Subcommittee on Tax Matters Ordinary meeting
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FISC European Parliament
Ihren Sitzungen folgenPhilip Kerfs
So in other words, almost every major international tax transparency initiative developed over these past 15 years has found its way into the DAC. And that close cooperation has enabled the member states to rapidly and consistently implement these transparency initiatives, but also it has allowed to contain costs, implementation costs, compliance costs in particular for large internationally active businesses because it has allowed them to comply with reporting obligations that are broadly aligned across jurisdictions. Against that background, I would like to highlight three aspects of the recast proposal that are of particular importance from an OECD perspective. First, we are obviously very pleased to see that this proposal continues the successful approach of maintaining close alignment with the OECD standards and frameworks, including in the CRS and the CARF and the model reporting rules on digital platforms. These frameworks are still continuing to evolve in light of practical experience.
And for example, the OECD is currently consulting, organizing a public consultation on a limited number of targeted amendments to the model reporting rules for digital platforms that were implemented through DAC 7.
And that consultation focus on a limited number of practical issues that have emerged from the implementation, implementation that is by the way also mainly by EU, to a large extent by EU member states. And so these issues relate to clarifying the definitions of platform operators, the treatment of intermediary sellers and also, as already mentioned, reporting obligations with respect to low-value sellers. These same issues that are in, that we are consulting on are also reflected in the Commission's proposal, which illustrates again the continued close cooperation between the OECD and the EU. And one issue that is currently under consideration concerns the possible extension of the reporting obligations to intermediary sellers. So these are entities that are active as sellers on platforms but in a capacity as intermediaries.
That is not a simplification measure, that is a measure to improve the outcomes of the reporting. And this is an area where care is needed because any extension here should strike a good balance between the information needs of tax authorities and the additional compliance burdens that could be imposed on potentially a large number of small and medium-sized companies that are active as intermediaries on these platforms. And that is also why we are, that is the main focus of our public consultation, which will conclude in mid-August. And given the close alignment between DAC7 and these model reporting rules, the outcome of those consultations may also be relevant as the discussions on the DAC recast continue. Second point, besides being aligned with international standards, we think that the proposal also contains a number of measures that will improve the effectiveness of the existing frameworks.
And we can of course only express our support for this at the OECD.
One example is the proposed tax identification number validation tool. We have learned through the years that TINs are extremely important to allow tax authorities to match the information they will receive, and so improving the TIN validation will help administrations match the information and avoid unnecessary follow-up inquiries. Another example that is worth mentioning is the proposal to strengthen the use of beneficial ownership information in connection with exchanges of information on real estate. This will become also relevant in the context of the framework that was adopted last year on the voluntary framework on the exchange of information on real estate, where 26 countries have so far joined and committed to implement this as of 2029-2030. And we think that with this proposal, combining information on the property and on beneficial owners will significantly strengthen the quality of the data that will be available to third countries and will hopefully then also attract more third countries to join this framework.
The proposal also places greater emphasis on collection and analysis of statistical data.
That is very important because better statistics help jurisdictions to evaluate whether the transparency frameworks work and will also help the OECD in that and will identify where improvements need to be made and also will then make sure that these improvements, when they are made, are guided by proper evidence. So taken together, we think these measures demonstrate that improving tax transparency frameworks does not always need to mean more information to be collected, reported, exchanged. It can also focus on, and it should also focus on, improving the quality and the usefulness of the information. And then third and lastly, the proposal contains obviously important simplification measures. And the proposed amendments to DAC6 are a good example.
The recommendation that we developed at the time under BEPS Action 12 recognized that mandatory disclosure rules are most effective when they provide tax administrations with timely, meaningful, and high-quality information and at the same time remain proportionate and administrable for intermediaries and taxpayers. And we think that this proposal reflects that broader principle by reviewing certain of the reporting obligations in light of the implementation experience.
So Chair, honorable members, allow me to see that I am running out of time, so allow me to conclude with one final observation. Over the past 15 years, the EU and the OECD have built an exceptionally close partnership in the field of tax transparency, and from the perspective of the OECD Secretariat, continued alignment between these international standards and regional implementation frameworks such as the DAC have been and continue to be one of the keys to the success of international tax transparency. So we at the OECD Secretariat look forward to continuing the close cooperation with the Parliament and the Commission and the Member States as this work progresses. Thank you very much, and I look forward to your questions.
Kira Marie Peter-Hansen
Thank you very much, Mr. Coffin. I hope the clock is not too stressful up here. And with this, I give the floor to Professor Dr. Nadine Riedel, who are joining us remotely.
Nadine Riedel
Good afternoon, and it's a pleasure to be with you, so I'm very sorry that I can't be in Brussels in person. So let me first stress that combating tax evasion and aggressive tax avoidance is of course an important public task, and the DAC and its successive amendments are central instruments in this domain.
Under DAC member states exchange tax-relevant information, in many cases third-party reports on taxpayers' affairs. But do we know how effective this is? Academic evidence is still relatively scarce. Where it exists, DAC is shown to have bite and constrain profit shifting and tax evasion. Best studied is automatic exchange of information on financial wealth and income, which induced sizeable shifts in offshore financial wealth and cross-border deposits.
Generally speaking, optimal tax enforcement design should not necessarily eliminate all evasion and avoidance, but it should be chosen such that the marginal benefit of tighter enforcement, so in terms of tax compliance, revenue, improved fairness, is balanced against the cost.
Kira Marie Peter-Hansen
Nadine, can you slow down a little bit? Can you slow down a little bit because our interpreters have a struggle to follow? So if you can just speak a little bit slower, then we're sure that we get the interpretation right.
Nadine Riedel
Okay, sorry. I'll do that. Yeah, no. Okay, thank you. Thanks for pointing it out.
Okay, this implies a simple design principle: information reporting is most valuable where information can be matched automatically to taxpayers, integrated into enforcement systems, and used with little ambiguity to detect misreporting, thus constraining evasion and aggressive tax avoidance at relatively low administrative and compliance costs.
Information reporting in turn is least valuable where it generates relatively large volumes of unclear reports that tax administrations cannot systematically use. This distinction is important for assessing the DAC recast, whose broader objective is to reduce compliance and administrative burdens without weakening the fight against evasion and avoidance. This in general is highly welcomed. EU anti-abuse and transparency rules have become relatively complex and businesses complain about high compliance burdens, and reviews suggest that not all exchanged data is always effectively used or can be effectively used by tax authorities. This warrants caution, also given that we know that regulatory burdens can induce sizeable adverse consequences for firm investments and real activity.
In an ideal world, we would evaluate the social desirability of individual DAC elements drawing on granular data on each item's enforcement value, revenue effects, administrative costs, and private compliance costs. Such evidence is unfortunately not yet available. Commission evaluations and academic studies to date provide important guidance, but they usually cover broader regimes rather than individual data fields or hallmarks.
This said, the proposed simplifications under the DAC recast seem very useful. Consolidating DAC 1 to 9 into one legal act can improve coherence and usability, although it creates a unified legal instrument rather than a unified reporting regime. The most significant changes concern DAC 6. This is relatively well chosen because DAC 6 is among the most complex and contested part of the DAC framework. Its logic is sound, it creates an early warning system for potentially aggressive cross-border arrangements relying mainly on EU-based intermediaries and in some cases taxpayers.
Evidence suggests that DAC 6 matters, a paper by Edwards and co-authors, for example, find that effective multinational firms reduced income shifting and reported higher effective tax rates after DAC 6 adoption, with stronger effects where legal professional privilege exemption were narrower and penalties were higher. However, there are also reporting costs and complexity, legal uncertainty, and overlaps across reporting regimes. The DAC recast aims to address some of this.
The proposed carve-out for arrangements involving groups within the scope of Pillar Two is a reasonable attempt to reduce double monitoring. Evidence of this, of course, the question is whether this may lower reporting scrutiny in incrementally important areas too. Given that reporting is relatively strict on these multinational firms, this may dampen some of these concerns.
Kira Marie Peter-Hansen
Nadine, I'm so sorry to interrupt you again. But can you speak a bit slower because our translators have difficulty to translate it simultaneously? So if I can ask you again politely to speak a little bit slower.
Nadine Riedel
Again slower, okay, sorry. Okay, I try to again be slow. Evidence moreover suggests that multinational profit shifting is largely directed to the lowest tax affiliates within the multinational group, which is disincentivized by the 15% minimum tax floor. I also support the generic category A hallmarks, deleting the generic category A hallmarks, extending the reporting deadline from 30 to 90 days, developing guidance on main, the main benefit test, and clarifying legal professional privilege. Category A hallmarks are theoretically sensible but have proven too blunt in practice as the same features can arise in ordinary commercial and legal work too.
