Class 5

Question 1

What are some recent developments for the VAT-system?

Answer 1

• Communication October 2017: new rules for intra-EU B2B supply of goods → idea was to be fully operational by 2021: 2 main substeps:
  
  1. Commission to prepare cornerstones = basic framework of a definitive regime and the current system would be changed through quick fixes
  2. Detailed rules for the actual technical implementation of the definitive regime.
• So the idea is that the intracommunity acquisition and intracommunity supplies are supposed to disappear.

Question 2

What is the second main step for the measures?

Answer 2

• Extension of the system for intra-EU B2B supply of goods through all other cross border supply of goods and also services. Proposal that about 5 years after the implementation is operational by 2022. In 2027 = new proposals.
  
  • Accompanying measures: plan to fight or fraud through stronger administrative cooperation, more freedom for MS to set VAT rates.
• Long discussion to harmonize VAT rates but now more leeway for MS to choose. Also simplification for SME’s.

Question 3

What are the cornerstones of the definitive regime?

Answer 3

• Art. 402 inserted into the VAT directive concerning the introduction of definitive arrangements based on the principle of taxation in the MS of destination.
• So this would lead to intracommunity transactions to disappear → one stop shop system is supposed to be introduced.

Question 4

What are the quick fixes in the Communication in 2017?

Answer 4

1. The checks concerning the VAT numbers should be stricter
2. VAT numbers should receive higher importance
3. Certain rules concerning chain or triangular transactions → because there is a lot of difficulties here = moving from the first one to the last recipient.

Question 5

What is Directive 1910/2018?

Answer 5

• Directive 1910/2018 = simplification of certain rules for the taxation of trade between MS:
  
  • Certain quick fixes included → supposed to be applied already as of 1st of January last year 2020 but some cornerstones have already disappeared: eg. art. 402 or any equivalent is not in the directive anymore.
  • Also the title changed from “introducing the definitive system for the taxation of trade between MS” = totally disappeared.

Question 6

What is CTP?

Answer 6

• New concept was introduced: the certified taxable person (see art. 402): CTP:
  
  • MS should check taxpayers and grant them a sort of certificate: only them would be able to profit from the new system.

Question 7

What about the harmonization of VAT rates?

Answer 7

• VAT rates: directive has been passed in June 2018 that 15% is the minimum standard rate.
• Also proposed in 2018: MS more flexible rules concerning reduced rates:
  
  • MS can use 2 separate reduced rates between 5% (= absolute minimum).
    
    • You can have one reduced rate between 5-15%
    • One between 0%-reduced rate and that does not exclude VAT deduction → zero outputs and not taxable but still able to deduct VAT = real exemption.

Question 8

What is the negative list that the Commission has drawn up?

Answer 8

• Commission has a negative list = excluded certain types of goods and services from the application of reduced rates:
  
  • Eg. precious metals, jewelry, goods subject to excise duties
  • Alcohol, tobacco, oil, goods, weapons,…
• These reduced rates = not yet in a directive, still in the making.
• Also in the proposal: certain simplifications for SME’s.

Question 9

To remember about excise duties:

Answer 9

1. There are specific types of goods which are subject to those duties
2. MS are obliged to introduce minimum rates.

Question 10

What is the directive on capital duties?

Answer 10

• Important directive: Directive 69/335/EEC: indirect taxes on the raising of capital. Title: “indirect taxes are the object of this harmonization measure”:

Question 11

What is the competence rule used here for directive on capital duties?

Answer 11

• You need to have a competence rule for the basis of harmonization because the EU only has attributed powers so you need a a competence rule in primary law in order to allow the European institutions to pass secondary legislation.
  
  • Nowadays: art. 113 and 115 for indirect and direct taxes.
• Here we have 2 legal basis because not everything could be regarded as indirect:
  
  • Only place in the area of taxation that has 2 legal bases.

Question 12

What is the aim of the directive on capital duties?

Answer 12

• Aim of the directive: free movement of capital between the MS in the common market (now internal market).
  
  • MS had all kinds of different indirect taxes on the raising of capital: a lot of discriminations where the cross-border situations was treated much worse than the domestic ones.
  • Also a lot of disparaties and differences between the different legal systems.

Question 13

What are capital duties?

