German Industry's Priorities for European Tax Policy

POSITION | EUROPE | TAX POLICY

German Industry’s Priorities for European Tax Policy German EU Council Presidency from July 2020 onwards

7 July 2020

Competitive tax law in Europe 23. Oktober 2017 The European Commission faces major economic and political challenges with respect to globalisation, digitalisation and climate change. Not only does Europe face global competition in the digitalisation of the economy, in addition, the commitments of the Paris Agreement on Climate Change need to be implemented as well. At the same time, it is essential to strengthen the European Single Market as a sine qua non for Europe's prosperity and success.

The Political Guidelines for the European Commission 2019-2024 focus on six political priorities, two of them also relate to the tax policy agenda. The key issue refers to the tax challenges of the digitalization of the economy, which uses the implementation of the proposed reform of the international taxation system as a starting point. In addition, and as part of the European Green Deal, the Energy Tax Directive will be revised until 2021 in order to bring it into line with European climate targets.

The German EU Council Presidency in the second semester of 2020 will be responsible for coordinating and driving forward the Council’s work on these dossiers. The German federal government calls for a modern and innovative tax policy “in order to continue to promote Europe’s economic strength and safeguard Member States’ tax revenues.” German industry advocates for focusing on growthfriendly tax policies in Europe aiming to strengthen the international competitiveness of European businesses. An additional burden on individuals and businesses would counter Europe's economic recovery and increases the costs of doing business and should therefore be avoided. Instead, Europe's industrial base and European cooperation need to be strengthened.

Tax and Financial Policy | T: +49 30 2028 1507 | m.wuennemann@bdi.eu| www.bdi.eu

German Industry’s Priorities for European Tax Policy

Table of Contents Key Messages ................................................................................................................................ 4 The European Commission’s priorities in the field of tax policy ................................................. 5 Essential priorities for European tax policy from an industry's point of view ............................ 7 Tax challenges of the digitalisation of the economy .................................................................... 7 The European Green Deal – Towards a carbon neutral Europe................................................. 11 Harmonisation of VAT Systems .................................................................................................. 12 Common Consolidated Corporate Tax Base .............................................................................. 13 Financial Transaction Tax ........................................................................................................... 14 Mandatory disclosure requirements on reportable cross-border tax arrangements................ 15 Unanimity rule in European tax policy ........................................................................................ 16 Transparent state aid control ...................................................................................................... 19 Summary ...................................................................................................................................... 21 List of abbreviations .................................................................................................................... 23 Legal disclosure........................................................................................................................... 24

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German Industry’s Priorities for European Tax Policy

Key Messages 1.

Tax challenges of the digitalisation of the economy Avoid unilateral measures at EU level and promote a global consensus

2.

The European Green Deal Revise the Energy Tax Directive and promote carbon neutral energy sources

3.

Harmonisation of VAT systems Proceed with the harmonisation of tax rates and tax collection by establishing a definitive VAT system

4.

Common Consolidated Corporate Tax Base Implement both stages of the CCCTB, i.e. the harmonisation of the tax base and consolidation of profits and losses

5.

Financial Transaction Tax Avoid unilateral action at national and European level; instead strengthen company pension schemes and Europe as a business location

6.

Mandatory disclosure requirements on reportable cross-border tax arrangements Introduce a European "white list" for everyday, non-reportable arrangements

7.

Decision making on EU tax policy Maintain the principle of unanimity for key areas of taxation

8.

Transparent state aid control Work towards more transparent state aid decisions of the European Commission

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German Industry’s Priorities for European Tax Policy

The European Commission’s priorities in the field of tax policy The European tax policy agenda is shaped by the political guidelines1 of the President of the European Commission, Ursula der Leyen. By presenting this position paper, BDI intends to assess this agenda and to lay down German industry's priorities for European tax policy.

The political guidelines for the European legislature from 2019 to 2024 rightly state that "Europe must lead the transition to a healthy planet and a new digital world". Two out of the six headline ambitions of the European Commission (“A European Green Deal" and "An economy that works for people”) contain specific implications for tax policy.

The European Union (EU) is currently facing immense tax policy challenges, which are accompanied by considerable effects on the competitiveness of German industry. By taking over the presidency of the Council of the EU in the second half of 2020, Germany is requested to set the right priorities in cooperation with the European Commission. Germany and Europe need to be strengthened in terms of tax policy in order to be brought back on a growth track after the current COVID-19 pandemic.

Tax challenges of the digitalisation of the economy One of the European Commissions’ tax policy priorities is to address the tax challenges of the digitalisation of the economy. On this issue, the European Commission is rightly committed to the work at OECD level. BDI is convinced that any reform should be based on a coordinated approach at international level. At the same time, the European Commission has repeatedly announced that it is ready to act alone if no deal was reached at OECD level by the end of 2020. In light of the need for a uniform global level playing field, these considerations should be disregarded. Instead of unilateral measures at EU level, a global consensus at the OECD/G20 level is required.

The European Green Deal The European Commission’s second priority regarding tax policy is related to the "European Green Deal"2, which holds a prominent place in the Political Guidelines and focuses on climate protection, ecology and sustainability. The revision of the Energy Tax Directive (ETD) as one element of the “European Green Deal” aims to align the ETD with the European climate targets. In particular, the revision calls for a review of the current tax exemptions and announces the closing of loopholes. At national level, the "European Green Deal" is intended to provide the context for a broad-based tax reform that goes along with removing subsidies for fossil fuels. In this context, the European Commission is called upon to reconcile its climate policy objectives with the requirements needed for a competitive location for industry.

1

The Political Guidelines ("Political Guidelines for the next European Commission 2019-2024") focus on six headline ambitions for the EU: A European Green Deal; An economy that works for people; A Europe fit for the digital age; Protecting our European way of life; A stronger Europe in the world; A new push for European democracy.

2 European Commission, COM(2019) 640 final, 2019, Brussels. BDI has published a detailed assessment of the European Green Deal proposal (see BDI publication: Document number D 1126).