Member states accounting for a large share of DAC6 reporting indicated that these hallmarks provide relatively little value added while creating significant processing burdens. This clearly speaks in favor of their deletion. The legal professional privilege clarification is important too. The recast protects core lawyer-client confidentiality while preserving intermediary reporting for non-privileged advice. This is sensible as empirical evidence shows that third-party reporting by intermediaries is important for DAC6 effectiveness.
More debatable is the attempt to resurface parts of the UNSHELL agenda through DAC6, with substance criteria to be developed later by a Council implementing act. Politically deferring the definition of substance criteria is understandable as this might delay negotiations of the DAC recast, but it is not obvious that defining economic substance is merely technical. A reporting-only substance hallmark could become the reference point for later substantive tax rules. A cleaner approach might be to define a narrow reporting-only substance hallmark directly in the directive or to return later with a proper legislative amendment.
The proposal also contains useful adjustments in other areas, for example reducing low-value reporting under DAC6. Displacing national gold-plating can reduce fragmentation, compliance costs and legal uncertainty, although it turns the EU standard into more of a ceiling. At the same time, the recast strengthened DAC in important areas. Member states would no longer be able to limit automatic exchange to information already held by the tax administration. They would also have to draw on information in governmental registers and databases that is electronically or digitally available.
This is especially important for immovable property. The recast together with the updated AML framework extends exchange from legal ownership to beneficial ownership of immovable property. This closes an important transparency gap documented in recent research which shows that increased financial transparency under the CRS and DAC2 led offshore users to substitute into real estate. Finally and importantly, the DAC recast aims to improve administrative processes related to cross-border information reporting.
Here in particular, accurate taxpayer identification numbers are essential, as unmatched reports create manual follow-ups and compliance costs and simultaneously limit enforcement use. The proposed centralized digital TIN verification tool is very valuable in this regard, although the strength of the validation will depend on technical implementation. By contrast, the incremental value of a new EU-wide TIN is somewhat less clear. It might help track mobile taxpayers and reliably link databases and regimes, but it also comes with compliance costs and implementation burdens. The verification tool already achieves much of the relevant matching function by preserving national identifiers and optionality for businesses.
Summarizing, the DAC recast offers valuable revisions to the DAC and is welcome at times where Europe struggles with low growth and structural challenges, amongst others related to the regulatory and bureaucratic burden of businesses. Thanks. And sorry for being too fast. I hope it worked in the end.
Kira Marie Peter-Hansen
Thank you very much and all good and apologies for interrupting you as well. Then we move to Dr. Miroslav Palanský. You have the floor.
Miroslav Palanský
Thank you very much, dear Chair, members.
So there is much to like about this proposal. Consolidating nine amendments is definitely a sensible idea. Especially some of the new provisions are clearly improvements over the current state, as has been mentioned. In my opinion, above all, the interconnectedness of real estate registers, including beneficial ownership of immovable property. Those are definitely welcome provisions.
I want to focus on today on the one provision that I believe has significant tax revenue at stake, which is the carve-out for large multinationals from the DAC6. And I want to look at it from a perspective that I think should be used in every policy evaluation, that is a cost and benefit analysis.
The impact assessment states that the benefits in forms of compliance cost savings of this provision will amount to 300 million euros per year, which is based on a somewhat unsophisticated calculation of 3,000 groups estimated to be affected by this carve-out times a flat figure of compliance cost of 100,000 euros. I think it is important to highlight that while I understand that this is an estimate, the reporting costs are proportional to the amount of reportable tax aggressive schemes that a company implements. So companies that do not implement any tax aggressive schemes have also no compliance costs to save from the carve-out. I will come back to this point. On the cost side, the impact assessment assumes a flat zero, that is that we do not lose any tax revenue as a result of the carve-out.
The only support in the impact assessment for this claim is an OECD study from 2020, which was way before the Pillar Two was implemented in its substantially weakened form during the negotiations. Here is why I think that the costs of this provision are not zero.
While the 15% minimum tax rate in pillar two may remove some motivation for aggressive tax planning, it definitely does not remove all of it. My own research and report earlier this year, we found using confidential country-by-country reporting data at the firm level that only about 50% of profit shifting is even targeted by pillar two, and that is before any behavioral response by multinationals. It is also important to highlight that the impact assessment itself cites that the reason for the carve-out is that the motivation to implement tax aggressive schemes will disappear with pillar two. Well, if the motivation will disappear, so will the DAC6 burden, because those schemes will become non-reportable. So the burden disappears by itself, if it were the case.
So what I believe in the end is that the carve-out only saves money where these tax aggressive schemes continue, which is exactly where the reporting is still needed. I also think that the analysis of the costs and benefits of this reform does not meet the bar for a reform of this magnitude. I think we should analyze the best available data for such questions, which are the DAC6 filings themselves.
We have seven years of such data, and yet the impact assessment does not use this data at all. I do not believe that we have the evidence needed to make the changes that are proposed in this. We do not see an analysis of the tax arrangements that are in DAC6. We do not see the tax revenue that is at stake or who would benefit from the carve-out. The supposed replacement of the DAC6 reports for largest multinationals, which are the minimum tax returns, only contain information about the tax outcomes and not about the arrangements that produce the tax outcomes.
And I myself see on a daily basis the value that administrative data can bring. We work with administrative data in more than 10 countries, and I think, I believe that here that analysis is very much needed too.
I carry out a lot of research on corporate profit shifting by large multinationals and so I wanted to highlight a few things that we do know from the available literature. As I mentioned, we do not know how many companies run tax aggressive schemes that are DAC6 reportable, but from what we know about profit shifting, which is driven by these tax aggressive schemes, is that it is concentrated in the very large multinationals, often the US-headquartered ones, where basically for such companies for which it makes sense to implement tax aggressive schemes, those companies have chosen to do so, which means that they did so because the tax that is saved from those arrangements exceeded the compliance costs. So the savings from this potential carve-out would go to the companies that are running the schemes and just make those schemes even more profitable. On the other hand, companies that do not currently have such schemes gain nothing from the carve-out, so overall the carve-out would subsidize the most aggressive companies over the compliant ones, which would not be the direction of creating a level playing field.
So I believe that the evidence does not exist today to make that decision, but the good news is that there is a straightforward way to build that, and that is to analyze the filings, also evaluate the first cycle of minimum tax returns, which are being exchanged this year for the first time. I want to highlight that the two potential mistakes that we could be making are not symmetric. If we first evaluate the costs, that might present a rounding error for the revenue of large multinationals. Repealing it, the DAC6 for large multinationals, wrongly would cost us billions in tax revenue. And more importantly, we would not be able to observe that, and politically, I think you would agree with me, it would be very difficult to get back.
So I think in conclusion, I think that carve-out, the provision of the carve-out from DAC6 as proposed should be rejected. The direction should be the opposite, that is not less information for tax administrations, but more efficient collection and use of the data in state-of-the-art analysis of the exchange data. Enhanced competitiveness needs a level playing field and not cheaper aggressive tax planning for the largest companies, which this provision seems to be making. Thank you.
Kira Marie Peter-Hansen
Thank you very much, and I think that's the best conclusion to then hand it over to the Commission to share their assessment of the proposal and perhaps also reactions to the speakers.
Benjamin Angel
Thank you, Chiara, and thanks for the invitation, it's a pleasure to be with you. We have a very rich apparatus of evaluation that guided the preparation of our work. We have done an evaluation, we have done an impact assessment. The Court of Auditors have done successive reports. We have had a number of working party with Member States.
During a year, we had a system also of peer review from Member States where a team of experts from Member States and experts from the Commission visited each and every country to assess how the DAC was implemented. And we conducted bilateral with all ministries, all tax administration, and of course many meetings with the business community. So what we try to do in the DAC is three things. We try to clarify, we try to simplify, and we try to deepen. First, we try to clarify, and we are bringing primarily six simplifications.
The first one has been noted and welcomed by all experts on this table. The DAC becomes readable.
It's a text which you can read from the beginning to the end without having to find hurdles linked to the style of amendment as it was before. We have clarified the meaning of the legal professional privilege in DAC6 following the jurisprudence of the EU Court of Justice, so here we are not inventing anything. We have clarified that the tax administration will have access to the future single access point to land registry which is created by the AML legislation. It was already implicit but it's even better when we make it explicit. We have also clarified that the statistical authorities will receive the full CBCR data which will allow the national statistical authority to make national statistics and in so doing Eurostat will be able to make long awaited statistics on corporate income tax for MNEs which we don't have today in Europe.
