Subcommittee on Tax Matters Ordinary meeting
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Rita de la Feria
VAT is paid by customers, by the consumer, but it's collected by the supplier. This that is known as third party reporting has been a huge success. If you want a tax, a consumption tax that is collected by the person who is paying, then you have the retail sales tax in the United States where the levels of fraud are enormous, much bigger than the VAT. And there is a very good reason why the VAT has spread to 170 countries and the retail sales tax is only in the United States.
have tried to substitute the retail tax with a VAT. And this is because you basically minimize the risk. There is in principle no self-interest when the payment is done by the customer, there is no self-interest by the remitter to not deliver the money to the government. That is the logic of the VAT. And it functions for the most of it.
I know we all feel very anxious about VAT fraud, but in the big picture compared for example with what the retail tax in the US does, our levels of fraud are relatively small. Now, this is not to say we should ignore it, but it is to say that if we implement the reverse charge ad extremis, what will happen is that we will transform the VAT into a retail sales tax. And the big advantage of the VAT, which is the third-party reporting, will disappear because the person paying is the person remitting the tax. So, I understand why reverse charge has developed as an ad hoc measure to a desperate situation, but it's not a solution that we can rely upon. So we have to look at other solutions that do not destroy the VAT, but rather improve the VAT as it stands.
And that starts with in essence trying to understand VAT fraud. And the first thing I wanted to show you is some graphs with good news. So, this is from a paper I wrote with Canadian colleagues at the University of Montreal, political scientists, and it basically looks to people's perceptions of fraud. Now, I'm old enough to remember when people used to say, oh you know, he doesn't pay any taxes, oh good for him. We all know it's true, I certainly as a Southern European know it's true.
But this has changed. So we made this paper, our survey basically was looking at people's perceptions of fraud amongst small businesses. So is it acceptable for a restaurant, for a car dealership, for a construction small firm to engage in tax fraud? Now, we actually changed names to detect what is known as immigration bias, etc. None of that actually panned out.
What emerged from the survey, which was done in two countries, one in Europe in France and one the other was the US, is that people don't care about immigration on this issue because fraud has become completely unacceptable. So when we asked people, do you think the, you know, the owner of the restaurant doesn't declare all his sales, is this acceptable? Over 90% of people now say that this is unacceptable. Now, this has been a quiet revolution. If you go back 20 years ago, papers on this area, research on this area indicated that people tolerated fraud, primarily when it was done by small businesses because, you know, it was always a friend of a friend of a friend.
This is no longer the case. Now, in the paper we don't know why this is not the case. We can't identify the reasons because the results for us were so unexpected that we actually didn't ask why do you think it's wrong, which, you know, with hindsight was a mistake. But we suspect, we put forward some proposals and some suppositions that it has to do with the effects of the financial crisis post-2010. But what is for sure is that the shift has happened.
So now people are not acceptive of fraud. Now people think that fraud is unacceptable. What is also interesting is that people think that even though it's unacceptable, that it is prevalent. So the second question asked, but do you think people do it? And on that, around 50% said that fraud was happening.
So they think it's unacceptable, but they think it's happening. Now in another paper, we look at why is this happening. Now you may think that this is, of course people don't want to pay taxes, right? That's what everybody's thinking. But think about it.
VAT is not supposed to be a tax on businesses. It's supposed to be a tax on consumers. The remitters of the tax are the businesses. So why is it that businesses are not remitting the tax? Because we know that even though organized fraud gets the headlines, it's the missing trader fraud that gets the headlines, the majority of fraud in all member states across the whole Europe, outside the European Union, is on small business.
Small and medium-sized enterprises are the biggest culprits of VAT fraud in macro terms. Each operation is for a small amount, of course, but in macro terms they account for the biggest part. So why are they not remitting the tax? It's not them paying, it's their customers. VAT is supposed to be a neutral tax, right?
So in another paper, we actually, one of my former PhD students and I look at this. And it turns out something quite surprising. Small businesses don't think they are collecting the tax. They think they are paying VAT. So they see it as, they see it as a tax on them.
This is why they are not paying. And this for us came as a complete surprise. So what that means in essence is that small businesses are not remitting VAT because their owners have the same attitude to VAT as they have to personal income taxes. So the second step is why do people not want to pay taxes? So we use the literature on personal income taxes and detect why small businesses don't want to pay taxes.
And we identify two types of measures, two types of reasons. One are reasons that are exogenous to the tax system, so reasons that are outside the tax system, and the other are reasons that are endogenous to the tax system. So they are reasons that are to do with the functioning of the tax system. Reasons that are to do with outside the tax system, the biggest reason is the standard of public services. So if a standard of public services is bad or perceived, this is actually quite important, perceived as bad.
It doesn't need to be bad, it just needs to be worse than it was two years ago, okay? So if it's perceived to be bad, people don't want to pay taxes. If they perceive corruption is high, people don't want to pay taxes. These are things that us, or myself as a tax policy expert, cannot control. I cannot control whether people, whether the public services, the expenditure side is functioning, whether there is corruption.
But then there's also reasons that are inside the tax system, and those we can control. Reasons that are inside the tax system, one of the biggest ones is sense of fairness. And we go back to the issue, do you think that fraud is acceptable? No. Do you think it's happening?
Yes. One of the biggest reasons why people don't want to pay taxes is because they think others are not paying taxes. Now here is the conundrum. We talk all the time about tax avoidance on multinationals. It had helped us in raising public awareness.
It has been very handy for us. But there has been a collateral damage.
And the collateral damage is that people have lost faith in the system. The perceptions of fraud are much higher than the actual fraud. Now, I'm not saying not reporting about these issues, it's not important. Of course it is. But we have to be mindful that being overly negative about these things decreases people's willingness to pay taxes.
We have to tell people that they have to believe, they can believe in the system. That the system functions and it will function for them. Not just for, you know, the rich people or the big multinationals, that it will function for them. Another thing that I wanted to to mention that is also important on the exogenous motivations is the fairness of enforcement. Perceptions that tax administrations work well, are friendly, it's easy to get information, it's easy to comply, etc. increase your willingness to pay taxes.
So there are things that we can resolve. I'll finish now.
Rita de la Feria
Yeah, yeah. My point, I'll go back to just two minutes, one minute, one. To say many good things have happened as regards tax fraud and the combat of tax fraud. And I want to compliment particularly the European Commission on the efforts as regards the use of technology to combat tax fraud. This has been a fantastic development.
Administrative cooperation has increased massively. This is also a great development. But we need to accept that until we have a better legal design on VAT, and that means one that is more harmonized, not less harmonized, and one that has less exceptions, meaning less reduced rates, less exemptions, etc. and it's more uniform, until we get there, we will always have some level of tax fraud. Thank you very much.
Pasquale Tridico
Thank you. Thank you very much Rita for offering this perspective, very interesting. Now we go to Madame Christine Weinzierl for seven minutes, please. Thank you.
Christine Weinzierl
So, thank you and unlike Rita, it's my first time here. It's very interesting, thank you for having me. One of the reasons for the VAT gap, you mentioned that, is the VAT fraud and here especially also the missing trader intra-community fraud. The reverse charge mechanism was found as a useful tool as an interim solution, of course, to tackle the VAT fraud in some fraudulent sectors back in 2010, currently extended until the end of 2026, so until the end of this calendar year. The reverse charge mechanism options provided in Article 199a of the directive are used by most member states, by some very extensively to combat VAT fraud.
That's what also Rita said before, it's not harmonized, it's in the different member states it is used differently, but in some of the member states it's really used extensively. The leading sectors being the construction sector, that's where also my home country Austria started, the mobile devices and the greenhouse gases emission sector. Based on the feedback by the member states and also some studies undertaken on behalf of the European Commission, it appears that the reverse charge mechanism has had a positive impact on combating VAT fraud.
But nevertheless, the reverse charge mechanism has been an exception to the normal rule. The normal rule being the supplier charges VAT and pays it over to the authorities and the customer deducts the input VAT. Exemptions should be limited and avoided. But other exceptions have also been used for simplification reasons, in particular in cross-border trade within the single market, basically to avoid registration of the supplier in the destination member state. This is most prominently used for B2B intra-community supplies of services.
So the reverse charge mechanism under Article 194 of the directive will even be expanded under the ViDA package. For the supply of goods, the definitive regime, which proposed that the supplier has to charge VAT of the destination member state to follow the normal rules, was ultimately abandoned. The implementation and operation of parallel processes is something which affects almost all businesses. Especially for small and medium-sized businesses and small and medium-sized practitioners, these parallel systems lead to additional costs and a lot of administrative burden. This holds also true for the reverse charge mechanism, which implementation for specific goods and services is very often at extremely short notice in order to effectively tackle VAT fraud, combined with challenging terms like thresholds, unclear scope, classification of goods and services.
And it's also undisputed that the reverse charge mechanism bears some risks. The fraudulent activities could move on to sectors which are not covered by reverse charge system or to member states which do not operate a reverse charge system for these goods. But the most significant concern, and you also mentioned that, is the increased risk of fraud or VAT loss. So in general also VAT loss like from insolvencies of businesses at the retail stage of the supply chain. As the VAT on purchases will not be deducted from the VAT on the sales, the VAT loss is incurred on the amount of sales rather than on the value added.