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German Industry’s Priorities for European Tax Policy

Challenges for the German EU Council Presidency The COVID-19 pandemic represents a caesura for the economies of the EU. In order to cope with the economic consequences of COVID-19, the Presidency’s priorities as laid down in the programme3 include overcoming the consequences of the pandemic and rapidly concluding negotiations on the EU’s Multiannual Financial Framework for the period from 2021-2027. Further priorities include tackling issues such as climate change and digitalisation. The programme advocates for a “modern and innovative” European tax policy, “in order to continue to promote Europe’s economic strength and safeguard Member States’ tax revenues”. Hence, the German EU Council Presidency should not only deal with crisis management, it should also set the necessary course for the future. In particular, this should include business-friendly industrial policies by making use of taxation.

Following the conclusion of negotiations on the OECD project, the German federal government is committed to press ahead with implementing the results in the EU. BDI continues to support the OECD project to address the tax challenges arising from the digitalisation of the economy with the aim of finding a global solution at OECD level. However, in view of the COVID-19 pandemic, industry is concerned whether the planned timetable can be met. In case the project needs to be finalized by the end of 2020 due to international political pressure, the timetable for the subsequent implementation of the agreed measures in the participating countries should be postponed uniformly by one to two years due to the crisis.

According to the programme, the German EU Council Presidency is continuously committed to work on the introduction of a Financial Transaction Tax (FTT) at European level. However, especially in times of crisis introducing an FTT would send a wrong signal and lead to negative effects on the economy.

The programme also mentions the revision of the directive on administrative cooperation (DAC).

In order to “simplify taxation”, Member States’ tax authorities are required to work together contributing to tackling “tax evasion in an effective manner”. In addition, Germany advocates for a modernization of European state aid legislation and aims to discuss “the expansion of carbon pricing to cover all sectors and the introduction of a moderate minimum carbon price within the context of the European emissions trading system (EU ETS).”

With its proposal for Europe’s economic recovery, the European Commission has sent a strong signal as well. In this context, new taxes and levies at EU level, such as digital and plastic taxes or additional carbon levies, are to be rejected. This also applies to possible new own resources for the EU based on an additional corporate revenue tax. An additional burden on citizens and businesses would run counter to Europe's economic recovery and would increase the costs of doing business. This should be avoided at present in order to ensure a rapid economic recovery.

“Together for Europe’s recovery. Programme for Germany’s Presidency of the Council of the European Union.” 1July to 31 December 2020.

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German Industry’s Priorities for European Tax Policy

Essential priorities for European tax policy from an industry's point of view The European Commissions’ priorities in the field of tax policy as well as the additional priorities of the German EU Council Presidency should not distract from the fact that there are other items on the agenda as well. The additional items on the agenda are primarily related to the further deepening of the European Single Market and the strengthening of the competitiveness of the EU. These dossiers include the harmonisation of VAT systems, the introduction of a Common Consolidated Corporate Tax Base (CCCTB) and the mandatory disclosure requirements on reportable cross-border tax arrangements. Furthermore, BDI expresses its view on the discussion of the principle of unanimity in the field of taxation and on EU state aid control in tax matters.

Tax challenges of the digitalisation of the economy Digitalisation goes along with increasingly digitised and cross-border business models, a development which has brought extensive new challenges for international taxation.

What is taxed and where?

Source: Jaques Delors Institute

The original reason for the discussion was the observation that new digital business models could no longer be covered by traditional taxation rules and that an intergovernmental redistribution of taxation rights should take place. In the meantime, it has become clear that the OECD proposals would have significant consequences for conventional German companies as well. Even for companies that would not be affected by an alternative "Digital Services Tax", high additional administrative burdens and the threat of double taxation risks could arise.

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German Industry’s Priorities for European Tax Policy

The OECD proposals in detail: the two-pillar approach The two-pillar approach provides for a redistribution of taxing rights on corporate profits (Pillar One) and aims to ensure a global effective minimum taxation (Pillar Two).

Pillar One: Redistribution of taxation rights

Pillar Two: Global minmum taxation

▪ Proposals for the allocation of taxation rights between the states

▪ Proposals to ensure a global effective minimum level of taxation

▪ Objective: grant market states extended taxation rights

▪ Objective: to avoid profit-shifting to lowtax jurisdictions

▪ Ways of implementation: ▪ formula-based distribution of global corporate profits ▪ fixed discounts for marketing and sales functions abroad ▪ dispute resolution and avoidance

▪ Ways of implementation: ▪ Tighten provisions of the German Foreign Tax Act ▪ Strengthen the limitation for deducting operating expenses for payments abroad

▪ Problem: high additional administrative burden and risk of double taxation

▪ Problem: risk of double taxation and legal implementation risks

Pillar One: Redistribution of taxation rights The first pillar of the OECD proposals includes a global redistribution of taxation rights. This is intended to strengthen the taxation rights and thus the tax revenue of the "market states" in which the users of digital services are located. To this end, the OECD presented the "Unified Approach" in October 2019 for the redistribution of taxation rights on corporate profits.4 The "Unified Approach" focuses on large and consumer-facing companies and proposes a new nexus to ensure taxation of corporate profits in the market country when a physical presence in the sense of a permanent establishment is not maintained. A redistribution of taxation rights in favour of the market states is to be achieved by means of new profit allocation rules that go beyond the arm's length principle. The OECD approach is intended to increase legal certainty for taxpayers and tax administrations and consists of a three-part mechanism.

1. The first stage, "Amount A", represents the central response to the challenges of digitalisation and proposes to allocate additional taxation rights to source and market states. To this end, corporate profits are to be allocated on a formulaic basis if the sales of the multinational enterprise exceed group and country-specific sales thresholds. The place of supply for tax purposes for this new taxation right should be the turnover as an indicator of significant economic activity in the market state. As the new nexus understands sales as an indicator of significant economic activity in the market state, it would be irrelevant for tax purposes whether a company maintains a physical presence in the market state in the sense of a permanent establishment according to the previous principles of the OECD Model Tax Convention for the Avoidance of Double Taxation.

4

OECD (2019), Public consultation document. Secretariat proposal for a “Unified Approach” under Pillar One.

