Subcommittee on Tax Matters Ordinary meeting
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FISC European Parliament
Filip Debelva
Thank you so much. Ladies and gentlemen, honorable members of parliament, first of all, thank you for the opportunity to present the findings of our study titled, feasibility of a 28 tax regime and its potential to support EU competitiveness. What we'll do today is we'll first start by giving a bit of background and context behind our study and the objective of the study. And afterwards, we have three blocks of content, one dealing with the type of legal instrument that we're looking at in order to adopt the '28 tax regime, followed by two content blocks where we propose several ideas in order to enhance your competitiveness through tax measures. And we'll end with some key recommendations and the way forward.
Perhaps by way of background, of course, business activity is increasingly across borders. However, the legal frameworks remain, to a large extent, national. It is especially so in the area of taxation, as taxation remains primarily a national competence. It is up to each individual member state to decide how they design, how they shape their own national tax systems. However, companies or businesses operating in multiple member states are faced with these different legal systems, resulting in them having to apply several sets of legal rules which coexist at the same time.
That means that companies expanding their activities across several member states are faced, for example, with different rules on calculating corporate income tax burdens or tend to apply several different rules on withholding tax relief. By way of illustration, there are currently more than fifty different forms in place in order to get withholding tax relief. Needless to say that these divergent rules make it more difficult for companies to expand, to grow and at least a higher compliance cost, legal uncertainty, each of these having, of course, a negative impact on EU competitiveness. This was all already highlighted, for example, in the Draghi report, which underlined that these differences in laws and regulations across EU member states continue to limit stability of companies to operate seamlessly across EU boroughs in the EU single market. Now the EU Commission has announced its intention to propose a 28% regime for innovative companies covering several areas of law.
This includes corporate law. This includes labour law. This includes insolvency law. However, we are of the opinion that the area of taxation is currently still underdeveloped, and this study aims to respond to the gap. It's important to stress that the regime that we are proposing here today is not intended as a full tax harmonization nor as a tax rate harmonization in corporate income tax, but it should be seen as a targeted simplification instrument for cross-border business activity.
The tax framework discussed in our study is also not an all-or-nothing package. It is we treat it as a menu of building blocks so that the EU legislature can combine only those elements that are politically and legally feasible. And as already indicated, our study was also written before the publication of the recent proposal, which contains some provisions regarding employee share remuneration, but our study covers a bit more ground. The study addresses three questions in an integrated way. First, how can such a regime be implemented in a politically realistic way with your respect for the principle of subsidiarity, and keeping in mind the specific context of tax rules?
Second, how can, from a substantive perspective, compliance costs be reduced in specific areas of taxation? And third, and linked to the previous point, how can the twenty-eighth regime avoid duplication of compliance obligations? We have decided to address these three questions integrated by choosing an optional, a targeted and functional integration mechanism designed to operate alongside national tax systems. From a procedural perspective, it is important to note that even if tax provisions are embedded in a broader 28 regime initiative, its tax components, and that includes both indirect tax and direct tax components, can only be adopted on the basis of the specific treaty articles on taxation. All of those legal bases require unanimity in the council as opposed to the normal qualified majority voting requirement.
In the past, for several tax rate proposals, they have faced exactly this difficulty, meaning that it was difficult to reach unanimity on all points. An option would be, of course, to amend these majorities in the EU treaties themselves. But from a political perspective, it is, in our opinion, unrealistic to expect that EU member states give away a core part of the fiscal sovereignty on this point. This is why we have explored several alternative avenues within the existing treaty network. A first option would be to apply the procedure of enhanced cooperation, allowing a set of at least 9 different EU member states to proceed in a more integrated manner.
A 28 tax regime would, in principle, be compatible with this framework, as harmonization would not be imposed on the member states who are not inclined to participate. It will also be flexible and open to later accession by more EU member states. An alternative would be to work through a directive that is formally accepted with unanimity, meaning that all EU member states accept this directive, but it would, from a substantive perspective, only apply to EU member states if they choose to implement the tax system. In other words, participation would be voluntary, but it would still be adopted unanimously. A third option would be applying a temporal modulation of the directive.
This, as such, does not directly address the adoption problem, but it reduces fear of so-called being so-called locked into the treaty into directive framework. Directive itself is adopted, but directive automatically expires after a certain amount of time, and it is only renewed in case all EU member states agree. And this renewal can take place, for example, after an evaluation has occurred.
Anne-Mieke van der Koog
Before diving into the specific recommendations that we had, I would like to share that we actually can divide our recommendations into three categories. I think first, it's important that we keep the status quo for the new company form. If we look at the parent subsidy directive, if we look at the interest and royalty directive and the merger directive, then we see that the scope of the advantages in those directives is limited to a closed list of companies. So it's very important that this new company form is integrated in the annexes of those directives to ensure that they are entitled to the benefits already available. So that's the first category.
Then secondly, we noticed that a lot of complexity stems from the fact that there is no coordination between the national systems. For instance, even if there is harmonization, procedural differences between the member states can create additional complexity. So it's important to look at the procedural aspects, to look at coordination, to think about, for instance, ex ante rulings, to make sure that you can create legal certainty where it is possible, but also to make sure that there are dispute resolution mechanisms in place that can make sure that if a conflict occurs, that it's easy to actually resolve it. And as a third category, we have actually made some recommendations, some limited recommendations regarding new substantive rules. So that's the least important category, I think, in this context, like coordination and procedural rules are very important.
If we look at the specific recommendations that we have in mind, we don't have the time to go through them all in detail, but if you have any questions, please ask them afterwards. So we have withholding taxes. We think it's very important that we have a sort of one stop shop concept for withholding taxes that we centralize, for instance, tax residence certificates, and that we work further on the initiative that's already in place, the faster initiative. We can broaden the scope and make it available for companies under the 28 regime. Regarding corporate income tax, we have a few recommendations.
We think it might not be feasible at this point to actually implement the whole Bayfi proposal as it stands, but it's very interesting to look at some building blocks of that proposal and to introduce them potentially in this regime. For instance, it would be an option to coordinate the tax base using the same, for instance, IFRS or GAAP system and to make sure that companies operating in different countries can use the same accountancy standards throughout their whole group and to build on that and to have them, certain national, divergent rules, but building on the same building block. We made some recommendations regarding cross-border tax relief. We think that's an important factor as well. And if you start a business abroad, the fact that you pay taxes in your home country even when you're making losses abroad, that might be an important cash flow issue that can be resolved through different means.
We made a proposal to work with a temporary tax deferral in case you are exploring new activities abroad. There are different ways to deal with cross-border tax losses, and they can lead to a definitive loss of tax revenue in a certain country. We want to avoid that. That's why we created or proposed a simple system, but we can go into detail if there are questions regarding it. An idea where we did have substantive rules in mind, that's when it comes to R and D incentives.
We think it might be very interesting if all EU member states would offer the same level of r and d incentives. Of course, it's important that if a company opts into the 28 regime, it's not worse off than in case it would just stay within the national system. So there would be, important if there is a harmonized tax level credit that if the national level would be higher, then an additional tax incentive is offered to make sure that companies opting into the 28 regime would still enjoy the same level of incentives. So we have the tax incentives on the one hand, but it's also important to look at expensing of R and D expenses. There, we would suggest that there should be an option for immediate expensing of all costs incurred relating to R and D, or at least provide for an accelerated amortization, depending on what is best for the company at the time.
And then we have the transfer pricing story. We feel that's a very important issue as well. We've discussed the matter with specialists in the field, and we would recommend to hold on to the ALP concept. But it would be interesting to create a few safe harbors, for instance, for low value added intergroup transactions or simple financial transactions within a group, as to make sure that compliance costs reduce and that the burden of documentation is also limited. Also, here, we see potential advantages in a one-stop shop concept.
Furthermore, regarding corporate mobility, we feel it's important that even though there are already a lot of IDs in place through the merger directive, to make sure that the options to be mobile across the EU would be enhanced by providing for standardized models. For instance, regarding valuation, if a company leaves a member state and it enters into a new member state, it's, of course, very interesting if both states agree on all values of the assets that transfer from one comp country to another. That being said, we think exit taxes should be kept in place because every member state is entitled to keep its own taxing rights, but we think there are added flexibilities. There are added rules that can make the process easier. Then when we get to employee share remuneration, as has been mentioned, the commission already has some ideas in mind when it comes to the employee share remuneration.
We share the idea that tax should be deferred until there's actually a liquidity event. That's also what was part of the commission's proposal. But what is still important and what was lacking in the commission proposal was it's also crucial that it's clear which country has the rights to tax income resulting from employee share remuneration. So we think that the sourcing rules should be clear as well. It's interesting to add that part to the proposal.
And then regarding value-added tax, there's already a lot of harmonization. But if we look at procedure rules, registration process, and so on, there are a lot of improvements possible. So we made a few recommendations on those as well. It's important to keep in mind that there are some constraints. It's not possible to just implement whatever rule might be interesting for this '28 regime.
From a competence point of view, it's important to keep in mind that we cannot say that, we just wanna create a tax, an interesting tax system for this new corporate form. There has to be a goal of improving the internal market, and we have to look at distortions that we wanna get rid of. So we have to make sure that the right goals are behind what we're trying to introduce. Furthermore, of course, it's important to look at equality constraints. We have nondiscrimination that needs to be respected.
If we introduce rules that are only applicable for this new corporate form, we have to make sure that we can justify why other national companies would not be qualifying for this regime. So we have to make sure that there's a correct justification for that. And, of course, we have to keep the state aid rules in mind. But as you will read in our reports, we are of the idea that if we make sure that the concept is strict in the directive and there's not a lot of leeway for the member states, then these constraints, stated rules, and other constraints should not be an issue. Then, of course, we know that there are some questions regarding potential abuse of law, but then we wanna point out that all general principles keep applying, that we have the general anti-abuse principle that also can be applied in this context, and that, of course, ATAAT stays in place and also, where applicable, the pillar two story is still applicable.
Filip Debelva
Perhaps too very short because we're, I think, running out of time. To answer to a few key recommendations, we are of the opinion that indeed introducing a 28 tax regime can enhance your competitiveness. I think that is clear. Also, I think from a procedural perspective, you need to keep in mind the limitations imposed by European treaties. And from a substantive perspective, we have proposed several building blocks that can be used.
And like we said, I think this is not an all or nothing approach, but more of a menu card from which we can choose, and we can see how we can progress on this matter. Thank you.
Kira Marie Peter-Hansen
Thank you very much for the presentation and for the study. We can now move to a debate with members of the Air Risk Subcommittee, and I will start with Ludwig Niedermeier from EPP. And you have two minutes for your questions.