What do the digital reporting requirements to be implemented under the ViDA package do and can they replace the reverse charge mechanism in the fight against VAT fraud? Under the ViDA package, the VAT reporting obligation shall be modernized by introduction of a digital reporting requirement for cross-border transactions in 2028, so in four years' time. DRR is a transaction-by-transaction reporting system in an electronic format based on electronic invoicing, which will provide higher quality and faster, almost real-time information on a granular level to the tax authorities.
tax authorities. This shall allow the tax authorities to closer and faster monitor transactions and the VAT reporting. And to earlier intervene when they detect errors and anomalies. So without any doubt, the TRR will help the tax authorities to fight against VAT fraud. An increasing number of member states have already or have plans to implement a national TRR.
And there appears to be early indications of their positive impact, also when seeing that the reduction of the VAT gap in these member states. But the obligatory TRR for cross-border transactions will be effective in 2030 only, so in four years' time as I already said. So and the details and the formats and standards are still not yet finally known. The TRR for national transactions will be optional anyway, and harmonization will be reached if at all by 2035. So some member states may might want to wait with the implementation of a national TRR until further details are known, also to avoid adaptations to the systems for their businesses.
The national TRR is basically based on the normal VAT rules. So the supplier charges VAT, reports and pays it to the tax authorities and the customer deducts the input VAT and claims it back from the authorities. So the fraud reducing factor of the TRR is the near real-time reporting of the transactions and the possibility of the tax authorities to detect the anomalies very early. On the other hand, when applying the reverse charge mechanism, the VAT liability is shifted from the supplier to the customer and the supplier is preventing from receiving any VAT which he might not transfer to the tax authorities. But the reverse charge mechanism leaves the issue of the VAT loss at the end of the supply chain, which is I admit a significant one.
There are a number of options to address this. One option might be to prolongate the reverse charge mechanism for the fraudulent sectors until the TRR is up and running and most of the member states have operated a national TRR. Another option would be to to keep the reverse charge mechanism for fraudulent sectors even under the TRR, as the reverse charge mechanism per se prevents from claiming VAT by the customer which was not paid over to the authorities by the supplier. The TRR with the near real-time nature would support the detection of anomalies along the supply chain, spotting the major risk of the reverse charge mechanism, namely the last mile problem. Thank you very much.
Pasquale Tridico
Thank you very much. Thank you very much, Christine, for that. And now we go to the last talk but not least of the day, Marta Vall Jimenez, please.
Marta Vall-Jiménez
Good afternoon everyone. Thank you very much for the for the invitation. It's my first public hearing as well, and it's really an honor to be here and to share with you this time our recent experience in Spain in the fight against the VAT fraud, specifically in the fuel sector. First of all, I must say that I'm so I mean, I so fully agreed with all the statements made by my fellow speakers earlier that I feel it's a good time because I think that the experience in Spain I'm going to share with you is a kind of example of most of the things that you have already said as so both Rita and Christine. So the first of all is so next slide please.
Okay, thank you. What Rita said, reverse charge mechanism is a proven, it's been a proven tool in some sectors, it is, but it has not been, it's not the final solution to fight VAT fraud. And why, and I must also repeat Rita's statement this way, as I was saying there, how far can we extend the reverse charge along a distribution chain before it stops working? And how could we do it without risking the same, I mean, the very multi-stage nature of VAT, that it is collecting the tax in all the stages of the chain? And the second question I have, and I think it's the relevant questions we learned from the lessons from our experience in the recent fight against VAT fraud in the fuel sector in Spain is, when do we need something more?
And I'm going to be, I mean, just being advanced in my presentation, something more like Christine said, the digital report requirements, for example, and we'll see now with this example of the fight against VAT fraud in the fuel sector in Spain. As I said, the VAT reverse charge mechanism, it worked in Spain in certain sectors and there are own reports from the tax, Spanish tax authorities stated so. There are sectors such as scrap supplies, precious metals and trading emissions, emissions trading, sorry, and certain real estate transactions and also in the supplies of laptops, mobile phones, tablets, etc. In these certain sectors it has worked. It has worked because there were isolated missing traders in the chain of the distribution.
You could always find a reliable taxpayer in which you could apply this reverse charge mechanism and then from that link in the chain you could just make the VAT work properly in a multi-stage transaction as Rita said. But what happened? What happened in 2021? In 2021 in Spain it was detected a very huge fraud in the fuel sector. It was, it was a concerning problem both for the tax authority and both for the oil businesses because we were very worried about all the, both tax authorities they were worried about the huge revenues losses and businesses we were worried about the huge distortions in the competition market.
And the problem was when the tax authorities were investigating this kind of fraud, the problem was that they detected that there was not an isolated missing trader as it could happen in an intra-community supply. It was more than that. First of all, I would like to explain why there was this fraud. It was not intra-community supplies, they were domestic supplies in the fuel sector, but it was, they were based in the purchases performed inside the excise warehouses. In the excise warehouses you have excise products such as petrol and diesel, they are under a excise regime suspension and you can buy as long as they are stocks in this excise warehouses, you can buy the fuels with no VAT.
So once the fuels are released, are released from the excise warehouses, they can be sold with a very low price as long as this missing trader doesn't intend to pay the VAT is collecting from the purchaser. So that was the problem, but the problem that was detected, this was not that they were isolated missing traders that could disappear. There were, they identified criminal networks and a very sophisticated fraud structure that control almost the entire chain of distribution of the fuels. That was the problem. And then the tax administration, the Spanish tax administration consider applying the reverse charge mechanism.
Okay, but where could you find the reliable operator in that chain if even they identified and detected that there were tax warehouses holders involved in this criminal network? So it was a very desperate problem, as you say, in a very desperate circumstances, but the final approach of the Spanish administration was not going with the, not implementing the reverse charge mechanism because there was no way, they couldn't identify in this criminal networks a healthy link over which to implement this mechanism. So what was the final approach of the Spanish administration? Instead of spreading and extending the mechanism of the reverse charge mechanism of VAT, they decided to implement additional measures to fight this VAT fraud in the fuel sectors. The key elements of this policy against the VAT fraud in the fuel sector were, first of all, obligation to provide a guarantee covering that the supplier who is purchasing excise goods inside of a excise warehouse with no VAT will pay the VAT that will collect in the following, in the subsequent supplies of fuels.
That was one of the first, the key elements of these measures against VAT fraud in the fuel sectors. The second one was requiring a joint and several liability of the excise tax warehouse holder just in case the supplier of good who release goods from that tax warehouse won't comply with this guarantee. And the last but not least, and here I remit to what Christine said as well, is that all operators in the fuel sector since 2025 are obliged to settle, first of all, to settle VAT monthly, not on a quarterly basis that it was very easy to disappear in that way, and also to submit the information both the input and output invoices immediately through a system we have in Spain that is, it's called SII, it's immediate information supply of the invoices. And the information is supplied to the tax authorities in a deadline of four days since the output invoice is issued or since the input invoice is registered in your accountancy.
So just for your information, the first two elements, they were, they are just in force since February of this year, but the last element, I mean this last requirement of monthly VAT settlements and this information through the SII VAT system is being in force since January 2025 and we have already, the tax authorities has already published data about the success of having near real time of this information of this very long criminal networks and just it's not a way to prevent fraud, but it's a way to detect it in a very quicker way. And well, that's all I want to share with you about our experience, recent experience in Spain fighting against VAT fraud. I think the last slide, please next slide, okay. I think here it's, I'm repeating most of the statements we have already had in this table. The reverse charge works, but not always, not in all sectors and not in all the circumstances and you are risking undermining the real nature of the multi-stage VAT in the distribution chain.
It has its limit, above all in the cases as I just shared with you in when you have a fraud structure that controls almost all the distribution chain and surely additional measures are needed, both if you want to implement the reverse charge mechanism as if you don't want, they are necessary and we are in that way with the DRR requirements in the ViDA package this time. Thank you very much.
Pasquale Tridico
Thank you very much. Thank you, Marta. And now we go to the member. We start with Mr. Dorfmann, EPP, please the floor is yours up to two minutes.
Herbert Dorfmann
Grazie chair. Very interesting. Thank you very much for the presentations. Professor de la Feria, I found interesting your philosophically in the good sense of the word thoughts about tax fraud. I agree with you that people maybe accept less tax fraud than in the past, but maybe if the others do it.
So maybe they speak, they don't see the own tax fraud, they do not accept the tax fraud of the others, but they do it by themselves, I have a bit this impression. But coming to the question and this is also going to Madame Weinzierl, I mean we are going to introduce the ViDA package now you mentioned. How would you see something a conditionality, so the more we introduce the ViDA package the more we go out from the reverse charge mechanism? So how could we link the two things in order to create a good transition from one system to another? And we have also a study here, an EPRS study which probably you know that estimates the cost of red tape, bureaucracy and connected with the reverse charge mechanism of 5.1 billion euros.
So do you have any data how much this affects small and medium-sized enterprises, how much this affects big enterprises, is there any data available on how this let's say these costs are shared in the system? You mentioned also the article 199a is an option for the member states. So how much do you see this a burden for the common market in Europe?
