Tax Policy & Controversy Briefing | October 2013

European Union update

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In parallel with developments at national level and mirroring the wider international debate on base erosion and profit shifting (BEPS), activity within the tax field in the EU is increasingly focusing on combatting avoidance, evasion and fraud. But also reflecting similar developments elsewhere, more recent EU activity highlights the shifting focus both onto national level policies and whether in fact some elements of EU harmonization itself may be contrary to EU Law.

Reflecting the demand in many quarters for increased tax transparency the recently adopted Capital Requirements Directive IV was extended at the last minute to encompass country-by-country reporting requirements (CBCR) in respect of the tax affairs of EU regulated financial institutions. These requirements enter into force on 1 January 2014, by which time individual member States are required to enact their own detailed implementing provisions. In the first year of reporting (2014) certain elements of the data reported (pre-tax profit or loss, tax on profit or loss and public subsidies received) is required to be submitted to the European Commission on a confidential basis.

The Commission will review this data, consider the potential negative economic consequences of publication of such information, and report to the European Parliament and the Council on the findings of its review by 31 December 2014. Unless specific changes to the directive are enacted following the Commission’s review, then all affected institutions will need to publicly disclose this data on a country-by-country basis from 1 January 2015[1].

This development is mirrored in the revised Accounting Directives (78/660/EEC and 83/349/EEC) which introduce CBRC obligations for large extractive and logging companies. Beyond this, the Commission is now proposing  to introduce similar requirements into the Transparency Directive so that all large companies and groups will be required to declare, in the words of Michel Barnier the EU Internal Market Commissioner, “the taxes they pay, how much and to whom.”

Automatic exchange of information

The EU Administrative Cooperation Directive, which entered into force in January 2013 provides, inter alia, for the automatic exchange of information (if available) on five categories of income and capital from 1 January 2015. These are income from employment, Director’s fees, life insurance, pensions and immovable property.

Such is the heightened state of willingness to combat tax evasion, however, that even before these provisions have been implemented, the Commission proposed in June of this year to extend the scope of automatic information exchange to cover income from dividends, capital gains, other financial income and account balances also from 1 January 2015. This followed the launching of a pilot project along similar lines between the UK, France, Italy, Germany and Spain. If adopted, this will mean that Member States would share as much information amongst themselves as they have committed to doing with the USA under the Foreign Account Tax Compliance Act (FATCA).

In parallel with these developments, the EU Council has given the Commission a mandate to renegotiate the EU's agreements with Switzerland, Liechtenstein, Monaco, Andorra and San Marino to ensure that these countries continue to apply measures equivalent to those applied in the EU for the taxation of savings income.

Combating VAT fraud

In June the EU Council adopted two Directives designed to help Member states combat Intra-community “carousel” fraud.  The first allows Member States to opt to use the reverse charge mechanism to counter fraud in the following sectors: mobile phones, integrated circuit devices, supplies of gas and electricity, telecoms services, game consoles, tablet PCs and laptops, cereals and industrial crops and raw and semi-finished metals.

The second enables Member States to immediately introduce the reverse charge in other sectors in cases of sudden and massive VAT fraud (the "quick reaction mechanism") for a short period of time, pending authorisation for such a measure from the Council. Both Directives will apply until 31 December 2018 by which time it is hoped that the Commission will have put forward proposals for a new, more fraud-resistant VAT system.


In the first half of 2013 a “roadmap” for handling further detailed technical discussions on this proposal was agreed by Member states under which work on the proposal would continue on a step-by-step approach, the first step focussing on the tax base with discussion of the issue of consolidation being postponed to a second step when work on the base has been sufficiently advanced.

They also agreed that the proposal was not yet ready for a political discussion. On this basis the Irish Presidency produced a new compromise text which is serving as the basis for on-going discussions.

Harmful tax measures

The Commission has very recently escalated its efforts to eliminate “harmful tax measures” in the EU by using its State aid powers to begin scrutinising rulings given by some Member States to taxpayers intending to make significant investments in a country, in order to give certainty in advance on how transactions will be taxed[2].

Recent weeks have seen a number of media outlets (including The Financial Times (UK), Reuters (UK), The Irish Times (Ireland), Sueddeutsche Zeitung (Germany), Handelsblatt (Germany) and Neue Zuericher Zeitung (Switzerland)) reporting that the Commission has asked a number of EU Member States - Ireland, Luxembourg and the Netherlands, though other countries may also have been contacted - to provide information related to certain preferential tax rulings.

Development of an EU Taxpayer's Code and creation of an EU Tax Identification Number

The European Commission recently held two public consultations on specific measures which should improve tax collection and ensure better tax compliance across the EU. The first consultation was on the development of a European Taxpayer's Code (‘EU TPC’), which would clarify the rights and obligations of both taxpayers and tax authorities.[1] The second consultation was on a European Tax Identification Number (EU TIN), which would facilitate the proper identification of taxpayers in the EU.[2] Both the EU TPC and the EU TIN were among the measures proposed by the Commission last December in its Action Plan to tackle tax fraud and evasion. 