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German Industry’s Priorities for European Tax Policy

2. The second stage, "Amount B", is intended to provide the source states, i.e. those states in which a physical presence in the sense of a permanent establishment or a subsidiary is operated, with a fixed remuneration for so-called basic activities. The main focus in this context rests on marketing and sales activities.

3. If branches in the source state perform functions and bear risks beyond the basic activities, the third stage ("Amount C") enables source states to claim additional taxation rights. In this context, the “Unified Approach” aims to provide legally binding and effective dispute prevention and resolution mechanisms.

Pillar Two: Global effective minimum taxation of corporate profits Pillar Two of the OECD proposals5 seeks to develop measures which ensure that corporate profits are subject to taxation at an effective minimum rate. The underlying assumption is that the characteristics of the “digital economy” allow profits to be shifted to low-tax countries and therefore justify limiting tax competition to a certain minimum level.

The global minimum taxation of corporate profits, the second pillar of the OECD proposals, is to be ensured by two interlinked measures, as proposed in the so-called "GloBE" proposal: ▪

an extension of the national rules on additional taxation ("Income Inclusion Rule") and

▪

a limitation or prohibition of the deduction of business expenses if the effective minimum taxation level is not reached ("Undertaxed Payments Rule").

The impact of these measures on individual countries and the tax burden on companies will depend significantly on the effective level of taxation prior to the introduction of the new rules and the global minimum effective level of taxation. At the same time, the full sovereignty of states to set tax rates should be preserved.

BDI position: From a business point of view, it is to be expected that the German tax base will generally be reduced as a result of the OECD proposals under Pillar One. Even under current tax regulations, tax substrate is already being partially transferred to other countries, as some states (namely India and China) have already unilaterally created a tax law that anticipates the first pillar approaches that have been presented. So far, such tax "accesses" beyond a routine profit customary for foreigners have only been observed in isolated cases. According to the OECD's proposal for the first pillar, however, this access to the tax base, which has so far taken place in individual cases, would in future be worldwide.

There are also several concerns regarding the technical design of the project. For example, efficient and binding mechanisms for dispute avoidance and resolution are necessary. An international, consensus-based solution is essential for German industry. The inclusion of rules for effective dispute avoidance and binding dispute resolution by all participating states is thus a mandatory prerequisite for German industry's support of the OECD proposals. Therefore, any multilateral agreement that does not contain a binding clause for the avoidance of tax conflicts for all states should be avoided, thus eliminating the risk of multiple taxation.

5

OECD (2019), Public consultation document. Global Anti-Base Erosion (“GloBE”) – Pillar Two.

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German Industry’s Priorities for European Tax Policy

1.

BDI position on the redistribution of taxation rights (Pillar One)

With regard to Pillar One of the OECD proposals, clear and appropriate rules are needed that do not lead to double taxation. In the view of BDI, the following measures are the minimum necessary to achieve this: Scope: ▪

The "Unified Approach" of Pillar One must not only be further developed on the basis of a centralised multinational group with a single entrepreneur, but must also take into account decentralised structures of groups of companies, since most German groups of companies are predominantly organized on a decentralized basis.

▪

B2B business models should be completely excluded from the scope of application of "Amount A" in accordance with the objective of the "Unified Approach", which is basically to cover only B2C business models.

▪

However, clarifications and further limitations are also necessary for the area of B2C business models. In order to achieve international consensus, the scope of Pillar 1 should be limited to those business models that would also be affected by an alternative "Digital Services Tax" based on the EU model.

Allocation: ▪

The currently discussed profitability threshold for estimating the additional taxable profit to be allocated under "Amount A" has to be raised significantly, e.g. up to 20 percent. In order to determine the additional taxable profit after exceeding the profitability threshold, the currently discussed formula-based approach could be used (operational margin minus x percent points multiplied with y percent).

Tax base:

2.

▪

For the determination of the surplus profit to be distributed, the average excess of the profitability threshold over a certain period of five years (for example) is to be taken as a basis instead of an annual calculation of the surplus profit. The current developments due to the COVID-19 crisis show that losses must also be included in this analysis in order to achieve the necessary symmetrical control according to actual performance.

▪

The regulations on the consolidated financial statements or financial accounts (e.g. regulations based on IFRS 8 ("management approach")) should theoretically determine segmentation for the purposes of Pillar 1 in order to avoid unnecessary administrative burden.

BDI position on global effective minimum taxation (Pillar Two)

Under the second pillar of the OECD proposals, solutions are needed that ensure moderate global minimum taxation and do not force comprehensive additional taxation according to the model of the German Foreign Tax Act regulations. In the view of BDI, this requires at least the following measures: ▪

The accounting standards of the consolidated financial statements at the level of the parent company must be used to calculate the tax base. Adjustments to commercial law for tax purposes must be carried out uniformly worldwide and by means of comprehensible, easily applicable rules ("global blending").

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German Industry’s Priorities for European Tax Policy

▪

The minimum effective tax rate is to be determined uniformly and moderately worldwide.

Since activity and substance exemptions are to be made within global minimum taxation, the system would otherwise lead to an unjustifiably penalty tax. This tax rate is only applicable at the level of the parent company.

The European Green Deal – Towards a carbon neutral Europe With the "European Green Deal"6 on 11 December 2019, the European Commission has placed climate protection, ecology and sustainability at the centre of its political programme. In terms of tax policy, the "European Green Deal" includes a revision of the emissions trading system and an adjustment of the Energy Tax Directive (ETD). In addition, a Carbon Border Adjustment mechanism for selected sectors is to prevent carbon leakage and protect Europe as a business location.

Specifically, the currently valid version of the ETD which first came into force in 2003 will be revised “focusing on environmental issues” and aligned with the European climate targets. This is particularly important because the current version of the ETD does not yet differentiate between conventional and sustainable energy.

The revision focuses on the following key elements: ▪

Minimum tax rates: In order to better align the minimum tax rates with the EU's climate and energy policy objectives, the revision will focus on various aspects such as inflation, energy content and the link to emissions and their impact on excise rates.