So we have fundamental different VAT systems in different member states on the same product. How much does this affect the common market in the European Union? And in the end you mentioned two options. I didn't understand which one do you prefer or do you see them on the same level? Maybe you could say also your own personal opinion on these two options.
And to the last speaker in Repsol, I understood that you said it works, the system works. So going out from this system, what would you prefer now? I understand that these short-term extensions of 199a which we had till now is not really helpful because it creates discontinuity. Would you prefer a long-term prorogation of 199a or do you see a situation where introducing the ViDA system you could fundamentally achieve the same results as you have now in your sector, which is the petrol sector and in this sector you have all the success, the results you have till now with the reverse charge mechanism? Thank you very much.
Rita de la Feria
So on the three different issues that I want to mention. The ViDA package, I think this is a great development. So I mentioned earlier that the technologies will help us a lot. And as we progress to real-time reporting, that will limit the scope for, for example, missing traders because the temporal gap that missing traders used to use to make VAT disappear is going to not be evident anymore. So I think that the ViDA package will help.
There might be transitions issues on the practical side. I'll leave to my fellow panelists to discuss those, but from my perspective it's positive. Compliance costs from reverse charge, and I will connect that to the third point about the divergence of rates. Exceptions are terrible for businesses. It makes it much harder to trade.
I don't have numbers, but it makes it much harder to trade. And I know the Eurostat asks frequently about obstacles to intra-EU trade and VAT always makes the top ten reasons why you don't engage in intra-EU trade, particularly for SMEs. So I think that this is what the last point that I wanted to make on that slide that was a bit rushed, but we need to have more harmonization, not less. And the situation that we have in terms of legal diversions of rates is just making problems worse, including the application of the reverse charge. Thank you.
Christine Weinzierl
So basically I can only agree to what Rita said. We need harmonization also on your third question, the burden for the common market. If you have options, if you have derogations, it makes it harder for the businesses to be competitive with other businesses which are not in the European market. So I also admit that harmonization is crucial for the European Union. On reverse charge and TRR on the interaction, yes, technology will help a lot.
It is only the starting point. And I think seeing the developments of the last few years, I think we can really hope that the technology and digitalization will help a lot in combatting VAT fraud in the future. So now we have a almost near real-time reporting. And I think the near-time or the real-time will be feasible very soon. And this will help combat the VAT fraud.
I also do not have any figures on what the burden for small and medium-sized businesses is, but usually it is for the smaller businesses, they have small volumes and they have the same burden as the bigger businesses have to bear. So it hits them a lot harder than big businesses, which have the systems in place, which can easier adopt to new developments. And finally, on the solutions, on the options, I mentioned the one being the TRRA, so wait or have the reverse charge in place until the TRRA is up and running. And the second option, keeping the reverse charge and using the TRRA to focus on the supply chain and to have the possibility to detect anomalies earlier. I think for the time being, the second solution will be the solution that would work.
And then we will focus on how the national TRRAs will be work. We talked about the developments of the technology, further digitalization. So I guess this will help us then also to reduce the reverse charge on the fraudulent sectors.
Marta Vall-Jiménez
Well, talking about the questions about, yes, the reverse charge, it work, but not in all the sectors. And as I said, finally, it will be the digital report requirements, the, I think, in my personal opinion, the most useful tool to combat VAT fraud, together with the reverse charge mechanism or with no reverse charge mechanism. The problem I see is just the transitional period, meanwhile not all the tax administrations in the European Union are just working at the same pace in these requirements of digital reporting for just tracing all the operations, both domestic, well, we know that with the VAT ViDA package, this obligation in the intra-community supplies won't be in force, if I'm not wrong, in the middle of 2030. So in my opinion, the problem will be what to do during this transitional period where if we extend the reverse charge mechanism, for sure it will be necessarily accompanied by additional measures of requirements of reporting to the tax authorities. That's my opinion.
Francisco Assis
Thank you very much. I will speak in my language, Portuguese. Eu vou ler um texto da autoria do meu colega, do nosso colega Bruno Gonçalves, que não faz parte desta subcomissão.
Ele não pôde hoje estar aqui presente e eu vou ler um texto da sua autoria. Caro presidente, caros colegas. De acordo com um relatório recente da Comissão Europeia, estamos a perder 128 mil milhões de euros devido a incumprimento com o pagamento de IVA. Trata-se de uma quantia substancial que tanto priva o Estado de recursos como transfere a carga fiscal para os cidadãos cumpridores. É, portanto, o nosso dever encontrar medidas que corrijam as lacunas prevalecentes e que viabilizem estes esquemas fraudulentos, sem esquecer a importância de simplificar o quadro regulatório onde tal se revele possível.
Ora, a informação que recebemos aponta para a eficácia do mecanismo de reverse charge, chamado de inversão de sujeito no combate à fraude. No entanto, esta ferramenta também expõe excessivamente a cadeia do IVA à última transação, ou seja, a venda ao consumidor B2C. Dessa forma, gostaria de colocar algumas questões específicas aos nossos oradores que podem orientar o trabalho neste relatório. Primeiro, se compararmos proporcionalmente o IVA perdido nos setores em que o mecanismo de inversão se aplica com o daqueles em que não pode ser utilizado, onde encontramos uma maior prevalência de fraude e evasão fiscal? Segunda questão: nos setores em que esta medida é possível, o que podem os Estados-Membros implementar para evitar um aumento da fraude na última etapa da cadeia, ou seja, nas transações diretas ao consumidor?
Terceiro, por último, qual é a melhor solução estrutural, não ad hoc, e que podemos associar a uma possível extensão do mecanismo de reverse charge à implementação de tal política pública? Muito obrigado pela vossa atenção e pelo vosso contributo.
Rita de la Feria
Peço perdão, deputado, mas vou falar em inglês para que todos percebam. So I agree with the statement, primarily the issue of that was my first point on the exposure of the last stage of the production chain. So transforming, progressively transforming the VAT into a retail sales tax. That is my biggest concern as well. I will say something on the prevalence of fraud.
I don't know the numbers by sectors. And it is true that in the sectors where reverse charge has been applied, it has been effective. But I will say this. I think that the biggest misconception that we have when we discuss these issues is to think about fraud mostly as an organized type fraud in VAT, whilst the large majority of fraud in VAT is from small businesses. Now, I do understand why organized fraud is more appealing.
It's catchier, bigger numbers, you know, it has other effects that small businesses fraud does not have, for example, the link to organized crime activities such as narcotrafficking and human trafficking. So I understand why most of the attention has been on organized fraud, but the attention has to be also because those 128 billions that deputado Gonçalves was talking about are mostly to do with small businesses, small and medium-sized enterprises. And we have to accept that and have to accept, and I know it's not an easy message in terms of voting because of what the Americans call the white van man, but it's not an easy message, but it's the truth and it creates massive distortions to competition.
So if one restaurant in one street is not paying taxes, the other restaurants will be in a competitive disadvantage to that restaurant. And is A, not fair, and B, it will encourage the other restaurants not to pay tax either. So it is a self-perpetuated problem. Finally, just say on the structural solution, I couldn't agree more. This is what I am trying to appeal for.
This is not that we have to go beyond ad hoc measures, not just in VAT unfortunately, but across the tax systems, European tax systems. And in terms of structural changes, we need to actually look at how our VAT is working. We made a decision some a couple of years ago, a few years ago, about disharmonization of VAT rates, for example, which was, I understand, convenient politically for for some member states, but it has massive costs to the functioning of the of the internal market. So the structural solution is a better, more harmonized and single functioning VAT as much as possible, where tax administrations are coordinated to limit the costs of compliance for businesses and where someone in Portugal knows what the rate applicable in Germany or in the Czech Republic or in Estonia will be. Thank you.
Christine Weinzierl
Yes. So I don't have numbers on on the volume of the of the fraud either. I think what you also said is, I mean, the organized fraud is certainly bigger numbers and and therefore it's significant. And I think this is also the reason why there's so much focus in it. But of course the fraud at the retail stage is big, even bigger, but the numbers are smaller, but nevertheless it's a big issue.
And many countries have implemented cash registers to get at least a tool to improve the situation. And I think in the member states who operate a cash register, it works quite well. And you can also see it on the VAT gap that the VAT gap is is reduced. But of course also the VAT registers have to be audited and there has to be a focus on this one. So this is one option what we could do to improve the fraud on the retail stage.
What can we do in order to improve it on the fraudulent sectors? I think the reverse charge is an option and I think at the moment is is one of the the options which shows us that there is an impact. So there is improvement, but we also see of course the concerns that it's moved other member states to to other sectors. So this is also a critical issue. But I think I can also just confirm what Rita said.
We need a better and more harmonized VAT system. So we really have to work hard on that. And I guess and I'm sure the digitalization and the technology we get at hand at the moment will help us with it.
Marta Vall-Jiménez
Yes, for what what Rita was saying, it's true that I may have focused on the big criminal network, that that was our experience in Spain, but it have to be taken in account that these big criminal networks in the end of the chains were spelling very small retail stations because they could not afford, I mean, not even pay prices that were not the one, the low prices from a criminal network maybe in a very small area, an isolated area in the country.
