the whole focus was on corporate tax avoidance because there had been a major scandal, and suddenly everything was about stopping corporate tax avoidance. And then, a while later, we forgot about it, and now we focus on tax benefits that could be abused for corporate tax avoidance, creating a very unstable legislative environment.
Redner 5
We have met several times within the last decade. We've had historic, fundamental reforms to the corporate tax system. But at the end of the day, I think that's one thing. If you want this panel to agree on one point, at the end of the day, what has increased is actually just the complexity. It's different layers of fixes, and I think we would all agree we've ended up with a really very complex international tax system.
So that's my first point: I really think we need to include all the aspects, obviously including international corporate tax avoidance. And then the second related point is that I think we need to look at more fundamental reforms. The system right now is an ongoing discussion on how to fix the transfer pricing system, and we would argue that we're on a mission impossible here. And Brussels actually used to be a place where we discussed a more logical way of taxing multinational corporations, which was formulary apportionment with a minimum effective corporate tax rate. So, we're still in favor of focusing on those discussions.
Redner 10
Thank you very much, Chair. So, one personal remark at the beginning. So, I'm one of those who also negotiated, Deborah. And what I learned during those negotiations is that we are light years away from tax justice and a fair system. We made it finally with a compromise of a compromising European Parliament. Well, you know the story; here we are.
Redner 11
My questions for you, so thank you very much for your presentations, are the following. Is the deductibility of interest payments still justified in an economy that aims, and I use those words we use all the time today, to promote resilience and long-term investments? Thus, the current tax treatment of debt contradicts broader European Union objectives on financial stability and sustainable growth. I'm just on purpose using those big words because those are the goals that drive us in the European Parliament, and taxes are part of the game. So, who ultimately bears the fiscal cost of this debt-equity bias?
Is it workers, consumers, or smaller domestic firms? I think every one of you has an answer. And finally, does the equity-debt bias proportionately benefit large multinationals with sophisticated tax planning structures while disadvantaging SMEs? I'm just asking that because when we were working on Dread Deborah, we also tried to do a little bit to be more favorable to SMEs. But okay, the world is as it is, and I'm interested in your answers.
Redner 3
Thank you very much for those points and questions. The first question is, are interest deductions justified? I think you made two points, and they go in different directions in a sense. So the issue of financial stability and the treatment of, you know, the encouragement to use more debt, I think that's a problem. And I think you can try to solve that problem in one or two ways.
You can either take away the favorable treatment of debt or give similar treatment to equity. And I think either direction would kind of be a step up for that particular problem. If we think of long term as sustainable investment, I think the problem of taking away interest deductibility is that we're effectively taxing business investment more, and you're going to get less business investment in that case. So, for a long-term stable solution, that's why I would advocate going in the other direction. So, I think the first problem is, you know, going either direction.
For long-term investment, I would actually give more relief to equity. I think the issue you said, of who bears the tax burden, is fundamental if we're thinking about fairness. And there's, you know, I am reporting from the academic debate on this. There is a big academic debate, and people do not agree. Some people think it falls more on the shareholders. Some people think it falls more on consumers and workers.
And in my view, it depends. It depends; it will vary from market to market depending on the profitability of companies, the nature of the market, and the nature of competition in that market. I don't think we can necessarily just look at business and say, you know, business paid more tax. That has got to be good. That has got to be fair.
I think we do have to look through, and I think it's very difficult to identify which individuals are worse off, whether they're rich or poor, and whether it's progressive or not. I think finally on multinational companies and the treatment of multinationals versus smaller companies, I do agree there's a problem of tax avoidance. I agree that the existing system of transfer pricing that we've had for many years is flawed; I think I'm one of its strongest critics. I don't agree with that at all. I think the way we allocate profits across countries is a complete mess, and it needs fundamental reform.
I think there are other ways of fundament. I think the former apportionment system, the CCCTB approach, is one way. A way that I've advocated for myself is to focus more on taxing profit instead of sales. But I do think the general point is that we need some fundamental reform, and the existing system is a mess in many ways, going well beyond the debt-equity problem.
Redner 4
I think that, here, we have two basic concepts, as I tried to mention: tax fairness and resilience of companies. I don't want to make a clear-cut distinction, but it comes to my mind that tax fairness is more for intergroup funding. When you say that multinationals have many ways to avoid taxes, it's because there is debt, which is internal debt, not third-party debt. And here, we have a lot of rules to avoid deduction and taxation. Also, we have the concept of justice and fairness that relates to the overall world.
So we are not saying a deduction in one country and taxation in other countries. But justice is to have deduction and taxation in general. And I think this is something that you have already addressed. If we talk about resilience, we are basically talking about third-party funding. And I think that if you say that interest is not deductible, first of all, we have to consider that interest income should not be taxable either.
And especially, I think that companies will still borrow for a lower amount because the amount of cash they can save in taxes is important to determine their capacity to borrow. So, if with interest deduction I can borrow €100,000,000, maybe without interest deduction I can borrow €80,000,000, but I can still borrow. So I don't think that this is the right point. Also, we have the point of the ability to pay because if the company is borrowing, it is an expense; it is a genuine expense. I don't see why we should have any deduction at all.
Redner 7
Yes. Thank you so much for that question. First, on the issue of small and medium enterprises. Obviously, I think in this discussion, it's often highlighted that the interests of small and medium enterprises are a central part of the discussion. But if we look at most small and medium enterprises, many of them don't trade cross-border.
Redner 5
They have no use for any transfer pricing system. Everything we're discussing is irrelevant. And then we're often discussing different types of tax benefits that are related to reducing the taxable profits, but that assumes that the company has profits. Many small and medium enterprises go through several years of loss before they actually start making a profit. And it's related to the way that the word "tax competitiveness" has changed meaning in Brussels because, during the state aid cases that we had less than 10 years ago, the whole competitiveness discussion was exactly about the worry that when a small and medium enterprise opens up—let's say we have a small company that tries to sell coffee—and they have to compete with a big multinational corporation that can use the transfer pricing rules to avoid taxes, of course, it's going to be unfair competition.
Now, the whole discussion about tax competition seems to be that American companies have different rules, and we do agree that the recent developments on Pillar Two have created a terrible mess; it's very unfair. But that doesn't change the fact that, in my view, we are forgetting the small and medium enterprises because we have to stop large-scale corporate tax avoidance. That's what is going to help them. In terms of sustainability, the other thing that we're forgetting is that inequality is rising so fast. That is extremely unsustainable.
It's extremely unhealthy from an economic perspective, but also in terms of the broader social and environmental objectives we have. This extreme inequality is something we cannot avoid tackling if we want to talk about anything sustainable. But at the end of the day, the tax rules are also very unsustainable. It's very clear that some sort of compromise gets negotiated, but the fact that it's so unfair causes a pushback from the public. And this would be my expectation: that the public call for change is going to continue to be there. So that means unless we start looking at fundamental change, we're going to be back here again discussing that the rules are not working and that they need to change.
And that's the last point: for us, it's hugely exciting that the UN negotiations and the framework convention, with the mandate that it should be an international tax system for sustainable development, also mean that we can start discussing links to the environment. How do we integrate the polluter pays principle? How can we make sure that big fossil fuel companies also pay for the damage they cause? So there's a much more sustainable tax discussion emerging, and that's what keeps us positive.
Colleagues.
Redner 14
Now, the tax systems lead or force companies to finance themselves by debt rather than by equity as a lever. But that means not only having more levers, but also more fragility. Now, the commission had tried to find an answer to this with Deborah: a deduction on the taxable base for 10 years based on the level of, well, the public level of borrowing plus 1.5. That's supposed to be neutral, but in practice, that will become a new, rather complex niche, which is going to be used in an unequal way and would also lead to a loss of tax sovereignty. Yes.
Redner 16
We need to reduce this bias of debt over equity because it stifles competitiveness, but not just have a system that would make the tax base more fragile and lead to more red tape. The priority is a framework that is easy to read, ensures rule stability, but is not an environment where companies can't invest. They need to have a place where they can naturally invest and recapitalize. So how can we avoid, Deborah, becoming a tax on bonuses, particularly captured by big companies to the detriment of SMEs? If the objective is resilience, then why not privilege simple national rules?
Redner 15
For example, reducing corporation tax and supporting reinvestment of profits instead of a European mechanism is one-size-fits-all, which would just make things more complex. Thank you.