Luděk Niedermayer
Maybe I will be sure, but thank you, Madam Chair. Thanks for the presentation. I would have just a relatively simple question because, obviously, comparing what you present here with the commission proposal shows that commission proposed very little, especially in the tax area. But you rightly said that there is a political problem that the member states are not very happy to go along with that. And as you rightly mentioned, one of the options is enhanced cooperation.
But I didn't completely catch from your proposal how big should be the scale of the firms that should be eligible for that kind of tax regime in order to make it politically feasible? Because, obviously, if a lot of firms will suddenly, from national member states regime on corporate taxation shift to European, then we cannot expect that finance ministers will be happy about it because this will basically take away a substantial part of their member states' right to set the corporate taxation. So the question is, if in addition to enhancing cooperation, you are considering that the tax regime that you are here writing about should be limited only to a small number of firms? And if so, what kind of firms should it be?
Speaker 5
Thank you, Ludwig. And I hand over to both of you or one of you, depending on.
Anne-Mieke van der Koog
That's a very accurate question, and we think indeed it's politically loaded. As we understood, it would be the idea to focus on young, innovative companies at this point to make sure that it's more politically acceptable. But, of course, I think we have to look at the total picture. So as we mentioned, there's several building blocks, and you don't have to take all the building blocks. Blocks.
So perhaps the more building blocks you take in, the more limited the number of companies you will be willing to give the advantage to. That's, I think you have to balance it out in the total picture. And I had a second remark, it slipped my mind. I'm sorry.
Filip Debelva
But perhaps I can add something. I think if you only apply the 28 tax regime to innovative companies, it can also be seen as a sort of test or laboratory to see how it works. And at a later point in time, it can also expand to more companies, of course. But I think answering your question that toppling such a regime for a limited set of companies will, of course, be more acceptable than just an across the board harmonization.
Anne-Mieke van der Koog
And, what I wanted to add was that a lot of the suggestions or recommendations that we made are not necessarily impacting the budget of a state. If we look at enhanced corporation, if we look at rulings, if we look at dispute resolution systems, it does not necessarily impact the income of a state.
Speaker 7
Thank you very much. And then I look towards Bruna, if you're ready to take the floor.
Sharon Bruno Gonzalez
Thank you very much. Start by thanking the experts for conducting this study. As you know, we have always linked the studies that we have committed to this committee to any reports that we have been willing to take. To this point, there is not a commitment from other institutions on the 28th tax regime, and I think this is a very clear starting point. This is unfortunate in our point of view since it neglects our SME select tax and VAT as the most prevalent barrier to operate in the internal market.
It is good to note that we have that we share a few assumptions on a 28 regime, most notably its usefulness to unlock cross border economic activity, building on existing initiatives such as BFIT, carrying from last mandate, but that it should not replace tax policy harmonization in a broader sense. However, I have a few questions, and I will pose two of them. The first is that I'm concerned that 28 tax regime becomes a ceiling for corporate tax regimes. Countries that with higher standards or tax standards may lower them to prevent companies shifting to the 28 regime, while other member states with lower requirements sit still. How could we attempt to preemptively mitigate this effect?
And the second is that in the absence of a common consolidated corporate tax base, how can loss relief be integrated in the 28 regime without a significant risk of shifts in taxable income across borders. So our point is clear that the 28 regimes should be something to simplify and to connect our companies within a common market, but it should never be a form of avoiding or eroding our fiscal and social basis. Thank you very much.
Filip Debelva
Thank you for your question. We deem the risk for tax plan in this respect to be very, very limited. As most of the building blocks that we proposed, they do not really have a direct impact on the substantive tax burden. But to aim to harmonize several aspects of, let's say, tax compliance in a broader sense, dispute resolution, advanced tax rulings, standardized forms, and the like. I know of the impression that these proposals will lead to companies relocating or setting up new companies in more beneficial regimes.
And.
Anne-Mieke van der Koog
If I can get back to the Ross loss relief, we had a specific proposal in our text. We had a specific recommendation. So the idea would be if you start an activity abroad and it turns out that you're making losses there, then we should just look at the amount of losses just calculated in that country, and then just grant a tax deferral in the head office or the country of another related company. So we should go for a tax deferral, so we should not have a loss of taxes in the head office or in any other group member state. We would just defer taxes because we realize that if there's an issue with losses, the issue is that you have a cash flow that's going out.
You have to pay taxes while you're still generating losses abroad. So it's all about cash flow. So if you just make sure that you don't have to pay taxes while generating losses abroad, we can work on the issue of cash flow. So if we just defer taxes without actually seeing the tax base changing, then there shouldn't be an issue. It's just a timing question then for the country.
If the head office grants a tax deferral for losses that you have had brought just for a fixed period of time, then it's just a deferral of the tax income. You don't lose the taxes. It's just a deferral. So that was our idea. And we know it's simplified, and we know there are downsides to the system because it's not tailor-made, but it's simple.
And that's we thought the balance was making it okay to go for the simplified system because, otherwise, you need, if you look at the recapture mechanisms that are already in place based on double taxation treaties, it requires quite some coordination. It's complex to have to follow-up. So I thought it might be more interesting to just go for the tax deferral and just aim at simplicity.
Kira Marie Peter-Hansen
Thank you very much. And then we move to the Patriots and Mister Thomas Kupin. Mister Kubin, you have to, no? No. Okay.
I don't see a speaker from the ECR. Just to check. No. Then I move to Mister Ludovide O'Donnell, who is also the rapporteur of the upcoming INE on this.
Ludovic O'Donnell
Thank you very much. It was very interesting, and I also like these connections between our studies and the work we are doing because then we can have a much better insight into the topics. And this time, actually, we worked in parallel on three fronts. We were working. You were working.
Commission was working, and now we have three aspects. But there are many overlaps, and I was also grateful to meet the authors before to discuss some of the aspects of our proposal. So and also, I'm ready and willing to incorporate some of the ideas of the authors into the report. I have basically three questions because we mostly agree on the ambition that we need to be ambitious if we are talking about the 2018 regime. It's not just about the legal basis.
We need to talk about taxation also. So, what are these questions? The first one is on a corporate tax base. Why do you favor a kind of more fragmented approach? And why are you not supporting more strongly a kind of a one base approach?
And related to that, you are mentioning some of the earlier proposals, but, for example, Deborah is not there. So do you think it would be interesting to look at also the debt versus equity financing problem in this area? Or is this something which is not really relevant at this stage? The second question is about another layer of complexity, which is the employee employer social security contributions, where actually you have a lot of diversity inside the EU. So what do you think about potential simplification or targeted harmonization in those aspects?
Does it make sense or not? And the third aspect is that it was not highlighted enough during the presentation, but our aim is not only a simplification but also to attract investments into this segment. So in order to make the environment much easier to understand for potential investors. So what are the key aspects? What can you recommend us to include in our reports?
Thank you.
Thank you very much.
Anne-Mieke van der Koog
To start with your first question regarding the corporate tax base, we totally agree that it would be very interesting if we had a benefit-alike concept that would actually be implemented. But I guess, we thought it might not be feasible at this point. I think that's why we went to the building blocks. The whole concept of building blocks would make it more approachable, would make it easier, acceptable. That's what we thought it would be easier to implement in several steps.
While if you look at the Bayfid story, it's something that would require a giant leap up front, so that's why we went for the building blocks. But we totally agree, of course, that this would be the ideal scenario. We only thought that the building blocks would be more feasible.
Filip Debelva
And perhaps taking your second and third question together, what are some of the key priorities here? Well, I think in the first place is that if we look at the introduction of
Filip Debelva
New corporate legal form, I think it's important to give that corporate legal form access to the benefits that are already available to existing national company forms. And by this, I mean, very practically inserting those company forms into the scope of the existing tax directives, meaning the parent’s pre directive and the interest and royalties directive. I think that would be key. What would also be interesting is to indeed look at the corporate income tax side of things. Areas that are a bit of lesser importance, in my opinion, are currently VAT. We currently already have quite a bit of substantive harmonization.
So any further measures taken there would necessarily be only of marginal relevance in the bigger picture. It would, however, be better also to attract new investments in the EU to make things simpler, more efficient, to work with more standardized forms, which I think reached throughout several of the building blocks that we have proposed. Regarding employee share remuneration, it's indeed included as, I think, the only tax measure in the current proposal. However, it's my personal opinion that that is not really the most important issue at hand for innovative young companies. So from my perspective, that would be a lower priority than the other measures that we have discussed.
Kira Marie Peter-Hansen
Thank you very much. Then I take on my greens hat in the way of my chair hat and then ask the next question. So first of all, you mentioned, professor, that there is a lack of coordination between member states already today, and this would need to be developed. Can you elaborate a little bit on what the issues are, where they arise? And then the second question, following up on Ludac's question on scope, where do you see that there was like, would these recommendations also be fit for purpose if we were to enlarge the scope to include M and Es?
Filip Debelva
Thank you for your question. We have identified several areas in which, yes, basically, there is a lack of coordination. I think I gave the example of the withholding tax forms, the 450 different forms that's currently in force today. But it's something that we noticed across basically all areas of the study, including the VAT. There are different types of VAT returns across all of your member states.
There are different national practices that can in some way be coordinated also from a procedural side, without really affecting the tax base. So it's, I think it's more about making things simpler, easier, more accessible, less constraints on that side? And regarding your second question, indeed, currently, the study looks at these young innovative companies to tie in, of course, with the corporate proposal. But yes, it can indeed serve as some sort of testing ground for a later harmonization at a larger stage if this proves to be successful, of course.
Anne-Mieke van der Koog
Okay. I think it's interesting to know that we try to build on existing proposals so there would be a coherence overall. So if we look, for instance, at a faster proposal, it just builds further on that. So in that sense, it is meant to have a broader scope than just the '28 regime.
Yossi Sarandon
Thank you. And thank you for your work and a very interesting presentation. It was also very interesting what you said about BFIT and the harmonization of the tax base. My first question is, would it be far more simple and efficient against tax avoidance? Just to go further, and with only one tax declaration for all the companies in the EU, and then a formulary apportionment of the benefits regarding real economic activity in each member state.
Speaker 11
So why would we need this special tax regime? And then another question, to give tax credits, that's a very controversial choice. I would like to know more why it's part of the proposal. Thank you.