So it's true that the key point we have to consider when designing additional measures to fight VAT fraud is, as Rita said, thinking of these small and medium companies and trying to get a balance between the burdensome of the measures and the proportionality and not punishing the honest business for the sins of the fraudsters. So, and this is quite difficult. I agree, it's a very difficult point, but it has to be, it have to be in mind whatever measure you want to design to fight against VAT fraud, apart from the harmonization, as both Rita and Christine said, that it's, they are crucial just to enforce the fight against VAT fraud and to let people think, as Rita said, that we are paying taxes for something else and not, I mean, it's not being good to not to pay taxes. So I think this is the message, but it's difficult to transfer this message if there is not a proportionality with the formal requirements for the business, honest businesses. I agree.
Thank you.
Pierre Pompili
Alors, c'est en français. Bien, je remercie donc les experts pour votre présence et je voudrais soulever deux points. Concernant le premier, l'étude montre que le reverse charge peut réduire fortement la fraude dans les secteurs couverts, mais qu'il peut aussi déplacer le risque vers les autres secteurs, les autres produits ou vers d'autres États membres. Donc après 2026, quel devrait être le critère décisif d'évaluation, donc la baisse de la fraude dans le secteur couvert ou la baisse nette du risque dans l'ensemble du système TVA ? Ensuite, le second point que je voudrais soulever.
ViDA et la facturation électronique vont donc rendre plus facile la visibilité transactionnelle, mais leur mise en œuvre sera progressive. Aussi, je voudrais savoir à partir de quel moment il sera possible de considérer que ces outils numériques sont suffisamment opérationnels pour remplacer ou réduire au moins le recours au reverse charge dans les secteurs à haut risque. C'est tout, je vous remercie.
Marta Vall-Jiménez
Okay, thank you. Yes, well, about the first question, it's difficult for me from a practical business approach to answer which should be the criteria just to evaluate the implementation of the reverse charge mechanism, but about the second point, I could offer you a very good example of what happened in Spain.
As I told you, since January 2025, all the operators, big, medium, and small companies operating in the fuel sector in Spain, they were obliged to report the input and output invoices in a deadline of four days to the tax authorities. And there are several press notes of the tax authorities, one of them in the end of December of 2025, only 12, not even 12 months later that this measure of digital report requirement was in force in the domestic transactions in the fuel sector in Spain. And in this press release, they said that they finally they could have detected and caught a criminal network they were investigating since 2024, I think. There were like, well, I don't remember, millions of VAT defrauded, but the question was that they were investigating it and it was so difficult to get into a network of 38 companies all together involved in the same fraud. And until this report requirement was enforced in 2025, it was not possible to trace all the invoices.
So I think it's going to be a very successful tool as soon as it is implemented in all the countries. The problem is again that the need of harmonization just to be all together, all the member states together in this fight against VAT fraud. But it's been a very useful tool in only one year, one year and a half with evidence of that.
Christine Weinzierl
Yes, on your question whether from 2026 onwards, it's the option to reduce the fraud in order to cover more sectors or all the fraudulent sectors, or whether it's more that we have to work on our system as a whole. I mean, just to focus on the fraudulent sectors is a quick reaction thing. So you can introduce the reverse charge mechanism and then you can see the results quite soon because the fraudsters leave the sector very often and the honest businesses can do their business as usual. So, but of course there is the risk that they move on to other sectors, other goods, or to other member states. So the point is really we have to work on the VAT system as a whole in order to improve the situation.
On your second question on the invoicing, when the invoicing and also the DRR system will be set up in a way that the reverse charge system could then be abolished. The point is, of course, as I said, there is another four years until the cross-border DRR will be in place.
So this will take some time until it even will be implemented in all the member states. And on the national ViDA, this is an option. So not all the member states have plans to do so, but I think or I would expect that more and more member states, seeing the results and also the positive impact on combating VAT fraud in other territories, will follow and implement the national ViDA. So it will take some time, but I'm quite confident that digitalization and the technology available will help us in tackling the VAT fraud, but it will take some time. And the one point is that it will only be introduced in four years' time.
Rita de la Feria
So just a few comments to add to what my fellow panelists have already said. So on the criteria in terms of effectiveness for reverse charge, I think that this is actually quite an important issue, not just for reverse charge, but in terms of effectiveness of anti-fraud measures. And I think the criteria cannot be just revenue. It cannot be just revenue. The effects on competitiveness of businesses, the proportionality that my colleague Marta mentioned earlier, has to be an important consideration.
And maintaining the levels of harmonization and maintaining the unity of the single market has to be a consideration. So I think that the effectiveness has to be a package of considerations, not just one. And my feeling at this moment in time is that when member states, of course, at the request of their own tax administrations, pressure for reverse charge, the main consideration, probably the sole consideration, is the effectiveness in terms of revenue. And this cannot be the case because we have to think about the consequences in terms of the functioning of the economy as a whole. On the second issue, I perhaps will tell a story on the effectiveness of digital tools.
A lot of member states already have these digital tools. So ViDA is a change, but there are several member states that have been doing this at internal level, using technologies at internal level to combat tax fraud. One of those countries is my own country, Portugal, that implemented these digital technologies during the Troika bailout. And I can tell you, because I was working with the Portuguese government as an advisor at that moment in time, that it was massively effective. But it was from one moment to the next.
So you introduce those digital technologies and the reporting with the cash registers, real-time technology, and in the space literally of a couple of months, revenues in the sectors affected, including the entertainment sector, restaurants, bars, etc., just skyrocketed. This during a contracting economy, when the country couldn't consume. So the effects are very quick and are very effective. So digital tools, I think, will be the future. This is why I complimented the approval of the digital package.
I think this will be transformative, and it will be even better if we can do that together with further harmonization of the legal framework. Thank you.
Ludovit ODOR
Thank you very much and thank you for the interesting discussion. I have one comment and two questions. The comment is actually that it is not so clear-cut that there is this clear advantage of the VAT, that there is no self-interest. In the retail sector, in many times there is a clear self-interest because, you know, giving no invoice and paying in cash is actually a benefit for the company of a revenue for them. And also in terms of the corporate income tax, that if they do not have to fill it electronically actually and their revenues are officially lower, then they will pay lower corporate income tax at the end.
So there is some motivation to collude together with the consumer to have a transaction without any VAT. That was the comment. And the two questions are, the first question is that digitalization is just part of the answer for the retail sector and many countries tried also some behavioral approaches how to tackle this. Do you have a kind of an advice what can be done in along those lines? And the second question is that you mentioned more harmonization in order to combat VAT fraud.
Do you mean, what is the bigger problem for Europe, the fragmentation in terms of the tax rates and exemptions or fragmentation in terms of tax administration, compliance and other things? So just in order to understand better where the weak spot is in the VAT system of Europe. Thank you.
Christine Weinzierl
Yes. So on your question on the behavioral changes, I think there is in some member states done a lot. I also hear that some member states consider to have lotteries, so where when you receive an invoice and you can demonstrate that you have paid VAT on it, that you are then in a pool and then you have the chance to win something. So this is also something to attract the honesty of consumers. I think on a behavioral change, as Rita said, it's always that people think there is corruption and others are also not honest, that that makes them feel that they have to do or they are not blamed for doing the same.
But also I think if the tax rates are sometimes high or perceived to be high for the persons, they think they have a right to not pay VAT or income tax. So this is also something that working on that people think they pay a fair share and the tax rates are not perceived too high could help people tend to be honest on their purchases. On the harmonization, yes, fragmentation on rates and exemption is hard for the businesses and I think it also leads to a sort of compliance gap because businesses don't know the situations in other countries.
So it is important for the business also to reduce their cost on compliance to have a harmonization in this area. But if the rates are really or the fragmentation in the rates and exemption is helping or is has an impact on fraud, I don't think that this is the case. It's just a burden for the businesses and it's necessary to harmonize the VAT law in the member states.
Rita de la Feria
So first, I would like to make a comment. I'm so pleased that Mr. Llodra mentioned the spillover into corporate income taxes of VAT fraud. So I always tell this to my students. When, you know, the code that, you know, it's a universal code. So I have students from all over the world, from Africa to Asia, on my master's program and everyone understands the social code for "would you like an invoice?".
Literally everyone, from Kenya to Thailand. It means do you want to pay VAT or don't you want to pay VAT? And I always tell my students they say that as if they are doing you a favor. In reality, it means that they are not paying income tax, whether it's personal or corporate income tax. So I'm glad you made that link and it is true that there is that link.
But what we saw in our study that I wanted to emphasize is that the VAT is seen as separate from it, meaning the business owners actually think they own that tax, which came to us as a big surprise. So when they pay the VAT, they feel it's actually eating into their profits, that it's an extra tax they have to pay, which this is not what we say in VAT theory. So economic theory tells you VAT is a neutral tax. It turns out it's not because of the psychology. And that leads me to the second point.
It is true that we have been using behavioral psychology and social psychology to combat VAT fraud and the studies on this have increased massively over the years. Now these studies tend to focus on personal income tax rather than VAT, but some measures would be effective for VAT as well. And this goes back to the point that I was mentioning. In order for us to understand how to manipulate the psychology, we need to understand why people are not paying. So if we understand why they are not paying, then we can try to manipulate them into paying.