Micha, do you want to start? Thank you.
Redner 3
Thank you for those points and comments. I agree with you, first of all, on Deborah and its complexity. But I think the direction in which Deborah is going is one that I approve of. But, actually, the way that it was formulated, no doubt because of many compromises, there are a number of features which I think make it more complex than I would advocate as a pure academic. You know, those including the kind of ten-year limit, what happens after that?
So there are issues where, you know, I still have equity in my company, but I've had it for 11 years, and now I no longer get relief for it. And indeed, if I reduce it, my Deborah relief becomes negative. And I think there are a number of problems involved in that. And part of the problem is also this differential treatment of the limit between debt and equity. So I do see a number of problems with the specific proposal of Deborah.
I think I'm somewhat on the fence as to whether this benefits big companies as opposed to small companies. I mean, the rules are primarily the same. It may be that big companies find it easy to borrow. But I think here we're talking about, you know, some of the other points that have been made. We are just thinking here about the additional effect of the tax on the equity ratios.
You know, there are all kinds of factors which affect how much debt companies use, and many factors unrelated to taxation. And I don't think anybody is proposing to change any of those. The question here is: what is the additional effect of tax? And it seems to me that this can have an effect both for small companies and for large companies. I think there is an interesting question you raise as to whether some reform on the way that finance is treated in the corporation tax system is best done at a European level or at a national member state level.
And, you know, we already see this difference across member states. So, member states that are worried about this can already operate within their own systems to do that. So the benefit I can certainly see is the benefits of a European-level approach to something like the CCCTP in their form of apportionment because that is an international issue. If we're thinking about debt and equity at a national level, then that can also be addressed by national governments.
Redner 4
Thank you. I think the focus here is on interest deduction on the debt. And it seems that if we limit interest deduction, there is a lower amount of debt, and therefore, much more equity and more resilience for the companies. I don't have this evidence. So, if there is no introduction, maybe there is a certain level of debt.
If the shareholders don't have equity, they cannot put in equity, and maybe there will be less investment. I think it's very important to have an incentive for the investors. So, there is an incentive for people to put equity into the company, and not just for the company to deduct interest expenses. So, the tax credit for the investors is also an incentive to have the company go public and to open the equity to third parties. If the company is listed, there is less flexibility in determining just short-term debt or other different ways of funding the company.
Redner 5
Yes. I'll also comment on the question of when we should have EU-wide rules. As you can hear, we're very skeptical towards introducing tax benefits for equity as well. And, of course, we agree. Why should the EU decide that all member states should do that?
But when it comes to tax sovereignty, in the bigger picture, the reason why many countries struggle so much to tax big multinational corporations is because profits move across borders. And so, the tax law in one country can destroy the tax base in another country. And so, in that sense, we've lost our tax sovereignty a long time ago. So there is a very strong case for international agreements on tax, but it should focus on the real problems and the fact that countries today are just not able to tax big multinational corporations as long as we have the transfer pricing system. And we should take it very seriously that, when we look at where profits go, we have EU member states that are the biggest destinations of profits.
That's where multinational corporations move their profits to avoid taxes. At the same time, if you look at which countries are losing, EU member states are also some of the biggest losers. But the pain of this problem is being felt all over the world. And that's why the developing countries at the United Nations have said that we need a solution to this problem. So, I partially agree.
I think Deborah and debt equity bias, yes, I see no reason for EU legislation on that, but there have to be international initiatives to solve the international problems on taxation. Thank you.
Redner 18
Thank you very much, and thank you for the interesting discussion. I guess it was Albert Einstein who said that the hardest thing in the world to understand is income tax, and that was even before transfer pricing rules. So, I think we are going in the wrong direction. But more seriously, I basically have just three questions. The first one is, if you look not at the European level, but at national taxation levels, which are the tax systems that are the closest to a kind of optimal taxation from your point of view, just focusing on the debt-equity bias?
For example, I know that in Estonia, they do not have tax on reinvested profits, and so on. So, is there any kind of benchmark that you see as an option for us to agree on, which is, of course, quite hard, but I just wanted to know from a more academic and practitioner perspective? The second one is a question for Mister Ludovici. I hope I pronounce the name correctly. You mentioned that maybe we can have a kind of second, secondary solution to that via, I don't know, tax credits and other motivations for the companies to go public.
So if you can elaborate a bit more on those proposals and what you think those second-best options can achieve in the longer term? And my third question is about the international situation because we are talking about a specific issue. Economists can agree on this issue quite easily. But also, if we look at the international landscape, there are not too many jurisdictions where there is equal treatment of debt and interest, or debt and equity, interest income, and gains on equity. So my question would be: are international corporations or international organizations, like the UN, going in that direction, or not really at this stage? Are we just talking about the problem of having to mobilize more equity capital inside the European Union?
Thank you.
Redner 3
Okay. Thank you for those questions. On your first question, I would hesitate to choose a tax system of a member state and say this is a good one and the others are less good. And that's largely because I think I haven't really looked in detail at any member state's tax systems. And, you know, I could talk about that as a general point, but the ways in which most member states have actually implemented some kind of relief for equity finance usually have features which I would not approve of, particularly.
So, there is no country that I would pick and say, this is the gold standard, particularly. I mean, Estonia, I think, is a very interesting case, but it has a very different kind of tax system altogether in terms of corporate tax. So maybe we could come back to that, but that's really a very different kind of tax system. I'll leave this as your second question. On the international side, I think it's very difficult to know where international organizations are heading in this framework, thinking about debt and equity, especially. That's relatively detailed for the UN, for example, even the OECD. To try and make a prediction as to where they're going, I would say, is very difficult.
So I would hesitate to try and answer that one, I'm afraid.
Redner 4
Thank you. I don't know all the countries. I know Italy. So, in Italy, we had the dual income tax. So, a system where you have different tax rates depending on whether the money or profits were invested or not, and we abolished this system.
We have a reduction of taxes if you don't distribute and reinvest, and we have abolished it. Then we have the notional income tax system like the DEBRA, which we have abolished effective this year. They were abolished for a matter of budget, but also because they were not very successful. For instance, for DEBRA in Italy, 37% of the benefit was for banks. I know for the DEBRA directive, the proposed directive for banks was out, but this was the situation.
I know that we were working on tax planning, having debt in one country deductible, putting equity into Italy, deductible under the notional interest deduction, and so forth. So there are a number of ways for which they don't work. On the matter of tax credit for a new venture and startup, we know the benefit for the investors. We are struggling with state limitations, and we are struggling with budget limitations for each country. And then each country is trying to have this type of system complying with budget limitations and state requirements.
For listing, there were a number of proposals. For instance, if you get to the company listed, you have a reduction of the tax rate for a number of years. Maybe you can have a step-up in value, and you can amortize the step-up value. Maybe you can have a rollover relief for capital gains, or you can have an exemption from capital gains. Then you can have a listing, a merger, and so forth.
Because in a lot of countries, what we see is that the companies are relatively small. They should aggregate, and they should aggregate for listing. So we try to invest to incentivize listing and aggregation, both of them. The point is that anytime we come up with a proposal, there is a budget limitation and a standard limitation, but this can be a way.
Redner 5
Yes. On the question of the ideal tax system of EU member states, we actually carried out a mapping of tax systems in different EU member states some years ago. And when it comes to tax benefits for equity, obviously, there are a number of EU member states that have notional interest deductions. However, in our report, we listed it as a harmful tax practice, and we raised very strong concerns about it. And we also raised the point that notional interest deductions here mean companies are deducting expenses that don't actually exist.
You just said that if it had been a loan, there would have been an expense. And so, now we need to find a similar expense. And so, we also raised the concern that the tax system has become more complex and more detached from reality. So yes, I don't think we can call those ideal tax systems. Just one short comment on the international developments.
Indeed, the discussion at the UN: we just came back from another negotiating session in New York a week ago. The discussion is not about debt-equity bias and details within the transfer pricing system, but there is a very strong concern. What many developing countries are saying is that we're not able to collect tax from major multinational corporations that have high levels of economic activity in our country. That's our concern. And in the question about what to do about it, one thing that is coming in more and more is gross taxation.
