Subcommittee on Tax Matters Ordinary meeting
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FISC European Parliament
Ihren Sitzungen folgenMariella 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 BusinessEurope.
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 investments require 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 investments 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 don't know if the slides are visible, so are they? Okay, perfect.
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.
Thank you.
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 employee in Luxembourg and 7.1, sorry, this is the... I think it's not working. Ah, yeah.
Sorry about this. So this is the second slide. Now you can see Microsoft's profit per employee. Should these 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 managed to do this, how did Microsoft manage to do this? I now brought the example of Google to not only claim that Microsoft has a problem. And here you see how Google's avoidance scheme has worked for many years. This is the historic 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. Slow, okay.
So, 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-avoidance 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 Two 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 hundred 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 hundred 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 exempt, or this would allow Pillar Two groups to be exempt from CFC rules. How would the situation look like? We would still have the German parent sending a hundred 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 headquartered 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 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 a 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, yeah.
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 need 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.
Those 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 three billion euro. You may think three billion euro is a lot of money for member states to lose. Let me give you an order of magnitude. The member states collect every year seven trillion euro of tax income.
Seven trillion. We're talking of three billion out of seven 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. And 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, debt, 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 pays more taxes. So at the moment a company is in trouble, it pays more taxes.
We have seen better in term 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 government today with reason. We cannot tell the industry invest more and limit their funding.
It's 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 Two, 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 Two, 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. And that's why the business community was not so happy about the administrative compliance cost of Pillar Two.
The companies which are subject to Pillar Two, 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 Two 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 Alison.
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 an imported hybrid mismatch, a tax administration needs to know the rule not of one foreign country, but of two foreign countries, and understand it sufficiently well to take deduction on the interaction between the rules of two foreign countries. Guess what?
The role of a tax administration is to implement national legislation. They are not expert in foreign legislation. Since this rule exists, we have taken in the European Union the breathtaking number of zero decision on imported hybrid mismatch. Zero. Is it really worth maintaining a rule when you have zero decision because everyone knows that it's unenforceable?
We need to be serious when we talk about simplification.
We have also other elements on R&D that we alluded or on clarification of the tax measure directive and the dispute resolution directive. It's very clear that we have a competitiveness issue, things will not improve miraculously by themselves, they will improve if we show courage and if we show some ambition. Taxes are often the problem, but if we have the courage to admit that sometimes we can review what we have done and take into account that we don't need a belt and braces and harness and safety net and parachute approach, we can agree some simplification and make also taxes part of the solution to help supporting our competitiveness. Thank you.
Pasquale Tridico
Thank you very much. And now we go to the MEPs, starting with Fernando Navarrete, please, Fernando.
Fernando Navarrete Rojas
Thank you, Chair, and thank you all the speakers for clarifying on a very technical and specific topic. And I'm very grateful that Mr. Wermer has mentioned that this is not everything, but it's part of an important approach. So we have to see all what we are doing all together. So it's 28th regime combined with the simplification where simplification really matters, it's really the policy. And I would like to express my support for the line of travel that this omnibus is taking.
I think it's the right approach strategically. My worry is a bit of timing. I mean, sorry, as dramatic as has been put, the challenge is for today. In 2037, all the decisions, many decisions in many sectors that are relevant for the future are already gone. So I understand that the given clarity for the very distant future also has value today, but it's fairly limited.
I would strongly suggest to go much more ambitious and to try to bring forward these benefits not for the 2030s, but at least for the 2020s, because if we want to have a future. Now, on I like very much this approach that we take into account not just the complexities of avoidance technique, but also the additional layers of rules that we have decided together, which is Pillar 2. But if we take this logic to the fullest, it's not just only CFC, it also might apply. And I would like to ask Commission why you have not thought about getting away from this limitation to interest deductibility, for example, for groups under Pillar 2. I mean, this idea of you have some subsidiary with a lot of debt because it's under tax.
Sorry, the same logic that you mentioned for CFC, I think could apply also for this.