So for example, we know that as I mentioned earlier, that tax morale is the willingness to pay taxes is affected by others. So for example, some tax administrations, including in the UK, have started sending letters to small businesses saying, you know, 80% or 90% of businesses, has to be a big percentage because if small it backfires, right? But 90% of businesses have already paid their tax. So to show that basically it's not if you are not paying, you're the one who is going against this social convention, so that others are paying. So the other thing that we know is how complex the tax is.
And this is actually related to your third question. So we found in our study a very high correlation between perceptions of complexity and unwilling to pay taxes.
So and this goes to the two sides that you mentioned. So the exceptions in the base, so reduced rates, exemptions, but any other exceptional system like reverse charge, right? So any exceptional system complicates compliance. And so exceptions, but also tax administrations' demands from them. So if you have a tax return that has 200 boxes, it is going to be very burdensome for the small and medium-sized business to do it.
As Christine mentioned earlier and Marta, these costs are regressive. So the costs are higher for small businesses. So if it is going to be a lot of hassle, you just don't bother doing. So we have to make it simple for businesses to pay taxes because otherwise they'll just go pff. So one very interesting experiment done here in Belgium with personal income taxes.
You know that people that have small kids tend to be to default on the payment and delivery of tax returns on time. So it turns out from a study done here with taxpayers here that this is to do with the fact that they don't have time. So if you have if you have two jobs, if you have small kids, you're too busy, you postpone because it's hard. Oh, it consumes an entire day or it consumes several nights of the week, you postpone it, you postpone it, and then basically the deadline is gone. And then as soon as the tax administration sends a letter saying, you know, just to remind you that everyone else has paid and you haven't, immediately people go and and pay because it becomes a priority in their head.
So this is the type of phenomenas we have to be aware. We have been too reliant on we have been too driven by revenue and not thinking enough about the taxpayer. So we have to be more driven from the taxpayer than just by tax administrations. We have to put the two together. And if if we do that, we will find a more profitable for all sides VAT system.
Thank you.
Jussi Saramo
Thank you, Mr. Chair, and thank you all for your very interesting speeches. In Finland, we have the saying that everybody loves taxes because we get great happiest welfare state in the world, but actually it's not that much anymore. I guess that individualism is growing. But we also had some tax fraud, especially have had and still have, especially in the construction business, and reverse VAT has been actually a big success on this. But today we heard that in terms of quantity, VAT fraud is not the biggest problem, maybe, and most of it happens in small scale.
But we have heard before in some hearings that the traditional organized crime is using it was said today also that they are using the money they are getting from here, they are using the same money for very traditional crime, the most terrible things we see in Europe, human trafficking, drugs, everything. So just like it was said that in fair competition, which was an important point in terms of crime, we cannot measure this only in money. So my question is that do we have and should we have different ways to to work and attack the small operators and the organized crime on the other hand? Thank you.
Marta Vall-Jiménez
Yes, just coming back to the example of Spain, this fraud I was telling you about the excise products, it had happened for over all the years, I mean, even since forever. But the problem, as you said, is that when there are criminal networks that came into, it's they use it as an entrance to the to to achieve more and more revenues. But not only what happened in Spain, it was not only they don't only get profits from the VAT fraud. They use that network also to not to comply with the regulatory requirements such as biofuels blending that were compulsory in the fuel sector. So they they got more and more savings from that.
So it was not a a small distributor that just purchased a just a small shipment from the tax warehouse and just make some money with that and and just pass the the border to the other country. No, it was this VAT fraud that has always existed, it was an entrance to more fraud. They also I think at that time they got profit also of the importing fuels from forbidden countries, from forbidden origin. So it was just the perfect storm just for them to create more and more networks and and to create more shell companies and just to just that way the the tax administration couldn't trace them, couldn't control them anymore. So that's why at that moment the reverse charge doesn't work didn't work anymore.
It as you said in Spain there was also some it worked for the construction sector and it was quite successful, but at that time with this entrance to this fraud, general fraud in all kind of in all aspects of regulatory and tax requirements, it was impossible to to follow them and to control them until these measures and well, they they have come quite a little late after five years, but it was very difficult. It was even very difficult to try to design measures to tackle the problem. So, yeah. So I don't know if it's I think that for small and medium companies reverse charge can still work, but not for a big criminal network. Yeah.
Christine Weinzierl
Yeah, of course, the in order to tackle the fraud with the small businesses, with the consumers and to tackle fraud connected to crime, we need different ways to do that and I am sure there are different ways. I mean, when we talk about crime, we go we have to go beyond VAT measures. So the VAT and the reverse charge mechanism is of course not the only measure which is done. There's also anti-money laundering and so on. So there is a there are a lot of measures which tackle the the fraud related to to crime.
With regard to small fraud with with the retailers, I think something which we have already discussed is to change the behavior, to make them on the one hand the consumers, but also the retailers are more compliant to VAT, but also combined with measures like cash registers, so just to implement also digitalization to to to tackle the VAT fraud associated to the small fraud, yeah.
Rita de la Feria
Thank you. So in my classes I actually do what is called the typology of fraud and basically separate into these big two groups. One is the evasion and the other is the organized fraud. And everything is different about them. One is a big quantity of transactions but a small amount of money per transaction.
The other one is a small number of transactions but big amounts. One is the actors are your neighbors, the other the actors are organized crime groups. One tends to be domestic, although it is growing on the internet, the other is done primarily across borders. So everything is different between these two types of things. And one thing that is clear is on the small businesses, often the behavioral attitudes will push them, we do in the behavioral science word for this is nudge them into compliance.
Obviously to organized crime groups there's no nudging, right? So as you mentioned, the links between organized fraud and VAT fraud and organized other organized criminal activity is well known. OLAF has done significant reports on this issue, human trafficking, narcotrafficking and more recently in one of the reports OLAF made the connection between terrorist cells in Europe and VAT fraud funding. So these people cannot be nudged into compliance, right? This is a business format.
It is also known that on borders of some member states what they do is they test the routes for tax fraud, not just VAT but also excise, and then if the route, the territorial route works, then they use it for other things like human trafficking and narcotrafficking. So it is a platform for more serious crime. So with this type of criminal activity, beyond the issues of reverse charge or whatever, I think the cooperation between investigative policing agencies is priceless. We are doing better than we used to do on this, but I remember, so my husband is a professor of criminology and one day he had the head of the policing investigative policing in his classes just to give a guest lecture and he said, if only the tax administration talked to us. So we need more cooperation between criminal agencies and policing.
On the small taxpayers we have to do another type of activities, behavioral, digital technologies, etc. in order to dissuade them. But I think this distinction that you just made is absolutely fundamental. We need to understand the phenomenon, that includes why people don't pay, what type of people don't pay, what actors are involved. We haven't done any of this on a systematic basis. We just approve measures to increase the revenue in like almost blindly in the expectation that it will be effective.
And we need to take a more systematic approach to these issues.
Thank you.
Rita de la Feria
Also, the Finnish are the happiest and the happiest to pay taxes in the whole of the European Union. I don't have the exact number, but it is, I saw it the other day on a conference. Unbelievable. So you're doing something right.
Siegbert Frank Droese
Thank you, Chair, I will speak in German. Es ist, also vielen Dank für die Berichte von Ihnen bzw. die Stellungnahmen. Also ich bin zwar jetzt nicht direkt schlauer geworden, sehen Sie mir nach bitte. Und ich wundere mich schon ein bisschen, dass wir eigentlich in Europa als Gründungsidee von Freiheit und Vertrauen sozusagen uns gegründet haben und heute diskutieren wir hier über die Umkehr der Steuerschuldnerschaft. Also ich weiß nicht, ob das eine gute Entwicklung für Europa ist.
In den letzten Jahren wurden zahlreiche neue Instrumente eingeführt: Eurofisc, CESOP, ViDA und weitere Datenaustauschsysteme. Gleichzeitig verfügen große Konzerne über eigene Steuerabteilungen, während kleinere und Mittelunternehmen diese Möglichkeit eben oft nicht haben. Besteht da, das ist die Frage, die erste Frage, besteht nicht die Gefahr, dass immer komplexere Mehrwertsteuerregelungen gerade jenen Unternehmen belasten, die keinerlei Bezug zur Mehrwertsteuerbetrug haben? Also man stellt ja im Kern alle mit den Debatten, die wir hier führen, unter Generalverdacht. Ja, und das halte ich für wider unserer europäischen Idee zunächst mal.
Und wo liegen denn konkret die Belege dafür? Sie haben einiges aus Ihren Nationen, die Kollegin aus Spanien hat hier von Spanien gesprochen. Wo liegen denn die Belege dafür, dass zusätzlicher Verwaltungsaufwand für Unternehmen, der zweifelsohne besteht, und Behörden tatsächlich in einem angemessenen Verhältnis zu den erzielten Erfolgen der Betrugsbekämpfung steht? Zweiter Teil: Mehrwertsteuerbetrug wird regelmäßig als Begründung für neue europäische Instrumente, Datensammlung, Kontrollmechanismen angeführt. Besteht tatsächlich die Notwendigkeit, dass jede neue Maßnahme zur Betriebsbekämpfung mit zusätzlichen EU-Kompetenzen, neuen Datenerhebungen oder weiteren Eingriffsmöglichkeiten einhergeht?