Basically, the idea is that countries will start taxing all money that leaves their countries; they will reintroduce withholding taxes. Of course, the other thing that can be discussed is an alternative to the transfer pricing system. But I think when it comes to discussing quick fixes and little sticky plasters that can make the transfer pricing system work, there is just fatigue. We've seen the OECD try for decades. So, I'm not seeing any discussion about a quick fix to the transfer pricing system anymore, and we welcome that.
Redner 1
Thank you. Now, New Zealand, please. I have a Ludac. Probably, you need to leave. Yeah, Ludac.
Do you mind? Yes, please, Ludac. Okay. Sorry. Because I
Redner 20
I will need to go outside for a few minutes, but I have a very simple question as we work hard with Evelina. On Deborah. We were frustrated that the council was not willing to go forward. And as indicated by the commissioner, it will likely not change. So, the only option would be to go for enhanced cooperation.
Redner 19
So I wonder how you see the cost-benefit of trying to get the Deborah through enhanced cooperation.
Redner 3
That's a very interesting question. I haven't really thought much about exactly how it could be introduced. I think I would probably start by coming back to the issue of the extent to which there's an international problem as well as a national problem. I mean, if we have enhanced cooperation, and there's only a subset of members who undertake this, I think we may have some of the international problems that have been mentioned. But within each country, that is still a national decision.
I'd say, on balance, this is probably an issue where enhanced cooperation is more reasonable than some other issues where we would actually need unanimity. I
Redner 4
Focus more on the substance of Deborah than on the way to approve Deborah. And I, obviously, like the idea of the notion of interest deduction. Even from my experience in Italy, it is extremely complex to handle the anti-abuse legislation. I didn't like the part about the further limitation on the interest deduction. But again, I focus on the substance and on the way it could be improved.
Redner 5
Yes. Enhanced cooperation, such as the financial transaction tax. I mean, all EU member states can coordinate and move ahead if they want. But if you start introducing corporate tax rules only in the EU, you are already trying to treat the EU as an island. If you then go down to a smaller group of member states, it becomes even less.
That said, enhanced cooperation, if you like, is an important part of the dynamic at the United Nations. Looking at coalitions of the willing that will go forward and define a better corporate tax system is a very important part of the discussions. But there, we're probably talking about over 100 countries. So, it's on a very different scale. So yes, I think it's important, but not in the EU.
Redner 21
Thank you very much. Actually, I wasn't supposed to be here yet, but it was very interesting. So, I'm happy I managed to come. Actually, all my questions were answered, but there is a comment that might also be a question. Should we incentivize equity?
In Finland, the owners of unlisted companies pay a very low tax on dividends in exchange for high equity without any need to explain anything. So they don't need to do this kind of practice, but I can tell you that it is not working either. As a result, the business owners maximize their low tax dividends, and they focus on tax planning instead of making solid investments for the future. So, companies don't grow, and productivity in Finnish companies develops very poorly. And so, more loopholes to fix the old ones that were said by Tuva; it is a harmful race to the bottom.
So I think this kind of competition does not make us more competitive, but the opposite. Thank you.
Redner 3
Thanks. That's a very interesting comment. I think I would say, firstly, that the mechanism by which one introduces some kind of relief equity is very important. And doing it in one way, you know, the way you've described, taxpayers or their advisers are going to try and exploit whatever rules there are, and the actual features of those rules can be very important. You know, just saying we give some relief for equity, but in a different way.
You know, we have to think through what that different way is and what the incentives are. And it sounds like, you know, that's what's happening in Finland. I guess we should also say that there may be much more fundamental problems in the economy of raising finance and investing, which are unrelated to the equity-debt problem. And so, we shouldn't necessarily conclude that because things are not working well everywhere, it's all due to the tax problem.
Redner 4
It's very interesting what you said. Let me just make a comment. If I have a company that is 100% mine, I can see that there is an advantage in lower taxation of dividends. So I can make sure that the company distributes more dividends because it's 100% mine. But if the company is listed and they are minority shareholders, I don't want to have a distribution to all of them because, for instance, if I have 30% of this company, in order to have a lower taxation by 30%, I make sure the company is losing 70% to minorities.
And so, it's better to have this money in the company to make investments. So, I'm coming back to the point that the more companies have equity open to third parties and are listed, the less flexibility we have, and the more people focus on some management decisions rather than on tax planning for their own pockets.
Redner 7
Yes. Thank you. I'll also sneak in one comment. We're here to discuss Deborah, but actually, before we even got here, Deborah is on this graveyard of EU tax proposals that were never adopted. And there are very clear reasons for that.
Redner 5
The EU, if you look at it from a tax perspective, has some of the world's most aggressive tax havens among its member states. Among the countries that are losing out, some in Western Europe want headquarter taxation because they have corporate headquarters, but Central and Eastern Europe have completely different interests. And then we have unanimity, and that's just been the recipe for going nowhere. But we don't have unanimity in the UN tax convention negotiations, and we see that as a huge game changer that can also help us here in Brussels because all the countries that are losing out, all the ones that are not tax havens, can team up and say, "Enough is enough." We've lost so many billions of euros because of this.
We want a more functional system. So, we see this as an opportunity to negotiate a compromise between headquarter countries and source countries, but also, once and for all, an end to tax havens and international tax avoidance. And we call this the Race to the Top Alliance. So, I just want to make sure that we end on a positive note, and we think this is going to be interesting.
Siegbert Frank Droese
I'd also like to thank the experts. It was very interesting. It's interesting to listen to what you have to say. The ESN group, of course, wants company tax to be mainly a matter for member states. I really don't understand the justification for transferring further powers to the EU level when it comes to equity and debt taxation.
Now, I agree that there are structural distortions when it comes to debt. Some colleagues have said, as regards Deborah, that it's quite good for now that it's been put on ice or even buried, because I believe that we want to keep our startups in Europe and SMEs. And I think it would actually deter them. And I have a question for Mr. Ludovici.
How great is the risk that special EU rules could divert capital to the U.S.? S. Or Asia? That would not be in our interest. And the second part of my question is for Ms.
Riding. You talked about what might be the first billionaire in the world's history. And, of course, there's a lot of innovation behind that. I assume that you're talking about Mr. Musk, who is not only flying off to space but is also playing astronomical taxes.
So, it's not so straightforward. And I don't think that we want smart people to face too much of a tax burden. We have SMEs that we are particularly concerned about. And in Germany, we have an industrial structure that is very much based on smaller businesses. So, for example, when you're looking at interest deductions, how do they affect family companies?
Redner 25
Would we be looking at greater complexity or creating new loopholes? Thank you.
Paulo, do you want to answer?
Redner 4
Thank you. I'm not aware of what happens in the US and China, but they have a totally different stage compared to some countries. The point is that if people have money and want to invest in venture capital, without any incentive, they may tend to invest in ventures in the US or in China where the market is better. We want to channel investment in Europe and in each individual country. In order to do that, our experience at least is that people make investments in a risky activity in a domestic environment if there is a benefit for the investors.
Benefit for the investor doesn't mean deduction of interest expenses because normally, startups are not profitable at all in the first years. So then the issue is, again, not focused that much on the reduction of interest expenses, but on how to incentivize people to put equity. That's the point.
Redner 5
Yes. It's just to say that now we've discussed the debt-equity bias and corporate tax. I think the question is a great reminder that there are so many other very important issues to discuss. In terms of unfairness, we could be diverting investments to the U. Yes, the side-by-side agreement under Pillar Two is obviously hugely concerning.
So, I hope we can discuss that one day. And on the question of whether potential soon-to-be trillionaires are paying astronomic amounts of tax, our feeling is that often what we call unearned income, meaning return on wealth, is actually taxed at much lower rates than earned income, meaning what the workers earn when they go to work and make their money. So, yeah, if you think the corporate tax system is unfair, you should look at the wealth tax system. I hope we can be back one day and continue these interesting discussions, but I just wanted to say that the issue of taxation of high-net-worth individuals is also part of the UN negotiations. So, on all these issues, we think there are interesting things happening in the coming years.
Thank you.
Redner 3
So very briefly, I just wanted to agree with your comment that even the EU, a large block, is one of many competitors in the world, including the US and many other countries. And so, although there are lots of factors that affect where our investment is, we've seen tax competition across the world for many years, driving down tax rates but also affecting tax bases. So, anything that the EU does is also potentially going to affect where investment takes place and whether it takes place in the EU or not. So, I think that is a factor that has to be taken into account. Thanks.