So we have to take it to the fullest that Pillar 2 will be up and running and it will be effective. It's the agreed, globally agreed solution to many of these problems. So these European-specific solutions that made sense in the past, maybe are no longer up to the task. So I would like also to suggest to be more aggressive. Also be more aggressive if possible, I mean, other proposals on the table, but in the negotiations, I think we in Parliament should be more aggressive, for example, in terms of limiting the options for Member States, because this is a directive.
So yes, full deductibility sounds very nice, not just for inter-group, for all companies, but then you have Member States where deductibility you still allow to be 95%, only 95%. So you have a cascading effect within a group that has no connection with the cost of keeping a participation. And this, this clearly is a breaking in the smooth functioning of the single market. I think this loophole should be, should be removed from the policy options for Member States. So thank you, thank you very much, sir.
Benjamin Angel
Thank you for your word of support. I think what we have tabled is ambitious, and being ambitious in the tax field when you need unanimity is very uneasy, to put it diplomatically. So yes, we would have liked to be quicker. And the biggest ticket of the package, the withholding tax, is very backloaded. We foresee an entry into force only eight years after the directive.
Is it what we wish? No, I fully agree with you, it would be ten times better to be quicker, but it's also a difficult balancing exercise, taking into account that some member states are in a delicate fiscal situation and that they need time to prepare for changes when a measure is likely to have a short-term impact. What we explain to them is that the measures are, for some of them, having a negative short-term impact, but you should not look at the short-term impact. What you should look at is whether it's worth it, whether the benefits in the medium to long term outweigh the immediate impact.
And the analogy I like to take for withholding tax in particular is with custom duties. When we took the decision to create the single market and to abolish custom duties among ourselves, that was an immediate fiscal cost for all of us. Was it the wrong decision? Is there one person in Europe saying that we should recreate custom duty among us? I don't think so.
That's the same for withholding tax. It's a barrier on cross-border investment and we need to have the courage to address this barrier. On whether to go further for Pillar Two companies than what we have proposed, it's again a balancing act. We have heard the criticism sometimes that we are still in the infancy of Pillar Two, that we just went through the first transmission of data that took place in June, actually, that we cannot draw very strong conclusions so far. We have proposed alleviation in two areas: the CFC and DAC6.
Incidentally, that's a nice package because all the last year you have heard, and we have had this discussion here many times, complaints about the cost of Pillar Two.
And Mariella has channeled it very strongly last year together with her colleagues. The biggest study that we have on the cost of Pillar Two is the one of Tax Foundation today, and they assess the cost of Pillar Two to be around 500 million euro for EU MNEs per year. If we lift the CFC and lift DAC6, the benefit is around 600 million, actually. So we offset almost entirely the cost that we have imposed on our companies via Pillar Two. And we also show fairness because we don't need to have multiple layers of safeguards when we think we have a general one in which we believe in.
And the last point you mentioned, which is very important, is paying more attention to the way Member States implement the directive. There are too many options, we cannot agree more. It's difficult because we're talking about directive, so directive as such needs to be transposed and we don't have tools to tell national parliaments: "Don't add up when you transpose." That's their right as parliament.
We can only incentivize, but at least we can try not to have too many open doors in the legislation that lead to differences. And just to repeat again, in ATAD, when you take all the various elements, including those that we are not tackling in the Omnibus and all the various options, the total number of mathematical combination is 14 million. So this is not a surprise that we do not even have two Member States implementing ATAD the same way, not even two. Now put yourself in the shoes of an MNE which is operating in 10, 11 countries. Have we harmonized anything with ATAD?
Alison Schultz
Yes, thank you. I would just clarify, maybe there was a misunderstanding on the imported hybrid mismatch rule. It is not that me and other academics like this rule so much. This was just to illustrate the rule was set up to respond to complexity and then the rule was complex and if the rule was not used it just means we have not solved the problem at all.
