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Taxation in enlarged Europe Summer school ISEO 2004 July, 2 Raffaele Rizzardi.

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Presentation on theme: "Taxation in enlarged Europe Summer school ISEO 2004 July, 2 Raffaele Rizzardi."— Presentation transcript:

1 Taxation in enlarged Europe Summer school ISEO 2004 July, 2 Raffaele Rizzardi

2 We pay taxes for public services army and police foreign policy justice interest on bonds

3 We pay taxes for welfare Healthcare School Housing Cheap transport Unfunded pensions Aids to industry Unemployment subsidies

4 Level of public services = level of taxation Stability pact: deficit <= 3% of GDP4 Tax competition Fair - Unfair or harmful (EU – OCDE): taxation to incoming foreign corporations lower than for national ones The Irish case The Primarolo report (code of conduct)

5 Corporate tax burden = tax base * tax rate Harmonization of tax base - 1988 – first proposal of directive - 1992 – Ruding report - 2002 – revamping of Ruding report - 2004 – corporate tax conference in Rome

6 Harmonization of tax base SE - Societas Europea - EC Regulation 2157/2001 since October 2004 HST – Home State Taxation – tax base of each subsidiary according to taxation rules of the Head offices State - Small Medium Sized Enterprises CCTB – Common Consolidated Tax Base – Assessment of a global tax base – Splitting according to multiple keys: turnover, cost of staff, value of plants, etc.

7 Common rules in tax base Thin capitalization - Debt (granted or guaranteed by stockholders) to Equity ratio Participation exemption Limited taxation on dividends – No more tax credit Consolidated group tax base (national or worldwide)

8 Tax credit on dividends TAX CREDIT Corporate tax base 1.000 Corporate tax (360) Dividend 640 Tax credit 360 Shareholders tax base 1.000 Prepaid tax 360 PRESENT SYSTEM Corporate tax base 1.000 Corporate tax (360) Dividend 640 __________________ Additional tax base for shareholder 5% or 40% of dividend (0% in fiscal consolidation)

9 Localization of business profits National tax law for foreign activities: 1) Exemption rule 2) Imputation rule with foreign tax credit

10 Branch or subsidiary? 1) Branch – imputation of revenue or loss taxed at head office rate – foreign tax credit – matching credit 2) Subsidiary – imputation of incoming revenue (dividend) – Parent/subsidiary directives 3) CFC legislation – subsidiaries in tax heavens treated as branch (carry over of losses abroad)

11 Transfer price Risk of profit transfer by excess payment of costs to a foreign corporation in the group or reduced selling price OCDE guidelines – 1979 – Revised 1995 Arms length rule – comparable transactions between independent corporations

12 Information on inter-group transactions Special auditing (Ireland) New restrictive German law Documentation on services rendered, on comparable costs for foreign purchase, on effective use for subsidiary No shareholders costs

13 Transfer price audit Double taxation Corresponding adjustments OCDE model – article 25 – mutual agreement EU arbitration convention Burdensome procedure APA – Advance Price Agreements

14 Model tax conventions First agreements in 1930 Production and sales mainly local Few international exchanges (custom duties between each country – risk of currency fluctuation) 25 States in EU = 25 x 12 = 300 different treaties >> one multilateral treaty?

15 Model tax conventions(2) may be taxed – in both States – foreign tax credit (e.g. dividends – interest – directors fees) shall be taxable only – in one State (e.g. royalties, excepted limited withholding tax; capital gains on stocks) Deviations from general rules in each agreement

16 Place of effective management Permanent establishment (PE) International tools for taxation are obsolete and do not fit a globalized economy E-commerce: is a computer server a PE? Subsidiary: is it a PE of parent company? Hidden PE (the Philip Morris case in Italy)

17 European Court of Justice Impact on direct taxation No specific power by EU treaty Judgments mainly based on: - article 43 – freedom of establishment – case C-9/02 de Lasteyrie du Saillant – exit tax on unrealized capital gains – case C-324/00 – Lankhorst-Hohorst – thin capitalization - article 56 – freedom in movement of capital – case 334/02 – Comm. vs. France – exclusion of fixed levy for foreigners

18 Taxation of savings Present rule: a resident of one State is not taxed if the paying agent is in another State – Interest income should be declared in resident State Directive 2003/48/EC – withholding tax for Belgium, Luxembourg, Austria – negotiations with non EC countries – rate 15% - 20% - 35%- transitional period Exchange of information for other countries and for all after transitional period Directive 2003/49/EC – associated companies - interest and royalties (+ code of conduct = Monti package)

19 Definition of interest payment Current accounts, bonds including premiums and prizes attaching to securities Zero coupon bonds NO: penalty charges for late payment – capital- gains on bonds (taxed in Italy)

20 Value Added Tax National laws complying with directives No majority voting – Missing agreement: options Consumption tax – (should be) neutral in business activities Deduction of input VAT from VAT due for supply of goods or services

21 LIST of Standard VAT rates applied in the Member States Below is a table brought up to date until Febrary 02, 2004, illustrating the standard VAT rate applied in the Member States of the European Union. Member stateOrdinary rate Austria20 % Austria ( Communes of Jungholz and Mittelberg)16 % Belgium21 % Cyprus15% Czech Republic19% Denmark25% Estonia18% Finland22 % France19,6 % Germany16 % Greece18 % Hungary25% Ireland (Eire)21 % Italy20 % Latvia18% Lithuania18% Luxembourg15 % Malta18% Netherland19 % Poland22% Portugal 19 % Slovak Republic19% Slovenia20% Spain16 % Sweden25 % United-Kingdom17,5% VAT RATES

22 Financial and insurance services VAT exemption Input VAT non deductible Higher costs for outsourcing Impact on structure: branches rather than subsidiaries – Group taxation in some countries Proposed cash flow method

23 Transitional period – supply of goods and related services VAT due at customers country (reverse charge) Listings to check compliance Identification number of customer – Full disclosure now starting on internet Audit to check that goods have left the country of origin

24 Place of supply of services Present rules (article 9 – directive 77/388/EEC) 1) Physical identification – place of immovable property – physically carrying out of some services – distances covered 2) Place of customer (plus effective use and enjoyment) 3) Place of supplier

25 Refund of foreign VAT 8th and 13th directive – EC and non-EC countries (reciprocity) Application for refund to each of the central national authorities Refund if tax is locally deductible The case of car lease (Netherlands and Luxembourg)

26 New proposal General rule: reverse charge if customer is a taxable person Including car lease over 30 days No need for refund Listing for services Local VAT for tangible services, supplied for immediate consumption (restaurants)

27 E-commerce - goods Private customers pay VAT in the country of purchase if they take care of transport Suppliers shall identify and pay destination VAT over a yearly threshold ( 35.000 or 100.000) New project: One-stop shop – ID only in head offices country – VAT paid to local tax authority with rates and details of destination From outside EC: custom rules

28 E-commerce – services Directive 2002/38/EC De-materialized goods (files) = services Reverse charge if customer is a VAT taxpayer VAT due by supplier for private customers From outside EC (private customers): ID in a single country – VAT paid to local tax authority with rates and details of destination Audit of compliance and enforcement ??? Where is customer really located ???

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