EY considers the topics of both Commission consultations very important. Therefore, our tax policy professionals across the 27 EU Member States have provided personal viewpoints and experiences to both consultations. Their contributions have been individually submitted to the Commission. Additionally, we consolidated and summarized the responses received on our internal consultations in a letter to the Commission and an online article highlighting the most interesting viewpoints and experiences from our internal consultation is available at

[1] See European Commission, Consultation Paper – An European Taxpayer’s Code, Brussels, 25th February 2013, TAXUD.D.2.002 (2013) 276169.

[2] See European Commission, Consultation Paper – Use of an European Tax Identification Number (TIN), Brussels, 25th February 2013, TAXUD.D.2.002 (2013) 276134.

This development relates to the ongoing discussion on how multinational companies are taxed and mirrors wider efforts currently being led by the OECD to shed more light on international tax policy issues - including BEPS Action #5, which sets out the desire to “Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.”

Despite relating to Member States’ tax policies, the current scrutiny comes from the Directorate-General for Competition (DG Competition), led by Commissioner Joaquín Almunia. In general, tax matters are handled by Taxud, the Commission's Taxation and Customs Union Directorate-General, headed by Commissioner Algirdas Šemeta. However, whenever a certain Member State’s policy measures may have a relevant impact in relation to competition in the internal market, DG Competition is the relevant competent body.

Many countries provide rulings for taxpayers, including for taxpayers intending to make significant investments in a country, in order to give certainty in advance on how transactions will be taxed. The question here is whether rulings provided by the countries concerned are preferential rulings, giving discretionary incentives, or simply set out for the taxpayer how the generally applicable law applies in their circumstances.

The information requests are probably driven by questions around whether a Member State’s tax-reducing measure qualifies as State Aid. The current EU State Aid legal framework allows for the Commission to demand from the Member State a repayment from the recipient of an illegitimately granted tax benefit respectively from the addressee of the illegitimately granted tax advantage, i.e. the ruling.

Such a repayment could potentially be demanded with retroactive effect from when the benefit was first granted. Additionally, contingent on the individual case, the EU State Aid legal framework allows for the Commission to impose fines and penalties on the Member State.

Preferential tax treatments will only be considered to be illegitimate State Aid under the Article 107 et seq. of the Treaty on the Functioning of the EU if the following criteria are fulfilled:

  1. The tax advantage under scrutiny effectively lowers the tax burden which normally applies,
  2. The tax advantage is granted by the Member State or through the Member State’s resources,
  3. The tax advantage affects the competition and trade between Member States and
  4. The tax scheme is of a selective character.

At this stage, it remains to be seen whether, based on a case by case examination of the granted rulings, the above mentioned criteria are fulfilled. Whatever the outcome, these new developments should  be considered as significant; at a macro level, they represent a growing focus on the tax policies of individual countries, not just the companies operating under those policies. Moreover, the EU State Aid legal framework provides for a legally binding instrument which directly grants the Commission directly with far reaching influence and competence.

The Financial Transaction Tax

It appears that the 11  Member states who have requested and received authorisation from the Council to proceed with the introduction of an FTT through "enhanced cooperation" are having difficulty in reaching agreement upon the scope and type of FTT they want to implement. Early agreement is therefore unlikely and much may depend upon the attitude of the new German government following the recent federal election.

It is not only the opinion of the new German government that is if relevance to the FTT, though; in an opinion dated 6 September 2013, the Legal Service for the Council of the EU (CLS) expressed the view that the “counterparty” rule in the proposed Council Directive (Directive) for a harmonized FTT is contrary to EU law. 

The counterparty rule provides that a financial institution actually established outside each of the EU11 jurisdictions (the Participating Member State or PMS) is deemed to be established in a PMS if it enters into a financial transaction (for example, the acquisition of equities or bonds, or entry into a derivative trade) with another person (whether or not a financial institution) who is established in that PMS. 

Thus, a UK bank, or a US bank, would be deemed to be established in Germany, simply by virtue of being party to a financial transaction with a bank or corporate client that is authorized or has its registered seat in Germany. In such a case, that respective bank would be liable to the EU FTT in Germany on the transaction (at the FTT rate applied by Germany). 

In summary, the CLS expressed the view that the deemed establishment rule is contrary to EU law because it:

  • Exceeds Member States’ jurisdiction for taxation under the norms of customary public international law as they are understood by the EU.
  • Is not compatible with Article 327 of the Treaty for the Functioning of the European Union as it infringes on the taxing competencies of the non-PMS (Article 327 sets out the conditions for the “enhanced cooperation” procedure governing the operation of the EU FTT proposal).
  • Is discriminatory and likely to lead to distortion of competition to the detriment of non-PMS.

It appears unlikely that the CLS opinion will spell the end of the entire EU FTT project but that, nonetheless, it is likely to act as a catalyst to further change the proposal content.  