Everyone uses commercial database which are sometimes good, sometimes not so good. And we have also clarified for DAC7 that the intermediaries are in scope and need to report. Here we have a bit of nuance between Philippe and I. We do think that for the quality of the data we need to get as much as possible data from the taxpayer. When we get, let me take an example so that it's not abstract.
Many people renting flats on Airbnb use a concierge, or sometimes you get concierge managing 30, 40 flats. If via DAC7 you get information from the concierge, the concierge is not the taxpayer. Which means you cannot match automatically this information with the national one and it's resource-intensive and costly for the administration to make use of the data. So what we need is not the tax identification number of the concierge, what we need is the tax identification number of the owners of the flats which are managed by the concierge. Last clarification, we have foreseen that in the future we should clarify what hallmark D2 means in DAC6.
And hallmark D2 is substance. And then brings us back to a discussion which has taken a lot of time in Parliament and even more time in Council about Unshell. You certainly remember that it was a difficult discussion and the whole debate was somehow an attempt to answer only one question, which is: what is substance? What does it mean? Well, in the existing legislation we have an hallmark of substance but that no one has defined.
So the easy solution that we have found is, well, Council, you must define it within five years from the entry into force so as to make sure that we get clarity.
Second objective: simplifying. In Annex VI, there's a number of hallmarks which trigger a lot of reporting, actually 40% of the reporting, but what we could not track is a single decision based on this reporting. That's the hallmark of category A, which are assorted from a main benefit test for the experts. Burdensome for the businesses which have to prepare the report, burdensome for the tax administrations that receive it and they don't do anything out of it. So, simple situation, let's stop it.
Now, as a second simplification, let me touch on the more sensitive one, which was raised by Miroslav, which is our proposal to stop implementing DAC6 for Pillar Two companies. So let me assure you, we care as much as you do about fighting aggressive tax practices, but it's also an issue of proportionality and fairness. We do impose considerable administrative workload and compliance costs on Pillar Two companies, and on them only. They have to provide the country-by-country report.
In the globe information return, we're talking for an average MNE of around 2,000 new data points. 2,000. But there is one element that gives us comfort that you have not mentioned, but that I can mention because I'm also co-chairing the network of the head of tax administration. I can tell you those companies are audited all the time because of their size. So not only do we receive kilometers of reporting from them, de facto there's a tax auditor on their neck every day, every week.
The likelihood that we discover something via a DAC6 report that we don't know already is close to zero. You're right about the impact assessment. We have done a mistake, but not in the direction you point. Actually, we have underestimated the benefit. We mentioned erroneously 300 million.
Most MNEs mention a cost attached to DAC6 of around one, one and a half permanent staff. So around 100,000, 150,000. But where the mistakes come from, we have used 3,000 companies. Actually, we have 4,600 companies which are subject to pillar two in the European Union.
So the real benefit is around 500 million actually, which is quite significant. And keep in mind that we're talking of an information which de facto for this company presents very little added value. Third simplification, we improve the articulation between DAC6 and, sorry, DAC4 and DAC9. In DAC4, the country-by-country report, and DAC9, the global information return. There's a big overlap between those two.
Not a full one, but a part of the information is the same. Ideally, it would have been good to merge the two reports, but it's not possible because the global information return is still being fine-tuned in the OECD. So at least what we do is merge the notification of who should report, and that cuts the number of reports by 100,000 a year. Fourth simplification, there is one category of data which 18 Member States do not exchange.
That's life insurance. And actually, when you dig further, there's a good reason why they don't exchange, because there's a great deal of overlap between this obligation that exists in DAC1 and DAC2, the information on financial account and from financial institution. It just happens that life insurance products are commercialized and distributed by financial institutions, so de facto we get already the information that we need very much from DAC2. Last important clarification that Philippe has mentioned, we correct the mistakes that we have done in DAC7, which were affecting negatively the second-hand market of goods, which was a very bad news because we believe in the circular economy. It's an important political priority and de facto DAC7 had rocked very negatively the market for operators in this field, such as Vinted or some other like eBay.
And for this reason, we propose to drop the monetary value threshold and to drop the number of operation threshold and to increase the monetary value threshold. Last, we also deepen the DAC in four different directions. We extend the obligation to provide information. At the moment, member states have to provide information on the various categories of income only if it's available to the tax administration. We propose to make it compulsory if it's known to the state, meaning if another ministry has it, well, we expect them to pick their phone or send an email and make sure that they get the information.
While we care about it, if we don't ensure that the information flows between the ministries of the various branches of the administration, we end up in a situation with the same stakeholders receiving a request for information twice. And we believe in the report only once, and for this we have to make sure that if the information is already available, then it has to be provided. Second, we increase the number of income categories for which exchange of information needs to take place. At the moment it's five, we propose six. Third, as was mentioned by Philippe and the other speakers, we follow the last development in the OECD, and the last kid in town is a very important one, it's the exchange of information of beneficial ownership on real estate.
As you know, when we want to fight tax evasion, notably for high-net-worth individuals, having this information is key. If you want to hide money today, you do not put it on a bank account abroad because thanks to the common reporting standard we end up knowing, you rather buy an expensive villa, put some kind of structure in between, and we have major difficulties to identify it. So exchanging beneficial ownership information for real estate is key, and as usual we want to be in the forefront of the implementation of OECD agreement so as to try to bring as many jurisdictions as possible with us in this effort to be transparency.
Last, we have a new tool for validating and identifying tax identification number. That's important from a practical point of view. If you look at the matching rate for the various DACs, that is the rate at which you manage to match the tax data with the national data, it's not bad. It's around 90% for most DAC. But that's not the right indicator.
The right indicator is the automatic matching rate, that is identifying the taxpayer, not putting a staffer behind it, but putting a software. Because if you have to put someone from your staff, it's painful, it's expensive, it takes time. There, it's not good. It's somewhere between 35 and 65% only. So the simple things that we propose to do is not to create a new tax identification number, and I think Nadine was probably a bit confused in her intervention.
What we propose is just to interconnect the databases of existing tax identification number in each member state. So no one will change of number, but the tool will allow to automatically check whether the number is correct, yes, no.
And we plan to make it accessible on a voluntary basis to businesses. And if they make use of it, then we will alleviate some obligation to provide the data. For instance, for DAC7, we have to provide data such as the date of birth, the address. We clearly do not need it if we know that the TIN is correct. So the DAC is a balanced product.
It clarifies and simplifies. It deepens. The discussion has already started, actually, on the first day, first morning of the Irish presidency. So the presidency wants to be quick. The objective for the DAC is to try to get a political agreement before the end of the year.
Let's see if we manage. But they have planned nine meetings, so it's not impossible. Thank you.
Kira Marie Peter-Hansen
Thank you very much, and thanks for all the four speakers. I think you very well highlighted the different dilemmas that this proposal entails. And with that, we can go to discussion with the FISC members, and I will start by giving the floor to Michalis from EPP.
Michalis Hadjipantela
I will be, I will make three specific questions and I hope I get an answer. The first one is we've heard you all saying about the DAC that was implemented for many years. But I haven't, as a member of European Parliament, you haven't mentioned the benefits by doing all this compliance and all these costs to the European Union. This is something we need to know. So what we have done, something that costs a lot of money to the companies, but we don't know what we are getting back.
Thank you, Chair. Thanks to all the speakers.
Is that all this information that the companies they are providing through the systems, does anyone look at them? Does anyone see there is a problem and you go and get the tax evaders, or they are just doing all this information, the companies, and they are sitting in an office somewhere and no one is getting them? I would like an answer from the Commission on this. Second, Mr. Palansky, he said we are trying to do something that we do not have the data. We have to be careful.
If we don't have the data, why are we going to do something and make things more difficult than simplified? When I've done the report, I was the rapporteur of the simplification of the tax system in Europe, together with all of my colleagues here, Juri is here. We want to tackle tax avoidance.
And in the report again I was a rapporteur for the with OLAF we had a unanimous report. We are united in fighting tax avoidance. But at the same time I was here you are telling me what to do here with all these complicated structures beneficial owners that people they will they you say you will save they will not save but because by the time they understand what's going on it's gonna be because I've been I'm in the sector of this and I know by the time you do this then there will be seminars in the whole of European Union to try to understand what you are trying to do. More seminars more seminars more cost then by the time they understand what you are doing so are we trying to help to simplify things or make complicated? Because while hearing to you I understand we are making things more complicated but not simplified.
But I want you to tell us tell us one measure you would like us to do to tackle tax avoidance and for sure this committee will vote it. But don't tell us all this bureaucracy and and and all these things that they don't simplify things for the companies. Thank you.