Anne-Mieke van der Koog
Regarding your first question, I think, indeed, it would be easier to have benefits in place and to work with a formula. But I think it's very hard to find common grounds on what that formula should be, and that's why we didn't have an idea as how to create that or how to translate that to a very specific proposal. How would you divide the tax basis among the different related countries? I think it's very controversial to find common ground on that, and that's why we were looking for something that would be feasible and more easily acceptable. So as I mentioned before, that's where we were aiming at, the building blocks, the small steps to make it comprehensible, to make it acceptable.
And I think BFIT is way harder to take in and to agree to. So I guess in the back of our mind, we were hoping that if we take little steps toward beef it, that at some point in time, it might be feasible. But in our appreciation, it's like too big a step to take at this point in time. So that's the first one. And regarding tax credits, so we focused on the idea of young, you know, innovative companies, and that's why we thought it would be interesting to take the R and D tax credits into our mind, as well as to make sure that companies are not disencouraged to, yeah, choose a specific country to have the investments.
Filip Debelva
Yeah. And I think to add, if I may, I'm not sure if it is really that controversial in this context because recent studies have also showed that several member states already have some sort of R and D tax credits, but only limited, of course, to that context, sort of R and D tax credit in place. The only difficulty is that these national schemes often differ widely in the scope of these R and D tax credits and calculation methods. And of course, again, the different forms and these requirements follow up. So I think, in essence, it's not that new to work with R&D credits.
Speaker 7
Thank you very much. And then we move to Mr. Trose, who I believe will speak German. So if you.
Siegbert Frank Droese
Yes. Thank you, Chair. I will speak German. Thank you for the study and the presentation of the study. There's a lot of ideas put forward.
For me, it's quite an experimental, the way you're going down. Do you think it's possible that this experiment will fail? What about the political acceptance of the ideas? You think it will fail due to that lack of political acceptance? Did you consider what will happen if the study fails or the attempt fails?
Speaker 15
What would be the results thereof? What would be the consequences? Thank you.
Filip Debelva
Yes. Thank you also for your question. I think the different elements of your question are a bit tied in. Let me start with the second part of your question. What will happen if it fails?
Well, the worst thing that can happen is that the status quo still applies. So we still have the existing rules in place. That is, I think, the worst thing that can happen. Yes. Regarding political acceptance, that was, I think, a key issue from the start when we started drafting this study.
We really were aware of the fact that tax is a sensitive area. Adopting tax measures at you requires unanimity as well. So we tried to look for design principles that enter into the least conflict with that context. And I think that's the way in which we conceived this study as a set of building blocks. It's not an all-or-nothing approach.
It can be modular. And I think each and every one of those different areas and building blocks, if they are adopted, would be an improvement over the status quo. A second thing that we a second strategy to be applied in our study is that we tried to tie in as much as possible existing proposals or existing ideas because that might also, I think, make political acceptance a lot easier. Thank.
Kira Marie Peter-Hansen
Thank you very much. This concludes the first round of speakers, and we will then move to a catch the eye for members who have following questions. And I start with Ludwig Niedermeier.
Luděk Niedermayer
Thank you very much, Guitar. I will follow on that idea of the tax regime for certain companies. And I don't think that it's mission impossible because normally these companies do not generate a lot of corporate tax revenue. So I can imagine that there could be ground for negotiation. But this is also linked to the question of how long they can stay in that regime.
Because, obviously, if one would say that forever they can use CCCTB or something, then it will completely change the picture. So what's your idea about not only entrance but also exit from the special tax regime for the firms if it will be established?
Anne-Mieke van der Koog
That is a very interesting question. So as we mentioned before, we try to focus on young innovative companies, and then indeed, it would be interesting to have a definition. We have not worked on that at this point, but there should be a definition of what qualifies as a young innovative company. And then indeed, if you no longer qualify as young and innovative, then you should no longer qualify for certain rules. But then it's important, of course, to make sure that there are certain transitional rules that are in place to make sure that there's no abrupt change from one system to the other.
Kira Marie Peter-Hansen
Thank you very much. And I look around to see if there are follow-up questions for the CACI. No. Then we can conclude the presentation of the study. And as Ludovic said, it's very timely, because we will start the work now fully in the Fisk Committee.
Speaker 16
So thank you very much for your availability, and for your replies. And we will now make a two minutes break before moving to the consideration of the draft report on the INI, on the twenty eighth regime. Okay. I think we can slowly begin again, with the next point on the agenda on the consideration of any report on the feasibility of the '28 tax regime and its potential to support EU competitiveness. The English version of the draft report was circulated on March 24 and is available on the FISC website.
Kira Marie Peter-Hansen
And I will start by giving the rapporteur, Ludovico Rodol, four minutes for introducing his draft report, followed by interventions of two minutes by the Shadow rapporteur. Aloude Rui, you have the floor.
Ludovic O'Donnell
Thank you very much, and we will continue with the same topic, actually. And I would like to also highlight that the title of the report is very important, which is feasibility and related to competitiveness. So I will focus, basically, my first intervention on these two issues. So, what are the problems with competitiveness? You know, it's not a secret thing.
Mario Draghi and Violetta, they wrote a lot about it. And actually, if we ask also companies, SMEs, scale ups, why they are leaving to the U. So, what are the main hurdles on the single market? They usually name two things. The first one is the fragmentation of the legal framework, and the second one is a very complicated taxation system and fragmented system inside the EU. So we are now in a position that we know the commission's proposal on the legal framework.
So the FIS committee can focus on the complementary aspect, which is the taxation aspect of the problem. What about the feasibility question? Because that is very important. I think what we need to do in this report is to send a clear signal of what are the potential options for consideration, what options can be feasible to include into the 28 tax regime. So it is important to distinguish between the two regimes, the legal and the taxation regime, because there is no need to have a unified system.
And I think also from a point of view of political acceptance and feasibility, if we would like to solve most of the problems of these young innovative companies, then we should narrow the focus much narrower than in the report about the legal base in order to try out some of the concepts which can make their life much easier and work seamlessly inside the European Union. So as it was mentioned also by the authors of the report, I'm also very much in favor of the optional modular approach based possibly on enhanced cooperation, have to add several features. But to be more ambitious than the commission proposals, to talk more about taxation issues, which are relevant for these companies, and let's see what can be agreed at the level of the union. But at least it is important that the parliament sends a signal that, you know, we need to be a bit more ambitious in terms of designing a kind of a 28 regime. One aspect which was not mentioned, neither in the debate before or in the commission proposal, is the international aspects.
I really think that if Europe would like to succeed, it is not just about comparing tax regime inside the EU, but also talking about international benchmark because those companies are not leaving from Germany, not leaving Germany towards, I don't know, Malta, but they are leaving to the US. So we need to understand much better what is working internationally. And lastly, I would like to talk a bit about the structure of the report. We are talking about taxing the corporate income based on principles already mentioned before, the BFIT, CCCTB, head office, Deborah. So a lot of issues which can be included there.
On value-added taxation, I agree that it can be much more focused on simplification than targeted harmonization. The major maybe element which is missing in the previous report is a bit more ambition on employee taxation. As I mentioned, in some cases, Social Security contributions are very fragmented. And then we have on transfer pricing, access to capital and tax incentives, and this is it for the report. I'm really happy to discuss this with the fellow shadow reporters, and I'm looking forward to the cooperation.
Thank you.
Kira Marie Peter-Hansen
Thank you very much to the rapporteur, and then I move on to the shadow reporters, starting with Ludwig Niedermeier from EPP.
Luděk Niedermayer
Thank you again, and thanks Ludovic for a very good report. The report was published roughly at the same time when the commission proposal came, so it's hard to divide one from the other. Let me start with emphasizing what is the main purpose. The fact is that while the start ups in the EU work pretty well and they can get the financing when they want to get larger, it's a problem. It's a problem to get the financing because the market is fragmented.
Sometimes it's even difficult the fact that the market for the product is often outside of EU. We will not change it overnight, but we need to do the change to change things. And so the legitimate question is to which extent the commission proposal is delivering. And it seems to me it's not delivering a lot. Here we are in a taxa meeting.
So from the tax point of view, there is more or less nothing because even employee share, if I understood, is the recommendation. So the purpose, the reason is probably that the commission understands that the member states don't want to harmonize. As I said in earlier debate, I can see two reactions or two solutions of this problem. One is to open really fully the option of enhance cooperation. The second is to go for some subset of 28's regime that will include also tax provisions that will be eligible only for a limited number of companies.
In this regime, I would strongly suggest to go for CCCTB with Deborah and other provisions to make it really simple for the firms to operate cross border and create simple and understandable rules, and to do basically obligatory harmonization of employees' shares. At the same time, we need to define the exit from this regime because otherwise, politically, it will not be feasible to go through. So this is my suggestion where to go. And apart from this in a report, I guess we should try to form a strong opinion of the parliament to push commission to come as soon as possible with a clear timetable what will be following this proposal that is not delivering what we need. And we need to, in order to keep our credibility in this area, we should show that stronger steps will follow closely soon.
Thank you.
Speaker 17
Thank you very much. Then I move to the S and D, Sharon Bruno Gonzalez.
Sharon Bruno Gonzalez
Thank you very much, and thank you Ludovic for your work. I think that your ambition is quite welcomed as it contrasts a lot with the, most of the times, the silence that comes from the heads of governments and states when it comes to the harmonization of tax policy in the EU. And I think that, I mean, from the S and D group, we have been completely behind the idea of one Europe, one market. And even though I would not be the first enthusiastic of the '28 regime, I think we need some steps forward. And if this could be a step forward, this is more than welcome because at this point, we just have the absence of the taxation matter when it comes to the political discussion.
And that is quite curious because when we analyze the data, what we see is that more than 2,120,000 SMEs are showing that VAT is one of their main causes of worrying. When we see, for example, the main causes presented already in this committee by the competent authority on fraud. VAT fraud also stands very first. And these are also, I mean, very worrying cross-border barriers when it comes to commerce. And I think that we cannot pretend that this information is not available to us.
And as such, we need to act. And I think that it's also very important that we signal to the council that we cannot just pay lip service regarding the strengthening of our internal market. This is our first and core point, and this is probably the philosophy that we will take into consideration when discussing the technical issues of the report that is coming. I think we need to assess the best options that we have. The S and D group has also been very clear where it stands on tax harmonization.
We do not think that the '28 regime would replace such a tax harmonization, but it could be a step forward in terms of the political direction and political guidance. I think that we also should focus on the design framework that simplifies the cross border operations, that provides certainty regarding tax incentives. And when I say certainty, I think it's also good if we can reach a broader political majority to be sure that what's happening within this legislative term of this parliament does not happen in the future, creating uncertainty and instability for these SMEs, mostly because some of them will rely on this tax framework for their scaling up. And therefore, I think we have a good starting point, and that's all I'm eager to say at this point. Thank you.