Redner 1
Thank you very much, everyone. Thank you. It was a very interesting talk and discussion. Now we take a one-minute break before going to the next hearing on the current tax framework for the EU financial sector, and we do have Matthias here. One minute, please.
It's yours.
I think you need to use it.
I think you need to.
Redner 1
So, actually, I say the ERIC, but in fact, we are about to present the consideration of the ERIC report. Colleague, please, can you sit down? We start. Thank you. So, we have this consideration by Matthias Eck on the current tax framework for the EU financial sector.
Matthias, you have four minutes to present them, and then we will listen to the rapporteurs, Regina. Robert is not here. Then we have to call Gill Boye. Rasmus Anderson is sick. He told us, so then we'll have to use it.
Matthias, four minutes and four seconds is yours. Thank you.
Matthias Ecke
Thank you, J. Thank you, Pasquale. Well, dear colleagues, let me begin by explaining why this report was prepared and why it may be particularly timely. To put it frankly, the EU's framework for the financial sector has developed in a fragmented and largely uncoordinated manner. For me, that became more and more clear the more we had this debate and the more we talked to stakeholders, regulators, and so on.
A central driver of this fragmentation is the VAT exemption for financial services. It was introduced decades ago, maybe for technical reasons that might have been reasonable back then, but today are no longer necessary. Yet, this exemption remains at the core of our system, and it creates a structural policy gap, which member states have tried to fill through around 90 national sector-specific taxes. 90. It's hard to believe, but it's true.
So the result is a framework that reinforces distortions, discourages scale, and makes it really difficult to have cross-border activity in the sector. And ultimately, it undermines the development of a fully integrated European capital market, as well as the savings and investment unions that I think all of us, or at least most of us, are striving for. So, the commission's launch of a comprehensive study—we talked about that already—on reforming the assumptions shows that the problem is widely recognized. And I also remind you of the mission letter of Commissioner Hoekstra, where he was really tasked by the Commission President with developing a coherent tax framework for the EU's financial sector. The industry itself, the European Banking Federation, points to inefficiencies, hidden costs, and fragmentation under the current system.
And this, for me, also confirms that this debate is already underway. The commission's recent consultation on the banking sector competitiveness is something that I think we all are looking forward to the outcome of. It really highlights the urgency of that debate because that is part of what impedes our competitiveness. So, Europe faces major long-term investment needs. That's another debate.
And that one depends on deep and integrated financial markets. It not only depends on tax revenues. This is something that we might, to some degree, agree or disagree on here in the parliament, but it also depends on integrated financial markets because Europeans save enough. But because of the fragmentation of our financial industry, much of the capital leaves the EU to finance projects elsewhere than in the EU. So, I deliberately focused this report on a clear problem analysis rather than on prescribing a single solution.
The commission's study is still ongoing, and rightly so. We need a solid analytical basis before debating concrete remedies. It's a complex debate, and there is no quick fix for that. It goes on for years and decades. The range of potential solutions goes well beyond the scope of this small report.
I'm aware that some colleagues might wish to broaden the scope of these reports, and that is understandable. But I would strongly argue for the focused approach that I presented. There is parallel work underway. We already concluded the report on corporate taxation, digital assets, and, in particular, the dedicated tax simplification report that is led by our colleague, Michaelis Heiterpenthaler. So, we see that there are a lot of things going on here, and not all of this is supposed to be in this report.
If we attempt to address everything, we will probably weaken the outcome. So, the aim of this report is, in a nutshell, to establish a shared understanding of why the current VAT framework no longer works and why further analysis and Commission action are needed. And I would really look forward to the exchange with the shadow reporters, with the colleagues here in the commission, on how we can evolve around that analysis and how we can move forward. Thank you very much.
Redner 1
Thank you, Matthias. And now, we go to Regina Doherty. Please, Regina. Two minutes.
Redner 29
Thank you, Chair. First of all, I'd like to thank Matthijs for his work and his engagement on this one. I do look forward to working together to find a compromise. Chair, the report is a good opportunity to push ideas on the table, but we all know the uncertainty that exists in the world and the enormous pressures on the European economy. And it is for that reason that any reforms we consider for the taxation of the financial services sector should be focused on driving competitiveness, innovation, and economic growth.
Redner 30
We believe that Europe needs to remain open for business and attractive to foreign direct investment, and that includes measures such as tax competition that make us competitive on an international scale. There are two important areas where I think we could make a significant contribution to this report. One is the SIU, and the other is the decluttering of our tax system. When it comes to the SIU, we know that in many countries, taxation acts as a barrier, not an incentive, to the retail participation in our financial markets. And this is something I think we need to consider in the context of the commission's blueprint for a savings and investment account, the kind of account that has the potential to be transformative not only economically but also culturally, in terms of building a real culture of investment.
Redner 29
There are 10,000,000,000,000 in low-yield bank accounts across the EU that could be used more productively and really deliver value for our people. Therefore, it's vital that the member states take up the challenge and implement SIAs that are easily accessible, focused on delivering returns for the investor, and, crucially, tax-attractive. This report is an opportunity for our committee to contribute to this discussion about what tax-attractive options look like for building a culture of retail investment. We should identify where the barriers are and how they can be cleared. And, thankfully, I think there are some member states that are already leading in this way and showing the rest of us a positive example.
Redner 30
While taxation is, of course, a national sovereignty based on the social contract, it still benefits from European and international cooperation. We need to look again at the value of the open method of coordination and the semester process for aligning best practices in Europe when it comes to taxation. Secondly, I think this report is an important opportunity to comment on the value of the decluttering agenda, and this applies both at the EU level and at the member state level. Taxation reform needs to be part of an ongoing administrative simplification process. Particularly in the financial sector, where we are looking to grow Europe's leadership and innovation, we should be looking at ways to make the lives of EU citizens and SMEs easier, not more challenging, when it comes to taxation. Taxation should help to boost certainty, convenience, and efficiency.
Our citizens and our companies are not just piggy banks for the governments. We really rely on them to create economic growth and increased wealth, just to support society. And we know that there are still significant divergences between member states when it comes to sectoral taxes in the financial sector. So, this should also be part of our discussion. We have a duty to look at best practices and to see where we can learn from each other.
Redner 29
So, I look forward to meaningful negotiations to reach a compromise. Thank you, Chair.
Redner 31
Thank you very much, Chair, and thank you to our rapporteur for this work that has been carried out. Now, when it comes to the financial sector and all sectors, I think in the EU we have a weighty and fragmented tax system with overlapping divergent national tax systems. And for the financial system sector, and for all sectors, we should have one objective in mind. That objective should be to have a tax environment that is simpler, more consistent, and more predictable for all economic players by favoring financial and tax integration throughout the EU and supporting investment. I, therefore, support the ambition for simplification and harmonization that has been put forth by our rapporteur, and the fact that he focuses on consumers and retail banking that pay the price generated by the current tax system as it stands.
When it comes to that, the rapporteur underscores the fact that the exemption applying to financial services currently creates a huge economic distortion. The ways forward in the report could lay a solid foundation; therefore, for discussion on the subject matter. Moreover, we should keep in mind that the financial sector is a cornerstone of the European economy, and any measure that has an impact on it will have repercussions on the real economy and our competitiveness. That is why I have reservations when it comes to sectoral taxes, specifically regarding temporary withdrawals on windfall profits. That would potentially have a negative impact on the resilience of financial institutions and reduce their ability to rally savings and finance investment, specifically when we most need it.
I should like to thank our reporter yet again, and I look forward to working with him and our discussions on this subject, with the priority of strengthening the capacity of our financial system to support European economic growth in a sustainable way without creating an additional tax burden that would be counterproductive. Thank you.
Redner 21
Thank you, Mister Chair, and thank you for the good draft for the rapporteur. I think the analysis is very good. It's very easy to agree with what is written. But I want to go to one solution that is topical, even though I understand the position we are in. As was said, the financial sector remains structurally undertaxed due to VAT exemption.
But I think, and we think, we need to ensure that it contributes fairly compared to the rest of the economy. So, financial transaction taxes are a great way to do it because they correct the existing tax distortion created by the VAT exemption. They provide a stable and meaningful source of public revenue while also having redistributive effects. They help curb highly speculative activities, such as high-frequency trading. This is the classic "sand in the wheels" argument.
