EU REFLECTING ON NEW COUNTERMEASURES IN REACTION TO RUSSIA’S INVASION OF UKRAINE

The Russia’s invasion of Ukraine has completely reshuffled the agenda of these last days for EU heads of States and Finance ministers. On Wednesday 2 March, EU Finance Ministers held an emergency videocall to discuss the economic impact of the war and sanctions on Russia. The EU is actively working on measures to prevent circumvention of international sanctions imposed on the Russian banking sector, in particular the exclusion of seven banks from the SWIFT system. In this context, it is reportedly considering putting in place new provisions to avoid any attempt to evade sanctions imposed on Russia through crypto assets. The European Commission is also reportedly preparing a package of measures for this week that should help EU countries to mitigate the impact the war will have on the energy market, with possible state aid waivers and new loan programs.

THE IMPLEMENTING DIRECTIVE FOR PILLAR II BACK ON ECOFIN’S AGENDA

The Implementing Directive for Pillar II is back on the agenda of the next Ecofin Council on 15 March. The French presidency of the EU Council seems fully determined to try to reach an agreement as soon as possible despite ongoing differences among Member States on introducing the rules from 2023 and whether the Directive should be linked to Pillar I (reallocation of taxing rights) of the OECD tax deal. Many issues have reportedly come up during recent discussions, including Germany’s idea of keeping open the option to apply pillar 2 to smaller companies that don’t reach the €750 million turnover threshold. Another issue would be the request by Estonia for a voluntary application of the Income Inclusion Rule (IRR) since the Undertaxed Payments Rule (UPTR) will be applicable in any case. Malta would also reportedly have requested that the introduction of the minimum tax rate be delayed from 2023 to 2025.

HIGH-LEVEL GROUP MAKES RECOMMENDATIONS FOR FAIR AND EFFECTIVE TAXATION IN POST-COVID-19 TIME

The High-Level Group on post-COVID-19 economic and social challenges published on Tuesday 1 March its report on how Europe can recover sustainably and promote global stability. The document puts forward recommendations in five areas, including for “fair and effective taxation for the triple transition”. Among other things, it suggests to encourage and help national tax administrations to fight tax evasion and tax avoidance, notably by promoting the use of digital technology and the simplification of national tax rules. The report also recommends putting more emphasis on behavioural taxes, in particular environmental taxes, to maintain a desirable overall level of progressivity of the tax system and to adjust the composition of taxes towards less elastic tax sources, such as taxes on immovable property. Finally, the report supports a broadening of the corporate tax base and particularly the “Business in Europe: Framework for Income Taxation” (BEFIT) proposal.

ECON COMMITTEE STARTS ITS WORK ON THE RECAST OF THE ENERGY TAXATION DIRECTIVE

The Economic and Monetary Affairs (ECON) committee of the European Parliament started its work on the proposal for a recast of the Energy Taxation Directive (ETD), presented in July 2021, with the publication on Monday 28 February of the draft report from MEP Johan Van Overtveldt (ECR, Belgian). “The timing of the ETD proposal makes it even more challenging as rising energy prices and inflation are currently hitting Member States and broader geopolitical and military developments are not at all reassuring”, the rapporteur writes. In his report, Mr Van Overtveldt acknowledges that the proposal contains some good elements, such as the change from volume to energy-content as the basis for taxation and the broadening of the taxable base, but believes that it also has significant shortcomings. He particularly finds the absence of an assessment on the overall impact highly problematic and thus proposes to link the date of entering into force of the Directive to a comprehensive overall impact assessment. Moreover, he considers that Member States should remain free regarding the updating of the tax rates and therefore does not support the proposal for their automatic indexation. He also warns about the social costs of the recast of the Directive, in terms of a rise in energy poverty and unemployment.

UPDATED EU BLACK AND GREY LISTS OF TAX HAVENS

The EU Council decided, on Thursday 24 February, to maintain unchanged the European Union’s blacklist of jurisdictions that are uncooperative on tax matters. American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu remain on the list. On the same day, the Council also approved the grey list of jurisdictions with tax risks but which have committed themselves to take corrective measures. This second list has been extended following the adoption in November 2021 of the Directive to increase country-by-country reporting and notably includes Russia.