Kira Marie Peter-Hansen
Thank you very much. Now I move to the Patriots to Thomas Kubin, who is replacing the shadow.
Tomáš Kubín
Thank you, madam chair. Speak on behalf of our shadow, Mr. Pompey. Firstly, thanks to the reporter for his work. We agree with the starting point of this discussion. Too many European companies, especially start-ups, scale-ups, and innovative SMEs still face unnecessary fragmentation, excessive compliance costs, and too many legal obstacles when they want to grow across the single market.
So simplification is needed. Yet faster registration, digital procedures, and lower administrative burdens can help European businesses scale up in Europe instead of moving elsewhere. But we also believe that this report goes significantly beyond what the commission has recently proposed. The commission proposal is, first and foremost, an optional corporate law framework. It is meant to simplify company formation and operation.
It is not a mandate for building a parallel European tax system by the back door. This report tries to report open unresolved debates on tax base harmonization, cross border loss relief, formulary apportionment, centralized VAT withholding tax exemptions, or even social security linked to the head office jurisdiction if there are more. It therefore moves away from pragmatic competitiveness and leans towards an overly ambitious integration projects. In our view, this is neither realistic nor desirable, because these are political sensitiveness issues that member states have been debating for years without agreement. And it is not desirable because a regime that is supposed to simplify life for businesses should not become a new layer of legal, tax, and social complexity. So our approach is, therefore, simple.
Corporate law first, simplification first, optionality first. We can support measures that reduce costs, speed up procedures, improve legal certainty, and help innovative firms attract talent and investment. But we should avoid turning this report into a vehicle for broad fiscal harmonization. Thank you.
Kira Marie Peter-Hansen
Thank you very much. And then I will move to myself as a green shadow. And thanks, first of all, to the rapporteur for his draft report. I think it's going in a really good direction and shows also a good way forward. From the side of the greens, one main thing that our consideration is that we should build on existing legislation, on existing OECD guidelines and agreements, and this is both from a political and a practical perspective.
From a political perspective, by doing so, we avoid having new discussions on what formula to build on, what should the tax base be, which I don't think we will solve within this, Ini, and from a practical perspective, to avoid potential duplication or parallel tracks of rules. So that is one thing that will be guiding us when we make the amendments. And then we have two areas of caution. One is that I think it will be important to set some safeguards to avoid tax, or to, yes, to avoid tax avoidance. We've had some proposals from the policy departments on how to do this.
And secondly, we would be a little bit concerned about how much we touch upon the employment aspects, because we know when we go into that field, the '28 regime can easily become very controversial. So that's our area of caution. And then to end on a good note, I think also the parliament should send a very strong message still on unanimity, because of course, we can go around and do enhanced cooperation and do opt in and modular approaches. But I think we also have a role to say that without actual legislation, actual harmonization here, we won't really need or we won't fulfill the overall possibilities for the internal market that we have due to unanimity. So that will be some of our focus points.
But as a shadow, I look forward to the work, and I think we will end up with a good parliamentary position. So with this, I move to the left shadow, Yossi Sarandon.
Yossi Sarandon
Thank you, Chair. It's not a big surprise probably that we are not big supporters of the 2018 regime. But in taxation, I want to be very open and practical. So what I heard today, I think we have a common starting point. Actually, we would like to go further on the harmonization of the tax base in the spirit of PFIT.
So there are some things we, I think, we have a majority. And if we are doing the twenty-eighth tax regime, I think the approach to be optional sounds very wise. But there are a lot of problems, of course, in the details like the to give tax credits, but I think we will come onto this further when the negotiations begin. But I really look forward. Thank you.
Kira Marie Peter-Hansen
Thank you very much. That concludes the round of shadows, and I hand it back to the Waffer Thur to conclude the discussion.
Ludovic O'Donnell
Thank you very much. And what I take from this discussion is that the identification of the problem is the same across basically all the shows. The question is how to solve some of the particular problems, how quickly, and what are politically feasible and what aspects are not politically feasible. That will be an important part of probably the amendments. And as I feel from the discussion, for some groups, they need safeguards regarding their political priorities.
So I'm very open to discuss all those issues to have a report which is, you know, consensual among the FISC members and shadow members in this parliament. So, again, thank you very much for your comments and the discussion. Thank you once again for the report. And I'm really happy to work towards a good compromise. Thank you very much.
Kira Marie Peter-Hansen
Thank you very much to the rapporteur. And for information, the deadline for amendments is on Monday at 05:00, and the consideration of amendments will take place at the FISC meeting of June 2 with a vote in the Econ Committee the following day as the timeline stands now. And this concludes the first part of our day, and we will do a short break before moving to the presentation of the study on excise on tobacco products.
Pasquale Tridico
Okay, colleague. Good morning. Thank you for being here again. So let's start this, first presentation on a very topical issue, I would say, very interesting for citizen, for budget, for health. So I will immediately give the floor to the two distinguished speakers, doctor Hannah Ross, who is an expert on that.
She has published more than 60 articles and reports on tobacco taxes. Her focus is on tax reform in the EU, Africa, and Southeast Asia. And then we will have as well Dr. Christian Fidanovsky. As well, he has published several articles and studies in the area of tobacco, particularly focusing on central and East European countries. He's working with the Vienna Institute of International Economic Studies right now.
So, thank you. The floor is yours for about 10, 15 minutes, and then, of course, we will have a debate. Thank you.
Hana Ross
Great. Good, thank you, mister chair. Good morning. We have a very limited time, so I'll go straight to the presentation. We are gonna give you an overview of results of our study where we modeled the impact of the proposed tobacco tax directives on the internal market and also on nine countries within the EU.
Speaker 23
So this. Okay. So in this first slide, what you see on your right left hand side, you see the current minima, which is €90 for thousand cigarettes. That's the parallel bar. And then you see the proposed minimum, which is €215 per 1,000 cigarettes.
Hana Ross
And the bars represent the current tax rates in member states. So what is interesting about these two parallel lines is that the €90 per thousand was adopted in 2011. So if we were to adjust this €90 for inflation, that line would get very close to the proposed line of 02/2015. And if we adjust that even for income growth, these two lines will be very, very close. So meaning that the proposed rates are not something that is extraordinary.
It's, in most cases, just catching up with inflation and income growth. But also we see here the gap between the current rates and the proposed rates. So because the proposed rates will be also adjusted by purchasing power parity, the gaps, in fact, will be lower than we currently see on these graphs because, for example, for Bulgaria and Romania, their minima will be lower than €215 per thousand cigarettes. So this to say that the proposal is a good proposal, but it's not something that is out of scope of what could be done or what should be done given the inflation erosion and of the current rates. On the other graph shows our nine countries that we studied.
First, let me explain why, you know, why we have these 9 countries. These countries were selected based on their geographical diversity and their different socioeconomic backgrounds as well as their state of tobacco control. And on this graph, you can see the smoking prevalence. And what we put in there, the horizontal bar, is the average prevalence in high income countries. And you can see all of these countries that were randomly selected in Europe have prevalence higher than this average rate in high income countries.
In fact, Europe has the highest smoking prevalence in the world. If we were, and this average even includes the countries that are in Europe. Therefore, if we exclude the countries that are in Europe, their smoking prevalence from the average, their average in high-income countries would be even lower. What it means is, we do have a problem in Europe, and the way to solve it is to increase taxes. How did we do that?
We used a tax simulation model that is basically taking tax, it's looking at the impact of a tax increase on prices of cigarette prices. Then it translates this change in prices into a change in consumption. We also look at the impact of the profitability of the industry. We also look at the income impact on fiscal revenue. And then we also are able to calculate the impact on public health.
We use data primarily from national sources to the extent possible. The second best option was, of course, EU-level data. And then we went for the macro level data, we looked into World Bank and IMF, and then some data were from Eurobarometer and Euromonitor. We modeled the commission proposal as it was published in July 2023, which is €215 per thousand sticks. When you can then see what we modeled for the other products, and there was from what the commission proposes, these were the more ambitious proposals.
Nevertheless, you can see that all the other products will, in fact, be taxed less than manufactured cigarettes. So heated tobacco, e-cigarettes, roll your own tobacco, all have, in fact, a tax advantage compared to manufactured cigarettes. Maybe not ideal, depend on if how we want to, you know, how we view these products. But again, it's something that is currently being proposed. And it's in a sense, that's innovation of the current proposal because there is currently no minimum tax imposed on these cigarettes in the EU.
What are these? The proposal is the minimal. So we, in fact, hope that the countries could and will impose rates that are even higher than the proposed minima. We used as a baseline for the model the year 2024, and we predicted what's going to happen in the year 2028 when the new proposal should be put in place. We adjusted all the figures for inflation and purchasing power parity.
Now I will give floor to my colleague, Christian Fidanovsky, who is going to give you an overview of the results.
Christian Fidanovsky
Thank you so much, Hannah, for the excellent introduction. Distinguished members of parliament, distinguished chair, Mr. Tridiclo, it's a pleasure to be speaking to you here today. And now I'm going to zoom in to the nine countries that we modeled for the purposes of this study, to see what the new TTD will look like for them in practice. And I'm going to show you the expected impact according to our model on exercises, prices, consumption, revenue, as well as public health.
So let's start with the excise rates themselves, if I can figure out the technology.
It's a little bit okay. No. It's a bit delayed.
Christian Fidanovsky
Thanks, Hannah. Yeah. So when you look at the excise rates here for our nine countries, we have it divided by product category. So first of all, for cigarettes, for manufactured cigarettes, you see that in all of the countries, in all of them, the excise rates will go up in 2028 with the new TTD. For France, it only goes up a little bit because this is the inflation adjustment, the sort of top-up that Hannah mentioned just now.
For the other ones, the increase is more significant, and you see that especially for countries such as Bulgaria and Poland, it will be felt quite a bit. For roll-your-own tobacco, we see a similar picture. So again, it goes up for all nine countries, but overall, it goes up by a little bit more since the baseline current rates in 2024 for this product category were generally lower in our nine countries. Here, we see a particularly big increase for Poland. But, again, the East European countries typically will see a bigger increase.
For heated tobacco products in the bottom left corner, you also see large increases, I would say even more so given that these products are typically under-taxed at the moment. Here, we see a slightly different regional pattern with countries such as Italy and especially Spain, where current rates on HDPs are very low, sort of joining the East European countries in seeing some of the largest increases for this product category, and Czechia actually stands out quite a bit. For e-liquids, electronic cigarettes, the picture actually reverses a little bit. So here in the baseline, France goes from top performer to bottom performer because as of 2024, France and Slovakia do not have formal minimum excise rates for this product category. So for them, our simulation shows the biggest increase, but, again, quite significant gains are seen across the board for all nine countries except Portugal, which only sees an inflation top up because it already has a rate above the new minimum as of 2024.