Hat die EU überhaupt noch ein, also überhaupt ein Konzept zur Bekämpfung von Mehrwertsteuerbetrug, das nicht auf Datensammlung, mehr Kontrolle, mehr Kompetenzen für europäischen, für europäische Behörden hinausläuft, also auf mehr Gemeinschaftung? Ich gebe euch zu, das ist für mich ein Graus, weil es ist ja noch so, und dafür stehen wir auch ein, dass natürlich die Steuererhebung nationale Aufgabe ist und auch die Bekämpfung von Steuerbetrug zunächst mal nationale Aufgabe, auch die Durchsetzung von Steuergerechtigkeit. Also sehen Sie es mir nach bitte, ich habe von Ihnen heute hier keine stichhaltigen Argumente vernommen, die mich in irgendeiner Form von meiner Position eigentlich abbringen sollten. Vielen Dank.
Rita de la Feria
On the effects on compliance on SMEs and versus multinationals, I actually had the opportunity to talk about this at the last hearing on tax obstacles to the internal market. I very much am concerned about this, that there is an over-burdening in terms of compliance versus the advantages that certain measures bring. For example, the classical example that is being discussed right now in Europe is not on the VAT but on the corporate income tax and Pillar Two. The burden of compliance that is being put on companies in Europe versus the revenue effects that these measures are expected to have are completely disproportionate. So many of European multinationals are paying three and four times more in compliance than they will be in obtaining, than the revenue that they will be paying.
So I share your concerns on this regard. But it is true that we need to combat fraud because fraud has many consequences.
We talked about organized crime groups, but we also talk about competition. It is just distortive of competition. Every time there is a fraudster in the market, everyone else that is compliant will be at a disadvantage. And so if we want to be a competitive economy, we need to combat fraud. On the data collection, this always also is of a source of concern.
The Europe has been at the forefront of protecting data, but I think more could be done specifically on the protection of data from taxpayers. Because the ViDA, and not just the ViDA, but several systems that Member States are implementing together with the ViDA, will be a amount of data that is dangerous for cybercriminal groups. Thank you.
Pasquale Tridico
Thank you very much. Thank you. We are running out of time. Thank you very much for your answer, Rita. We will go to the next item now.
Just let me say that we are having, in fact, a hearing with EPPO as well, exactly for the issue that you raised in the previous question. In the recent years, in fact, a lot has been done with electronic bill. I speak, for instance, for my country, for Italy, there was a huge improvement. There was, actually, there was a result in the past ten years in Italy in terms of reduction of VAT. In Italy, the tax evasion has been reducing for thirty percent in the last five, in the last ten years, which was a huge improvement.
You know the numbers in Italy are quite important on that. And in particular, the reverse charge, the split payment, were contributing in reducing, according to all the analysts, in reducing tax evasion. I can speak as well from my side, from my experience that I had at the INPS, the Institute of National Security, which was sending, which was using as well, beside all the tools that at national level we were introducing, it was using as well a nudge approach. You mentioned it. So just before the deadline of a payment, INPS was sending to some business where we were noticing some problem, just an informal letter saying, please, you may have probably missed the deadline, there is a problem if you missed for many other days, consider to pay or reconsider the account that you have done.
So it was just an informal letter. We saw that after this nudge approach letter, thirty percent more of contribution we were getting from the business. So this has been as well very, very useful. Thank you very much. Now, one minute's break and then we go to the Mr. Ludovít Ódor report or consideration.
Thank you.
Okay, colleagues, we can start. So, we open now the discussion on the consideration of amendments on the feasibility of a 28th tax regime and its potential to support EU competitiveness. The rapporteur is Ludovit Odor. There are as well shadow rapporteur Luděk Niedermayer, Bruno Gonçalves is replaced by Evelyn Regner, thank you very much, Pierre Pampy, Robert Zīle, Kira Marie Peter-Hansen, I don't see her, and Enikő Győri is here. So, thank you, Ludovit, I will go without hesitation just to you because we already spoke several times on the 28th regime, we all are looking forward, please, the floor is yours.
Ludovit ODOR
Thank you, thank you very much, and first I wanted to thank to all the shadow rapporteurs for the very constructive atmosphere, even in those cases where there was no final agreement on many issues, but the discussion was quite fair and frank, which I liked very much. Basically, I would like to highlight three or four areas where I think the amendments from our colleagues made the text much better. But first, I would like to say something about the philosophy of this report. The main philosophy was that we had a Commission proposal on the legal regime, the business environment regime, and most of the shadow rapporteurs thought that it was not ambitious enough in the taxation area because if we look at the main hurdles companies are reporting, this is not just about the business environment, but also a taxing environment, so that was the main consideration. And but of course we know quite well that we need unanimity in many of these issues, so our main focus was to be much narrower or more narrow on the scope, but much deeper in the substance.
So that was the general idea to limit the scope of the tax module of the 28th regime to companies, scale-ups which are leaving Europe for the United States, especially in the scale-up phase. In terms of the amendments, I think there was quite an agreement that we do not want to create a regime for fraud and we do not want to create a regime which is a race to the bottom in terms of, I don't know, worker rights or worker protection. So that was a consideration mainly from the S&D and the Greens and Left side. On the other hand, there was a lot of agreement even with, I don't know, the ECR and PfE that in simplification without changing the tax matters, we can go a long way in order to allow firms to have one-stop shops for tax filing purposes, in order to, you know, also in the compliance area what we heard just now on VAT that we need a lot of simplification. As for the scope of the report, I think there was quite an agreement that it would be nice to have a border-free regime for the corporate income tax, a lot of simplification for the VAT, avoiding duplication in the area of withholding taxes or clear rules for transfer pricing.
And the last thing I wanted to mention is that the report focused not just on tax payment by the innovative companies or scale-up companies, but also on access to capital. Because if we would like to deepen the savings and investment union, we need a kind of a standardized version of a firm where outside investors can invest and can have a positive impact on the competitiveness of our economy. So just in a nutshell, that is what we discussed with our fellow shadow rapporteurs and I think we have a nice compromise on the table between some of the political groups.
Pasquale Tridico
Thank you. Thank you, Mr. Otte. Luděk Niedermayer, please, the floor is yours.
Luděk Niedermayer
Thanks, I will be brief because I will probably repeat a lot of things that Ludo said. So first of all, thanks him and thanks the other shadows for good cooperation. I believe this is both economically and politically very good proposal. Economically because it address the issue that we need to address, politically because it can demonstrate that we can move forward. Commission proposal is also in my view behind the expectation.
It's addressing the legal dimension, need for digitalization, but not much more. And we believe or I believe that simplification, digitization doesn't create market. And market is market for especially scale-up is what we need because this is only way how to secure for them financing and increase the chance that they will stay in Europe. So we need single rules. And single rules are not created by simplification and digitalization but by creating the single rules.
We should especially focus on the companies that are operating cross-border and as I said, I guess scale-ups are the most important targets. And obviously, realistically speaking, we should focus only on certain part of the operations that are politically feasible and not try to focus on something that is politically unrealistic. And this is for me perfectly okay.
So within this tax area is one of the most important especially I mean corporate taxation and that's why we believe that that this the Commission proposal should be as soon as possible accompanied by different modules that will address address this issue and tax probably should be one of the first one. And we agreed and I believe we have the majority for some principles that are important. So it should be limited only to certain companies not to create the risk that the national corporate environment will be undermined. We believe that limited duration can be fair because not to grant kind of unfair advantage over the over the other businesses in later later scale. I guess it's perfectly okay to agree that in some political sensitive areas especially labor taxation this should not be covered in this module because this would mean very substantive impact on the national tax policies.
And I strongly believe that the most effective way is to focus only on a CCCTB logic because this is simple transparent avoid risk of tax avoiding and and so on it's simple simple to cooperate. As we know that it will be politically challenging to reach the agreement in the report we suggest that we open the doors for or enhanced cooperation on different opt-in system because to improve the competitive position of the Europe it would be enough if let's say 10 15 countries opt in because this will create substantive market and frankly those that will not join will be I believe in disadvantage but this could be their choice. So our view is that this is INI INI report so that's why we should try to be as as inclusive as possible to reach reach the broad agreement where possible but as as Luděk said and this is where I finish the the dividing line is that some people believe that simplification and digitalization is enough. I believe that not. That we need to create the single market and create the single market should should mean that there will be single rules according to which the firms will be able to cooperate simple way on cross-border basis on the predictable basis and this is the way how to create the market that we currently don't have and puts our growth on break.
Thank you.
Evelyn Regner
Thank you very much chair. So Bruno Gonçalves the S&D shadow rapporteur can't be here today but notwithstanding he insists on sharing a few ideas on this report and the amendments and I have right now the pleasure and the honor to present them. The most important thing first. A big thanks to the rapporteur and the very constructive shadow rapporteurs who engaged positively in this negotiation. Our group can support the compromises as proposed and we hope for a smooth voting session.
S&D tabled amendments that went further on harmonization most notably because we note the one Europe one market agenda will be an empty slogan if we don't solve tax and VAT barriers which SMEs themselves point as the main problem. But naturally there are different interpretations of what the 28th tax module could or should be. The most important is how the negotiation team and the rapporteur in particular found a fair and ambitious compromise that balances those differing views.