MARLENE NEMBHARD-PARKER APPOINTED CO-CHAIR OF OECD/G20 INCLUSIVE FRAMEWORK ON BEPS

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) elected on Tuesday 1 March Marlene Nembhard-Parker from the Tax Administration of Jamaica as its new co-chair. Ms. Nembhard-Parker will lead the group with Ms. Fabrizia Lapecorella from Italy who currently serves as Chair of the Inclusive Framework on BEPS. Ms. Nembhard-Parker is the first to hold the position, which has been established following a recent report on developing countries and the Inclusive Framework on BEPS calling for the governance of the Inclusive Framework to be more representative of developing countries.

NEW EU SANCTIONS AGAINST RUSSIA AND A STATE AID TEMPORARY CRISIS FRAMEWORK

On Wednesday 9 March, EU Member States agreed on additional sanctions against Russia and Belarus in retaliation for the invasion of Ukraine. The EU decided to sanction 160 more people: 146 members of the Council of the Russian Federation and 14 oligarchs and businessmen involved in the metallurgical, agricultural, pharmaceutical, telecommunications and digital industries as well as members of their families. With this decision, the EU’s restrictive measures now apply to 862 individuals and 53 entities. Those designated are subject to an asset freeze and EU citizens and companies are forbidden from making funds available to them. Natural persons are additionally subject to a travel ban, which prevents them from entering or transiting through EU territories. Moreover, the European Commission clarified, on the same day, the notion of ‘transferable securities’, so as to clearly include crypto-assets in the restrictive measures and ban these people from trading digital assets in the EU. On Thursday 10 March, the Commission also sent to Member States for consultation a draft proposal for a State aid Temporary Crisis Framework to support European companies hit by the fallout of the war in Ukraine and sanctions on Russia. Finally, on Friday 11 March, EU leaders adopted the so-called Versailles Declaration on the Russian aggression against Ukraine, as well as on bolstering defence capabilities, reducing energy dependencies and building a more robust economic base in the EU.

GREEN/EFA PROPOSALS TO PREVENT RUSSIAN OLIGARCHS FROM ABUSING EU STRUCTURES TO HIDE THEIR WEALTH

On Tuesday 8 March, the Greens/EFA Group in the European Parliament welcomed the economic sanctions targeting Russian oligarchs supporting Putin’s regime but unveiled a plan to go further. Among other things, the group recommends that the seized assets from Russian oligarchs should be injected into a fund financing the Ukrainian recovery. The ecologist group is also of the opinion that Russia should be added to the EU’s AML blacklist and that all automatic exchanges of tax information with the Russian authorities need to stop. On a more general note, the Greens/EFA Group also suggested to set-up a European registry of the beneficial owners of all types of assets, such as real estate, yachts, private jets, art and called on the Council to adopt as soon as possible – and without watering it down – the UNSHELL proposal to go after shell companies in the EU.

IMPLEMENTING DIRECTIVE FOR PILLAR II: SEVERAL OPEN ISSUES AHEAD OF ECOFIN MEETING

France is determined to have another debate at the Ecofin meeting on 15 March and try to reach a quick agreement on the Implementing Directive for Pillar II despite some outstanding political issues to resolve. On Wednesday 9 March, eight Member States could not support the last French EU Council presidency’s compromise proposal. Estonia, Hungary, Latvia, Luxembourg, Malta, Poland, Slovakia and Sweden would reportedly not have supported the compromise while Austria, Belgium, Croatia, Cyprus, Finland, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Slovenia, and Spain were reportedly in favour of the text. The Directive can only be adopted by the unanimity of Member States. Among the open issues is a request by some Member States to link the entry into force of Pillar II to the entry into force of Pillar I (reallocation of taxing rights) of the OECD tax deal. The French presidency had proposed that the EU Council adopt a separate statement confirming the commitment of all Member States to the ongoing process on Pillar I. Another issue is the date of implementation. Some Member States are arguing that it would be difficult for them to meet the deadline of 1 January 2023.

AGREEMENT IN SIGHT ON CBAM AT EU COUNCIL

EU Finance Ministers should reach an agreement on the Carbon Border Adjustment Mechanism (CBAM) during their meeting on 15 March. The compromise text put forward by the French Presidency of the EU Council reportedly received the support of a qualified majority of Member States on Wednesday 9 March. The text is very much in line with the initial proposal made by the European Commission in July 2021 in terms of implementation, scope and timetable for entry into force. In its approach, France does not address the problematic points, such as the use of revenues from CBAM or the withdrawal of free allowances under the Emissions Trading System (ETS). However, seven Member States are reportedly 100% ready to agree on the text and want more clarity on several points. But as an agreement was reached by qualified majority, France will be able to submit the file to Ecofin next week. In the European Parliament, the report by Mohammed Chahim (S&D, the Netherlands) on CBAM is expected to be voted in plenary in June.