So I'm just saying what we need to do is simplify the system. So it will not solve our problem if you're just saying we're not applying all these rules which no one really likes anymore. We really need to go for a simple corporate tax system in Europe. And I think this is actually something which also many business representatives have agreed on. The Commission as well, and where there have been very good suggestions by the Commission as well.
And I just think that would be the right way to do both a reduction of red tape, to do things in a much more simple, to do things in a more harmonized way and at the same time keep up the objective of tax justice. And maybe also on the interaction between or the difference between CFC rules and Pillar Two. I think the claim that we achieve the same objective with Pillar Two than we did with CFC rules. And again, CFC rules is just a solution for a broken system. We have the transfer pricing system which is not working.
That's why we need these rules. Let's change the system, we don't need the rules anymore. However, at the moment, these rules solve some of the problems that profits are leaving the country where they are generated. Pillar Two will not solve this problem. Pillar Two will just make sure that the tax haven can continue to receive the profit and instead of taxing them by zero percent, tax them by fifteen percent.
So it's not achieving the same objective. And I think it was a big win of the business lobby to really tell this story that we have solved the problem. We have not solved the problem. And then I think maybe just to clarify that all the harmonization points that have been made, we very much agree with them as well. You shouldn't have all kinds of different rules.
I think there's a debate whether we really need to agree on the very minimum standards or if we could agree on something that is more like the average of the member states at the moment. But I think nobody is against having coordinated and well-harmonized rules in in this field. Thank you.
Mariella Caruana
Yeah, first of all, I think that in these debates we should have Allison and myself because we agree. We agree that we should simplify and this is the reason why I am here. I would never be the person in the room that says that we should not protect the tax base because that would really look bad for the credibility of the business. So I think these are two separate points, simplification and deregulation and it is really important to keep to keep them separately. The other thing I wanted to say is that I feel that this point that, you know, we should not talk about complexity is a little bit outdated because maybe 10 years ago it could have flowed better that this is a business point, but today we have the Draghi report.
And this is clearly stating that, you know, regulatory complexity is part of Europe's problems.
And it introduced this kind of checklist, which I really wish we can have in Europe as well, how to draft legislation. This is, I think, a very, very important, let's say, guidance to go with. And then also in Europe we have the competitiveness agenda, so clearly there is a problem of complexity. The reduction of unnecessary burdens came from, you know, the recognition that rules are complex. And at the end of the day, this was also agreed to by the member states that asked the Commission to deliver a decluttering, a tax decluttering plan.
Gerhard Huemer
If large multinationals really want to have this simplification, then we should work together to get a solution for more harmonization and a common tax base. It is still not true that large enterprises running around and asking member states to have common tax base because they are benefiting from it.
And the hurdles we have now to solve are created to limit the creativity of tax engineering between large enterprises, and SMEs suffering from them. I think I am partially with the point that as long as we are not finding a better system, just trying to get rid of the safeguards is of course a risk that tax engineering becomes cheaper in future. The only point where I see a bit of a Pillar 2 one, yeah, of course you can say if Pillar 2 is alone working, then it goes still to the tax haven and they have to pay 15%. But if they have agreed 15% should be the tax level, then maybe the others should also go down to 15% to have a fair taxation. But you cannot, having two safeguards on the same things with different results of course, maybe going a bit too far.
But in principle, I think everyone knows this, yeah, we cannot solve the complexity of the current system without harmonizing the rules.
Matthias Ecke
Yeah, thank you chair, thank you to all of you on shedding some light on these really complex proposals. Let me maybe start by stating that I do worry a bit. I do worry a bit about the fiscal situation that our member states are in. We've seen this in a lot of big member states, but also smaller ones. We've seen the debt situation in some of our member states.
We've seen the fierce debate over the next multiannual financial framework of the EU because a lot of member states really have to struggle to make their contribution to the next EU budget. So we have a general environment of EU member states struggling to make ends meet fiscally. So for me, it would be an extremely important element of the proposal to which revenue losses it finally will lead. So this is why I would ask the Commission to be a bit more precise here on what you expect the Tax Omnibus to, which revenue consequences do you expect it to have.