▪

Sectoral tax differentiation: The differentiation between motor fuels and heating fuels as well as the existing exemptions and reductions will also be reviewed. This applies in particular to the maritime and aviation sectors, where the European Commission has identified "fossil fuel subsidies".

▪

Product coverage: The review will take the current inconsistencies into account between the taxation of existing fuels and their more environmentally friendly, newer alternatives.

Additional loopholes are to be closed at the macro level. The goals and direction of the "European Green Deal" are to become the basis for a broad-based tax reform aiming to abolish subsidies for fossil fuels.

BDI position:

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▪

From BDI’s point of view, it is right that climate and environmental protection as elements of sustainability have a high political priority in the EU. However, a one-sided approach should be avoided, because otherwise European companies could become less competitive internationally. Europe's future viability does not depend solely on the ecological goals of the "European Green Deal". Such a comprehensive transformation will only succeed if it is based equally on all three pillars of sustainability, which include ecology, economy and social aspects.

▪

The European Commission’s approach to revise the ETD is basically to be welcomed. In the announced revision it must be considered that in the future carbon neutral energy sources will be exempt from taxes and levies. In order to achieve the goal of making Europe carbon neutral by 2050, sustainable support of carbon neutral energy sources is essential. This is the

European Commission, COM(2019) 640 final, 2019, Brussels.

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German Industry’s Priorities for European Tax Policy

only way to bring them onto the market quickly and it would be an incentive to increasingly use renewable fuels as an additive for conventional fuels.

▪

Technology-neutral incentives for greenhouse gas savings could help to create new business models. Reliable framework conditions are particularly important for this.

▪

The revision of the ETD must not neglect the primary objectives of the current regulation. The regulations must continue to guarantee the proper functioning of the European Single Market, the international competitiveness of European companies and the avoidance of tax discrimination. For example, a kerosene tax levied solely in Europe would negatively affect the competitiveness of EU-based airlines vis-à-vis foreign competitors, since they maintain their hubs for long-haul flights outside the EU and thus do not pay kerosene tax.

Harmonisation of VAT Systems Member States’ administrative regulations in the field of VAT are still complex, which is one of the main obstacles to the single market.

The transition to a definitive VAT system The current European VAT system is complex and leads to high compliance costs. It was set up as a transitional solution until a definitive VAT system would be established in order to complete the Single Market. Under the current transitional system, taxation takes place in the country of destination through a combination of a VAT-exempt intra-Community supply of goods and a taxable acquisition in the country of destination. For this purpose, there is the need to register with the tax authorities in the different destination countries and foreign companies are subject to VAT compliance and reporting requirements. The current quick fixes for the documentary evidence of the intra-Community supply of goods and the mandatory use of a valid VAT ID number demonstrate the complexity and limits of the current system. For practical reasons, the introduction of the Mini One-Stop Shop (MOSS) allows companies to supply electronic services to customers in EU Member States where they do not have an establishment and to account for VAT just in the Member State of identification. This principle is currently expanded to all types of cross-border services to final consumers in the EU. In order to reduce complexity and to complete the Single Market, in 2018 the European Commission has proposed a definitive VAT system. It aims for a taxable treatment according to the destination principle in order to replace the combination of a VAT-exempt intra-Community supply of goods and a taxable intra-Community acquisition of goods.7 The proposal intended to introduce the concept of an intra-Community supply of goods, where the intra-Community supply would be taxable in the country of origin according to the destination country principle with registration via a One-Stop Shop (OSS).

Transitional system in the EU VAT-exemption of intra-Community supplies in the country of origin and taxable acquisition in the country of destination

Definitive VAT system in the EU Direct VAT liability in the country of destination via a supply “within the EU”

Due to reservations expressed by the Member States with regard to the technical challenges resulting from introducing a comprehensive OSS and businesses’ concerns with financial risks and burdens, no progress has been made in the discussions on the European Commission's proposal for a definitive

7

European Commission, COM(2018) 329 final, 2018, Brussels.

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German Industry’s Priorities for European Tax Policy

VAT system. In the light of the challenges of taxation via the OSS in the country of origin according to the specifications of the country of destination, the additional proposal of the European Commission to give Member States more flexibility to set VAT rates led to incomprehension, especially by the business community. In order to reduce complexity and compliance costs, the final VAT system requires more harmonisation and not more flexibility for Member States.

Due to the ongoing discussions on a definitive VAT system, the new European Commission has focused on the technical requirements of a definitive VAT system and at the technical solutions developed in recent years for tax collection in the individual Member States. This is to be welcomed, as the inconsistent approach of Member States and the different methods and technologies of tax collection represent a considerable barrier to the completion of the Single Market. The existing technical methods for tax collection have to be harmonised, and at the same time the technological possibilities must be used to establish a definitive European VAT system.

BDI position: The European Commission should ▪

seek to harmonise the existing technical methods of tax collection, giving great importance to data security in view of the enormous volumes of data involved,

▪

actively accompany the further development of technical developments and create technical solutions for legally compliant information systems throughout Europe. Only in this case a definitive VAT system can be implemented in a legally secure manner for companies and for tax authorities alike.

▪

withdraw the proposal to give Member States more flexibility to set VAT rates. Instead, the European Commission should work on the harmonisation of rates and tax matters. In order to implement the destination principle in the EU, more harmonisation is needed, under the premise that the supplier should be the taxable person in the definitive system.

▪

discuss again the question of the place of supply in order to create a single VAT system.

In the light of technical developments, the distinction between supplies of goods and services must be questioned in the light of technical developments. Therefore, the European Commission should develop a future-oriented system.

▪

allow the discussion on the introduction of a reverse charge mechanism for intra-union supply of goods. Pre-determining the tax liability of the supplier instead of the recipient does not allow for an agreement on a definitive VAT system. The European Commission should therefore allow a discussion on alternatives to the notion of a "certified taxable person".