S&D is pleased not to interfere with labor matters, as our group's main concern regarding the 28th regime is a circumvention of national standards. That was, is, and will always be our priority, and we welcome the work in finding a compromise that accommodates it. We also cherish positive references to social conditionality regarding the design of fair tax incentives and the prevention of shell or letterbox companies, which would undermine the spirit of boosting real economic activity and entrepreneurial innovation. And it's equally important to see a clarification that the 28th tax module does not replace any legislative efforts to reduce market fragmentation. For S&D, the discussion on tax base consolidation and formulary apportionment must remain alive.
That harmonization is the real simplification the single market needs to fully fulfill its potential. We know how important it is, and we know how difficult it is, but this is a report that should put the finger in the wound and offer solutions. So, this was in brief the overview of Bruno's remarks and his inputs, and again, thanks to the rapporteur and the shadows.
Pierre Pompili
Donc c'est en français. Donc certes, eh bien je, eh bien je remercie les rapporteurs pour le travail, et je confirme que les échanges se sont faits dans une certaine convivialité. Certes la, alors, certes la, certes la, certes la fragmentation du marché pèse sur les entreprises, les startups, les scale-ups et les autres font face à trop de coûts, trop de démarches quand elles veulent se développer au-delà de leur seul marché. Sur ce point, le 28ème régime peut être utile, sous réserve qu'il reste un facteur de simplification. Or le texte va plus loin.
Il ne se limite plus, donc il ne se limite plus à la simplification procédurale, à la digitalisation ou à la sécurité juridique, mais il engage un véritable processus fiscal à l'échelle de l'UE. Nous ne pouvons pas donc aller si loin vers cette logique. La fiscalité doit, doit rester une compétence des États membres. Les bases imposables, les pertes, les incitations fiscales, les charges sociales ou la qualification des revenus ne doivent pas être redéfinies de façon indirecte par ce rapport. Alors nous avons certes pris acte de certains progrès.
Le texte rappelle l'optionalité, le besoin de garde-fous, la lutte contre les coquilles vides et l'importance de la substance économique réelle de la substance.
Jussi Saramo
Thank you, Mr. Chair. Well, it's clear that 27 different regimes, tax regimes, is a problem in a one market area. But the questions that we had is that will it help to have one more? Does it make it simple or more mixed? Will it allow harmful tax competition that was maybe the biggest point for us?
But yeah, we need harmonization and we need common rules and we need ways for businesses to grow inside Europe and over our borders inside Europe. Common digital systems, one-stop shops, they are needed. So a lot of good stuff inside. So actually in the end it's about the content and inside and not the title. But to admit yet of course it also matters that we take a very critical view on the broader idea of the 28th regime, which this is part of.
Well, but the text, it has important safeguards, especially on anti-abuse, real economic substance, shell companies, workers' rights. So and there are a lot of good stuff. The hard part is that it's still, it's very positive about the 28th regime and open to a broader regime at the time in future. And we feel that it might risk that the risk remains that simplification becomes a pretext for harmful tax competition. But I think in the end we had a very good cooperation.
So I want to thank the rapporteur and the shadow rapporteurs, very constructive work and a very good atmosphere. Thank you.
Pasquale Tridico
Thank you. Thank you very much, Jussi. I don't think we do have other shadow rapporteurs now. So it was very useful. Thank you very much.
Mr. Othmar, the floor is yours if you want to come back to comments raised by colleagues.
Ludovit ODOR
No, actually I just wanted to thank once again because as I mentioned, even those who will not support this report were very constructive and the way it was discussed is I think a good thing for a parliament that even with those with different views can sit together and discuss important aspects for the single market. Thank you.
Pasquale Tridico
Thank you, yes, this is very good. Thank you very much for your work. And that's it. I would like to add some remarks, but colleagues have done, have said so many good things. So I share many of the things which were said.
I will go direct to the second consideration of draft report, the one of Kinga Gál. The EU approach to corporate tax policy in a changing international environment. We do have as well the rapporteurs, the shadow rapporteurs, sorry, Evelyn Regner, Pierre Pompili. For Renew we should have Katrin Kulmuni, but actually I don't see her. Jussi Saramo is here.
Rasmus is here. So fantastic. Kinga, the floor is yours for four minutes. Thank you.
Kinga Kollár
Thank you. First of all, I would like to thank already the colleagues because we have had some consultations before drafting the report and I tried to already take these opinions into account.
And actually we have had discussions with the European Commission representatives and the OECD, market participants and also academic researchers and NGOs. So we try to actually do our homework already at the start of the drafting of the report. Now the report starts from a very clear premise. International cooperation is imperative to maintain effective corporate taxation. However, as the international environment shifts, the EU must also adapt to these changes.
In recent years, the EU has championed international tax reforms and with good reason. The 21st century global economy is digitized, borderless and hypermobile. And while the OECD G20 two-pillar solution represented a comprehensive effort to reflect to these new realities, the actual implementation has since fractured. Most notably, the United States has stepped back from Pillar One. Furthermore, despite initially promoting a global minimum taxation, the US ultimately secured a quasi-exemption from Pillar Two rules.
Consequently, implementation is restricted to roughly 55 countries out of the 148 inclusive framework signatories. Just last week in our trip to Brazil, we learned that they have also applied for a side-by-side exemption and China is expected to follow. So we must take stock why this fragmentation is occurring. I believe that Pillar One is actually under-ambitious. By capping the scope to the world's 100 largest MNEs, mostly US-headquartered, it alienated American political support.
I think broader scope might have yielded a different American response. On Pillar Two, the struggle is that it's maybe a bit too over-ambitious because by bypassing local tax code, it forces companies to calculate minimum global taxes using parallel financial frameworks mixed with complex OECD adjustments. This separate, burdensome accounting layer has spiked compliance costs and triggered demands for side-by-side carve-outs. On the positive tone, Pillar Two fulfilled its main objective. The number of very low tax jurisdictions has decreased and about 90% of large MNEs are in scope of the global minimum tax, either through the domestic top-up taxes or other elements of the GloBE.
But as we see the international response to that, I think we need to adapt as well our strategy. So the report examines how the EU should respond, focusing on several key topics. First, it calls for addressing the competitive imbalances caused by the parallel side-by-side system in order to safeguard the competitiveness of European companies. Weakening the competitiveness and investment capacity of our domestic companies will ultimately compromise Europe's macroeconomic strength and we cannot allow that. Second, it highlights the importance of simplification.
We must avoid significant overlapping administrative burdens and high compliance costs associated with Pillar Two. In this regard, we need to review older legislation such as ATAD, the DAC framework and the Parent-Subsidiary Directive. Third, the report addresses the issue of digital taxation.
It recognizes that in absence of a fully coordinated global solution, several member states have introduced national digital services taxes. To prevent further fragmentation within the single market and avoid retaliatory trade measures, the report underlines that a long-term multilateral solution remains the preferred outcome. Overall, continued international cooperation in taxation matters is vital, but we must ensure a level playing field for European businesses. For this to happen, EU member states should cooperate their position and coordinate their positions and engage collectively at the OECD and the UN levels in order to shape global tax standards together and with a view to protecting European interests. I look forward to the amendments of the colleagues and the deadline is actually on the 9th of June.
Speaker 31
Thank you. Thank you very much. And now, Evelyn Regner, the floor is yours.
Evelyn Regner
Thank you very much and a big thank you to the rapporteur, also to the pre-consultation, looking very much forward to working on this report. As the group of the Socialists and Democrats in European Parliament, our priority remains the fight against tax avoidance and aggressive tax planning. Fair taxation is not only a matter of justice, it's also essential for ensuring the member states have the revenues needed to invest in public services, social protection, sovereignty, green transition, economic resilience. So, the full program. At a time of growing fiscal pressures, we cannot afford to lose billions of euros through aggressive tax planning schemes internationally and within the European Union.
So, I'm referring to your report, the structure of your report and start with competitiveness and international taxation. We support the report's call for the Commission to assess competitive distortions arising from differences between the OECD Pillar Two framework and the US tax system, especially with the new side-by-side agreement for of the for the United States. So European companies should not face disadvantages due to uneven international implementation and we therefore support efforts to restore a level playing field. But however, we are still very much in favor of the OECD BEPS agreements and call for the further integration because this is the right path. So, next part of your report, while we recognize the fragmentation of the international tax landscape, our response should be greater harmonization rather than simplification.
Many of the rules identified for review, such as ATAD, the Parent-Subsidiary Directive, public country-by-country reporting and DAC, are key instruments in the fight against tax avoidance and evasion and we are therefore concerned that simplification could weaken important safeguards and reduce our capacity to tackle harmful tax practices. We also regret the withdrawal from the Commission of important initiatives such as the Unshell proposal. So concerning BEFIT and EU tax legislation. So we have in this committee here quite a track as Parliament's rapporteur on BEFIT. I believe the Council should make progress on this file.
BEFIT can play an important role in advancing tax harmonization within the Union. We also believe that smaller tax administrations need more support and resources rather than weaker rules that could be exploited by large multinational corporations. And then, we welcome the progress achieved through Pillar Two in reducing profit shifting opportunities and limiting the use of very low tax jurisdictions. However, losses from base erosion and profit shifting remain substantial. So, recovering this foregone tax revenue is crucial if member states are to meet today's investment needs and respond to the challenges facing our societies.