So it was not really clear. I understand the focus on investment, and I understood now that in every policy field we can take Mr. Draghi's Bible out and it's solving us a lot of very foundational work because it always says if it's in the Draghi report, it's clear that it needs to be done in principle. But I also agree that we need cross-border investment, make it more easy. But of course, we have to balance it out here with revenue losses. So my question would be especially to the Commission on what you expect on revenue losses or what are the unknowns that need to be clarified in order to account for the revenue loss.
I see that in tax avoidance with CFC and Pillar 2, I see the point that you might want to streamline this a bit. But still, with Pillar 2 in place, without CFC rules, you have the possibility of significant tax avoidance with only 15% as a minimum rate. So I understand that we cannot like trade one for the other. I would like to ask you what you think, how can we concentrate like the capacities of the tax authorities more on real fraud, on specific cases of aggressive tax planning? And how can we limit the room for maneuver, because this is what makes for most companies' life so difficult.
So the room for interpretation, this is something that really also troubles me, that we can limit room for interpretation. And maybe a question to Mariella, you said that we should not stick to provisions that do no longer serve their purpose. So what exactly, what specific provisions do you think do no longer serve their purpose, because this is one of the questions we quite often have now when we talk about simplification, which we should not call deregulation, even if it's sometimes deregulation. So what specifically would you say, this is a provision that is no longer serving its purpose and this is the reason why it can be removed? Because if we concentrate on our efforts on those provisions, then it would probably be easy.
Thank you.
Benjamin Angel
Yep. So let me try to answer your question, Matthias. What first, what were we not able to estimate? There I have a simple answer. The measure related to CFC, we cannot estimate it for one very objective consideration, which is CFC decisions are not published.
There is no data available at all on the CFC decision. The member states know for itself, the company knows for itself when it gets a CFC decision, but for the rest, there is no repository, there is no publicity, and as such, we cannot do an estimate. For all the other measures, we have done a systematic impact assessment using a general equilibrium model. Incidentally, this is the first omnibus that comes with an impact assessment. So far, that was not the case.
So we have made a substantial effort. And it shows that the measures are usually neutral from a revenue point of view once you integrate into the calculation the positive second-round impact on the economy. On the R&D, which is a measure we have not so much discussed so far, where we have advertised full expensing as some kind of minimum standard for tangible assets. The work done by our colleagues from the Joint Research Centre even concluded on an amazingly positive impact should all member states do it. They concluded that the growth potential of the European Union would increase by 0.2 percentage point per year.
It may sound not much, 0.2, but keep in mind that our growth potential every year is around 1.8. So if you add an extra 0.2 to 1.8, we are talking actually of a very substantial impact. And the full expensing is an interesting measure from a tax point of view because it is not a tax loss, it's just a tax deferral. And it works very well with Pillar 2 because it is not recaptured by Pillar 2. It has been implemented successfully in the United States and in the United Kingdom, where now we have multiple studies showing how useful it is.
So that's a good example of avenues where we can do a bit more to make taxation support our business community and make progress in this field. On the interest limitation rule, we have to take into account the fact that the situation is different today in the various member states. That's why we have recalibrated our ambition.
You may know from leaked documents, and leaks are always a pain, that the Commission has considered, for instance, at some point a higher de minimis threshold than the one we have effectively proposed. And we have recalibrated our proposal precisely to take into account the situation of the five member states which today are below 3 million, so as to avoid rocking the boat. That said, and I will open an important parenthesis, we do feel member states have drifted too much from the original intention. The original intention of the interest limitation rule was to prevent abuse. That is, I'm a group, I borrow in one country, I push the interest from my borrowing in another part of the group where I can maximize the benefit because it's a very high tax country.
Fine. It makes sense that the follow-up from BEPS, why not? But de facto, it has turned into a cash machine for a number of member states irrespective of the existence of any abuse. When you don't have a de minimis, it does mean that all SMEs, whether they are purely domestic or cross-border, see an extra cost imposed on them each time they borrow. Do we really want to create hurdles on our companies when there is clearly no risk of abuse?