Common Consolidated Corporate Tax Base The European Commission has already presented a proposal for a directive on a Common Consolidated Corporate Tax Base (CCCTB) 8 in 2011. The introduction of the CCCTB would enable companies to use the EU as a single market for corporate tax purposes, thereby facilitating cross-border trade and investment. The most recent initiative by the European Commission dates back to 20169. To encourage swift progress, the European Commission has proposed an implementation of the CCCTB in two stages. As a first step, agreement should be reached on a common corporate tax base. It

8 9

European Commission, COM(2011) 121 final, 2011, Brussels.

European Commission, COM(2016) 685 final, 2016, Strasbourg.

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German Industry’s Priorities for European Tax Policy

provides a single set of rules for the calculation of the corporate tax base. After the second step, the consolidation, companies would be allowed to add up all profits or losses from different Member States, resulting in a net profit or loss for all their activities in the EU. Only thanks to consolidation, questions whether a permanent establishment and thus the resulting tax liability exist in a country, become irrelevant. Consolidation would then significantly reduce the administrative burden by providing a uniform tax return for all business units in the EU.

Level 1 Level 2

Creation of a common corporate tax base: uniform set of rules for calculating taxable corporate profits in all EU Member States Consolidation of the common corporate tax base: group-wide profit and loss offset

BDI-Position: The removal of income tax obstacles in the Internal Market through the introduction of a CCCTB is an essential measure that can enhance both growth and competitiveness of the economy within the EU. These objectives can be achieved if both stages – harmonisation of the tax base and consolidation of profits and losses – are implemented in rapid succession. For German industry it is essential that the reform project does not get stuck after the first stage, the harmonisation of the tax base. Without consolidation, it would not provide the improvements in the taxation on earnings in the Single Market that business needs. A complete unification of the tax base should be achieved.

In order to achieve the desired objectives, the CCCTB should be closely based on the established accounting rules (net principle, realisation principle, consistent profit determination, free choice of method for stock valuation). Deviating from these rules may, in case of doubt, be detrimental to the competitiveness of Europe as a business location, as they generally result in increases in the tax base.

BDI supports all measures that contribute to uniform competitive conditions in the EU and ensure full taxation of all profits and therefore welcomes in principle the intention to introduce the CCCTB in Europe. In this context, double taxation risks for companies should be avoided so that every profit of a company is taxed only once. Similarly, a CCCTB must remain flexible enough to be able to react to changes in tax law in important third countries such as the US or, in the future, the UK. It is therefore important to abandon the combination of the CCCTB with European minimum tax rates. This could cement competitive disadvantages, which is why the CCCTB should only be introduced with no lower limits on the corporate income tax rate in the EU Member States.

Financial Transaction Tax As a result of the financial crisis, the EU Commission has been mandated by the European Council to initiate the project of a European FTT in 2011.10 In 2013, eleven EU Member States gave green light to proceed with an FTT under enhanced cooperation and requested the European Commission to submit a revised proposal which should be based on the Commission’s initial FTT proposal from 2011.11 In its Impact Assessment of the 2011 proposal, the European Commission assesses this "Option B" of the EU-11 at least as a significant improvement over the so-called baseline scenario, which describes the state of world without taking any action at EU level.12

10

European Commission, COM(2011) 594 final, 2011, Brussels.

European Commission, COM(2013) 71 final, 2013, Brussels.

12 European Commission, SEC(2011) 1102 final Vol. 1, p. 49 ff., Brussels.

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German Industry’s Priorities for European Tax Policy

As a result, none of the various efforts to introduce an FTT under enhanced cooperation has led to visible progress, which led to a temporary halt in the debate on an FTT at the end of 2016. At the ECOFIN Council in May 2019, Germany and France again agreed on key points for the introduction of a European FTT, essentially following the French model of a stock-exchange turnover tax. As a result of lacking progress at the European level, Germany presented an own draft of a European FTT in the end of 2019.

The total revenue from an FTT in Germany, including the income tax effects, is estimated to be in the order of initially around EUR 1.5 billion. In contrast to the proposal at European level, which aimed at pooling and sharing revenues among the participating countries, the proposal of the German Federal Minister Scholz's was aimed at generating revenues for the basic pension being discussed in Germany.

BDI position: ▪

An FTT will have an significant and unjustified burden on the real economy, occupational and private pension schemes and savers The FTT would put a burden on stock purchases, which are of considerable importance for savers and institutional investors, especially in the ongoing low interest rate environment. Placing a burden on financial investments by introducing an FTT would reduce the income and company pension rights of employees or the pension rights from private pension schemes.

▪

An FTT fails to achieve its objectives, namely to stabilise the financial markets and to impose costs on those responsible for the recent financial crisis To this day, the supporters of an FTT claim that it could help to ensure that the financial sector pays its fair share to the costs of the financial crisis. However, studies have shown impressively that the proposed tax – in contrast to the European Commission's presentation – would neither contribute to a stabilization of the financial markets nor burden those responsible for the last financial crisis. This applies even more if the tax is to be unilaterally targeted at the trading of stocks. In this case, an FTT would have a considerable effect on citizens and the whole economy alike.

▪

Further, still unresolved issues After more than ten years of debate, there are still no robust solutions to the numerous technical questions and problems. In particular, this applies to the obligation of financial institutions located outside the remaining participating Member States to pay the tax and the resulting issues related to international law. The Council Legal Service has already expressed its critical view on an FTT in 2013.

Mandatory disclosure requirements on reportable cross-border tax arrangements Since July 1, 2020, intermediaries (e. g. credit institutions, tax consultants or auditors) are required to disclose information on cross-border tax arrangements to local tax authorities such as the German Federal Central Tax Office (BZSt). The reporting has to be done within 30 days after a reportable event (e. g. the reportable cross-border arrangement) is made available and is required to include personal and tax-related information as well as information on both the intermediary and the user of the tax arrangement.13 EU Member States were required to transpose this directive into national legislation by

This regulation is based on a European Commission’s proposal tabled on June 21, 2017 (European Commission, COM(2017) 335 final, 2017, Brussels.), the respective Directive (EU) 2018/822 entered into force on June, 14 2018.