EUROPEAN COMMISSION CONFIRMS THAT MEMBER STATES CAN TAX WINDFALL PROFITS MADE BY ENERGY COMPANIES

As part of its REPowerEU package, unveiled on Tuesday 8 March, the European Commission confirmed that Member States can consider to temporarily impose tax on windfall profits of energy providers and exceptionally decide to capture a part of these revenue to provide consumers with relief from high energy prices. According to the International Energy Agency, such fiscal measures on high rents could make available up to 200 billion euros in 2022 to partially offset higher energy bills. Such measures should not be retroactive but should be technologically neutral and allow electricity producers to cover their costs and protect long-term market and carbon price signals, the Commission outlined. The REPowerEU package was presented as a response to the energy crisis and to make Europe more independent from Russian fossil fuels.

EUROPEAN PARLIAMENT CALLS FOR A BAN ON GOLDEN PASSPORTS

On Wednesday 9 March, the European Parliament adopted a resolution drafted by MEP Sophie in ’t Veld (Renew Europe, Netherlands), asking for a ban on so-called “golden passports” and a strict control over “golden visas”. MEPs call on the Commission to table a proposal by the end of its mandate. These schemes allow investors to obtain EU citizenship or a residence permit in the EU in exchange for making investments in the relevant member country. MEPs also urge EU governments to reassess all approved applications from the past few years and ensure that “no Russian individual with financial, business or other links to the Putin regime retains his or her citizenship and residency rights”.

MEPS SUPPORT A EUROPEAN WITHHOLDING TAX FRAMEWORK

On Thursday 10 March, the European Parliament adopted a resolution, drafted by Portuguese MEP Pedro Marques (S&D), asking for an EU-wide withholding tax in order to ensure that all payments (dividends, interest, royalties, capital gains, etc.) made within the EU are taxed at least once before leaving it. This proposal could contain a minimum effective tax rate, MEPs say. The resolution also urges the European Commission to come forward with a common and standardised EU procedure for refunds of withholding tax for all Member States. This resolution comes at the right time as the European Commission intends to present a legislative proposal focused on withholding tax procedures in the EU during the fourth quarter of 2022.

GREEN LIGHT OF THE EP TO THE AGREEMENT ON VAT TAX RATES

The European Parliament gave its green light, on Wednesday 9 March, to the agreement that the EU Council reached last December on the Council Directive amending Directive 2006/112/EC as regards rates of value added tax. The text modifies the VAT Directive of 2006 to grant more flexibility to Member States in the setting of VAT rates and to ensure that they are all treated equally. In its opinion, drafted by Marek Belka (S&D, Poland), the EP says that “overall, the deal struck by the Council on this delicate subject is not only a step in the right direction towards using taxation to build a greener Europe; it also maintains the flexibility for Member States to lower VAT on essential products to benefit low-income households and, as such, tackle the regressiveness of the VAT system”. It however urges the Council to agree on a definitive VAT system based on the principle of taxation in the country of destination.

DG TAXUD PUBLISHES ITS MANAGEMENT PLAN FOR 2022

The Directorate-General for Taxation and Customs Union (TAXUD) of the European Commission published, on Monday 7 March, its management plan for 2022, which gives a good overview of what to expect in tax matters this year. As expected, the Commission will present, possibly on the 27 of July, a proposal for the implementation of the OECD global agreement on re-allocation of taxing rights (Pillar I) at EU level. Such a proposal will only come after the OECD multilateral convention on this matter has been signed and will seek to ensure that the reallocation mechanism is consistently transposed by all EU Member States, it explained. DG TAXUD will also prepare in 2022 a new transparency proposal requiring certain multinationals to publish their effective tax rate, a new proposal to clarify the criteria for tax residence as well as an initiative on the VAT gap. A proposal for a debt-equity bias reduction allowance (DEBRA), a revision of the Directive on administrative cooperation on tax matters (DAC8), a proposal for an EU Withholding Tax Relief Procedure and a package to modernise VAT rules are also expected to be presented this year.