And so finally, the future of international tax cooperation, also an important issue you're referring to. Despite current uncertainties in international tax cooperation, particularly following recent developments in the United States, the European Union must continue to lead. We should continue advancing discussions on a digital services tax and actively engage in the UN Framework Convention on International Tax Cooperation to ensure a fair and sustainable global tax system and the fight against international tax havens. So I think also this is the work of our committee. I just am very grateful that the chair was so generous.
Normally I'm not talking so long, but this is really such a passionate issue. I'm looking very much forward to going on with this report and to achieve substantive results.
Pasquale Tridico
Thank you. Yeah, usually I'm not so strict with time with everybody because it is good to, even when we are not so many, so it's good to speak. Now, Katri Kulmuni from Renew. Sorry, sorry about that. Pierre Pampy from Patriots.
Sorry, Pierre.
Pierre Pompili
Donc en français encore. Et bien donc une nouvelle fois, je remercie la rapporteure donc pour ce travail qui est très sérieux. Alors certes la et bien et bien la fiscalité des entreprises est un facteur central de compétitivité et nous rejoignons et bien l'objectif de lutte contre l'évasion fiscale et les pratiques abusives. Mais certes cette lutte ne doit pas se faire au détriment des entreprises européennes. Le rapport soulève à juste titre un problème majeur donc à savoir l'application très incomplète du second pilier au niveau monde.
L'UE donc applique des règles strictes, complexes et contraignantes pendant que les autres économies offrent des régimes plus favorables. Cela va à l'encontre de nos entreprises face à la concurrence du reste du monde. Cependant, il va de soi que nous ne pouvons pas rester aveugles face aux abus contre lesquels nos systèmes fiscaux se retrouvent sans armes. Alors la ligne de crête est donc très mince pour trouver le juste équilibre. De cette façon, notre groupe verra ce rapport avec trois priorités : défendre la compétitivité européenne, lutter contre les abus fiscaux et préserver la compétence des États membres.
Voilà, c'est tout. Je vous remercie et à nouveau je remercie la rapporteure pour ce travail.
Katri Kulmuni
Thank you chair and thank you for the rapporteur for the good cooperation already at this stage. As the rapporteur considers, the international tax framework has become unnecessarily complex and its effectiveness continues to be challenged and it also puts EU businesses at a disadvantage currently. While direct taxation remains in a competence of the member states, obviously international challenges require international solutions. In general, I'd say that the lack of coordination and cooperation in pillars one and two is not beneficial for the European or American businesses engaged in transatlantic trade. Regarding the first pillar, it is worth mentioning the fragmentation of taxes imposed by member states, some tax advertising revenue, others data sales, etc. and international solution would be probably better.
Otherwise we can consider an European solution but it needs to be really carefully designed. In addition, we should also look at the changes taking place in the digital economy, for example how we deal with artificial intelligence and data. So the report notes that there are different approaches to digital services taxes at national level without a first pillar agreement, it does not propose any European solutions to address the fragmentation and obviously the report also is cautious on the US action. I'd say it is in the interest of both the EU and the member states to strengthen coordination and present a unified position in multilateral fora.
Rasmus
Thank you so much also from our side for the draft. I think there are some positive elements in it like for example on the side-by-side system we welcome very much and also we agree on that like some level of harmonization and simplification is required to ensure that like complexity is not taking too much space. On the other side in the language we can see especially on the fight against tax avoidance and here I can echo what S&D already had said if I got you right at least we are a bit concerned about like the language when it comes to this because also for our group like the main priority remains the fight against tax avoidance and aggressive tax planning and I also think we will come with some language some amendments to strengthen the language. On BEFIT we would like to stick to the proposal and we are also still calling for fully implementing the global minimum tax under pillar two. The same is true for the need for a digital services tax where our group is in favor of and where I also think that we should take into account also some recent positioning we did also here in the parliament on the issue on the digital services tax having in mind the debate on own resources and the interim MFF interim report.
I think our response in this report should be linked to what we recently voted. On multilateralism we fully agree that this is key for corporate taxation and we always should go like for multilateral solution if this is possible. On the same side I also think in a time we are living in we also need to have in mind that like the EU is like not a weak actor at global stage meaning that we should also having some strong position when it comes to like multilateral agreement and the negotiations of multilateral agreements and I also think in general the parliament should play a stronger role in calling also for the commission and the member states to agree on some strong solutions there but of course this also needs to be done in the framework of the UN tax convention and so on but I think that we will also table some amendments here.
But of course, this also needs to be be done in the framework of of the UN tax convention and so on. But I think that we will also table some amendments here. The last point from our perspective, and I know this is controversial, but I still would like to mention it from our group, also the topic on the windfall profits is still relevant with also some experiences we made in the past at EU level, and we will also table some amendments regarding that.
Jussi Saramo
Thank you, Mr. Chair, and thank you the rapporteur for the valuable groundwork. It is important that harmful tax competition is identified and action is taken against it, especially at the EU level. Member States, they are way too small to to be actors on this. So even though it like it was said that it's it's the Member States that are still in the future deciding about the taxation, without EU cooperation, we have lost this game. Europe cannot be competitive or prosperous if large and foreign companies do not pay the fair share of their profits that they make here.
And we think actually that they should do it everywhere, not just in Europe, but in Africa to have a healthy economics globally. It is important for the global situation in particular that it has been identified where after a very good development, there has been a setback, especially due to current US administration. Of the OECD agreements, pillar one is dead and pillar two is wounded, and in our opinion, Safe Harbour should have not been approved. And to related detail, it is very important that the UN tax negotiations are taken into account even though we do not know how it's going there, but we definitely need global solutions. Maybe before that, we need European-wide solutions, but this is way too important thing to to leave just to very vulnerable Member States.
So thanks to the work so far, and we will table amendments.
Kinga Kollár
Thank you, Jussi. Kinga, if you want to have your final words on this comments.
Of course, thank you very much. Thanks to all of the colleagues for the valuable comments. I took note, but of course, we will continue then in the shadow meetings. Just maybe reflect on one point on tax avoidance and aggressive tax planning and how it comes together with pillar two. I think they are not conflicting, actually.
They are actually helping each other. And so I I don't see, you know, the main reason for pillar two was also to to basically fight the race to the bottom and to ensure that sufficient resources are at Member States level, either in Europe or outside of Europe. I think we need to make to reach this objective in a rational manner and not harming actually with the overlapping, rather overlapping, not not unnecessary, but overlapping regulatory requirements. So thank you for the comments. And as I mentioned, the deadline for the amendments is on the 9th of June at 18:00.
So I'm looking forward to our continued cooperation. Thank you.
Pasquale Tridico
Thank you, Kinga. Deadline for amendments are 9th of June. And then, by the way, I forgot to say that the VAT regime will be voted tomorrow in ECON, among with many, along with other things, other tax files, in fact, five at least. While this file is not yet scheduled the vote, but our next meeting will take place on 25th of June and probably we'll have the vote for as well this report. So thank you very much.
We will have now five minutes break and then we start our meeting for coordinators. Thank you to everybody.
Speaker 37
Good morning, everyone. I would like to welcome you to this meeting of the FISC Subcommittee. The first item on the agenda is the adoption of the agenda. The draft agenda was circulated to all members. Are there any comments or objections?
I see none, so the agenda is adopted. The second item is the Chair's announcements. I would like to inform you that the meeting is being webstreamed and that interpretation is available in several languages. Please refer to the screens for the specific languages available. I would also like to remind you that the use of electronic devices should be kept to a minimum to avoid interference with the sound system.
The third item on our agenda is a public hearing on the role of tax incentives in achieving the objectives of the European Green Deal. This is a very important topic as we look for ways to transition to a more sustainable and environmentally friendly economy. We have a distinguished panel of experts with us today to share their insights and expertise. I would like to welcome our first speaker, Dr. Maria Rossi, who is a senior researcher at the Institute for European Environmental Policy. Dr. Rossi, you have the floor for ten minutes.
Thank you, Mr. Chairman, and thank you for the invitation to speak at this hearing. The European Green Deal is a very ambitious plan that requires a significant shift in our economic and social policies. Taxation is a key tool that can be used to incentivize sustainable behavior and discourage activities that harm the environment. In my presentation today, I will focus on three main areas where tax incentives can play a crucial role. First, the promotion of renewable energy sources.
Second, the encouragement of energy efficiency in buildings and industry. And third, the support for sustainable transport. Starting with renewable energy, we have seen that many Member States have already implemented various tax incentives, such as tax credits or exemptions for investments in solar and wind power. These measures have been very effective in driving down the costs of these technologies and increasing their share in the energy mix. However, there is still a need for more coordination at the EU level to ensure a level playing field and to avoid fragmentation of the internal market.
Moving on to energy efficiency, this is an area where there is a lot of untapped potential. Tax incentives can be used to encourage homeowners and businesses to invest in insulation, energy-efficient appliances, and smart building technologies. For example, reduced VAT rates for energy-saving materials or tax deductions for renovation costs can be very effective. Finally, on sustainable transport, we need to shift away from fossil fuel-powered vehicles towards electric and other low-emission alternatives. Tax incentives, such as lower registration taxes or company car tax benefits for electric vehicles, can play a major role in this transition.
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