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German Industry’s Priorities for European Tax Policy

December 31, 2019. On June 24, 202014, the ECOFIN Council adopted an amendment to the DAC allowing EU Member States the option to defer the entry-into-force of the mandatory disclosure of reportable cross-border tax arrangements. The respective directive15 has been published in the Official Journal of the EU on June 26, 202016 and provides for the following time limits:

Mandatory disclosure of reportable cross-border tax arrangements: Deadline extension

"New" reportable arrangements in the period July 1 to December 31, 2020

30-day period for notification begins on January 1, 2021

"Historical" reportable arrangements in the period June 25, 2018 to June 30, 2020

Notification by February 28, 2021

Source: ECOFIN

Depending on the further development of the COVID-19 pandemic, the period of deferral of the time limits may be extended once by three months, at the latest until April 1, 2021.

BDI position: BDI welcomes the postponement. In addition to that, BDI welcomes that an administrative instruction in Germany has created a list of cross-border arrangements that do not require disclosure (“white list”).

BDI continues to advocate for the establishment of a "white list" at EU level in order to define crossborder arrangements that clearly do not need to be reported. This would reduce the administrative burden on businesses considerably. BDI explicitly welcomes the discussions on such a "white list", which aims to ensure a well-defined set of day-to-day, non-aggressive tax-planning arrangements that does not require mandatory reporting.

Unanimity rule in European tax policy Principle of unanimity under Articles 113, 115 TFEU In general, the principle of unanimity applies to European legislative acts in tax law, i.e. the Council adopts European directives by unanimous decision (see Art. 113 and Art. 115 TFEU) based on a proposal from the European Commission and after consulting the European Parliament and the European Economic and Social Committee. In contrast, for most European policy areas without an

14

Council of the EU, ECOFIN 457, Brussels, 2020.

Directive (EU) 2020/876 amending Directive (EU) 2011/16, published in the Official Journal of the EU on 26 June 2020 16 OJ L 204, 26.6.2020, p. 46 15

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German Industry’s Priorities for European Tax Policy

explicit mandate for harmonisation, the provisions of Art. 114 TFEU17 apply, which provide for the ordinary legislative procedure including qualified majority voting.

In recent times, the principle of unanimity in tax matters has increasingly been called into question by the European Commission, as it is considered to be detrimental for further European integration and to make the Single Market less attractive for international investments. Not least in order to make progress on steering taxes (e.g. with regard to climate measures), the European Commission is considering extending the ordinary legislative procedure to individual areas of tax law that are directly related to the functioning of the Single Market. The European Commission claims that qualified majority voting could ensure a better compatibility of the tax systems of the individual Member States and with the European treaties.18 Proposal on the transition to the ordinary legislative procedure On January 15th, 2019 the European Commission published a communication entitled "Towards a more efficient and democratic decision-making in EU tax policy"19 which proposes a step-by-step transition from unanimity to the ordinary legislative procedure in tax legislation. According to the European Commission, this approach could help to achieve EU policy goals and to complete the Single Market. By proposing a step-by-step approach, the European Commission hoped to increase the chances to achieve the required unanimity vote in the Council.

The legal basis for this procedure would be Article 48 (7) TFEU. This Treaty provision, known as "passerelle clause", provides that, on the initiative and following a unanimous decision of the Council, followed by obtaining the consent of the European Parliament and consulting the national parliaments (which are allowed to voice their opposition within six months), the legislative procedure in a policy area may be amended and may be changed from the special legislative procedure to the ordinary legislative procedure. The (unanimous) decision in the Council can only be taken if the national parliaments do not make use of their veto rights within a period of six months. Only if these conditions are met, the (unanimous) decision can be taken in the Council.

If Art. 48 (7) TFEU is to be used, the voting behaviour of the German representative in the Council would be determined by Art. 4 (1) IntVG. It is difficult to determine, to what extent Germany's influence in the ordinary legislative procedure would differ from that in the special legislative procedure.

Although Germany's influence in the ordinary legislative procedure is comparatively strong due to its population, in the end, the principle of unanimity still allows for a veto.20 It provides for a gradual transition to the ordinary legislative procedure: In a first step, according to the Europan Commission, qualified majority voting should be limited to measures which do not have a direct impact on Member States' taxing rights, bases or rates. This would only include measures aimed at combating tax fraud, tax evasion and avoidance and facilitating tax compliance for businesses in the Single Market. This could include initiatives to combat tax abuse which Member States have already agreed to at international level (such as measures in the context of the OECD-BEPS Action Plan).

In a second step, qualified majority voting should be extended to tax policy measures primarily of a fiscal nature designed to support other policy goals. This could include measures related to climate,

17

Article 114(2) TFEU provides for an exception for sensitive policy areas, which include not only tax law but also freedom of movement and labour law, and thus for the application of the special legislative procedure.

18 Marquardsen, ifst publication 534 (2020).

19 European Commission, COM(2019) 8 final, 2019, Strasbourg.

20 See Marquadsen, ifst-Schrift 534 (2020).

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German Industry’s Priorities for European Tax Policy

environmental, energy and transport policy, for example, in order to tax negative external effects in a more targeted manner.

In the third step, qualified majority voting should be extended on areas of taxation that are already largely harmonised and need to adapt to new circumstances. This would particularly cover VAT (or the transition to a definitive VAT system) and specific excise duties.

The fourth and final step would be an extension of the ordinary legislative procedure on other initiatives in the area of taxation which are necessary for the Single Market and for "fair and competitive taxation in Europe" (e.g. initiatives to introduce a CCCTB or to tax the digital economy).

Proposal for gradual transition to the ordinary legislative procedure Qualified majority voting limited to measures that have no direct impact on Member States' Level 1 taxing rights, bases or rates

Level 2

Level 3

Level 4

Introduction of qualified majority voting for tax measures directional Extension to areas that are already largely harmonised

Introduction of qualified majority voting on other initiatives in the area of taxation

Source: EU-Commission

Ordinary legislative procedure in case of distortion of competition With Art. 116 TFEU, the European Commission proposes a further path that enables the transition to decision-making in accordance with the ordinary legislative procedure: "Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member States is distorting the conditions of competition in the Single Market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.