Without affecting long-term investments or productive capital allocation. In practice, an FTT would not penalize long-term investors but would primarily target short-term speculative behavior. And you should act collectively by moving forward with a new white original commission that was proposing the 0.5 FTT, which actually sounds quite good. And I'm a bit sad about how things are evolving now. A coordinated European approach is to be preferred and is far more effective than fragmented national initiatives, and it would strengthen tax fairness within the single market.
All in all, at a time of growing inequalities and pressing investment needs, the EU should be reopening the political debate on the FTT rather than quietly abandoning it, as the Commission wants to do. So I wish that we could have this debate, not only when we are having this draft, but also wider in this parliament. I think now it would be time to talk about the issue before we make decisions that we are going to feel sorry for in the future. Thank you.
Matthias Ecke
Yeah. Thank you, Chair. Thank you, colleagues, for your contributions. I understand from the groups that did contribute to this debate that the analysis is shared: we have a difficult problem with the financial sector taxation being fragmented in the way it is, and that we also should build a common understanding around that fact and task the commission with a solution. I understand that different political groups have different ideas on how to come up with the next steps in order to remedy the difficulties that we have.
And is the sector undertaxed? Is the sector maybe not undertaxed? What kind of tax competition is it? What kind of alignment do we need? I think this also comes down to a kind of classical debate we have in this committee.
But I'm glad to hear that everyone is here in the spirit of compromise to develop a common understanding of the challenges ahead, and that we will make a meaningful contribution as the European Parliament to the debate on how the taxation of the financial sector is going to develop in the near future. Thank you very much.
Redner 1
Thank you, Matthias. Now I inform all of you that the deadline for amendment is Wednesday, 18 March at 6 PM. The consideration of the amendment will take place at the meeting of the FISC subcommittee on 04/16/2026, with a vote in the committee on May 5. Thank you, Matthias, and to all. We take one minute for a break, and I invite, in the meantime, Professor Renilde Begeller, Doctor Apostrophe Tomadikas, and Mister Michalis Cic.
Okay, colleague. We start because then we will have another final session after this one. And so, this is a public hearing. Now, on the feasibility of the 28th tax regime and its potential to support your competitiveness. We have three distinguished guest speakers.
We'll start with Professor Rainer de Vegler, senior fellow at Bruegel. Then we will have Doctor Apostolos Tomadakis, research fellow and head of the Financial Market and Institution Unit at the Center for European Policy Studies. And then we will have Mr. Michalis Sikh, head of office of the European Tax Adviser Federation. The speakers will have seven minutes each for the introduction remarks. Then we come back as usual to our member for their question, and then speakers are asked to reply freely for up to three minutes for each question.
So you will have plenty of time, not only in your introductory remark. I tell you just in case you want to economize your time, but also after you, the question of the members. Professor Rainil, the floor is yours for seven minutes. Thank you.
Redner 33
Yes. Thanks a lot for giving us this opportunity to present a proposal that we launched at Brighorn in a policy brief together with my colleague, Fiona Scott Martin. We call it not regime 28, but zero to regime here because we want to make sure that in case the EU expands, we are still counting correctly. I will be very brief, leaving out many details, but you can find them in the policy brief that you can download, as seen here. So, the first important point to make is actually why.
Redner 32
So what are we really looking for? What's the target here? So the motivation all boils down to the evidence that we all know, particularly since Draghi, on the European innovation gap as a major source of Europe's competitive disadvantage and challenge relative to the US and China. And that gap in innovation is mostly in private innovation spending. Within private innovation spending, particularly because the EU, as compared to the US and China, is much more focused on incremental innovations by incumbent larger players.
And what are we missing compared to the U.S.? S. And China has particularly new players who are introducing much more radical innovations, and that will become even more important in the future AI-empowered global technology race. So that's really where our challenge is: we're missing these new players who will come with much more radical innovations. And thereby also incentivizing our incumbent players with their adoptive innovations.
Now the question is, what barriers do such entrepreneurs actually face in the US? And from the evidence there, we also know very well this has to do with basically a fragmented single market, that we still have fragmented regulations, including for incorporation, including also tax regimes here, access to funding, to large risk funding, and access to key talents here, so the ability to attract and keep key talents here. And that's basically what we're trying to address in our proposal here: having a regime that's really targeted, a targeted incorporation regime for these types of entrepreneurs. So, who? So it's really this: we target innovative ventures that have a high growth potential.
So, we really want to have the capability and the incentive, for which it's also critical to be able to very quickly expand in terms of geographical scope here. So it's startups with growth plans here, and growth plans that include really being able to operate as quickly as possible on a larger market. So the founders that we are really focusing on are startups. It's founders, not just any kind of company, but founders who can demonstrate credible innovation and growth plans. Although we try to be as flexible as possible in terms of what kind of evidence we actually require to identify those here.
And the basic trick is actually in designing the regime zero specifically so that it's only attractive, or basically only attractive, for those kinds of entrepreneurs here and not for entrepreneurs that don't have the same kind of innovative growth potential and ambition. So, how do we do this? Very critically, this incorporation is done entirely digitally here. It can be carried out remotely very quickly here, and this happens through a centralized hub, the Hub Zero, we call it, a centralized online registry for incorporation and verification of Regime Zero companies. Once they are verified, they will actually be recognized automatically in all the EU countries.
So that's really important. But beyond that, what the hub also does is provide standardized contracts and legal documentation that will help lower the legal cost of incorporation and allow for real-time comparison tools for many issues that are still quite complex in terms of tax rules and labor regulations. So that the hub will also have all this standard information available here. And in terms of language, because translation is also a big issue here, we propose to have it in English, and any other kind of translation would also be done by the hub here, in order to make that easier. So, what are we looking for?
This is how we would do it with this digitized Hub Zero. What would we actually offer within that scheme here? So, as already said, we really want to remove the crucial barriers for this EU scaling of innovative ideas here. So, it will have some specific rules that really address these key barriers here: rules that have to do with corporate governance, capital, founders, key employees, labor, tax, bankruptcy, exits, acquisitions, and also the legal environment in terms of courts here. I will not go into too many details because you will find those in our policy brief, but just a few very important ones here.
So, in terms of corporate governance, we want to have simple corporate governance and liability rules, which, again, the standard contracts would be provided through the Hub Zero here. So, templates are very important in terms of taxes. We don't really address the different tax rates, or we actually don't touch on this here. The only thing we really try to apply is that because that's a key impediment for startups with innovative ideas: how equity compensation for founders and key employees is actually treated here. And what we impose there is that this equity compensation should actually be so that the equity value should be assessed at sale, with, of course, a mandatory holding period, and not at issuance.
The tax rate we leave to the member states because that's their competence here, but there's really this notion that it should be done at the level of sale rather than at issuance. And that's something we do impose on the regime zero structure here. Also, bankruptcy rules are quite important for our innovative startups here. And particularly, what we want to make sure is that the bankruptcy rules will sufficiently allow for an efficient exit. That is all legally assured here, but at the same time, it doesn't block or make it more difficult for reentry because we do see a lot of these innovative ideas exiting and reentering here.
Another important exit mode is acquisitions. That's a very important model here. And there, we also propose that for regime zero companies, if they are involved in acquisitions here, the European Commission, DG Competition, will look at whether these acquisitions follow the normal competition policy rules. That also creates much more certainty than the current situation, where these acquisitions of these regime zero firms are very often too small and will be landing in different member states, and then it's very unclear what kind of decisions will actually be taken because there is too much fragmentation here. What is also very important, and that follows from the immediate recognition of the regime zero in all the member states here, is that they must treat, of course, our regime zero firms equivalently to a domestic firm.
So, there should be no discrimination in areas such as licensing, public procurement, or subsidies here. And then finally, another important point is, of course, also the whole legal environment for this. So, of course, we also hope that Hub Zero could actually play a role in trying to become an important player for dispute resolution here. But in case it has to go to courts here, we also propose that there would be specialized courts in the different member states that are sufficiently familiar with regime zero legislation to be the legal environment for this. In terms of implementation, and this is one of my last slides here, implementation of regime zero is obviously very important, and we must try to reduce the fragmentation here.