Although the timing of the CLS opinion appears to have come as something of a surprise, the conclusions are not at all surprising. Many commentators have already expressed the view that the counterparty rule is the most controversial and legally questionable aspect of the Directive, not least as it has no precedent or analog in international tax law.

The CLS opinion is also consistent with the UK’s protective submission to the European Court of Justice (ECJ) on the legality of the enhanced cooperation procedure particularly with respect to its comments on the operation of public international law.   

Some commentators have already expressed the view that the CLS opinion signals the end of the EU FTT project. At this stage, it appears that the more likely outcome is that the EU FTT proposal will survive, albeit that its scope and content will change – a process which seemed to be already under way. 

In this regard, there remains powerful political support among key European stakeholders for some form of EU FTT. The public reaction to the CLS opinion includes comments from the German Government that it “advocates a swift introduction of the FTT for good reasons. 

We want to make the financial sector contribute adequately to the costs of the financial crisis. Nothing has changed on that. The legal concerns must be cleared up and dispelled as quickly as possible.” The EU Commission has also continued to defend its position robustly.

Nonetheless, while the CLS opinion is not binding as a matter of EU law on the Council or the PMS, it would be difficult in practice for the PMS to ignore the opinion given by the CLS, especially as the CLS is the Council’s own in-house legal unit, and is tasked with the responsibility of representing the Council before the ECJ in defense against the UK's legal challenge. Accordingly, it is likely that the “counterparty” rule will not feature in the FTT Directive if and when it is finalized.

It has been noted that a group of PMS, principally France, Italy and Spain, have already indicated that they would like to completely remove the establishment (not just the “counterparty”) rule from the Directive and move instead entirely to an “issuance” basis of taxation. In other words, they would like the FTT to apply (just as the domestic French FTT and Italian FTT operate) only to transactions involving securities issued by entities domiciled in the PMS.

The CLS opinion will therefore lend further weight to this stance, and arguably weaken the contrary view that has been expressed by some of the other PMS who have advocated the retention of the establishment rule. This is because the inclusion of any establishment basis of taxation without the inclusion of a “counterparty” rule would inevitably lead non-financial institutions located in the PMS to transact wherever possible with financial institutions located outside the PMS, and give rise to a migration of business outside the PMS.

If the establishment rule (or only the counterparty rule) is removed from the Directive, there is a key question as to how, if at all, the FTT could effectively apply to, in particular, transactions in derivatives and depositary receipts. For example, in relation to derivatives, the current proposal applies the issuance rule only to exchange-traded derivatives (and not over-the-counter (OTC) derivatives).

It may be that the PMS seek to extend the issuance rule to apply also to OTC derivatives, and to recast the issuance rule along the lines proposed by the European Parliament, by allowing the place of issuance of the derivative to “look through” to the location of the issuance of the underlying security. However, even this extension would apply only potentially to tax equity derivatives and bond derivatives. It would not appear effective to catch either interest rate derivatives or FX derivatives traded OTC or on exchanges located outside the PMS. 

Another possible alternative would be for the PMS to supplant the “counterparty” rule with a form of reverse charge – something which has been floated in working group papers that have been circulated in Member States’ discussions. Essentially, this would involve applying the tax charge only to parties actually established in a PMS, and would result in those parties looking to pass on the cost of the FTT in circumstances where a counterparty was established outside the PMS. The difficulty with this approach, however, is that it would mean that to be effective non-financial institutions would need to be primarily liable to FTT – and it is unlikely that this would carry any support amongst industrial concerns in the PMS.

The intervention of the CLS in such a robust way at this stage in proceedings would indicate that revised proposals can expect a similarly thorough legal analysis in future. This suggests a further delay in the policy-making process. It has already been reported in Germany this week that a Commission source has ruled out 2014 as a potential start date, with 1 January 2015 now being the earliest date. This seems more realistic.

The CLS opinion has not yet been formally debated by the EU Member States in the EU FTT working group meetings. The CLS summarized their views at the last working group meeting on 9 September 2013. Although the UK and Luxembourg expressed their agreement, and the Commission expressed disagreement, with the CLS opinion, the Lithuanian Presidency deferred discussions of the issues on the basis that the Member States had not had sufficient time to consider the opinion.

The next meeting is scheduled for October (although at the date of writing no date has yet been set). It is expected that negotiations on the shape of the EU FTT will continue in earnest following the outcome of the German elections on 22 September 2013, and that inevitably these negotiations will need to take account of the CLS opinion.   

[1] See EY Global Tax Alert “European Commission proposes extending automatic exchange of information to cover dividends, capital gains, other financial income and account balances”

[2] See EY Global Tax Alert “European Commission scrutinizes Member States’ tax schemes under State Aid criteria”

[3] See European Commission, Consultation Paper – An European Taxpayer’s Code, Brussels, 25th February 2013, TAXUD.D.2.002 (2013) 276169.

[4] See European Commission, Consultation Paper – Use of an European Tax Identification Number (TIN), Brussels, 25th February 2013, TAXUD.D.2.002 (2013) 276134.

  • Steve Bill
    Tax Policy & Controversy
    +44 (0)7768 035826