So it's important that we ask the right question and that we take the bold step of trying to find an answer. And when there is a small cost in the beginning, that we run generic real model rather than one-off system to assess whether it's worth it. And you will see that in 99% of the case, it's not a cost. It's an investment on our future.
What's the rationale? What's the logic?
Mariella Caruana
Thanks for your question and also thank you for raising this important point because I think this is the way that we need to assess the Omnibus and how to simplify the tax framework. I think the, maybe if we go a few steps back to the time when we all agreed that Pillar Two was the right thing to do, we at that point believed that this was going to be adopted by 140 jurisdictions, that it would bring about a global level playing field and it would also streamline compliance. And we now know that none of that happened and none of that will happen. And so it is in that context that we also as a group have advocated very hard and we have written a position paper on this last September and I can share this with you where we said, look, there is this asymmetry.
We can agree whether or disagree whether the compliance costs are higher here or elsewhere, but there is an asymmetry. And European businesses are are are subject to the full suite of Pillar Two rules whereas other jurisdictions are not. And so on top of that, if you couple that with the complexities of the EU tax framework and so I'll give an example, CFC rules, DAC6 reporting, transfer pricing documentation, country-by-country reporting, public country-by-country reporting, that is very complex and this is why we argue that businesses need compensation. Because yes, you rightly mentioned that the Draghi report is the bible, why, because it has the evidence and therefore we rely on it. And so if the productivity gap is is wide between Europe and the rest of the world, we need to do something about it.
You asked what provisions no longer serve a purpose. I think maybe the provisions in the Omnibus can be separated in a way. So the withholding tax question is kind of different than the rest of the provisions because at the end of the day withholding taxes, the removal of withholding taxes is a choice. Do we want, is this the Europe we want to be in in 10 years' time or do we still want to tax a payment just because it crosses a border? So that's that's really a choice, let's say.
Also on the anti-abuse points, they remain. So there's still a beneficial ownership test. There's still a general anti-abuse test, which has actually been broadened. Then I think the other question has been answered before me in the sense that on the interaction between the CFC rules and the Pillar Two, of course they are not the same, but they have primarily the same objectives. And this is where I think you can sort of make it easier or send the right signal to attract more investment in Europe.
Alison Schultz
Thank you. Yeah, I think the point with the fiscal situation is a very relevant point. I think especially because if you ask companies what they see as the major hurdle for their profitability and productivity in Europe, it's not that they say it's bureaucracy, because that's actually the question which the ECB survey on access to finance asks every year, in the beginning of this year as well. And the problem which ranks highest is always that they don't have enough qualified staff.
So if we know that the problem is maybe at least as much about qualified staff, we know that countries need revenues, not least for instance to have good education system, good higher education and so on. So I think when we think about the revenue estimates, we also need to consider that it's not only the foregone revenue because now certain transactions are not taxed anymore, but it's also a signal and it changes the incentive whether to plan taxes aggressively or not. And as soon as we put down some safeguards, it's not only that we will not collect this little tax anymore which is part of the safeguard, but it also means that companies will have an incentive to plan more aggressively. And this also benefits the companies we don't want to benefit. Most of the companies are not aggressive tax planners.
It's a very small share of the company which plans aggressively and which need these rules, and I agree with all the examples where companies wouldn't need that because they just have good intentions and they're doing good things, but we need the anti-abuse rules where they are relevant because there are the few big and bad companies. Then let me just finish with one note about the impact assessment, because I agree that there's not the perfect data available to estimate these things. But as an empirical economist, I can tell you it's never the case. You never have the perfect data, sometimes it's better, sometimes it's worse.
There is data which you could use, not the perfect one. You have Orbis data where you have some at least the structures. You can use CbCR data, which even with very bad assumptions, they often perform way better than general equilibrium models. And for this specific impact assessment which has been presented by the Commission, I think it has such a political touch because there's some there's some statements which in itself are really deliberately misleading. Let me give you an example.