Answer 13

• Capital duties: chargeable when capital is injected into a company or a firm:
  
  • Eg. when you inject capital into a company or firm when you set it up or if you raise the capital.
• Important: it does not concern later sales in the chain → the first step when the securities are created.

Question 14

What is stamp duty?

Answer 14

Stamp duty on securities (debt or equity): when they are introduced in another MS: stamp duty was due = to prove the validity of a document → sort of an entrance fee = the higher this stamp duty, the higher the barrier to entry.

Question 15

What did the directive on capital duties do? 3 elements

Answer 15

1. Full harmonization concerning the structure and rate: art. 129 and the list of taxable transaction in art. 4.
2. Stamp duty fully abolished: fully prohibited regardless of whether they concerned an equity character or adept character of securities and also irrespective of the origin. Stamp duty also abolished for purely domestic transactions
3. Additional safeguards were introduced, similar to art. 401 of VAT directive.

Question 16

What were the safeguards build into the directive on capital duties?

Answer 16

• Safeguards:
  
  • Art. 10: prohibits any taxes whatsoever, except for the capital duty on article 4 transactions.
  • Article 11 contains a prohibition of any form of taxation whatsoever on the creation the issue or the admission to the Stock Exchange or the making available on markets and the dealings in stocks that shares in company or give insurers so for example in bonds.
  • Art. 12: certain exceptions: duties on the transfer of security → difference between primary and secondary market.

Question 17

What did the recast directive on capital duties do?

Answer 17

• Directive 7 from 2008, entry into force: 1st of January 2009: enlarged a bit the scope of the harmonization of capital duty, also involves certain restructuring operations which as such do not necessarily concern the raising of capital.
• Scope has been widened:
  
  • Eg. if you move a seat of a company into EU from a third country there may be a capital duty on that the ultimate aim of this directive in any case is that sooner or later also this capital → this is supposed to disappear.

Question 18

Case Gielen v. Ministerraad

Answer 18

• Case of 2014: Mrs Gielen lived in Belgium: held shares in 2 Belgian stock listed companies: special bearer securities: Bearer securities give a title to the person who holds the paper = effecten aan toonder.
• Belgium: legislation to abolish bearer securities because they were giving the entitlement to the person holding the paper without the necessity of proving any specific identity = anonymous claims because the identity of the bearer is not relevant and the Belgian government thought it would be better to change that system as a measure against money laundering, terrorist financing etc.
  
  • As of 1 January 2008: no new securities could be delivered.
  • Existing ones: had to be converted either into registered securities that are registered on the name of the Holder or into so-called dematerialized securities.
• Mrs. Gielen converts her bearer securities into registered securities registered on her name and or the names of her children.
  
  • Belgium wanted to tax the conversion of bearer securities: 1% as of 1st of January 2012, 2% of 2013,…
  • Mrs Gielen had asked for conversion in December 2011, but it did not come through until 2012: she had to pay 1% → legally, the company had to pay but it had a civil claim against the holder = indirect tax burden on Mrs. Gielen.

Question 19

Case Gielen vs. Ministerraad: Court of Justice?

Answer 19

• Belgian constitutional court and court of Justice: looked at preamble of the old directive and new one: straight into historical, theological interpretation.
  
  • Court looked into art. 5(2): previous art. 11: ‘conversion of stocks’ is not mentioned in the wording: in accordance with the objectives of the directive.
• Court: this conversion is an integral part of a certain transaction concerning raising capital. To exclude a conversion from the scope of this prohibition would actually undermine the effectiveness of this prohibition in Article 5 (2).
  
  • Because the original issuance of the bearer shares could not be taxed → neither could the conversion.
• Belgium said: it falls under the exception of art. 6: transfer of securities.
  
  • Court: exceptions have to be interpreted strictly.
  • There is no transfer of a right from one holder to another = no transfer to someone else. We are still on the primary market, not the secondary: still within the sphere of the directive.

Question 20

What is this directive on capital duties known for?

Answer 20

• This directive is known for side effects that were not expected, especially due to the broad interpretation of these prohibitions previously in articles 10 and 11 now in Article 5.
• Side effect: broad prohibition of any form of indirect taxation → effect and impact on registration fees by domestic courts or administrations.
  