So now we see the cumulative effects on the weighted average price. So we were showing this for all four product categories together here, inflation adjusted and in terms of the per pack equivalent. And you can see that across the board, prices are rising. So here, there are no slight increases because when you take all four product categories together, for at least one of them, the countries are seeing big increases. So it's never just an inflation top up.
And maybe the most important thing is that the gap between the countries is lowering, because you see larger increases, of course, for the countries which are currently underperforming for these four products. So in terms of the coherence of the internal market and disincentivizing cross border purchasing, the price effects really show this additional benefit of the new tax directive. Now in terms of the effects on excise revenue, unless I skipped a slide. Did I? Mhmm.
Yeah. So let's look at the effects on consumption first. Here on the left-hand side, we see for each country, we have two bars. The first one in lighter shades shows the situation in 2024, the baseline year, and then in darker shades, the simulated situation in 2028. And, of course, in all nine countries, consumption is declining in some more than in others.
But then I think it's particularly interesting to see on the right-hand side, so the other graph shows the change over time. So in terms of overall consumption, in all nine countries, except France, the overall consumption of tobacco and nicotine products is expected to go down by more than a tenth or more. In Bulgaria, it's actually even by more than a fifth. So quite significant changes as a result of the new TTT. And if you look at it divided by market segments, you see that cigarettes, of course, since they have the largest market share in all these countries, they drive the change the most, with the exception of France, since it's already quite above the minimum rate, as we saw earlier for cigarettes, their e-liquids are driving the decrease in consumption the most.
And now we see the effects on excise revenue. So in all the countries, excise revenues from cigarettes and from nicotine and tobacco products are expected to go up in 2028. You see here that for Bulgaria, for example, since this shows the overall excise revenue in billion euros, it doesn't look like a lot of money. But as a percentage of GDP, it matters, of course, even more for the less wealthy countries. So we estimate that for Bulgaria in 2028, these revenues would actually correspond to 0.34% of the overall GDP of the country.
So it's actually quite a significant increase, and it's in the hundreds of millions for all nine countries and even billion euros more in countries such as Poland and Italy. And finally, I just wanted to also show the effects on public health.
This one. Yeah.
Christian Fidanovsky
Yes. So in terms of the effects on public health, we see here on the left-hand side the smoking and vaping prevalence. So, again, this is overall for all four products modeled in our study. This is one of the advantages of our study, that the countries have quite some variation in this regard, but we see that in all of them, regardless of the baseline prevalence, it is expected to go down. And then on the right hand side, in terms of premature deaths avoided, so the way our model calculates this, it assumes that thirty percent of smokers in the current cohort as of 2024 will die from a smoking related disease prematurely unless, of course, they cut down on consumption or they stop smoking altogether.
So we see here that the new TTD would therefore decrease will avoid premature deaths in Bulgaria, for example, to the extent of 1.2 percent of the adult population. And the increases are quite well, the gains in terms of public health are quite significant for the other eight countries as well. If anybody is interested in terms of absolute numbers, the range is all the way from about 19,000 premature deaths avoided in Slovakia to more than 300,000 in Poland. And the reason why it's the largest in Bulgaria in percentage terms is, of course, because Bulgaria is starting from the lowest excise rates at the moment, and because it has the largest smoking prevalence of these nine countries. So with that, I'll hand it back to Hannah to sort of give us the bigger picture conclusion, to zoom away from these nine countries and see what the TTD can do for the EU as a whole.
Hana Ross
Yes. Thank you, Christian. So you have seen the impact on maybe I'll go quickly here. The impact on public health, the impact on prevalence, it's good, but it's nothing dramatic. Europe will still be a it will be a region that smokes the most.
And that smoking, that prevalence of smoking and vaping is harming the competitiveness of Europe because it's really a big drain on resources of each member state. So it's challenging. Okay. We'll go, okay. Yes, here we are.
Speaker 27
No. One more time. Okay. No. He just doesn't want to stay where I want to stay.
Hana Ross
So TTD is a good proposal. No, it won't stay. Can you, I can try. Okay. Let's see.
Okay. Excuse me. No. TDD is a good proposal. It brings the excise rates in each country closer to each other, meaning it will discourage cross-border shopping.
That's a good thing. Yeah. We will, that's one of the issues that is really hurting current revenues and also con and supports more consumption in Europe. So if we to the extent we can remove that incentive, it's really gonna help both in public health and the revenue. The revision is good, but given it's not gonna make a big dent in the prevalence.
So what we really need is for countries to adopt the minimum and take it further in order to really decrease the consumption of and prevalence of tobacco use in Europe. The tax advantage for new products has been maintained in this proposal. Again, countries can go above that, and some countries already are treating the new products on par with manufactured cigarettes. It is the proposal it's gonna improve the fiscal revenue in each of the countries that we studied, and bring health benefits. And the health benefits are actually much more important than the fiscal benefits because it's the health benefits that's gonna lower the cost of health care and improve the productivity in the EU.
But what is really crucial is that this proposal is adopted quickly because, as you have seen, the last one was in 2011. So Europe is really lagging behind that, you know, that rate that needs to be updated as soon as possible. And what is also important is to have this effective indexation. Currently, the proposal asks for inflation-adjusted indexation. It could even go further and ask for inflation plus income growth, which would be even more important and more powerful.
But that indexation is important, especially now when we look at more inflation expectations for the future. So if we don't do these indexation adjustments, we will have to revise the proposal again in two or three years. So let's just do it once, do it good, and then we are well, you won't have to listen to us again. So thank you so much.
Pasquale Tridico
Thank you very much, Alna, for that. Very interesting, your presentation. Thank you. So I will go immediately now to the floor, starting with Matias Szeke for your question. I don't have a name from ABB, Ludac.
You don't have a.
Luděk Niedermayer
Well, I have nothing to add. I would have just a very general question. If that problem of consumption taxes that are set by nominal amounts and were reduced by the inflation substantially, if it should not be addressed in some systematic way. Otherwise, I have no question about that study.
Should I answer? If you want.
Hana Ross
Yes. And it is addressed by the indexation. So the proposal asked to have these minimum rates increased every three years by the amount of inflation. That will kind of account for the increase in inflation and keep these rates, you know, minimally updated.
Luděk Niedermayer
But I was talking about the general consumption taxes because also the consumption tax on diesel or petrol form substantially due to the inflation spike.
Hana Ross
That's not what we were looking at in these studies. But of course, yes, it should probably also be adjusted. Thank you.
Matthias Eckerssen, please.
Matthias Ecke
Yes. Thank you very much, Chair, and thank you, the distinguished expert, for your very interesting presentation, which is very welcome because I think it really shows that this proposal serves as a basis for achieving a lot of important goals at the same time, which means reducing consumption, improving public health, saving lives. After all, I mean, every one of us who has ever lost a loved one with lung cancer or cardiovascular diseases knows how heartbreaking this is and how many Europeans are affected by it. And it also increases revenues. So I think this is a very important point.
It should not be diluted on by all the lobbying that we receive in the moment. So if I understand it correctly, the revision of the directive also improves the status quo, but it may still represent a relatively limited step, at least in some member states. So for me, this raises a question of ambition. So would you just suggest that a projected reduction in smoking prevalence is sufficient to meet EU's public health objectives? Or otherwise, what would you suggest to improve the proposal?
And let's also talk about internal market coherence, because we have the rate convergence between member states. This is something this proposal brings. And it is clear that with reduced incentive for cross border shopping, we can, like, prevent this cross border shopping that undermines national and European public health objectives. I mean, coming from a border region in Saxony between Germany and Czechia, there's plenty of travel that is directed at tobacco products. And it is seen as something natural, but I think it undermines a lot of public health and also public revenue goals of the European Union.
So but it's not about taxation alone. What other, like, auxiliary or supplementary measures would you suggest that could, like, lower cross border shopping within the single market, but also with countries that are on the border and that have cross border shopping with third countries. Thank you.
Hana Ross
Yeah. Thank you. Very good points. Thank you for, I'm glad that you bring the public health aspect. Of course, these are minima, and we are, you know, we already see that there are four five countries in the member states that are already above those minimas.
So there's nothing that prevents the member states to go further. I think this proposed rate is sort of a little bit of a compromise, especially for Eastern European member states that are, you know, quite low, below the current proposed minimum, but their concern is being addressed by adjusting these rates by purchasing power parity. So it's mostly that finance ministers are a little bit concerned and worried what it will do to the market. They shouldn't be, you know, because we have seen, for example, Hong Kong just increased within two years their tax rate by 70%, and they drove their smoking rate to 8.5%, thanks to the tax increase. I mean, we have seen huge tax increases in other countries and didn't ruin the economy.
But, nevertheless, Europe moved slowly, conservatively, so we are happy about this proposal. Could it go higher? Yes. But it's a step in the right direction. And if we keep adjusting these rates for inflation, we will have a good, solid base from which the countries can go even higher.
So that's that. And internal market and coherence in cross-border shopping, there's this proposal that should help. It will not eliminate it. We have about seven years ago, there was a study that looked at the cross border shopping. It is a border area region.
People will not drive from the middle of Germany to the Czech Republic to buy cheaper cigarettes. So it is about the border regions, and it was affecting probably about 5% of the market in Europe. So it is not something, you know, something to worry about too much, but something to be concerned about, be aware, and study. Some countries now propose to have some kind of minimum that you can bring. There is a minimum bring from outside the EU, but there are some countries thinking about bringing or imposing some new minimum within the EU as well.
It'll be difficult to enforce, but it's at least the countries will have some kind of a way to, you know, if somebody does it as a business, if they, you know, bring whole trucks of these cigarettes, then it should be, it definitely should be something that tax authorities should be worried about.
Christian Fidanovsky
If I may just add a little bit to the first part of the question from Mr. Eke. You asked us what shortcomings we see in the TTD. An important one is also how the alternative products are treated. So on the one hand, it's a big advantage of the new directive that they're finally taken into account. But on the other hand, there are still major preferential rates, tax advantages for all these products.
For example, if you look at it on a per stick basis, the roll your own rate remains a third lower with the new minima, the HTP rate twice as low, and the e-cigarette rate more than three times as low as is the case for combustible cigarettes. We understand from all tax research that tax regimes are fairly inert. Usually, they move slowly, so we are not expecting perfect equalization at this time. But there should definitely be, ideally, more ambition in that regard. And we would also like to draw everybody's attention to the or clauses, which are included in the current proposal.