Kira Marie Peter-Hansen
Thank you very much. I will start by giving you the floor and then Benjamin and then Philippe and Nadine if you have something to add for three minutes.
Miroslav Palanský
Thank you very much for that question. I think you are exactly right that let the data show. We have not seen the data. Just to react maybe to I don't think you have made a mistake in the impact assessment. I've read it very carefully and you do mention the 4,600 but the 3,000 is a midpoint estimate of a range.
So you can be calm that there was not a mistake. But I was more talking about the cost of that carve-out. We do not know what it will cost. The only available evidence that I have found was the paper mentioned by Professor Riedel that you know has evaluated DAC6 as useful to decrease profit shifting and tax aggressive schemes. So yeah.
Thank you.
Benjamin Angel
Thank you. You asked Michalis whether the DAC is useful. Our clear answer is yes, it is. And it's not only the Commission, that's also the answer from member states. As you know, each time we propose a tax legislation, it's a bit a headache, sometimes a crucifixion path to get it adopted, but never for the DAC.
The DACs are always adopted within three, two months, two or three months. So that shows the eagerness of member states to make progress. Now, how to measure the benefit, which is a very difficult question. In the evaluation, we concluded that the annual benefit is around seven to eight billion euro, but it is difficult to measure for a number of reasons. First, because member states never use exclusively the DAC data.
De facto, when they take a tax decision, what they do is that they use a bit of the DAC data, a bit of the national data, and they mix the two. So to be able to report that decision as being attributable to the DAC's data, you need also the member state to be organized in such a way that each time it has used directly or indirectly the DAC data to come to this decision, he is able to report that this is the case. Some are able to, some are not. So it's not so easy.
Second reason, for some DAC, in particular DAC6, and I'm sure this time Miroslav will agree with me, there is value also not only on what happens, but on what does not happen. When I tour the Member States, very often I see people from the Big Four telling me, well, this kind of arrangement we were doing it before, but now that there are those transparency requirements, our client is not comfortable with the publicity that would come with it, so we stop doing it. You cannot put a benefit tag on something that does not happen, but it does not mean that there is no benefit. It is just preventive. So we have a direct benefit of around seven or eight, but a much bigger one in practice thanks to the exchange of information and the preventive nature.
And this benefit is growing with time because Member States are more and more equipped to use the DAC data in a smart way.
Kira Marie Peter-Hansen
I think we hear you now and when I close my phone the echo should go away.
Nadine Riedel
Okay, perfect. So I just wanted to second what Miroslav Palanský said on availability of data for academic research. So I think the question that you posed is a very valid one.
So if we want to have data-driven policymaking, and I think this is an area where this is really important, you need to provide the data to independent academics to evaluate that. And then you could, by linking kind of reporting obligations to firms and if they change, to see how firms change their tax reporting, you could actually answer very precisely how these reporting schemes actually impact firm behavior and revenue collection. But this is currently not possible, but I think it's a very valid thing. Nevertheless, the evidence that we have, and Benjamin Angel just mentioned some work by the Commission, but also academic work, actually points to the effectiveness, to benefits of the DAC provision also in raising more revenue. I think what you rightly ask is whether, you know, when we change, so we have a system and then we impose changes, then these changes may actually put additional compliance costs on firms.
And I think this is something very valid to think about and to consider. However, I think with this DAC recast, many obligations from a perspective of businesses actually are recast. So they drop away. And so I think there's clearly simplification also, at least in many of these proposals, and I just wanted to stress that. Thanks.
Philip Kerfs
Maybe very briefly I somehow agree that there could be more information showing the benefits of all these transparency initiatives but I do want to underline that there is information available and in particular already in connection with the DAC 2 and CRS and the benefits of the CRS. I think there are many studies already that shown that have shown an impact on compliance and a decrease of offshore deposits. We have also kept track of revenue that has been realized through thanks to voluntary disclosure regimes that were associated with when the when the DAC 2 and and the CRS came into place and and these are significant amounts. I personally always find the most let's say convincing way to to show the benefits of this is that the CRS for instance has given tax authorities visibility on a vast number of foreign accounts which it didn't have before. And there are a lot of academic studies that have shown that if tax if taxpayers know that the tax authorities do not know about these accounts they will not declare them.
So having that information will have a significant impact on compliance.
Kira Marie Peter-Hansen
Thank you very much. And then we turn to our next speaker, Bruno from S&D.
Bruno
Thank you very much. And first of all, I'd like to observe the chair's proficiency on the debate and also asking for your guidance on the timings. As a starting point, I wanted to note our positive view on what has been proposed and mainly on the inclusion of real estate assets and the extension of automatic exchange of information to all six categories under DAC1. This is for us an important step to create a more complete picture of economic activity across borders, thus also improving the ability of preventing tax evasion. And then I would have probably three or four questions.
And the first is that on on the other end, I'm concerned how companies under the Pillar Two that we have been discussing at least for the last two years are being excluded from DAC6 generic hallmarks, but also ATAD and CFC rules under the Tax Omnibus proposal in this house. Considering the the current geopolitical environment and giving given that the practical effects of Pillar Two remain uncertain, what evidence is there for removing DAC6 reporting before being 100% sure that tax authorities can identify and address the same risks without those disclosures? And furthermore, on on DAC7, the Commission's impact assessment notes this represents the primary reporting obligation. Could the cumulative effect of of the proposed threshold changes create new risks of under-reporting instead of over-reporting?
Bruno
Yes, I was just observing your proficiency and now I'm observing my lack of. So I was asking on on the possibility that this could create under-reporting and how can also this be monitored and what safeguards can we ensure that sellers or platform operators do not avoid detection? Last but not least, also connected to another file that we we will be working on on this committee regarding the DAC overall structure, we have information shared bilaterally and other registered and available in a central directory, if I'm if I'm correct.
And I would like to hear mainly from the Commission your views on the benefits of expanding the amount of information to be available through a central directory, specifically for individuals with ultra-high net worth. We could name these ones being the ones evaluated with assets of over 10 million euros in order to improve the capacity of Member States in securing effective taxation of their income and assets, if this is or is not viable, if this is or is not a competence that could be ensured through this central directory. Thank you very much.
Pasquale Tridico
Thank you, Bruno. I guess everybody can answer. Benjamin, you want to start? Thank you.
Benjamin Angel
Good afternoon, Pasquale. Let me just answer briefly on DAC6 again. We are comfortable that we can lift this requirement on Pillar Two company because of all the information we already get, notably, and that's the point which is constantly forgotten by the academic, notably from the fact that those companies are audited all the time. They are companies which are quite transparent to the tax administration. So if you add on top of it the country-by-country report, which is a brick, the global information return, which is another brick, where are the gaps?
When we talk to the tax administration, they are not too concerned about it.
Now I move to DAC7 on whether we're going too far on changing the reporting threshold. We don't think so, and actually we think we're just correcting a mistake that we made and that the OECD imported from us after, so that's a good illustration that the relation goes sometimes both sides, in setting the thresholds and notably the threshold of number of operations. In the DAC7 today, you have to report if you have more than 30 operations. Where we got it wrong is that we completely overestimated the average value of an operation. To give you a concrete example on the most popular platform today in Europe, or one of the most popular, a European one, Vinted, the average value of an operation on Vinted is single digit.
With 30 operations, you're not even reaching 300 euros. Is it relevant from a tax point of view? The answer is clearly no, it's not relevant from a tax point of view.
What we wanted to do primarily via DAC7 is to track people having an hidden professional activity, not the mother selling the used pajamas of the kids, because that's not relevant from a tax point of view. The problem is that this low threshold, together with relatively poor communication from the tax authorities sometimes on what they do with this information, has spooked the customers. That's why we feel that we can comfortably drop this number of operation threshold and increase a bit the value threshold to 3,000 euros, which is the value where people have converged in the OECD, without losing the people which have this hidden commercial activity, but without catching the people we don't want to catch. And this is not a small simplification, actually, because it cuts the number of reports by 11 million per year. 11 million reports for which in 99% of cases nothing would have been done with it.
So, it's important when we legislate to correct when we get it wrong and to correct quickly. And this is what we're doing, because this was really killing the circular economy. On your last question on whether the Commission works on an asset register, the answer is no, we are not working on preparing an asset register. But going forward, we have clearly a keen interest in developing registries for taxation in general.
We are considering in the future working on creating a tax data hub. We have to keep an eye on what is happening in the custom field because a custom data hub is being created and if it works well, it can be a good source of inspiration for the future because it would allow more efficiency if instead of having 27 countries exchanging all kind of information in all possible directions, we can just extract the information from a register that would be far more efficient, but we're not there yet.