If such consultation does not result in an agreement eliminating the distortion in question, the European, Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives. Any other appropriate measures provided for in the Treaties may be adopted.�21 In political practice, Art. 116 TFEU has not yet been used. This is, among other things, related to the necessary procedural steps and the uncertainties that arise in connection with the requirement of "distortion of the conditions of competition". From a legal point of view and in connection with Art. 115 TFEU, however, there are stringent prerequisites to be considered. In addition to the unclear

21

Article 116 TFEU.

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German Industry’s Priorities for European Tax Policy

definition of the terminus “distortion of competition”, another prerequisite would be a higher degree of disruption of the functioning of the Single Market.22 Ordinary legislative procedure for environmental measures Article 192 (2) TFEU is a special provision allowing to apply the ordinary legislative procedure in tax legislation. However, the provision is aimed at the protection of the environment. It is only applicable if the aspect of environmental protection laid down in a tax measure is the primary objective and not merely a secondary objective. The most recent case of application of Art. 192 TFEU could be the revision of the ETD. In its Inception Impact Assessment23 (formerly Roadmap), the European Commission has questioned Art. 113 TFEU as the legal basis of the ETD. In the light of the review of the ETD, which focuses on environmental policy aspects, the European Commission is considering the application of Art. 192 (2) TFEU. This would allow the proposal to be submitted under the ordinary legislative procedure.24 BDI position: The principle of unanimity in the field of taxation should be maintained. The step-by-step transition to majority decisions in tax matters, as proposed by the European Commission, carries the risk that the interests of individual Member States may be ignored. Decisions in the field of tax law are related to central areas of life that have a particular impact on the relationship between the state, citizens and business. The tax system of each EU Member State is adapted to its economic and social needs and, to this extent, there is a legitimate interest of the Member States to be directly involved in decisions at European level.

It may only be necessary to derogate from the unanimity rule in tax matters in individual cases, e.g. related to questions of procedural law or the taxable event. In general, however, Member States should still be able not to take part in decisions affecting central areas of their national sovereignty based on a majority decision. Instead of pursuing the transition to the ordinary legislative procedure in tax matters, a further harmonisation of European tax law should be promoted while retaining the participation rights of all Member States in order to achieve a better functioning Single Market.

Transparent state aid control EU state aid control in tax matters is an important element in creating a level playing field in the EU. EU Member States should not grant selective tax advantages that may affect competition in the Single Market. However, legal certainty of businesses is equally important to avoiding distortions of competition. Businesses trust that the tax laws of a state are in line with EU legislation and that they can apply these laws without reservation. This is why the European Commission has a special responsibility in state aid assessments. If the European Commission suspects illegal aid, a regulation that may be important for companies cannot be applied until the final conclusion of the proceedings. For example, the clarification of the admissibility of the so-called “restructuring clause” (German rules on fiscal loss carry-forward for ailing companies or “Sanierungsklausel”) in to Section 8c (1a) of the German Corporate Income Tax Act (KStG) took more than eight years: On February 24, 201025, the European Commission informed the Federal Republic of Germany that in its view the measure was not compatible

22

Marquardsen, ifst-Schrift 534 (2020).

Announcement of the European Commission on the amendment of the Energy Tax Directive (Ref. Ares(2020)1350088) 24 Marquardsen, ifst-Schrift 534 (2020), 11.

25 BStBl. [Federal Tax Gazette] 2010 I p. 482 23

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German Industry’s Priorities for European Tax Policy

with the EU Guidelines on Rescue and Restructuring aid. On April 30, 2010, the Federal Ministry of Finance instructed the German tax authorities to no longer apply the measure. It took until June 28, 2018 until the European Court of Justice (ECJ) ruled that the “Sanierungsklausel” does not constitute illegal aid and may be applied.26 Also, the application of the provisions on the tax exemption of the restructuring income, Section 3a EstG, could only come into force after the agreement by the European Commission by an informal and unpublished comfort letter stressing that the European Commission does not see any conflict with EU Guidelines on Rescue and Restructuring aid. The ECJ also plays a key role in company taxation with regard to aspects of state aid law.

One possible approach to avoid lengthy court proceedings is to carry out a safety check before the law is adopted. The European Commission has completed such a check in 2018 for the tax exemption for restructuring income provided for in § 3a EstG. However, the decision was not announced as an official decision of the European Commission, but only as a so-called comfort letter, which was not published.

BDI position: The BDI calls on the European Commission to make its decisions more transparent. Publishing and giving reasons for decisions can make a considerable contribution to an improved interpretation of Community law by national fiscal courts thus to greater legal certainty. In addition, transparency can lead to better decisions, because in the public eye work is usually done more thoroughly. For businesses it goes without saying to work in a transparent and quick manner and therefore, these principles should also apply to the public sector. It would also be desirable to strengthen the EU's supervision of state aid when considering the public sector in order to ensure fair competition between private and public companies.

26

In the course of the JStG 2018, the suspension was lifted by section 34 (6) sentences 3 and 4 KStG as amended and section 8c (1a) KStG was retroactively rehabilitated.

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German Industry’s Priorities for European Tax Policy

Summary Under the German EU Council Presidency and during the European legislative period until 2024, Europe is called upon to overcome the deepest economic crisis since World War II. In the light of global competition, Europe needs to be prepared for the future. A strong and innovative industry is the prerequisite for Europe to be able to help shape global issues of the future, such as climate change or digitalisation, with its own technologies and concepts on equal footing with the USA and China.

BDI calls for a growth-oriented European tax policy in order to strengthen Europe's economic power and competitiveness: Tax challenges of the digitalisation of the economy: In order to address the tax challenges of the digitalisation of the economy, a global consensus on the OECD's proposals (Pillar 1 and 2), which also applies to Europe, is needed. Unilateral measures are to be rejected and also a European approach would prove ineffective. For German industry, efficient and binding mechanisms for dispute prevention and resolution are of particular importance.

With regard to Pillar One of the OECD proposals, clear and appropriate rules are needed that do not lead to double taxation. Under the Pillar Two of the OECD proposals, solutions are needed that ensure moderate global minimum taxation and do not force comprehensive additional taxation according to the model of the German Foreign Tax Act regulations.