So we definitely want this to be a regulation rather than a directive here because with directives, you still run the risk that it will take too long before all the member states have implemented it, also leaving too much room for different implementations in the different countries here. What I also think is very important is that we don't really provide a uniformization of labor laws or other types of laws here. But what the system does do is provide enough transparency of what the relevant labor regulations and tax regulations would be in the different EU countries in which eventually our regime zero firms will be in residence. So it's that transparency that is important, which will also help to make it more manageable for companies here, without us having to touch on member states' policy competencies in terms of labor and tax regulations. But what we're hoping is also a little bit that transparency will help a lot, and that EU countries are free to design tax and labor incentives to attract some of these regime firms. That kind of transparency and competition will actually also lead to better outcomes in the future here.
So, in a nutshell, refocusing our regime zero on this innovative high-growth potential, because those are really the companies we will need to boost our innovative potential for competitiveness here. We try to do that by having this incorporation regime that's fast, cheap, and very clear here. We also hope that this will address access to finance because it will also make it easier for investors and reduce their cost of assessing these different ventures here, as there will be much less fragmentation. The equity composition is very important to help attract key talents here. So, that's it.
Still fine. No.
Moved. Okay.
Redner 36
Thanks a lot, and thank you very much for the invitation. I have some slides. Yes. So let's see how we can design or what are the elements of the 28th tax regime. So let's first start by clarifying what a twenty-eighth regime is and what it is not.
So, the 2018 regime is an optional EU legal framework that should coexist with national regimes and must be applicable by all member states or made available. It's a tool to reduce fragmentation in areas where full harmonization is politically or legally constrained. Now, what are the success conditions for the 28th regime? It should provide clear and quantifiable benefits for companies willing to opt in and use it. Uniform COA rules with minimal national discretion are also to be operationalized via the current framework and tools that we have in place.
Now, with regards to the tax element, optionality, of course, of the regime is one element, but it's not sufficient if we want to create an uptake and strong momentum also from companies willing to use it. The aim is to have neutrality and target incentives, not full tax harmonization. So now, in the study that we did, we came up with the idea of having a layered approach for the 28th regime, with corporate law at the bottom. So, this is the foundation layer. And then, on top of it, we can build and add other elements that we want to do: insolvency, accounting, tax law, labor law, and so on.
But of course, we should also be mindful that the more elements we add, the more attractive the regime becomes to companies, but at the same time, the political feasibility of this regime will go down. So we need to be careful about what we propose and how deep we want to go. Now, what are the core features of this twenty-eighth regime? Optional for all users, mandatory for companies, and for member states to offer it, legally anchored into national and territorial law. So it should be based on a sound Tibetan T foundation, but also be applicable in areas non-exclusive to EU competence, and also in areas where they are not already fully harmonized. It should also be designed for practical operability and institutional alignment, and also to open all companies.
So all scale-ups should be able to use it, but also all other types of companies. Now, what should be the tax layer for 2018? So, what should be included, as we say, is neutrality and recognition, meaning no fiscal penalty for opting in with regards to corporate income taxation, VAT, withholding tax, and so on. The second element is the home host recognition in order to avoid any hybrid mismatches and uncertainty. The other block of the 28 tax layer should be cross-border loss relief.
So, an optional mechanism to prevent loss lock-in when companies move from one member state to another. EU templates, certification, and verification rules can be used across all member states, with optional group consolidation for 28 entities that use them. Now, on the mobility rules, of course, to avoid exit tax frictions on genuine intra-EU recognition, companies can also use mobile workers from one member state to another to preserve tax attributes under economic continuity, but also optional advanced cross-border rulings to reduce uncertainty. Last but not least, it's also important to keep in mind the withholding tax and VAT interoperability. So, to make sure that it's applicable given the current tools we have in place in terms of funding money laundering, VIDA, DAC, and so on, as well as streamlined VAT registration and filing rules with Register One principal applicability.
Now, to keep that feasible and be able to use this joint regime, we also have to think about how to embed it into the current framework, how to pilot it, but also how to safeguard it. So, design choices that reduce political friction. So, the focus should be on administrative simplification and neutrality. Again, the aim is not to harmonize taxation across the EU 27 member states, but to embed the regime into existing EU transparency and anti-abuse frameworks that are already in place, and also use clear coexistence and conflict of law rules to avoid duplication for firms operating across borders. Implementation pathway, modular rollout.
So start as simple as possible with corporate law as a foundation, then test using sandboxes, competitiveness labs, Regimen 20 in Spain, and so on. Use countries and member states that are willing to experiment to test and pilot new things before adding them into the 2018 framework from the beginning. And also leverage digital infrastructures, a business single entry point, and so on. Now, in terms of safeguards, proportionality for SMEs, not to add extra burden, but also in terms of a fast-track dispute resolution and insolvency, to make it easy for these companies along the life cycle of the companies, from birth to growth and death. Now, the three takeaways moving forward. So, we need to define the regime tightly.
So, optional for firms, mandatory availability for member states with a self-standing rule book. Make tax a deal maker, not a deal breaker. So, neutrality, target interoperability, and also to de-risk politically. So, as we said, a modular approach, a layered approach, a pilot, and then, if you need to expand, also keeping in mind the SME proportionality and other anti-abuse safeguards. And I think I'll stop here. Thank you.
Redner 1
Thank you very much, Apostolos. Now you move to Mikael Schick. Please, Mikael, seven minutes. Yes.
Redner 38
Thank you very much. Thank you very much, Chair, for this highly interesting panel about the feasibility of the '28 tax regime and our underlying tax regime. A short view from our side, mostly the practitioner side, European Tax Adviser Federation, EDAF. As I have only seven minutes, very shortly on this: we're representing 220,000 tax advisers across the EU, with eight members in seven countries, currently growing. We will soon have another important member.
And what is important for us is that we are representing only the countries where the profession is regulated by law, which is unfortunately not the case in all the EU member states. And therefore, our expertise relies on the day-to-day practitioner experience of professionals. Now, to come into the topic, first of all, maybe just one remark. I have to say, Beta fully recognizes the challenges we still face in the single market, especially the fragmentation of national tax systems, because this continues to generate significant compliance costs and legal uncertainties for companies. But maybe just to preface this, recognizing the barriers does not help and does not determine the feasibility, which we'll talk about later.
That's why we have a very short review. I only want to be short on this. We made a list of four major tax barriers existing nowadays in the European Union single market. It's, of course, the tax base that varies significantly across the member states. And if the same situation is taxed differently, then it, of course, also reduces tax neutrality and legal certainty. Then we have the risk of double taxation despite the existence of the double tax treaties.
And then we still have a very high bureaucratic burden due to reporting obligations and anti-abuse rules, just to mention TAC 6, CBCR, and many others. By the way, we see different transpositions in the member states, which makes it very hard. So sometimes, the same situation has to be filed in a duplicate or double way. And this creates a high cost, especially for SMEs, putting them at a disadvantage. And, of course, in the administration, we have fragmented administrative procedures, different deadlines, formats, and languages, and this is all not harmonized. So, the compliance process is different in each member state.
But now, which elements could we integrate into a twenty-eighth tax regime? So from our perspective, well, that was a big question. If tax elements can be integrated into the twenty-eighth tax regime. But if they are integrated, or if they shall be integrated, from our point of view, in the first line, they should focus and lead to a real simplification for the companies and to a consistent administration. And it is very important for us and for the tax practitioners not to add another layer of bureaucracy and complication.
So, reduce duplication and provide certainty for business. So the main three points would be: a single entry point for cross-border tax reporting to avoid multiple declarations. So that would mean once submitted, one submission recognition in every EU member state, so EU-wide recognition. And this would reduce, of course, the repetition and the compliance costs. The second one is the common EU corporate tax base.
We all know that this would enable companies to calculate their taxable profits under a single set of rules. So no need for costly calculations under each national law. And then the third one is the recognition of a common working language. We did not put English here, but it will probably be in the end. But recognition of one language, alongside national languages, would also ease the administrative burden.
So now let's speak about what you took as a very good, well-chosen topic of this panel: feasibility. Because feasibility is a broad term, you can choose to go in different directions. From our point of view, feasibility is not only a question of political will or desire, but it is a question of how we would design such a '28 regime. And one of the main questions for us is, would we really substitute national rules or just create another additional layer as a parallel regime on top? Because the first one is better, of course, because from our point of view, it's clear.