Miroslav Palanský
Thank you very much. I would react by or start reacting by saying that the fact that tax administrations don't use a data source does not mean that we should take it away from them. It might mean other things such as lack of capacity, etc. I think the evidence that we have about the continuation of tax revenue losses due to corporate profit shifting, which are not going down, and the initial estimates that we have from pillar two implementation are also not very good. But I do agree that the compliance costs are high.
But I think we do have to remember that it's the company's choice to make those tax arrangements. They don't have to do tax-driven cross-border arrangements. I think that you're exactly right that we do not have evidence in the impact assessment about the benefits of creating the carve-out. As I said in my presentation, it is simply assumed to be zero. I think you then also said that it's not zero.
I was not disputing it.
So I'm just, you know, I'm not disputing that they might be larger, the benefits than the costs. I'm just saying that let's, let's quantify them. I can also confirm that it is not hard to do, as, as Professor Riedel has said. It is simply about looking at the data, which we have not yet done. I'm coordinating an initiative called Admin Data for Tax Justice, which aims to connect researchers like ourselves with tax administrations around the world.
We can relatively easily produce fairly good estimates, which currently, in my expert opinion, we do not have.
Philip Kerfs
Very brief, I'm, of course, very happy that Benjamin has admitted they've exported a mistake to the EU, to the, to the OECD.
No, I fully support everything that Benjamin mentioned about this threshold discussion. I think this threshold discussion was at the time also the reason why initially there was no consensus at the OECD to bring sales of goods in scope of these model rules. And I think the profile of these people, these are not tax evaders, and we should bear in mind also that this is a monetary threshold that is not an income threshold, it's a sales proceeds threshold. So the 3,000 is not even a 3,000 profit, but it's the total consideration. So I think the risk of that being abused is rather low.
Nadine Riedel
Yes, very briefly. So I second everything that was said on the low-value reporting threshold for DAC7, so I think that makes a lot of sense. I wanted to briefly comment on the Hallmarks and the carve-out for the Pillar Two companies.
So I think kind of the perspective if one says that even Pillar Two and even CBCR have not kind of, or only to a limited extent, impacted tax reporting of multinational firms, then I think it's a fair question to ask whether DAC6, which, as Benjamin also put it, kind of in its setup already looks like much less valuable. We don't know it because we don't have the data yet to kind of assess that in a very structured way, but from like the setup of the information, it looks much less valuable than CBCR and Pillar Two. And then kind of I think the conclusion, so I would not have concerns to take that out, especially also taking into account Benjamin's point about the regular audits. I think this is less valuable than the information that they already report, also acknowledging the overlap, of course, in terms of information. Thanks.
Redner 15
Thank you very much. Now we go ahead, and for the Left, I have Jussi Saramo.
Jussi Saramo
Thank you, Mr. Chair, and thank you all for very interesting speeches. I think it's very important to remember that the benefits do not only come from the tax revenue, but also from the fact that the largest companies do not get unfair competitive advantage over the smaller ones, or the dishonest ones from the honest ones.
And we are already seeing cartels and monopolization for reasons other than tax. And so I would not be worried if the largest companies have to report things that the small companies do not have to. I think the playing field is not very level in many other reasons. But my favorite principle is that one strong regulatory tool is better than a thousand weak ones. So I see the point of combining and trying to find, harmonize the rules and evaluate what is like extra bureaucracy.
And that is why I'm asking from your perspective, what are the things what should be added to the new DAC? Is there something that is missing and what could still be taken away from it? Thank you.
Benjamin Angel
How to address? Not sure the question was for me, because as far as the Commission, we tabled our proposal, which is the position of the College. Should new things be added? Well, we will keep on following closely the evolution of OECD discussion.
By definition, tax evasion is taking different shapes over time, and it's important that the legislation follows the practice and the creativity of the evader. So there are probably things that we are not even aware of today that will be the topic of discussion in the future. But for the time being, we are well aligned on the latest OECD development. And if on a personal basis I were to formulate one wish to see more progress internationally, it would really be on exchanging information on beneficial ownership. There, we're pretty good in the European Union.
We're very much in the forefront. We have registers which are interconnected. We're exchanging information. But globally, it is an extremely divisive and difficult topic, and which is not progressing much. And even some developed countries are quite reluctant to make progress.
And beneficial ownership information is key to answer a very simple question, which is who is behind the information we get. And as long as we don't make sufficient progress there, a large part of the exchange of information will remain a bit frustrating.
Miroslav Palanský
Thank you very much.
It's difficult to assess before we see the data of what should be in the data. From what we know about the effects of the previous DACs, it seems and from a synthesis of the available evidence generally, is that I completely agree tax evasion is taking on various forms and shapes. People do react to the transparency measures that we have in place now. So you know, the CRS had a famously very strong impact on bank account holdings in offshore jurisdictions in very convincing studies, I think we have shown that that was a strong effect. There is also pretty good evidence about some of the other channels becoming stronger, like real estate, which was on the table here, like cryptocurrencies, like beneficial ownership of some types of legal entities as Benjamin has said, perhaps outside of the European Union, of course, then than inside.
And there progress has been slower than we would have liked for sure.
Philip Kerfs
Yeah, I would think yes, beneficial ownership is important and it's true that the EU is at the forefront, it will probably be more difficult to build something similar outside of the EU, but it could be an interesting further development. We are obviously also still trying to roll out the automatic exchange of information on real estate. It has been adopted, but we still need to get more customers on board, more countries on board. But on top of inventing new toys, I think it's also very important that we make sure that our existing toys keep working properly. And I think, for instance, about the CRS, we need to keep the eye on the ball and make sure that it works properly.
And one of the developments that we need to keep an eye on is the phenomenon of decentralized finance. I mean, we have the crypto asset reporting framework, but that at this moment does not yet give an adequate answer to the decentralized finance phenomenon where people pretend that there's nobody having control over a platform, and that is probably also something to keep an eye on for the future.
Nadine Riedel
Yeah, thanks for the questions. So I think, of course, you can have multiple aims if you think about transparency directives and regulations. And fairness is of course very important, and a level playing field is also very important to think about competitiveness of larger and smaller companies. And we have an empirical paper where we actually show that the tax benefits that larger firms get actually also give them an advantage in product markets. So this is really real what you describe.
Nevertheless, I wanted to stress that we are in Europe, in all of Europe, currently in a growth crisis. We have structural challenges, and I guess the question is also how we now want to navigate through this situation and where we would want to put the emphasis.
And I feel that, you know, the last decade we put a lot of effort in constraining tax evasion, constraining tax avoidance, which is very valid, but also came with compliance costs and complex regulations. And I feel it's a good time now to take a step back. And this is essentially what the recast proposal does. And there are many, there's not this big one thing that we need to change, but there are like many areas where we can implement improvements. And this is what the Commission does.
And I think it's a valid step forward. And I think in terms of what you can even improve from there, this might also go in steps. Yeah, so and it may, you may think about further simplification. And here again, you know, we need data, otherwise everything is based on beliefs or anecdotes that tax administrations or businesses tell. But I think having like real rigorous data evidence would really help and would help you to think further about simplifications and what data is actually needed and what data is not needed.
And I think the same kind of goes for implementation of using this data within tax authorities. And Benjamin kind of accused me of misinterpreting the recast proposal. I think I framed it not in a good way.
I did not misread, but there there are kind of ideas around of going even one step further than, for example, this TIN verification tool and having an EU TIN. And this might potentially in the medium run be a good thing, but it would not be good to implement it now, but rather go in steps, see with the tool, with lighter tools which are not mandatory on businesses, see how that goes, how far we can get and then evaluate on a constant basis and go from there. Thank you.
Pasquale Tridico
Thank you very much. Thank you. It was very interesting for the part I heard. And now we do not have any other MEP, but we do have some time if any catch the eye. Please, Mr. Drosse.
Siegbert Frank Droese
Thank you, Chair. I will speak German. Die Neufassung der DAC-Richtlinie ist sicherlich das Ziel ist gut, besserer Informationsaustausch, effektivere Bekämpfung grenzüberschreitender Steuerhinterziehung. Das unterstützen wir auch. Die Frage, die wir eigentlich uns ableiten, ist, ob immer neue Melde- und Berichtspflichten tatsächlich zu besseren Ergebnissen führen oder vor allem den Verwaltungsaufwand für die Unternehmen und unsere nationalen Behörden erhöhen.
Wir sind ja viele in bürokratischen Staaten zu Hause und mein Eindruck ist der, dass eben oft nicht mehr Bürokratie automatisch zu besseren Ergebnissen führt.