The European Green Deal – Towards a carbon neutral Europe: It is right that climate and environmental protection as elements of sustainability have a high political priority in the EU. However, the European Green Deal needs to be equally based on all three pillars of sustainability, which include ecology, economy and social aspects. As regards the revision of the Energy Tax Directive (ETD) it must be considered that in the future carbon-neutral energy sources will be exempt from taxes and levies.

Harmonisation of VAT systems: Member States’ administrative regulations in the field of VAT are still complex, which is one of the main obstacles to the single market. Therefore, the European Commission should seek to harmonise the existing technical methods of tax collection. Technical solutions for legally compliant information systems throughout Europe are a prerequisite for a definitive VAT system that can be implemented in a legally secure manner for companies and tax authorities alike. In addition, the European Commission should work on the harmonisation of tax rates and tax matters and withdraw the proposal to give Member States more flexibility to set VAT rates. In order to create a uniform system, the European Commission should also allow a discussion of the introduction of a reverse charge mechanism for intra-union deliveries of goods.

Common Consolidated Corporate Tax Base: A swift introduction of a Common Consolidated Corporate Tax Base (CCCTB) including both stages (i.e. harmonisation of the tax base and consolidation of profits and losses) can assist to dismantle tax barriers in the Single Market. For German industry it is essential that the reform project does not get stuck after the first stage, the harmonisation of the tax base. Without consolidation, it would not provide the improvements in the taxation on earnings in the Single Market that business needs. Rather, it should closely follow the established regulations for financial accounting (the principle of taxation of net income, the realisation principle, consistent determination of income, free decision

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German Industry’s Priorities for European Tax Policy

on the method of inventory valuation). In addition, double taxation risks have to be avoided and any CCCTB must be flexible enough to be adapted to changes in tax law of important third countries.

Financial Transaction Tax: BDI rejects the idea of a Financial Transaction Tax (FTT), because it contradicts the European Commission’s declared aim of strengthening Europe as a business location in the context of global competition. None of the models discussed so far would succeed in avoiding negative effects on the industrial sector and thus on growth and employment. An FTT would be a wrong signal the deepest economic crisis since World War II. An FTT would not only put a burden on occupational and private pension schemes, it would also abet a further fragmentation of Europe as a hub for finance and investment while it fails to stabilize the financial markets and to impose costs on those responsible for the recent financial crisis.

Mandatory disclosure requirements on reportable cross-border tax arrangements: In the light of the consequences of the COVID-19 pandemic, BDI welcomes the postponement of the reporting obligations by six months from 1 July 2020 to 1 January 2021, as decided by the ECOFIN Council on June 24, 202027. BDI continues to advocate for the establishment of a "white list" at EU level in order to define cross-border arrangements that clearly do not need to be reported. A welldefined set of day-to-day, non-aggressive tax-planning arrangements which do not require mandatory reporting would considerably reduce the administrative burden on businesses.

Unanimity rule in EU tax policy: The principle of unanimity in the field of taxation should be maintained. Only in individual cases (e.g. for questions of procedural law or the taxable event) may it make sense to derogate from the unanimity rule in tax matters. A transition to qualified majority voting in tax matters carries the risk that the interests of individual Member States may be ignored. Decisions in the field of tax policy should continue to be made unanimously by all EU Member States. Instead of pursuing the transition to the ordinary legislative procedure in tax matters, a further harmonisation of European tax law should be promoted while retaining the participation rights of all Member States in order to achieve a better functioning Single Market.

Transparent state aid control: EU state aid control in tax matters is an important element in creating a level playing field in the EU. From a German industry’s point of view, more transparent decisions of the European Commission would be desirable. Publishing and giving reasons for decisions can make a considerable contribution to an improved interpretation of Community law by national fiscal courts thus to greater legal certainty.

In addition, transparency can lead to better decisions, because in the public eye work is usually done more thoroughly. For businesses it goes without saying to work in a transparent and quick manner and therefore, these principles should also apply to the public sector.

27

Council of the EU, ECOFIN 457, Brussels, 2020.

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German Industry’s Priorities for European Tax Policy

List of abbreviations Art.

Article

BEPS

Base-Erosion and Profit-Shifting

BZSt.

Bundeszentralamt für Steuern [Federal Central Tax Office]

B2B

Business to Business

B2C

Business to Consumer

CCCTB

Common Consolidated Corporate Tax Base

COVID-19

Coronavirus disease

DAC

Directive on Administrative Cooperation

ECJ

European Court of Justice

ECOFIN

Economic and Financial Affairs Council

EstG

Einkommensteuergesetz [Income Tax Act]

ETD

Energy Tax Directive

ETS

Emissions Trading System

EU

European Union

FTT

Financial Transaction Tax

GloBE

Global Anti-Base Erosion

i.e.

id est [in other words]

IFRS

International Financial Reporting Standards

IntVG

Integrationsverantwortungsgesetz [Responsibility for Integration Act]

JStG

Jahressteuergesetz [German Annual Tax Act]

KStG

Körperschaftsteuergesetz [Corporate Income Tax Act]

MOSS

Mini One Stop Shop

OECD

Organisation for Economic Co-Operation and Development

OSS

One-Stop Shop

TFEU

Treaty on the Functioning of the European Union

VAT

Value Added Tax

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German Industry’s Priorities for European Tax Policy

Legal disclosure BDI communicates the interests of German industry to policymakers. In doing so, it supports companies in global competition. It has access to a widely connected network in Germany and Europe, on all markets and in international organisations. BDI provides policy flanking for the opening of international markets. And it offers information and policy guidance for all industry-relevant issues. BDI is the leading organisation representing German industry and industrial service providers. It is the voice of 40 sectoral associations and more than 100,000 companies with around eight million employees. Membership is voluntary. Business interests are represented at regional level through 15 representations in Germany’s federal states.

Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Contact Dr. Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028 1507 m.wuennemann@bdi.eu Philipp Gmoser Senior Manager Tax and Financial Policy T: +32 2 792 1012 p.gmoser@bdi.eu

Document number: D 1210

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