Many practitioners told me that if you create an additional 28 layers on top of the others alongside, then companies would maybe be facing and challenging two different sets of rules. And this cannot be desired. This would increase the complexity. And then another important question is also, if we know that's a feasibility, which goes into the direction of legislation, would we align with existing proposals that are on the table for other proposals for harmonization? I name BFIT and HOT because these two, of course, if they were successful, could also already tackle many of the issues addressed.
Yes. Reducing complexity, we had, and yes, this point is the point all the way down: not adding a second rulebook on top of national law. That's really one of our core demands for the EU political players. And so, the general rule is: simplify, do not multiply. But also, when we come to feasibility, there's another aspect of feasibility in the poll at the political level.
We all know it. It has not been named yet. That's why I say, let's talk about the elephant in the room, the unanimity. Yeah. So, of course, the European Commission, for the general 28 regime, as it is the job of the commission, invokes Article 50 and 114 of the Treaty on the Functioning of the European Union (TFEU), which is the right one for the general 28 regime.
However, as we all know, this does not cover the elements of taxation. So if we would want to cover taxation rules, that would need 100 Article 115. And as we all know, the trials of circumventing the unanimity rules would never work. The member states in the Council would not accept that. I think we should also be realistic in that respect.
So in a nutshell, we would rather, in difference to my previous speakers, say it should be open to all limited liability companies. And the rest, the other points already mentioned: reduce duplicated filing obligations, improve administrative coordination—that's very important—ensure coherence with existing tax initiatives, and respect treaty competence and unanimity. So a recommendation could be, in that case, if we want to do a soft law approach, we are all aware that this is not the final solution. Using a nonbinding instrument could lead to a gradual alignment without overstepping the treaty competence. Thank you very much, sir.
Redner 1
Thank you. Thank you, Michael. Now, we go to the members, starting with Ludac Nedermeier. Please, Ludac.
Redner 20
Thank you. Thank you, Chair, and thank you. Thanks, Secretary George, for organizing. I think that because it was very helpful. You know, the commission created big expectations for the twenty-eighth regime, and not only after today, I am more and more concerned about what we will actually get.
I very much agree with Bruegel, especially on the strategy that it should be rather narrow and deep instead of wide and shallow. But I understood from your presentation that this very much corresponds with my view that we have two goals. One goal is to make it easier for companies to operate, and the second is to make it better investable. So that means that investment firms from Sweden can assess the firm from Portugal, and so on. And at the same time, we need something that could be approved.
And so, my first question is: to what extent do you believe that only enhanced cooperation is the option to achieve something sufficiently deep? And the second question is: what, in your view—and I'm addressing especially the first two speakers—is the absolute minimum functionality that must be delivered to make it at least a good start? And the second part: what is the minimum functionality that will create at least some beginning of the European capital market for the financing of the grow-ups, scale-ups, and progressing start-ups? Because we don't have a problem financing startups locally. But when they need more capital, there is no such market, and that's why they go to the US.
Thanks.
Redner 32
Right. Thanks a lot. These are really excellent questions here. So, I'm glad that you also like the more focused one, but deeper here. I think this will be really important to reach the target that we are eventually looking at, which is to improve competitiveness here.
And by actually making it, it also allows us to be much more tailored in a smaller subset, which is really critical, but not so large in terms of the number of companies here. So we hope that this also makes it much more interesting politically to get this realized here because only a small number of companies really have this ambition initially to be so innovative and need scaling up here. So we also looked at some numbers on that; there are not that many companies here. So that makes it much more possible to organize this within this hub system here, which we want completely digitalized so that it doesn't get overwhelmed by any kind of incorporation of any company here. So we hope that being focused will also help to make it more politically feasible here.
We also find the political feasibility comes from really trying to identify, given that we focus only on those companies here, what matters critically for those companies. And then your question is: what will be the absolute minimum here? So the fact that they can actually incorporate digitally here means that they get all the information through the hub, including what kind of standard contracts. If they used those standard contracts, they would actually comply not only with the regime zero, but also with all the other regulations in the country of residence, which would still apply here. So it's also this transparency that will be important for these companies here.
But in terms of the absolute minimum, I think, for us, it is particularly how you treat the equity shares here because that's really crucial for these companies in order to be able to compensate founders and key people with equity shares. And these, at least, I mean, are valued at the time of exit or sale; that's the only thing that's really critical for them. Even if the tax rates were really high or different across the member states, that principle is something that is really important for them. So I would actually go for that as the most important one here to attract the key employees. Sorry.
And then, in terms of how to make sure we attract venture capital and risk capital here, the idea is really that by making it much more cost efficient for companies to immediately incorporate at the EU level, it should also make it easier to attract venture capital because the projects will be more attractive here due to lower costs. And it's also easier for the venture capital companies to really assess what kind of legal infrastructure there actually is that they need to evaluate for these 28 regimes here, because there is much more transparency on that too.
Thank you. Apostolos?
Redner 36
Yes. We say that the regime should be focused. I mean, focused in the sense that we target the specific needs and challenges that scale-ups are facing. So, not the other challenges or obstacles that other companies are facing. So the regime should be designed with startups and scale-ups in mind.
And that should be if other companies want to use it, okay. But it's designed based on the challenges in terms of company law, insolvency, taxation, accounting, or whatever challenges these companies are facing. Now, we say to keep it simple. Let's not be ambitious for once. Let's start with a simple layer: corporate foundation, corporate law as the base, and then add only if needed. If we see that, we test, we pilot, and we can implement. Now, what should be the minimum?
The minimum should be that firms do not face a tax disadvantage for opting into the 28th regime. So this means that member states should treat a company set up and used to opt in to the twenty-eighth regime in a clear and consistent way in terms of corporate tax, VAT, withholding tax, and so on. So, that should be the simplicity without complicating the further processes.
Thank you. Mikael?
Redner 38
Just one comment: it would remain a corporate regime and not a tax regime because the tax rules as such would not change.
Okay.
Redner 41
Thank you, Chair. Thank you for the session. And sorry for not catching up on everything, but I have some points on Miguel's presentation. And you mentioned the topic of feasibility. So, I will try to focus and narrow my intervention on the feasibility of anything that we have been doing in terms of tax integration in the EU.
And taking from your positive note, I would like to ask you all at least two or three questions. The first is that the administrative burden we have from 27 rule sets is now detrimental to the efficiency and efforts to scale up the European economy. So, in your opinion, do you think that the 28 regimes could address the lack of harmonization in terms of corporate taxation? And if so, could we do it without pushing for a tax competition that would create a further loophole in the legislation that we currently have? And then, if we are also eager to explore how to help with key issues in cross-border economic cooperation, what would be the main issues to address in your view?
Last but not least, in the last polls that we have had, the last report from the Eurobarometer with the survey of 17,000 companies showed that VAT and tax were selected by SMEs as the main barrier to their cross-border activity. If the slogan that we have created, "One Europe, One Market," is more than an empty slogan, do you know what the figures or numbers would be for this administrative burden in terms of compliance with the 27 different regimes? Do you have any number in mind? Because we know that this is a burden for the companies, but then we don't know the exact number from the corporate side. So if you could enlighten us on this part, it could also be helpful for the next debates.
Redner 38
Yes. Thank you very much. On the integration of a common corporate tax base, we think, yes, of course, this could help solidify and strengthen the internal market. And also, yes, because it would facilitate a more consistent allocation of profits between the member states, reduce the risk of double taxation, and therefore provide much more predictability for the companies. And regarding the number you asked, I don't have it in my head right now.
I would have to look it up. Sorry, do you want to?
Redner 36
Yes. If I can say, I mean, I don't think that I know. We should be clear on how we treat the 20th regime. It's not about harmonization. I think we are substituting the word "harmonization" with the 2020 regime, and we are using it for everything.
So, we have to be careful with corporate tax harmonization. I wouldn't think of it. It's about simplifying certain things and making them easier, yes, but it's not about harmonizing tax rates. This is my view. Now, on the costs and benefits of the obstacles that companies are facing, I mean, we finalized a study where we looked at different things in terms of hours spent, how many hours a small company spends to fulfill tax burdens and tax obligations.
It can range from a couple of hours to 100 hours across member states. And, of course, this also creates costs. So, yeah, but again, we should be clear on how we use the term "23 regime" and for which purpose, to be specific.