Deswegen noch mal die Frage an die Experten: Gibt es belastbare empirische Erkenntnisse, dass die bisherigen Erweiterungen der DAC-Richtlinie tatsächlich zu einem messbaren Rückgang von Steuerhinterziehung und höheren Steuereinnahmen geführt haben? Vielen Dank.
Benjamin Angel
Well, one very clear message that we got from the business community was: do not change, delete. If you change a rule, it's a cost. If you delete a rule, it's a saving. And we have followed this principle in the DAC. We do not come with change of the hallmarks of DAC6, for instance.
When we came to the conclusion that some hallmarks, like the hallmarks of A category, are in practice not useful, we proposed to delete them entirely. We do not propose any extension of the reporting. Actually, for some of the DAC, we even, as we said in the previous exchange, cut massively the reporting. 11 million reports cut for DAC7, it's not nothing. The only new area is the one that we import following the last development in the OECD, which is having beneficial information on real estate.
And I don't think there is anything to fear about it. It also mirrors a development that already exists in Union law. Because as you know, taxation follows very closely AML. Tax evasion is also a predicated AML offense. And in the last version of the AML directive, which has been already adopted by this Parliament, there is an obligation to exchange information between AML authorities on beneficial ownership for real estate and also a single access point to the data in each Member State.
So what we're doing in essence is making sure that taxation follows the development not only internationally of the OECD, but also the development in the AML field, knowing that when you have a register of beneficial ownership, you don't have a different beneficial ownership if it's for AML or tax purposes. It's only one register at the end of the day, and we have to make sure that it's used by both AML and tax authorities.
Regina Doherty
Thank you, Chair, and apologies for being late. The question is to the entire panel or anybody that might have an opinion on it. So we know obviously the importance of the DACs. We know how it has expanded significantly over many successive revisions, yet we continue to hear the tax authorities, the businesses complain about the complexity of the reporting and the compliance costs, and then the practical use of the information that's garnered. So can I ask you, in your opinion, what one reform do you consider would be most effective, particularly in relation to the quality and the effective use of the information that we actually do gather and share between member states, as opposed to increasing the volume of what it is that we gather during the process, please?
Miroslav Palanský
Yes, happy to, thanks for the question. I would say centralized analysis of administrative data across tax administrations with proper capacity and rigor.
Philip Kerfs
Maybe very briefly. I don't see it as one small thing, but a long-term trend, and that is also something that is being worked on at the OECD in the Forum on Tax Administration, is all these reporting systems that have been built so far are all about tax authorities get information, they need to digest it, and then there is post-factum control. And there is a tendency to now try to, if you improve the quality of the data, it may also support services to taxpayers in the sense that maybe they will no longer need to declare it where you can get pre-populated returns based on that third-party reporting. This is maybe a long-term vision. This is not for immediately, but I can see the benefit of turning all these compliance costs related to third-party reporting to not only give them compliance benefits for tax authorities, but also to actually make it easier for taxpayers to comply with their obligations.
Benjamin Angel
Yeah, it's a difficult question, but I would answer two things. The first one is that member states have to be very careful when they transpose the DAC to avoid gold-plating and duplication.
We see too much gold-plating taking place. We have tried in the DAC recast actually for the first time to introduce a no-duplication principle, which would be a useful development, but it's difficult to contain because it's a directive. National parliaments sometimes are creative in the legislative process, and it is their prerogative to add to the existing requirements, sometimes with good intention, but not necessarily good effect. The second is that we need to bring more consistency in the way some key concepts of the DACs are implemented. And here it's not a question of legislation, it's a question of understanding what the legislation mean.
Let me give you an example: in DAC6, you have a number of hallmarks which work under the so-called main benefit test. What businesses tell us is that there are almost as many interpretation of what the main benefit test means as we have member states. So clearly this is not a legislative issue, but this is an issue where we need to bring all member states around the table and say, let's try to understand what this means.
Going forward, we will do systematically the exercise each time we have a new legislation, before the transposition, just after adoption, to try to agree the meaning of the words. The difficulty is to do it for rules that exist for many years, like the main benefit test. But we will try, because in practice that create a lot of unclarity, and when the rule is unclear, it makes the data that we get under this rule far more difficult to use.
Pasquale Tridico
Thank you. Thank you, everybody. We have finished this first session of today. We start in five minutes with the second hearing, so five minutes break and then it will be okay. Thank you very much.
Thank you very much. Thank you very much.
Welcome back to the colleagues and to the speaker, apart from Benjamin who was already here. And today actually we are speaking about in this second session on the omnibus on taxation, which is a very comprehensive proposal on which the Commission actually probably more than in other files there has been a strong effort for a comprehensive package that today we discuss. So it is really a pleasure for me to have the view of our speaker and expert from Benjamin Angel Benjamin from the European Commission TAXUD, then Mr. Gerhard Huemer, Director for Economic and Fiscal Policy, SMEunited, Madame Mariella Caruana, Deputy Director of Taxation Economics Department, BusinessEurope, Alison Schultz, Research Fellow, Tax Justice Network. You have as usual seven minutes each, then we go back to the member for their question and then back to the speaker for maximum three minutes for their answer. We start with Mr. Gerhard Huemer.
Please, you have the floor for seven minutes.
Gerhard Huemer
Thank you very much. SMEunited is the association of crafts and SMEs in Europe.
We are speaking on behalf of 26 million SMEs in Europe and you may imagine that not many of them are directly impacted by the proposal on the table. There are very limited which do cross-border activities and there are even less SMEs which are organized in groups affected by some of these rules we are discussing here in this context. The main reason for this is that if there are barriers, also taxation barriers, which hinder SMEs to do cross-border activities, like the different tax bases etc. etc., and as long as Europe is not successful in harmonizing tax base or at least allow SMEs to use head office taxation rules or home office taxation rules like the proposal which was rejected by the Council during the last 10-12 years, it will not change much. So if Europe wants to have more SMEs doing cross-border, we have not only need the Omnibus, we need something more to make it at the start attractive for SMEs to do something on cross-border.
This does not mean that the Omnibus is not important, but not that much for our SMEs. The other thing what may help be helpful is to have at least for some SMEs like startups or scale-up SMEs a 28th regime on taxation. You can a bit imagine how likely we will get this in the foreseeable future, but these are the elements which are needed to make SMEs go cross-border and make them beneficial from the Omnibus we have now on our table. We are still assessing with our members the proposal from the Commission. It's quite complex, quite broad, and our member associations are also not super active on these topics because as I said before, there are very few SMEs which are impacted by them.
What we hear so far from our members that they are happy with the addressing the competitiveness challenge related to the fragmentation of R&D tax credits.
There will be some advantages from interest deduction limitations, especially when it comes with the safe harbor of the 5 million. We see some good arguments why SMEs should be fully carved out from the Anti-Tax Avoidance Directive, could be justified. And of course, I know how slowly taxation processes are, but doing an omnibus which aims for simplification with entry into force between 32 and 37 is also not very ambitious from our point of view. This is what to be very frank what I have at the moment. We are more than happy to provide you with more input when we get more from our members and therefore I would like to use the second half of my intervention time to hand it over to my colleague from BusinessEurope because she has already much more elements to tell you than I have.
Thank you.
Mariella Caruana
Yes, thank you very much and I will talk about why this proposal is very important for us. So first of all, thank you Chair and thank you to the members of the FISC subcommittee for the invitation to be here and speak on behalf of European business.
We represent 42 member federations in 36 different European countries and represent some 20 million companies from across Europe. And I want to start today by saying that every day, companies across Europe make decisions on where to invest and where to grow, and those decisions shape Europe's future every bit as much as public policy does. We need in Europe much more investment every year simply to keep pace, and so the question is not whether Europe can afford investment, but whether Europe can afford not to attract it. There are too many companies in Europe that could become Europe's next global champions that are choosing either to invest elsewhere or simply not to invest at all. And whereas tax policy alone will not determine those decisions, it is an important factor because investment depends on confidence, and confidence depends on having a framework that businesses can understand, can predict, and can operate.
And unlike many competitiveness challenges, the simplification of tax rules in Europe, I think this is an area where we really have, we can act on our own.
We are not constrained by international negotiations, nor by geopolitical realities. We simply need the willingness to ask one honest question, and that is, do our rules still achieve their objective in the most effective way? In my role, Chair, I have the privilege of spending a great deal of time speaking with European business from across all of Europe. And what they ask is very simple: they want more rules that let them invest and less time administering. So this is why today's debate matters for us, not because business is asking Europe to do less, but because Europe is asking business to do more: to invest more, to innovate more, to help deliver Europe's strategic priorities, from the green and digital transitions to defense.