So what we modeled in the study is actually more ambitious. It's one of the two options for roll-your-own, for example. The proposal also allows for a relative minimum rate, which in terms of the price, would actually result in less ambitious rates. And for heated tobacco products, we believe, according to the literature, since there is less tobacco content in heated tobacco products, three times less than in combustible cigarettes, we believe that there is an inadequate conversion. So from the €108 per 1,000 sticks, the or clause estimates €155 per kilogram rather than €360 per kilogram.
So either this equivalence should be done better in the final version, or the or clause should ideally be removed from a public health perspective. Thank you.
Tomáš Kubín
Thank you for your presentation. I do not wish to address the TTD itself. I will solely concentrate on the study, although I'm the reporter for the draft of the TTD. As you know, Doctor. Ross, it probably comes as no surprise that I cannot agree with some of the conclusions.
And you know well that I will be more than happy that you are right, because if it will be on my decision, then there will be nothing like a study for tobacco and smoking needed, because it will be banned at all. But the situation is elsewhere. So from the perspective of someone who's trying to find a solution to the health, single market, and tax revenue trilemma. And after a long and intensive work, data collection, and model building, I have reached different conclusions in some respects. But we share a common goal, I think.
So let's help each other understand it better. So I have two points and two questions, let's say. First, in this study, you claimed that dual use may be equally, if not more, dangerous than conventional smoking. That's for me a little hard to swallow because other studies suggest that this dual use means cigarettes and some other products like heated tobacco and so on are reducing the levels of smoking, biomarkers, and potential harm and so on. So dual use is an incredibly broad category to focus on.
So why not use why not split the dual use into more subsets, more, let's say, specific subcategories, like separating dual users based on the mix of tobacco products and the frequency of their use. This will be provided data necessary to properly understand the effects of dual use and better informed policymaking. This is just a suggestion. And the second thing, on page 11, I think, is it, yeah, exactly in the key findings. You wrote that the reform represents an important, yet feasible, continuation and harmonization of existing national trajectories rather than an unprecedented fiscal shock.
I did some quick calculations using the numbers provided in the tables where you compare the status quo in 2024. I don't know exactly now with which page it is, with the projected tax rates on the ones the TTT comes in force. And this average increase of rates across the nine member states covering the four main product categories included in the study was more than 90-95%, I think, something like that. Some member states such as Portugal or Slovakia had only moderate increase of less than 50%, but three member states had average increases of more than 100%, with Spain even reaching 169%. So my question is, that's really a question.
How do you assess these market realities? Do they not qualify as an unprecedented fiscal shock already?
Hana Ross
Good. Thank you. Thank you for your remarks, and I'm really very pleased to see your interest in this subject matter. First, you mentioned that it will be, you know, that we cannot ban these products. And in fact, you know, this is something that if economists had a say, the products are so harmful, not only for human beings, but also for the economy, that in fact, we should not have them in the economy.
We're really harmful. We cannot ban them because they have been, you know, we made a historical mistake. We let this market develop, and now the market and the industry is so strong that it's impossible to ban these products. Second best option is to tax it, and that's what we are proposing. Taxing, increasing the price.
As an economist, we regulate consumption by price. We know it works. It works all over the world. It's gonna work in Europe, and has been working in Europe as well. So this is the second-best option.
As opposed to banning, we're gonna tax it. Dual use. The model actually has dual users in it. And the way we do it is because we look at the whole macro market. So anybody who is a dual user is captured both in the market for cigarettes and the market for HTP, for example.
So we do have these people there. We do not, in terms of HTPs, we do look at the whole market. We don't go for how many people are smoking, how many sticks they smoke per day. I think we can do that or how much heated tobacco use per day. We do it for cigarettes.
There, we can estimate that roughly half of the declining consumption comes from quitting, half comes from reducing consumption among the current users. So we have that evidence. For heated tobacco, that evidence is still missing. So we use we when we look at the reduction in consumption, we look at the total market reduction. And that is enough for us to calculate the impact on revenue and public health as well.
Instead of and now to the increase in the tax rates. Do you want to address?
Christian Fidanovsky
Yes. Yes, I can address that. Thank you so much, Mr. Kubin. Yes. I mean, of course, the increases, as we said before, are not insignificant.
But at least according to our calculations, and I think that came through in all of the slides that I showed earlier, there is no doubling in any of the countries that we modeled for any of the products except for maybe some very specific situations. But in the overall graphs, and we can go back to some of them, the bars were relatively similar, after all. So nowhere near doubling for most countries and for most product categories. But just on the broader topic of inflation, because it is a valid concern, of course, in terms of the effects on the overall economy, let's just remember that cigarette sales amount to about 2% of the EU basket of goods right now, on average. So there are already some, in my view, fairly credible estimates from some of our colleagues, which show that on average, you can actually expect a 0.3 percentage point contribution to overall headline inflation in the first year after the adoption of the TTD.
So it's really imperceptible. And for some countries such as Luxembourg, it will be slightly above one percentage point, but we know the situation in Luxembourg. They're starting from a very low baseline excise rate. But for the other ones, and you know, the way cigarettes work and tobacco in general just as a product, it has no multiplier value for the overall economy. So it's not like energy, for example, where you use energy as an input in producing other goods, and, therefore, the overall economy is affected much more strongly.
So we believe that inflation is something to keep in mind when designing the final version of the proposal, but it's certainly not a disqualifying, in our view, argument against the TTD revision.
Hana Ross
And here you see the increased tax rates here, and you see there's nothing, you know, the majority of the market is still cigarettes. Right? And then the increases there are not really except for Romania, Poland, and Bulgaria. Those will have the highest increases. But even there, like, we look specifically in the case of Romania, there, they can get to the new rate by two or three years' increases in the amount of about 5 to 7%, something they have been doing all along already.
So nothing really dramatic. They won't disturb anything in the market there, and for them to reach the new minimum. Thank you.
Christian Fidanovsky
And if I may just comment a little bit more on the dual use aspect, very briefly. We know already from the relatively abundant research on this aspect that about one third to half of all people who smoke alternative products, so heated tobacco products or electronic cigarettes, continue to smoke traditional cigarettes as well. So, of course, we're not medical doctors. We can't comment on the health implications of these products in detail. The WHO stance currently is that the evidence is inconclusive.
These products are still new, so they should be treated equally. But even if we weren't to treat them equally, just looking at them as economists, we see that dual use is just so prevalent that the kind of overall argument that maybe these products can serve as a quitting device or as a harm reduction tool clearly falls through according to the data even if we don't assume that the health harms are multiplying from using these product categories simultaneously.
Speaker 33
Thank you. Speaking French. First, I'd like to thank you for the presentation, which is very useful, very precise, and which, in a way, does allay some concerns that one might have. My group thinks that we need to raise the minimum excise rates, which have largely lost their effect today, while making sure, as you say, that there's an application which is more fair, equitable, which takes into account the purchasing power in different member states. Similarly, as you said, the extension of the scope of the directive to new products, new damaging harmful projects, is no longer an option.
It's a necessity. That's clearly a public health matter and concern in the argument, according to which increasing excise would lead to illicit markets, isn't can really no longer be used to slow down European action on this matter. In France, we've got two particular problems, difficulty, which you mentioned, with cross-border flows within the EU. You said that, of course, applies to border regions, and France has many borders. So we're especially concerned with that.
But also, of course, as with everybody, we have a difficulty with counterfeit goods coming from outside the EU. So, in that context, two questions. What are the priorities for action, in your opinion, for the EU to combat illicit flows of tobacco internationally? Secondly, once we've decided to increase tax, in your opinion, do we need to also have additional measures to support that, to guarantee effectiveness over the long term? Control measures, verification, good cooperation, traceability measures, or other measures.
Speaker 23
Thank you. Very useful comments. Cross-border shopping in France, yes. I know it's the issue, but hopefully, if we get this through, it's gonna get a little bit better. Illicit trade, counterfeit.
Hana Ross
So the thing is, from a few countries where we have independent estimate of illicit trade, we do not see that being a problem as much as cross border shopping. The fact is that the European Union, you know, in the EU, we haven't really invested in estimating illicit trade. The only annual illicit trade estimates that we currently have are fund financed and commissioned by the tobacco industry. And we know that their methodology is not transparent, and we know that they have an interest in exaggerating illicit trade, especially in countries that have good tobacco tax policies. So this is an appeal a little bit for you to maybe consider European mind illicit rate study.
The last one was done in 2010, and it was not very expensive. So it's possible to do it. I was actually part of a study for Olaf that described several methods, how to do it and how to estimate illicit trade in Europe. I believe that report is at know, you have access to this report, and so it's possible to do it in many different ways, and can be done. And it will be really nice to have good precise independent measures and numbers to do that.
What else can we do? How can we address illicit rate? Illicit rate is mostly a matter of tax administration. We have a track and trace system in Europe, but it's not being used very well for controlling illicit rate. From what I understand, it generates a lot of data, but the data is not being processed.
It's not being used for risk assessment. So it's another thing we can look into, how to better use the data, maybe even with the help of AI, because it's a huge amount of data that this system generates, but it's just not being cleaned and processed. So it's another way to sort of look at what's happening. So we do want to have tighter control on the market. That's for sure.
When it comes to counterfeits, we of course, again, that's a matter of enforcement. We do see every now and then some illegal factories dismantled, and they're being, you know, it's being reported. But one thing that I speculate could help Europe right now is actually the war in the Middle East, because a lot of these cigarettes are coming from the Middle East. So the disruption of supply chains, I think we should have a little bit of a break here in Europe with illegal or illicit cigarettes for a little while, but that doesn't mean that it's not gonna come back. So that's something to watch for.
We are trying to, you know, ideally, we would again have some data on this to see how this disruption of supply from Middle East is impacting illicit trade. We, for example, we know that during COVID time, the illicit rate in many countries dropped substantially. Why? Because of less movement, border closures, and stuff like that. So that shows us it's possible to control the market.
It's just a matter of, you know, coming up with solutions of good tools to do that. Yeah. Thank you.
Christian Fidanovsky
If I mister chair, can I, yeah? Thank you. So if I may just make a very small comment on the purchasing power parity adjustment, because it's closely related to the cross-border purchasing discussion. Currently, the way it's set up in the commission's proposal, a third of the excise rate, the new minimum excise rate for cigarettes, is calculated with the PPP adjustment. So the first two thirds are in general, and then the third one is PPP-adjusted.