Redner 33
Yes. Maybe I can; I fully agree with you on this. So, it's not really tax harmonization. Of course, we would like that too because it will reduce the cost in general here. But I think we should really, in order for feasibility, restrict the 28 regime or the zero regime to what we really want to address here, and that's this innovation gap for competitiveness.
So this is why we don't need tax or why we're not looking for tax harmonization for all types of companies, especially for these young innovative companies, which really want to scale up fast. And that's not only in terms of tax harmonization for operating, but also for how you recruit people and all these elements too. And so that's why we really want to assure that at least this is how you treat the tax base and also particularly the shares, how the compensation of the shares is quite important here, but also providing transparency so that it would reduce the cost and allow companies to have a much more informed choice of where they would actually incorporate, knowing what the different tax regimes would be depending on where they would. And so that kind of transparency, we hope, would also reduce the cost for companies here and provide an incentive for member states to actually compete a bit if they want to attract these kinds of companies by addressing those issues here.
Redner 18
Thank you very much, and thank you for the discussion. Actually, when we ask firms about scaling up, they usually mention two issues. The first one is the legal and bureaucratic issues, and the second one is taxation. So just creating a 28% regime without taxation maybe will not attract so many firms at the end. This is one argument.
And the second one is that, for me, it would be much better not to discuss the 28 regimes at 28 different committees because, in the end, we want to create one regime with all the legal aspects, insolvency regimes, taxation, everything in one package. Now, firms will not understand what the value added of a regime is. And in that, I agree with Mr. Tomodakis mentioned that Exxon’s value proposition for them is that these are the savings and these are the features. On the approach, I strictly prefer the narrow approach because I think that, also politically, it is much better to have a narrow regime. These companies usually do not pay taxes in the first 5 to 6 years.
So from that perspective, it is not very painful for the ministers of finance to agree on something. What should be done in terms of taxation? I will mention three areas very briefly. First, I think full agreement with compliance issues and also with the administration of taxes, in one place, fully digital, English first, whatever. This is very important in the 21st century.
A second aspect is what can be included from a more substantial point of view. I think employee stock options should definitely be there. A tax base calculation should be there. Capital gain taxation is designed to attract foreigners to invest in these firms. And maybe this is politically more difficult: employee taxation.
So, one option should be to use the employee taxation where the headquarters are, because usually in these startups, people move around Europe very quickly, and we need to consider how to apply telework and other policies. So from that perspective, it makes sense to have that kind of regime. But, of course, no country should be able to define their own tax regime. So this is, in my view, a kind of minimum space where we can talk meaningfully about the potential feasibility of 28 taxation regimes.
Redner 38
Yes. Just what comes, but then still, if you include the tax base and employee stock options and taxation of employees, then you would need the member states, and you would still need unanimity. I fully agree with you that one package would be perfect. But then, if DG tax would say themselves, "Yeah, it's tricky because we have unanimity and we can only have recommendations or character," then it's just a comment. Yeah.
I would agree.
Redner 33
Yes. I fully agree with you that we should avoid trying to go too broad here for all types of companies. We also have lessons from the past that really don't work here. So let's be targeted here, but also pick those issues that are really important for the targeted companies, and those are the innovative companies for which being able to attract key talents and founders with stock options is crucial. And that is really a very crucial component here.
So, I fully agree with you on that here. There is a lot of stuff going on in this, like, for instance, EASOF. It would be ideal that ease of use is for all types of companies here. If that were established, perfect. But if that doesn't get established, then at least we should already have this now for the '28 regime here.
And then, in terms of whether we should go for regulation or directive years, how deep can we go with the critical text dimensions here? Here, I would say the discussion is really making sure that you really target the right kind of companies and make sure that you address their barriers. This is way more important than political feasibility. We would actually prefer to go for enhanced cooperation of those member states that want to go as far as that, rather than trying to look for a single solution that doesn't target anyone and will be ineffective.
Redner 36
Yeah. Yeah. No. If I can say, I agree with what you said. I mean, the first element will be the basic: don't disadvantage or tax firms for using the regime.
So that's the minimum fact. The second is to make it easier for firms to use early-stage losses. If a scale-up makes a loss in the first country in which it operates and then expands, those losses often get stuck and cannot offset profit. So, that will be the second solution to fix it. And the other is, as you mentioned, two obstacles: withholding tax and VAT refunds.
So, how do we solve these things? I don't know, fast-track withholding tax relief at source and also streamline VAT registration through the digital registry that will already be in place if 2018 comes. So, yeah, as we said, narrow and focused.
Kira Marie Peter-Hansen
Thank you very much, and thanks for the good presentations. It's also interesting to tackle the same questions from three different angles. And I think this point of figuring out what the political goal is—whether it is indeed harmonization or the innovation gap—is probably good that we, at some point, decide. I think I have three questions. We'll see if I make them all.
But just to understand, because you mentioned, professor, sorry. The lady from Vrugel, that you wanted to see an aspect where you have national tax and labor rules also to create incentives for competing on that. How do you see it, because I would see some risks in that as well. So how do you see that? Because it can create a new risk to the bottom.
And also, the next speaker mentioned this idea of including mobility rules. If you can elaborate a little bit on what you mean by this. And now, of course, there is a committee dealing with the employment side of it. And then a question in regards to the scope, because if you want to include taxation, as you also mentioned, Missus Hick, you would need the bigger firms in a way, because, as you mentioned, the smaller ones don't necessarily care that much about the tax base. The bigger ones do.
So how do you see the trade-offs between the scope and then harmonizing the tax elements within the 28 regimes? And then lastly, if you can share a little bit more about how you see the different proposals for doing enhanced collaboration, such as a pilot phase or staggered implementation, what you see as the pros and cons of each? Thank you.
Redner 33
Yes. Thanks a lot for these questions here. So, indeed, I mentioned this competition between member states to attract these kinds of companies here. It's not really that we are looking for competition, and particularly not competition to the bottom here, but what we really want to make sure is that we get these companies in the first place, because otherwise, if we don't have any companies and we're missing them, that's an even worse outcome. So, making sure we get them in the first place, and this is why we're calling particularly for reducing the fragmentation by having this transparency here.
So, that is very clear for companies. So when they go for the 20 or the zero regime here, what the specifics are of that, and that's very narrow. But for all the other issues that we don't specify, which we leave to the member states for political visibility here, there is very clear transparency so that they know in advance if I would register in the Netherlands. These will be all the other reasons, all the other things and contracts I will actually have to use here. Same for Denmark.
And so that kind of transparency is important to reduce the cost for the companies. Hopefully, then also reduce and make it more interesting for venture capitalists to invest in these, and to attract key people here. And, of course, if in the end companies or countries want to really compete for these few companies here, they can do that. And maybe that will help a little, but it's not really our main purpose here. Our purpose is really to reduce the cost for companies and to ensure that, with transparency, they can choose much better in which countries they would actually incorporate.
And that's a way of trying to get that feasibility realized here, in a more efficient way.
Redner 36
Yeah. On the question, first, what is the political goal? The political goal is to create a regime that companies will want to use and that supports competitiveness for companies willing to use it. Now, on mobility, I was referring to the mobility of companies for tax purposes, let's say, to move and reorganize from one member state to another without facing tax charges, unfair tax restructuring, and so on. So, it was fair to make it easy for them to move, relocate, and reorganize from one member state to another.
Redner 38
Well, thank you very much. Yeah. This aspect of tax neutrality, of course, would be reduced if you have a common tax base. And from our point of view, we don't really see, I spoke about alignment of a possible twenty-eighth tax regime. That's why the title today is "Feasibility of the 28th Tax Regime."
That's what I decided then to sort of talk about. I spoke about the question: do we align with other existing proposals on the table, like CCCDB, which is only for large companies? And then, on the other end, you would have only startups and innovative companies. We don't really see why the difference. So, from our point of view, as we said, it should be open to all limited liability companies.
That would be good. Thanks.
Redner 1
Okay. Thank you very much. Yeah. We are at the end of this second hearing today. Thank you very much to our speakers.
These are in the 28 regions we are working on. Odo is making a report on that. I think that we'll come back on this as well with the consideration of the shadow reporter, and we were waiting for a final proposal from the Commission. Thank you very much for being here, our guests. Thank you.
Well, we now have the coordinator meetings for our coordinators, which start in 50 minutes. Yeah? Thank you.
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