And so if Europe is asking companies to invest more, then every part of the tax framework has to help them to do so, and it should not unnecessarily make it harder for them. We've all seen the Draghi report; it was a reminder that part of Europe's competitiveness challenge is self-inflicted. So this is a proposal, for once in a long time, that attempts to correct that by asking whether the same policy objective can be achieved with less unnecessary complexity.
And as a group, we strongly believe that this is a first step in the right direction. I will give some practical examples and I will start with withholding taxes because this is one of the measures that matters most for businesses, and if you were to speak with any finance director where the real burden lies with withholding taxes, they'll tell you it's everything from the tax that is incurred to what comes afterwards. You have cash that is tied up, you have finance teams that spend months preparing refund claims, the administrative effort is never refunded, and sometimes the cost for recovering the taxes is too high that basically we all know what happens, that you have legitimate claims that are simply abandoned, abandoned. So that's what makes this proposal one of choice and of courage, one about completing the single market. And completing it means also to remove the barriers that no longer serve a purpose.
This is also how we give practical effect to the freedoms that the treaties guarantee us as Europeans.
And it's something that should not wait until 2037, because we've seen other areas where Europe has moved on faster on harder problems. It's exactly the same question that arises with CFC rules. You do not get more compliance from businesses just because you have two overlapping regimes that exist. They are simply more occupied. So if we can achieve the same policy objective with fewer administrative obligations, I wouldn't call that deregulation, I would just call that better regulation.
It's the same principle that applies to the interest limitation rule. Nobody, nobody is disputing its anti-abuse objectives. But the world has changed, and today's Europe is asking businesses to invest more than ever. And investment requires financing. So are we asking businesses to invest more while making it harder to do so?
Take a few examples: a family-owned hotel that borrowed from a commercial bank during the pandemic to preserve jobs and to modernize its premises. Or else a company that is financing the construction of affordable housing or a new AI facility through an ordinary bank loan. These aren't examples of aggressive tax planning.
This is what Europe is actively encouraging. And therefore rules that are designed to tackle artificial financing should tackle artificial financing, not ordinary commercial borrowing. I'll briefly turn to R&D expensing because unlike the other measures, this is not one about removing obstacles, but it's about creating incentives. There are other major economies that have already moved decisively in this area, and let's be clear, they are competing for the same investment that Europe needs, not least in artificial intelligence, where the cost of infrastructure and talent is both enormous and mobile. So if Europe wants more of that investment to happen here, then our tax framework simply needs to encourage it, and it should not simply stop discouraging it.
I will conclude, Chair, by saying that tax is very complicated, and complexity is sometimes unavoidable. But complexity should always earn its place. Europe has committed itself to reducing unnecessary administrative obligations with very clear targets: 25% for companies, 35% for SMEs.
This is a proposal that gives us an opportunity to start turning that commitment into reality. But windows of opportunity do not remain open indefinitely. They close one investment decision at a time and that is how competitiveness gradually erodes. And by the time we notice that loss, it will be too late, many of those decisions will have been taken elsewhere. So it is our collective responsibility to make sure that more of those decisions are made in Europe.
And the question before this house is not whether this package is a perfect one. It is whether barriers that no longer serve a purpose should keep standing in the way of Europe's investment ambitions. So I will conclude by saying that that is why this proposal matters for business and that is also why it deserves the full support of this house.
Alison Schultz
Thank you very much. Good afternoon everyone, thank you very much for having me and giving me the opportunity to share my thoughts about the European Commission's omnibus proposal on direct taxation.
I'm I don't know if the slides are visible so are they? Okay, perfect. Thank you. So so in general as you've heard the Omnibus argues that several of the anti-avoidance rules have become overly complex and I actually agree that complexity is a problem. However, I rather argue that the complex rules are just a response to very complex avoidance schemes which have evolved over the years.
So actually complex avoidance does require complex rules and if we just remove them this rewards those who are the worst abusers. And I will argue that we should instead of just ignoring the complexity in the tax system, we should just simplify the tax system instead. So let me start with a question and this is whether the EU has actually managed to stop corporate tax abuse and what I brought here is some data from the country-by-country reports of Microsoft of last year they just released this two weeks ago. And what you can see here and this is very recent this is the last financial year which is reported that Microsoft very similar to many of the other big companies reports about 100 to 200,000 profits per employees in most of the European countries but more than 8 million profit per employees in Luxembourg and 7.1 sorry this is the I think it's not working.
So this is the second slide. Now you can see Microsoft's profit per employee. Should this be working or...? Okay. I think it's not.
Okay, I will ask you. Thank you very much. And in Luxembourg, it, Microsoft reports more than 8 million profits per employee, where it pays a tax rate of effectively 3%. In Ireland, it has reported 7.1 million per employee and paid an effective tax rate of 14%. Next slide, please.
And if we now ask how they manage to do this, how did Microsoft manage to do this, I now brought the example of Google to not only claim that Microsoft is the problem. And here you see how Google's avoidance scheme has worked for many years. This is the historical example because it's super difficult to know what they are actually doing at the moment. And just to summarize it, you don't have to understand this entire complex thing. What they did is just shift royalties around Europe to make sure that in the end they are not taxed at all.
What is important here, like I said, is not the exact scheme how it's working, but that complexity is how modern corporate tax avoidance is done. So actually, next slide, please. Okay.
So where does the complexity in avoidance rule come from? So we do see complex tax planning and therefore the European very rational response was to set up a system of complex anti-avoidant rules. If now the Omnibus says the rules are too complex, we have to ask whether complexity has actually disappeared or if we're just removing the safeguard and trying to be ignorant about the complexity that is still there. Next slide please. And if I look at the different proposal of the Omnibus, we mainly see that the Omnibus simplifies major safeguards.
Some of them from ATAD 2 and ATAD, the imported hybrid mismatch rule will be abolished or should be abolished, is suggested to be abolished. CFC rules will be exempting Pillar Two groups. The interest limitation rule will be set to a minimum and the withholding tax exemptions will be made way more generous in the IRD and the PSD. Next slide please.
I will continue with the imported hybrid mismatch rules, which should be abolished or which are suggested to be abolished just because they fit my example of Google so well. So again, here on this slide, we see the scheme where Google managed to shift royalties around to one of the entities, Google Ireland Holdings, which was incorporated in Ireland and tax resident in Bermuda and which actually managed or which allowed the royalties to manage to escape corporate taxation altogether. So if in the scheme you had one entity, here the example of Google Poland, which was actually a proper entity with proper real economic activity, the rule of the imported hybrid mismatch said that if the royalties Google Poland is now paying to any of the other Google subsidiaries are not taxed anywhere later in the process, they should be taxed in Poland and Google Poland would not be allowed to deduct these royalties from the taxable profits. Next slide, please. So if we now would just abandon that rule, Google Poland is just saying it's impossible to know what happens with these payments later, way too complex, so I'll just let the payments go.
However, the structure has not changed. The planning remains, the safeguard disappears. Next slide, please. Even worse is that the Pillar 2 groups are suggested to be exempted from the CFC rules.
So what does the current system of CFC rules do? Let's take a German parent who has a Swiss finance or IP subsidiary, and this German parent sends a 100 million of passive income to this subsidiary, meaning this income is not generated in Switzerland, it's just sent there because tax rates are low. So the German CFC rules would now allow Germany to tax this 100 million passive income because it will not be adequately taxed in Switzerland. Now, with the Omnibus proposal, they would allow Pillar Two groups to be exempted, or this would allow Pillar Two groups to be exempted from CFC rules. How would the situation look like?
We would still have the German parent sending 100 million in passive income to the Swiss finance or IP subsidiary. This would still be attractive because Switzerland is applying the minimum tax with 15%, but this is way below the tax rate of Germany and also way below the corporate tax rates of most of the other European member states. So without the German CFC rules in the proposal, Germany would not be allowed to tax this part and just lose the taxing rights here. Again, the planning remains as it is, the safeguard for European member states disappears. Next slide please.
And just to see whether this is a problem at all in terms of quantity, I've looked into the country-by-country reporting data which is presented or which is provided by the OECD and looked at the related party revenue from EU-based headquarters or EU-headquartered multinationals which go to tax havens who already said that they will be applying the domestic top-up tax. So this is basically the payments which could be affected by not having the CFC rules anymore. It's very big. It's 180 billion for Germany, it's 145 billion for France, and all the major member states where we have multinationals will be affected. So one major reason to do all of this, and this has already been reflected by my previous or by the previous speakers, and this is that we want to boost competitiveness of EU companies.