This means I mean, there's it's difficult to, you know, justify this from a public health perspective. But, of course, if it makes the overall process more palatable for certain countries, maybe it's advisable in that case. But the consequence of this is that, especially in some of the less wealthy East European and central and East European member states, the low rate is really diluted. So, of course, if we're worried about cross border purchasing, we don't want to have these countries with a significantly lower rate, and increasing the PPP adjustment even further, potentially for the final version of the proposal, would make this would exacerbate this problem. So that's something that we're very mindful of, even though in the specific case of France, since for the wealthy countries, the PPP adjustment drives the rate upwards.
So for Luxembourg, it would result in a larger rate and might make the cross border purchasing incentive lower. But overall, especially with the East European countries in mind, we would be very cautious against further increases of the PPP adjustment.
Pasquale Tridico
Thank you. Thank you very much. And now we go for, catch the ice. Mister Drosse?
Siegbert Frank Droese
Yeah. Thank you, chair. I will speak German. Thank you very much for the study. I'm from Saxony as well.
So I like Mister Eka when it comes to cross-border shopping and cigarettes being brought over the border. So I don't think that that's as long as it's not illegal trade, it's not such a big issue at all. It's not such a big issue. So that's not the issue for me, but thank you very much for the study. I'm happy that you're really saying openly what's at stake.
We can't prohibit smoking, so we should tax it. And it shows really what's wrong with the debate, because my country, Germany, of course, regularly increases taxes and secretly hopes, I imagine. Well, they hope they don't smokers don't give up smoking actually because of the revenues. And if you look at industry studies, in part, they come to other results, conclusions. So we talk a lot globally about European sovereignty and independence.
We should be careful that when it comes to raising taxation, we don't go too far. If people continue to smoke, and the tobacco industry is small, still exists, but let's not become dependent on third countries. The question I have, you say you can't prohibit it, so we need to tax it. So who pays you for the studies, and what objective do you have with this study? Do you want to generate greater tax revenues, a greater tax base? Or do you want to promote public health, improve public health?
Because you can't do both at the same time. And second question, in your study, were you asked to look at what level of tax really brings about a change in consumer behavior in smokers? I'd be interested in your response to that. Thank you.
Speaker 23
Great. Yeah. Thank you for the question. In terms of who pays for the study, in this case, it was you, the parliament. We thank you very much for your support of the study.
Hana Ross
In terms of contradiction between the public health and revenue, yeah, there is in fact, if we have, from now on, no smoking, it would be better for all budgets. In fact, every smoker is a net loss for all countries, for the economies of all countries. So, by taxing, we are reducing that cost. But also, so far, because we have so many smokers in Europe, we still generate revenue. Will it get to the point that the revenue is no longer generated?
We hope so, because that's gonna be good for everybody. It's gonna be good for the competitiveness of the EU. It's gonna be good for the economy. It's gonna be good for the public health of people. Yeah.
The revenue is gonna be replaced by something else. As I mentioned already, in Hong Kong, 8.5 people smoke. Where do I get the revenue? From something else. Ireland has the highest tax in Europe.
There every time they increase tax, and the same is in The UK, by the way. Every time they increase tax, they keep no longer increase the revenue because the tax base is lower, but they keep it more or less stable. But the excise revenue in Ireland is increasing because it's replaced by environmental taxes, taxes from, yeah, from petrols, cars, other kind of type of taxes. So it is being so their excise revenue, it will need a little bit of planning. But in Europe, we are way far from that point.
We have way too many smokers. Our tax base, especially German too, is a very high tax base. It will take us years before we get to the point that we will have to worry about less and less of revenue. We are still in a very safe space here. Thank you.
Christian Fidanovsky
You want some, just briefly, to maybe add how specifically we modeled this in the study. So this kind of story of a win-win in terms of both fiscal gains but also public health benefits. The study uses an elasticity that is very common in tobacco tax literature. So it's an elasticity of -0.54. And the idea there, to put it in very simple terms, is that when you raise, when prices go up by 10%, you can expect consumption to go down by 5.4%.
But it doesn't go down by 10%. It goes down by less than that. So, therefore, you have some public health benefits, decreased consumption. But since prices are higher, when you multiply that by the reduced number of shares of smokers, you still get fiscal benefits as well. And just very briefly, in terms of the cross-border purchasing, it's not a problem legally in the sense that you are not evading taxes.
But, of course, if you purchase them in a jurisdiction where taxes are lower, you're hurting your country at the expense at the benefit of other countries. And there is, of course, an aggregate public health harm for the EU as a whole.
Pasquale Tridico
Thank you very much. I have to clarify. Thank you, as well for the benefit of Mister Dros and for everybody that we work as a committee on survey studies that we do. We ask independent university qualified expert because, actually, this is our duty to work on empirical evidences, actually. Thank you.
Yeah. Madam Pocorna, please, the floor is yours.
Speaker 35
Thank you. I would like to thank you for allowing us to have this discussion here today. A couple of brief questions on the methodology and the conclusions of this study. The study is based on a simulation of impacts on member states. It generalizes conclusions across the EU.
So how is external validation assured when it comes to the specificity of the internal market, especially when it comes to the heterogeneity of tax regimes and consumer behavior? That's the first question. It doesn't take into consideration potential changes when it comes to cross-border purchasing and shopping. The impacts might be minimized and underestimated. It also minimizes the impact of illicit trade.
It focuses on the differences in prices. So how can you say that revenues are realistic when the model emits behavioral reactions and changes in consumers within the single market?
Speaker 23
I could answer in Czech, but I would probably get too dwindled, and so I'll answer in English. But thank you very much for your question. TEDSIM, external validation. So there are other studies that look at the whole EU. You know?
Hana Ross
We were specifically asked to model more deeply these nine countries. When we and those countries are varied enough. They go from east to west at different rates. And so we do have countries that have higher rates. We have countries that have lower rates.
The other studies that have been done and published come to similar conclusion. There is no, we don't even if we have done study for all 27 member states, we don't expect that it will be much different than that. The other studies have also been published already. They don't go as deep as we are because we mostly just look at cigarettes, because it's just the largest portion of the market, and have a more or less similar conclusion. Smuggling, cross-border shopping, behavioral change.
We see that the smuggling is not so much a function of excise rates. So here, this is what we see from empirical studies. When the tax is increased, the legal cigarettes prices go up, illegal cigarettes prices go up as well, very much in the same speed. So the response to consumers is pretty much what we expect. So when we the behavioral change is embedded in this price elasticity estimate, and the price elasticity estimate has been calculated on the market that already had some illegal products.
So it takes that into account. That's why, in fact, we have it by minus 0.54. In fact, if we take the illicit market out of that equation, we would probably come to elasticity that is a little bit lower than that. But we saw this electricity takes into account the behavioral change with some consumers switching potentially to illegal products. But as I said, the market reaction is such that illegal products also increase in price.
Why shouldn't they? Right? You know, if you are selling to a market, you're basically going for something if you're a smuggler, you go for something that is cheaper, but not too much cheaper because, you know, you have your profit margin, and you know if you can increase it, you will increase it. So that's so in that sense, the behavior aspect is taken into account. Anything else I missed here?
Maybe just.
Christian Fidanovsky
Briefly, to add that it's a very well-studied topic, right, in tobacco control, but especially the effects of tobacco taxes. So if we take the WHO as a benchmark, it has this empower tobacco control framework, which has six, I think, different sets of measures. And of those six different sets of measures, taxes and price-related interventions are known very clearly in the research to matter the most. They are the most effective tool in terms of decreasing consumption. There is always a risk with illicit rate, no matter what you are modeling.
In economics, we're not completely discounting that. But as my colleague Hannah mentioned, the research is also quite clear on this in the sense that taxes are not what drives illicit trade to the same extent as tax administration and strong governance capabilities. Okay.
Pasquale Tridico
Thank you. I have to close because we are already late, and we have another report, and then we have the coordinator meeting. So we cannot accumulate so much delay. I'm sorry, Thomas, not to come back to you, mister Jose as well, Mr. Kubin.
But you asked all of you already the first question. Thank you. Thank you very much. I will not add anything because I was so satisfied with your wonderful presentation. Thank you very much.
So now, we move to we just have one minute break just to change the speaker for the next presentation. Okay, colleague. Thank you very much. We need to start. Please take your place.
Thank you. Thank you very much. Sorry. Okay. I will give immediately the floor to Matthias Eck from SED for his presentation on the EIN report and a coherent tax framework for the EU financial sector.
Thomas, the floor is yours for a few minutes, four minutes.
Matthias Ecke
Thank you, chair. And dear colleagues, thank you for joining this debate on the consideration of draft amendments on the initiative report. Well, first of all, let me thank all of you for a very substantial engagement on this report. We received more than 200 amendments, which shows that this is a subject of great interest. But what is striking is not only the number, but also the direction of the amendments, because they sometimes go in different directions even within the same political groups.
We have different perspectives on that. And so it shows that our discussions on this are still evolving, and we really need to go dig deeper into the technicalities, also the challenges of that difficult subject. If we step back from the individual amendment, one thing becomes clear, and that is we agree on the core objective. We all want to stimulate economic activity in the financial sector by reducing fragmentation and making the financial sector in the EU work better. This is our main purpose of this report, of this initiative report, and this is also my guiding principle for the negotiations.
A central element of this fragmentation is the VAT framework for financial services. What was once a pragmatic solution now has, over time, contributed to distortions, hidden costs, and an uneven playing field across the single market. We know that we have 92 different taxes to compensate for the lack of value-added taxation of financial services. So this is outright crazy and is not something that is supportive of our single market. So the shadow discussion the other day has confirmed that there are, unsurprisingly, still different views on how to address that.
This is a complex topic, and I would be careful not to overstate these differences, because in many cases, they seem to reflect different approaches to a shared objective rather than fundamentally opposing directions. A large number of amendments have already been taken on board in the first compromise, in particular those focusing on reducing administrative burdens, improving legal certainty, and facilitating cross-border investment. This is something that we all share. We have also incorporated amendments underlining that taxation remains a member state competence. This is very important for a lot of members, and it's very clear.
On NVAT, we have also incorporated key points on the role of wet grouping, introducing complexity, and reducing the uneven implementation across member states and the need for greater convergence here. For me, this is the key point. This report is not about presenting a fully developed, comprehensive reform proposal. This is just not something in the remit of this initiative report, but recognizing that the current framework that we have with our organization in Europe in the financial market is insufficient, is not stimulating growth, not stimulating economic activity. It has a lot of downsides.
It has a lot of fragmentation. And this initiative report should contribute to calling the commission to present a comprehensive solution for that. Thank you.