For instance, the impact assessment says 45% of the respondents from the stakeholder consultation have said that anti-abuse rules are too much of compliance cost. They didn't include in this sentence that 70% of the respondents were business. So 45% of respondents saying that anti-abuse rules are too much of a compliance cost means that not even two-thirds of business respondents to the stakeholder consultation have said that this is the case. I'm not saying that these numbers are super relevant, but for me it's just making the impact assessment less trustworthy. And I find that a little problematic because especially Member States need to rely on the data they get and need to rely on the assessment they get to make a good decision based on the best data and empirical analysis out there.
Benjamin Angel
You don't believe us, that's your privilege, obviously, but maybe don't speak for the others. Since the omnibus was out, we got very clear message of support from Business Europe, from the International Chambers of Commerce, from AmCham, from Accountancy Europe, from CFE Europe. The whole business community, without any exception, is saying this is the step we need. Now, how many people answer to a public consultation? Yeah, it's not for us to determine and say who wants to answer, and the way it's computed is a bit weird.
Can I just add one thing, Allison?
For instance, Business Europe, which represents businesses in 42 countries, will count as one answer. I would tend to think, for instance, that Business Europe is more important than company X or Y because it speaks on behalf of everyone, but that's the way statistics are computed in those public consultations.
Alison Schultz
And sorry, very shortly, I'm not doubting the support by business. I absolutely believe you that there's a huge support. I'm just criticizing that numbers are represented in a misleading way, and that's the case no matter how the consultation works.
Jussi Saramo
Thank you, and thank you all. It was very interesting.
The Draghi paper was mentioned many times. We need public money to do it, and I haven't seen the 800 billion euros. It's all of tax money we need. Also the defense investment was mentioned, and everything there is paid by tax money. And actually there is no real market that would benefit on tax cuts, so I really don't see the point.
I think the sad thing is that EU failed to fix the taxation for decades. And member states, they built the tax avoidance system we saw also in the Tax Justice Network. And the biggest beneficiaries, they were companies, biggest companies outside the EU. And the biggest losers were all of us. And unfortunately, the OECD helped us towards the fair competition.
And together with our own rules, we were going to a better direction. And hopefully the UN would do more.
Now, if we are moving back to deregulation again, I'm very worried that it's actually the smaller companies in the EU and it's the EU companies wider that are losing, and again the biggest companies outside the EU are the biggest beneficiaries. And so that's why I would like to see a wider analysis, because to be honest, in this house I've seen so many omnibus legislation without a real impact assessment. We have done so many legislation, so much legislation without real impact assessments. So to the Commission, I would like to ask: what is the expected revenue impact on this proposal by member state, and since you don't have it, should we wait to have more understanding how Pillar Two will work, so we could do a real impact assessment before we do any drastic changes? To BusinessEurope, I would ask: does BusinessEurope support sorting out all of this and publishing the expected revenue effects of each measure?
And to SMEunited, I would like to know if the proposal has, since you said it has very limited impact on SMEs, aren't you afraid that big companies will get again more unfair competitive advantage of this? And to Tax Justice Network, I would like to know which proposed change creates the greatest risk for public revenues. Thank you.
Benjamin Angel
We do care for fiscal income, and I do care personally for fiscal income. You may not know, but I've spent 25 years of my career working on this. I'm still recently recent in the tax field, and I dealt also with the euro crisis, so I'm well aware of what it means when you face acute funding need. But this is not the question is. The question that we face now is whether some measures are good for the economy and in so doing for our growth, whether they produce ultimately more income than the original cost.
And this is what we try to assess. We do not have estimate per member state because, a, we never release estimate per member state, and b, our model is constructed so as to work at EU-27 model. By definition, member states have figures for themselves better than those which we have because, as Alison was saying, sometimes we end up using Orbis and other commercial database which just try to second-guess the data of member states.