And I think that's a very good goal. However, the problem is that if we just take away safeguards, we will benefit those people who abuse the system most. And if we look at current multinationals, this is not EU-headquartered multinationals. We consistently see in the data that US-headquartered multinationals are the most aggressive in profit shifting, are the most aggressive in aggressive tax planning, and that's what you see in this slide where you see the profit per employees for US-headquartered multinationals in blue and for EU-headquartered multinationals in green, and you see how it exceeds, how the mismatch of where they report profits just because the taxes are low exceeds EU-headquartered multinationals by far. Next slide please.
Oh, sorry, this was this slide. Next slide please.
Sorry about that. So what should we do instead? Instead of relying on the current system, where we have separate accounting, where we have transfer pricing, which allows all kinds of exploitation and therefore also requires all kinds of complex anti-avoidance rule, we should switch to a system where we have unitary taxation. So we should have one single consolidated tax base within the EU, very simple for companies as well. We should then allocate taxable profits based on real economic activity with a formula which just allocates the profits based on how many employees and how many sales are present in each Member States.
Such a system does not allow for complex and does not need complex avoidance, does not allow for complex avoidance, and therefore we would also not need complex anti-avoidance rule. Next slide and last slide. So what's my suggestion for the committee? The first thing is to request transparent estimates from the Commission and from national finance ministries on the expected revenue effect of the proposal. And just as a spoiler, it's not well done or it's not there in the impact assessment and it could be done based on the data which we have.
Second, prioritize reforms that align taxing rights with real economic activities to really simplify the system rather than the safeguards, for instance, BEFIT with formulary apportionment. And finally, support the ongoing UN negotiation on a tax convention that could deliver a simple and fair international tax system. Thank you very much and sorry for going over time.
Pasquale Tridico
Thank you very much, Alison. Now the floor to the, well, to the author of the proposal. Author in the sense of institution, of course.
Benjamin Angel
Absolutely. It's a big teamwork, as you can imagine. The competitiveness is clearly driving the effort of the Commission across policies to simplify, and taxation is certainly an area where we can make big progress. We have piled up legislation quite significantly in the field of direct taxation. We have now 17 directives.
And when you have 17 directives adopted in a relatively short timescale, it's normal to have a fitness check. This is what we're trying to do. So we're trying basically via this omnibus to pursue three targets: boosting our competitiveness, facilitating business funding, and modernizing our framework. I will not develop everything that we're doing because that would be a bit too long, but I will take examples under each policy.
First, boosting our competitiveness. We want our enterprises to grow and we want them to build on the single market. We want them to scale up. They cannot scale up without cross-border investment and without the possibility of relying on the market. Withholding taxes are a tax on cross-border investment.
They are a tax on those who believe in the single market and put their word and their money in another member state. Is it the message we want to pass? Do we care for the businesses, particularly in the small and medium member states which cannot build on a large market and who need for growing to build on cross-border investment? The Draghi report clearly identified withholding tax as one of the major obstacles we have left on building a single market. And we think it's time to deliver on one of the oldest pledges of EU tax legislation.
De facto 36 years ago the legislator has decided that there should be no withholding tax for dividend for intra-group payment. 23 years ago it has decided that there should be no withholding tax for payment of interest and royalties within the groups. Yet today we still have half the member states charging a withholding tax that needs to be refunded. Well rather than charging a withholding tax that needs to be reported if we really want to simplify maybe we can start by not charging a withholding tax at all. And since we want to build a single market let's do it for all payment business to business and not only those which are intra-group.
We know that it can have some fiscal impact so this fiscal impact is very often presented in a dramatic way by some intentionally. There are two different kind of impact let me just spend one minute on the benefit. We estimate that today companies lose around 800 million euro of red tape for filling those request of withholding tax.
That they have around 800 million euro of opportunity cost. They have to pay the tax and get a refund. And getting this refund in some member state is not a matter of weeks or months. It's a matter of years. It can go, it can take up to two years.
But more important, we have around, as Mariella alluded to it, around three and a half billion which is foregone tax relief. That is tax which is not due and that is paid just because the procedure to get the money back is so painful that people drop it. Is it the Europe we want? A Europe where people pay taxes which are not due? Now we have an estimate of the taxes which are legitimately collected today.
It's around 3 billion euro. You may think 3 billion euro is a lot of money for member state to lose. Let me give you an order of magnitude. The member states collect every year 7 trillion euro of tax income. 7 trillion.
We're talking of 3 billion out of 7 trillion to pass the message that we believe in the single market and that we should not penalize people that invest in another member state because this is exactly what we want them to do.
Second target: facilitating the access to financing. As we all know, we have huge financing needs for the twin transition, for the digital, for the green, and whether we like it or not, and the Commission would have preferred a different system, clearly, bank funding is still king in Europe. For MNEs, it might be a matter of choice. For SMEs, not a matter of choice. You just can't tap the market.
You have to go to the bank. Against this background, we need to review the big limitation that we put on the deductibility of interest that deviate from a fundamental principle of corporate income tax, which is a cost is deductible. Some of them can be justified from a prevention of abuse point of view, but in the example that Mariella took of the hotel just taking a loan, because those rules apply to SMEs whether they're cross-border or not, what's the risk of abuse? And to make things even worse, not only do we have rules which are very strict, we apply them in a super messy way. The interest limitation rule that exists in the Anti-Tax Avoidance Directive has more than 1,400 different declensions mathematically.
And ATAD as a whole more than 14 million, by the way. We have so many options with so many Member States picking different options in the transposition that for companies it's very painful and difficult to predict when they operate in several Member States. So what we want is to bring more harmony. The reference framework for the interest limitation rule in 22 Member States is 30— sorry, in 25 Member States is 30% of the EBITDA. Let's make it for all 27.
The de minimis, important for SMEs, is 3 million euro in 22 Member States. And incidentally, this de minimis has been set 12 years ago and never indexed, so it means we have become more demanding with time just because of inflation. If it's 3 million in 22 Member States, let's make it 3 million for all the Member States. And let's make sure that from now on it is indexed regularly, so as not to be more limitative with time just because of inflation. The companies have nothing to do with inflation, they just pay the bill because of it.
Other options which are important for companies, like the carry forward, the group escape rule, should also be made mandatory for everyone to make it more predictable.
We should also tackle the nonsense. For instance, today we have a big problem of procyclicality in the interest limitation rule. Let me explain. The deductibility of interest is capped at 30% of the EBITDA, so the earning before interest, tax, etc., etc. It does mean in practice that when a company is in trouble, its profitability goes down and the company hits the ceiling more quickly.
And because of it, the companies pay more taxes. So at the moment a company is in trouble, it pays more taxes. We have seen better in terms of construction. It's difficult to address, but at least we propose to have a breathing space whereby if the profitability falls by more than 50% year on year, the interest limitation rule is lifted fully for that year. We need also to show some consistency in our choices.
Defense is a major policy priority for all governments today, with reason. We cannot tell the industry invest more and limit their funding. This is just internally inconsistent. So we propose a temporary exception for the defense industry where all investment made during five years would escape the interest limitation rule for all the duration of the repayment.
Last, we need to modernize our rules. And here we come to the famous question of the CFC, which was a bit already partly alluded to in the previous panel. With Pillar 2, we have imposed a considerable burden on our companies, as you know. With good reason, and we are proud of the result which we are achieving with Pillar 2, which levels the playing field internationally. But if you're a company, you don't care so much about tax competition and level playing field, you just care about the burden that is imposed on you.
That's why the Business Committee was not so happy about the administrative compliance cost of Pillar 2. The companies which are subject to Pillar 2, they have to provide the country-by-country report, that was already there in the legislation. They have to provide the GloBE information return, thousands of new data points, and they're audited all the time. The object of Pillar 2 is to tackle situation of under-taxation of foreign subsidiary. The purpose of CFC is to tackle situation of under-taxation of foreign subsidiary.
The means are different, the objective is the same. If we believe in Pillar Two as we do, we have to be fair and take into account the huge compliance costs that we have imposed on our company and try to alleviate it wherever we can and wherever we think that there is duplication in the objective. And that's the reason why we have proposed to lift the CFC for Pillar Two companies. Incidentally, if we don't do it, we will end up with plenty of situation of double taxation. The reason being that the state taking the CFC decision is not obliged to take into account the existence of a QDMTT in the country where the subsidiary is, and most of the time might not even be informed of it because of the difference in the calendar.
So it's not only a question of fairness, it's also a question of efficiency, avoiding double taxation. We have plenty of other elements that we have tried to address, some of them were also mentioned by Alice. Let me just say a small word if I can on the imported hybrid mismatch for which you were quite vibrant. I understand why you like it and I understand why the academic community might like it, but outside of the academic community, honestly, this rule is entirely unworkable. To be able to implement...
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