Pasquale Tridico
Thank you, Matthias. Sorry. I was told I was naming you Thomas, actually, just because I.
Not the first one.
Pasquale Tridico
Sorry about that. I remind someone else. Thank you. So we move to the rapporteur, to the shadow rapporteur now. Regina is replaced by Ludac.
So, please, Ludac,
Luděk Niedermayer
The floor is yours. So you can call me Regina. So I will just read her statement because I'm not involved in the fair file. Chair colleagues, firstly, I apologize for being unable to be present with you today. Let me begin by thanking the reporter for the work that has gone into this report.
It's a complex file and ANSIC. We all recognize that it touches on some quite sensitive areas for member states as well as for the financial sector itself. From outside, in the EPP, we approach this discussion in the constructive spirit. We all share the same broad objective, which is to strengthen the financial system of Europe and ensure that support the growth, investments, and jobs across the union. We may differ slightly in how to get there.
For us, the starting point is quite simple. Europe today is not lacking in taxation in the financial sector. What we are lacking is investment. We have very significant level of saving across the union, but too many of the capital is not being channeled into European businesses or into the real economy. That is the challenge we should be focusing on.
When it comes to fragmentation, I think it's important that we are precise. Of course, there are real barriers that need to be addressed, particularly where they create unnecessary cost for and or legal uncertainty for cross-border activities. Those are areas where we can and should make progress together. At the same time, not every difference between national systems is a problem. It may cause those differences reflecting legitimate policies and choices.
They can also continue to a degree of healthy competition, which can support innovation and efficiency within the single market. So I would be cautious about framing all diversity as something negative that needs to be eliminated. On the question of VAT, I would like to argue a careful approach. The current exemption for financial services is not perfect, but it exists for a particular practical reason. It helps to avoid significant technical complexity and provides a degree of legal certainty for businesses and consumers.
EV moved too quickly towards fundamental change via risk, creating unintended consequences, including higher cost and additional administrative burden. I think there is more to be gained from improving how the existing system operates, for example, through better use of VAT grouping, rather than reopening the whole framework. More broadly, I would suggest that we keep our focus on how tax policy can support investment. That means encouraging long term saving, facilitating cross-border capital flows, ensuring that our framework remains competitive at the global level. If we place too much emphasis on increasing the tax burdens, there is a real risk that we end up in discouraging the very investments we are trying to attract.
In this context, I would like to caution about returning to the discussion on financial transaction taxes. We have been in practice that such a measure can reduce liquidity and push activity outside of union. At the time when we are trying to deepen our capital market, that is not a direction I think we should be persuading. The same applies to broader ideas that new EU-level taxes on the financial sector should be applied. There are issues that touch very differently on the national competencies, and they need to be handled with care and respect for subsidiarity.
Looking ahead, we need a framework that is clear, predictable, and supportive for the growth. If we can achieve that, we will be in a much stronger position to mobilize private capital and to deliver on our wider economic priorities. So from our perspective, we are very open to working with the colleagues across the groups to find a balanced outcome. If we can keep the focus on investment, competitiveness, and practical improvement of the existing framework, I'm confident we can reach a good compromise. Thank you.
Thank you.
Tomáš Kubín
Yes. Exactly. For all of you who came a little bit later, there was some misunderstanding in the names. There is a Thomas now under Exactly. Instead of Matt.
Yes. So, dear reporter, dear colleagues, with 20,224 amendments tabled, it is clear that taxation of the financial sector is highly important and often contentious issues topic. The reporter faces a challenging task of putting together a coherent text despite the often contradictory ideas. Unfortunately, our amendments are not among the ones chosen by the reporter, but we will still cooperate and strive to arrive at the text that is acceptable to all of us. Overall, we will come to several new elements into compromise.
In particular, we appreciate amendments from the EPP and renew that strike a better balance between member states, tax, sovereignty, and EU rules, which carefully calibrate any potential tax reforms. We fully agreed that getting this balance wrong would harm not only the sector and public revenues, but also customers. Yeah. Exactly. Consumers.
Customers as well. On the financial transaction tax FTT, the original wording in the draft report was problematic for us. We believe an FTT, even on European level, risks driving financial institutions out of Europe due to their high mobility. The revised wording now moves clearly in the right direction, and we are open to possible further changes to the wording. As discussed in yesterday's shadows meeting, in some cases, the current compromise text might give the impression that the financial sector is undertaxed or not contributing enough to state revenue.
We can support amendments from EPP and renew clarifying this, and ensuring that the language remains rather positive than negative. Once again, as yesterday, I would like to thank the reporter and the negotiating team for the good spirit and collaboration, and I look forward to reaching a compromise with you soon. Thank you, chair.
Robert Zile
Yeah. Thank you, chair, and thank you, Matthias, for your work done even if we are many issues are, as you remember, from day before yesterday, instead of meeting, we are not agree with this general position. So we are skeptical on VAT introduction either visor without zero-rating option. Why we think it's the best global competition and this could be to create finally a new capital market union. This would be more equal in that situation, with opportunities to finance businesses in the like in The US.
So, and taking into account that into US market, they're coming a lot of new money every year. According to our latest report, it was 300,000,000,000 going out of Europe mainly to US markets. So this is because of the capital market. So in that's why also, even a zero rate VAT, which would fix hidden costs, that's possible. But let's be honest, we have absolutely no guarantees that making these services, the VAT deductible bank services, will result in cheaper prices.
And, also, we have to understand that it creates on member states budget issues, fiscal impact definitely negative if people use this zero VAT tax. And, also, consul, as we know, always refuse this issue to do it like we are proposing. I'm not saying that parliament have to follow consul line, but we have to understand who do we are going to succeed on this issue or not. On other issues like financial transaction tax, it seems for us that it is not flying project. So we know that there's no enhanced cooperation or success on this issue, and we don't think that we have to try to do it.
Where we agree with this progress is with the faster directive, with streamlining fees, holding tax procedures. And this is, I think, a very supportive and good direction for the report which we ECRs will support. Thank you.
Thank you. And now for.
Thank.
Speaker 33
You, chair. I'd like to thank the rapporteur for his work on this subject, where it's not always easy to bring points of view together. We had an early discussion that allowed us to list what our different disagreements were and to try and find consensus. I share the summary of the report. The financial sector in the European Union has a heavy tax burden and one that's fragmented, that's characterized by diverging national legislation that's imposed on it.
There are two priorities in this work, I think. First is strengthening the capacity of the financial system to support European growth, and the second is to avoid additional tax burden, which I think would be counterproductive. We have a new number of points that require deeper discussion. In particular, the VAT regime applied to the financial sector and its possible developments, and I think this is the area where we see our disagreements most clearly. I'd like to recall that the structure of a number of financial services makes it difficult to assign a value.
And in this context, the partial application of the VAT regime might correct some distortions, but it also risks creating new ones. So I think this is something to be addressed with caution. Any future work on these rules should be proceeded as by a solid impact assessment and guided by clear objectives, simplification, legal certainty, and strengthening of the mechanisms where I think there's a great deal of consensus on this. The issue of the financial transaction tax at European level was also addressed, and I would advocate an approach based on specifics. Looking at all of the different options for taxation in the financial sector, rather than focusing just on a European financial transaction tax, which has already failed a number of times.
And as I said, this tax was implemented in an isolated fashion without international coordination, which could impede European competitiveness in its financial markets. In conclusion, we should bear in mind that the financial sector is a cornerstone of the European economy, that it already plays a role in taxation no less no more than any other sector, and any means, any measure that has direct impact on it or that has an impact on the real economy and on our competitiveness would be significant. And that's why I call for harmonization of any possible tax on exceptional profits, which might reduce our ability to mobilize savings and support investment. I'm very pleased to have discussions that would allow us to achieve a consensus that's satisfying to all. Thank you.
Pasquale Tridico
Thank you, Jill. I have to inform you now that the interpreter is leaving. So, you see, I don't think you want to speak in Finnish anyway, but just for the colleagues. So I don't have Rasmussen from the Greens. So, Juss, it's your floor.
It's your turn.
Yossi Sarandon
Okay. Thank you. Can I speak Swedish? No. It's an official language.
Yossi Sarandon
problem. Thank you. And thank you, Chair, and thank you for the rapporteur. He has done a very good, big work. So a lot of amendments to everybody knows that it's not an easy topic, because we have such different approaches towards it.
I think the main thing is that financial sector, it's not just any sector, in markets. It has special benefits and rights that are not given to anyone else. And in times of crisis, many times caused by the financial sector, it always gets saved. So it's a special sector, but it doesn't mean that it should not pay its fair share of taxes. I think it's the opposite.
And we are very open to finding common suggestions and ways forward. And because the financial sector, it's in nature, it's cross border, so it would be natural to find cross border solutions even though taxation is a member state responsibility. And because we know that we need two ways to finance, we need own resources to finance MMF. So the FTT, it would be a very elegant solution. It's already quite successfully in use in some member states, even though it would be working better if it would be cross-border.
So it would be an excellent partial solution for the MMF. And, I know that there is a lot of resistance on FTT, but there is resistance against all the proposals in MMF. So, in the end, we need to find some common answers, and that's why we would like to keep the options open in the next two years of negotiations of the IMF. And with this file, I think the negotiations have been in a good spirit, and then we want to continue in a very constructive manner. And even though we will not build the world in these negotiations to be ready, I think we could find common answers.
Thank you.
Pasquale Tridico
Thank you. So now, I mean, Matthias, just a few minutes if you want to conclude, very short, because we are late.
Matthias Ecke
Yes. Thank you very much. I mean it's we are now going into technicals and trying to have the next meeting on the next set of meeting in Strasbourg, so we need to continue. But to be honest, we have to find some substance in this report. So this report does not aim at providing a comprehensive solution, but we need to really work based on the evidence on the problem.
And we need to call the problem as it is. It is fragmentation. It is the VAT exemption that causes fragmentation, and we need a remedy for that. And we need a remedy, with a more coherent system, and we need a remedy that does not lower revenues of our member states in taxation from the financial. And this is what my work is centered around. And I'm optimistic that we can move forward in that direction.
But let's be clear, if we cannot agree on even that very basic analysis, what would be the core of the initiative report? So let's work on it. I think we'll work on the unclear substantive issues where we have different opinions on facts, and we work on wording that everyone is satisfied with. But my aim is really to send a strong signal from this parliament on the financial sector.
Pasquale Tridico
Thank you, Matthias. Now this session is concluded, so I will ask only the coordinators to remain, and of course, the policy and the rest to leave. Thank you very much.
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