So they all know what the impact will be for them. But we are convinced that those measures collectively can contribute to reinforcing our competitiveness and in so doing also support our tax income. We don't, we don't get richer by just cutting the taxes and I would certainly agree with Tax Justice Network here that we need to fund all the policies which are necessary to attract the foreign direct investment. If we don't have good infrastructure, good education, rule of law, we won't attract them. Taxation is not enough.
But we need also to avoid over-burdening our businesses where we can and where we think that other measures or simpler measures can do the trick. We shouldn't be masochistic. We shouldn't kick on our, we shouldn't shoot at our own feet and create handicap for our companies in the international competition. So it's a fine balance between the two, admittedly. But when we have measures which have exactly the same purpose or data collection for which we have evidence that we're not using it, let's draw the conclusion.
Why impose a cost if we don't use the data?
One last consideration, if you allow me, President. This package is more balanced than often perceived, because we focus here in this conversation a lot on simplification, but there are elements in both directions, also of deepening. For instance, on withholding tax, for the first time, we come in our legislation with a requirement on Member States to make sure that for the payment going outside of the European Union, there is no double non-taxation. And you certainly know that this is a very, very heated discussion with some Member States for more than a decade, because that is a very frequent form of aggressive tax practice where the money is not taxed and is leaving the Union to a tax haven where it's not taxed. We propose to address it in the package.
Mariella Caruana
One comment from me on the tax cuts that you mentioned. As a business community, and I think all the other business groups, we are not asking for lower tax rates. This is something that has come up and I have had to make that statement, we have had to make that statement repeatedly. It also came up in the context of Pillar Two. I don't think that any of the businesses are worried about the amount of tax that they pay.
I think this is kind of acknowledged that if you want to operate in a society, then you pay tax.
This is normal. The issue with that question would appear to me that there is an assumption that if we leave all that complexity in place, it is somehow attracting or generating sustainable revenue. And this is where I do not agree because the administrative complexity per se, the cost of that, that's not money that goes to the government to finance schools, to finance hospitals, to finance roadworks. That's just administrative complexity. Different sizes of businesses react to it differently.
So if you're a large company, of course you can cover that, but it is a distraction because as a large company you should be focused on other areas where you should be investing. If you're a mid-sized company, then basically it means that you have less possibility to hire more people, to continue growing. And if you're an SME, of course this is stopping you from scaling up. So I think this is an important point to distinguish. And then I think your question was whether we, BusinessEurope, support the publication of more impact assessments.
Absolutely yes. This is something that we have asked for. Not only impact assessment, but also afterwards. So fitness checks, this is also very important. And we don't think that this package is perfect.
We just, we really think that this is the first step. And I have talked elsewhere that if we manage to go into this direction, it means that we will have adopted a culture of saying no to something which is not adding value. And I think this is a really important point to discuss seriously if, if we all care about Europe. Where do we want to be in 10 years' time, in 15 years' time? Where do we see Europe compared with China, with the US?
It's one thing if we want to stand on our own two feet, or else if we just bow down to the other, to the other major economies.
Alison Schultz
Yes, very shortly. Thank you. And the question as which of the measures is the worst from our opinion.
I personally it's it's hard to make a decision also without having the numbers. I personally think the abolishing the CFC rules for pillar two companies is a bad idea in the current system because it just addresses another problem like I said that profit can somehow keep where it is generated at the moment with these rules and it's actually not like it's as the exempted companies are pillar two companies it's something which is just targeting the largest companies. Having said that I really think and I think this is something which came up all along like from all of us. If we say simplification does not need to be deregulation then we need to say that we need unitary taxation with formulary apportionment. Because this is the thing or BEFIT with a formulary apportionment.
This is the policy which will simplify a lot if well done and which is not deregulating because it's upholding way higher standards than the ones we have now. So I think the most important message especially also for the Parliament is that we need to have unitary taxation in Europe and it's nothing utopian. It's what the US has it's what we have in Germany for municipalities. So I think this is really the step in the right direction for both simplification and holding up high standards.