  • Registration was often on the amount of the value of the shares of the capital injection and certain enterprises thought that was much too high.
• Court: it is prohibited to charge fees beyond the actual value of the effort they make.
  
  • Eg. notary fees to get your deeds registered.

Question 21

What is the FTT?

Answer 21

• After the financial crisis: general rearranging process, regulations, supervision of the financial industry → who was going to pay in the future.
  
  • Polluter pays principle = do the banks have to pay, because they caused the problem.

Question 22

What were the 2 options of the Commission after the financial crisis?

Answer 22

1. Financial Transaction Tax (FTT): transaction that fits individual financial transactions (sort of like VAT = individual transaction). Sometimes called the Tobin Tax because it has been developed by an American economist James Tobin: idea has resurfaced.
2. Financial Activities Tax (FAT): broader approach: it does not look at the individual but the overall result, the profit of a certain financial institution within a certain period (eg. a year).
   
   • More comparable to a corporate income tax.

Question 23

Where did the whole discussion shift to after the financial crisis?

Answer 23

• The whole discussion shifted to FTT as a new own resource for the EU budget. Commission: proposal for a directive with the legal basis of art. 113.
• Discussion at the ECOFIN meeting in 2012: clear that there was no unanimity and it would be blocked by Luxembourg.
• This is where they introduced the method of enhanced cooperation: art. 20 TEU and art. 326 TFEU:
  
  • At least 9 MS: start a project of a directive among this smaller group and if it works → extend it to the other MS.

Question 24

What was in short the history of the FTT mechanism?

Answer 24

• 11 MS were interested in the enhanced cooperation for the FTT: in order to get going, all MS have to sit together in unanimity and grant them authority to continue with this project.
  
  • Council decision of 2013: the UK attacked this based on non-discrimination.
  • CoJ: the arguments that the UK is bringing forward against future potential contents of a directive are hypothetical in so far as that directive has not been passed yet by these 11 MS. This is just a decision of 27 MS together to let 11 MS go ahead and what the outcome of the further negotiations between these 11 will be in a couple of years, nobody knows.
• In the beginning: thinking a broad approach = triple A approach: all kinds of capital markets, financial instruments,…
  
  • Aim: system applicable as of 1st of January 2014: new way of levying means in the own resources.
    
    • Already a problem because the revenue of 11 MS would benefit all 27?

Question 25

What is the condition for financial institutions in the FTT proposal?

Answer 25

• Art. 3(1): Taxable object: art. 2.1(2): “Financial Transactions”:
  
  • Very broad: it includes the purchase and sale of financial instruments, but it also comprises derivatives, like swaps, futures, options,…
  • Some are explicitly excluded: eg. private loans.
• Financial transactions refers back to other definitions in other European law directives: eg. MIFID = A lot of these tax rules are based on regulatory provisions and definitions outside taxation.
• For the financial institutions → Directive falls back to concepts which are already known to European law, through directives which have already been passed and have been active in domestic legislation.

Question 26

What is the condition for financial institutions in the FTT proposal?

Answer 26

• Question: are the financial institutions established in a MS?
  
  • Art. 4: link between the financial institution and a MS = does a certain MS have tax jurisdiction over a financial transaction?
• Art. 4: only the 11 MS are interested in charging the tax:
  
  • Domestic authorization = has the financial institution received an authorization for a certain MS to exercise its business activities there. Is there a branch?
  • residence principle

Question 27

What is the counterparty principle?

Answer 27

• If the residence principle does not apply -> counterparty principle: one of the most discussed elements of the directive proposal:
  
  • If there is no link with a MS → fall back on the other side = counterparty with whom that financial institution is engaged in the financial transaction → might be in the MS = MS will be entitled to tax!

Question 28

What is the issue of principal?

Answer 28

• Whether a certain financial instrument has been issued under the legislation of a certain country.
  
  • Then there is a link with the territory of that country.

Question 29

What is the main idea behind the FTT?

Answer 29

Idea is that each financial institution involved in a financial transaction is obliged to pay tax.

Can lead that there may be 2x tax on the very same transaction.

Both parties are considered to be jointly liable: That means that if one of the two does not pay, the tax authorities can ask the other party to pay. That is especially relevant for the counterparty principle.