Mariella Caruana
But then I would also be interested sorry did I take it sorry. So we talk about BEFIT and how it is supposed to make things better. I'm not sure about that but if we go for that then are we saying that we are going to withdraw pillar two because the two are not compatible with each other. So I think this is a very serious discussion before we just say this is what we need. I think we need to see be very clear about what are the prospects of withdrawing pillar two to go for a BEFIT for to go for a common consolidated tax base.
Gerhard Huemer
I think there are very few people which believe that the 800 billion investment needs can be financed by public sectors. This will not work. This will not work without mobilizing private money. And mobilizing private money, then needs a whole bouquet of measures, but taxation is one of them. And not a lower taxation, but a simplifying taxation.
And for an SME, this is a Commission, an old Commission study. Only the situation that we have 27 different tax regimes in Europe costs for a small enterprise when they go cross-border up to 2.5% of their turnover. This is more than the profit margin for many SMEs. And this is the reason why SMEs are not going cross-border. And therefore, in this area has to be done something.
And if we are afraid that this goes against us, as long as the omnibus is about simplifying the administrative or compliance costs, I am fully happy that those who benefit from it should get it.
If it leads to a situation that they even can do more tax avoidance, then it becomes problematic. And it becomes also more problematic, and here I'm a bit on the side of Edison, because the complexity of the current system comes from the fact that the basic systems are born to invite companies to do tax avoidance. And it would not make, I mean, if there's a possibility to make it simpler and control it instead of fixing the basic problem, it's a step in the right direction. But more as a step in the right direction, if it does not lead to more tax avoidance, we don't see in this proposal at the moment.
Pasquale Tridico
Thank you very much. We do have just a few minutes for catch the eye. Kinga has a reserved question. Please be brief and then, or maybe if you want to address somebody in particular the question, please.
Kinga Kollár
I will do so, yes, thanks, I know I'm of the time concern. So to Mr. Angel, because you mentioned that you actually would have thought of, you know, being a bit more progressive, since we are the Parliament, I think we would be interested to listen to where you would be actually more progressive on this package.
I know it's a broad question, but maybe just highlighting.
Benjamin Angel
Well, I already gave you a large part of the answer, which is the, the measure on the withholding tax, which is really long, long overdue. The single market exists for decades and we still have those penalties on cross-border investment. It's a pity that it would kick in only almost ten years from now. So if this is one area where more ambition would certainly be needed, that is the one. At the same time, we have to balance the ambition with the realism, because we need unanimity.
So I can get excited on my chair and saying I want it next year, but that's how I don't get, I wouldn't get unanimity on this. So we need member states having the time to plan properly and to prepare for the measure, and this is what we're trying to do. We also clearly do not cover some element in this measure that we would have liked to cover, in particular one, we are not covering the fund industry.
We are not covering the fund industry because of technical reasons. First, the funds are usually tax transparent, so basically the funds are not taxed via the corporate income tax, they end up being taxed by the personal income tax. And the measures are corporate income tax measures, and on top, treating the funds would raise very significant beneficial ownership complexities that we were just not able to tackle now. Should Member States agree on the big step we propose on the withholding tax, we will need other steps in the future, and I would think that beyond the fund, one day we should also ask us whether we should do the same for individuals. Why should citizens face obstacles when they invest in another Member State?
That's the true question if we believe in a saving and investment union.
Pasquale Tridico
Thank you, thank you to everybody. It was really interesting, it was really participating, meaning the members are very careful on that. The speakers are excellent. The vision may be different as well.
This is a topic which is very divisive, I would say, or divisive. I have also to say that Europe in the last years did well, until few, yeah, last mandate in particular did step forward important in trying to conceptualize the problem. I have to say as well that formula appointment can coexist with Pillar Two. It's nothing contradiction, just to specify. But anyway, the issue here is so open.
Thank you very much to all of you. And we have basically no break because with coordinator we one minute break only to say bye to the speaker and thank you very much.
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