Tackling Taxes Business Perspectives from Across Europe

Tackling taxes Business perspectives from across Europe

icaew.com egian.eu Foreword

When I studied to become an economist back in the early ‘90s, it was already well known that there is too much complexity in Europe’s tax systems. There was also already a certain awareness that large multi- and transnational companies are using the differences in these complex systems to their advantage. The combination of 28 different national tax systems creates loopholes which can be abused. High complexity also creates unnecessary compliance burdens, in particular for small and medium sized enterprises (SMEs), which are the backbone of Europe’s economy. This poses both a threat and a competitive disadvantage for SMEs.

We, as pro-market economy liberals, support fair tax competition and a fair competition between companies. We want to simplify taxes to make everybody’s life easier. We demand a common consolidated corporate tax base for the EU, so that tax competition is done via the tax rate and not the tax base. The European Commission has recently tabled proposals for this and member states need to be constructive now. It is not enough to shy away behind the proposals of the OECD/Anti-BEPS- agenda: we need effective, binding EU laws, also for the external dimension, such as a withholding tax. Thus, we want to ensure every profit leaving the EU has been taxed, so that there is a level playing field for all participants in a free market. The global and increasingly digital economy needs a functioning tax system.

Reforms like these need a solid empirical basis to see where exactly the problems are for taxpayers and practitioners alike. This report will be ever so helpful as it contains both valuable findings and enlightening commentary.

Michael Theurer MEP Member of the European Parliament’s economic and monetary affairs committee (ECON) and co-Rapporteur for the special Committee on Tax Rulings (TAXE I and II)

2 Introduction

High VAT complexity, a strong call for clearer tax laws and a pronounced trend towards digitalising tax administration are key themes emerging in Tackling taxes – business perspectives from across Europe.

Carried out in mid-2016, this joint ICAEW-EGIAN survey provides a unique picture of the aggregate views of more than 170 tax professionals advising businesses on compliance with tax regimes in Europe. Tax professionals play an important role in making the tax system work by helping to ensure that taxpayers make correct returns and pay the right amount of tax at the right time. This report is based on their day-to-day experience supporting businesses of all sizes, across a wide range of sectors. Insights come from 29 countries, including Europe’s largest economies, eurozone and non-eurozone members, newer and older EU member states as well as European Economic Area (EEA) countries.

The last couple of years have seen global tax policy come under increasing focus. The EU, as one of the world’s largest economic blocks, has been actively pursuing change both via implementation of global reform measures agreed in other fora such as the G20 and the Organisation for Economic Co-operation and Development (OECD) and via a number of initiatives aimed at increasing disclosures by corporates and enhancing transparency on tax rulings. The European Commission has also re-launched discussions on the Common Consolidated Corporate Tax Base (CCCTB) proposal and is seeking to adapt the current VAT system to the realities of e-commerce.

At the same time, we see growing efforts to ‘make tax digital’. The debate about the fundamental impact of a digital tax revolution for citizens, businesses, professionals and administrations has only started. Whatever the outcome, the direction in which Europe is heading is of massive relevance for global efforts to build stronger tax systems.

While there is significant data available, including from the European Commission and the OECD, on key tax indicators, there is little research which takes as its starting point the views of tax professionals advising businesses on how to comply with tax regimes in the EU. Our report aims to help fill this gap. A more granular understanding of which taxes are considered to be particularly difficult to comply with – and how these may be improved – will provide useful input into the wider debates on corporate tax whether at European or international level.

3 Insights from the report are structured along three major themes:

1 Taxes in the EU 2 Policy perspectives 3 Digitalisation of corporate taxes

We would be delighted to receive your comments on this publication, send them to [email protected]

Martin Manuzi John Capper Director, Europe Region Executive Director ICAEW EGIAN

4 Key findings

1 Taxes in the EU • Taxes on goods and services (VAT) are seen as the single most onerous tax category for businesses. Across Europe, 2 in 3 respondents say businesses struggle to comply with VAT rules.

• The picture is more mixed when it comes to the perceived ease or difficulty for businesses to comply with corporate income taxes with views divided among our respondents.

• There is strong agreement between our respondents that the complexity of tax law is a root cause of the compliance burdens faced by European businesses. A smaller number also point to difficulties caused by the complexity of corporates’ own tax set-ups as well as by the information demands on businesses and associated time costs for compliance.

• Asked to identify their wish list for change, our respondents repeatedly express a desire for a more stable and simple tax system as well as reduced rates and the removal of the vast panoply of deductions and exceptions. A number also call for enhanced communication with tax authorities.

2 Policy perspectives • Awareness of the major debates relating to aggressive tax avoidance taking place at European and international level is high. Eight in 10 respondents are familiar with the OECD Base Erosion and Profit Shifting (BEPS) initiative. Similar numbers are aware of the discussions generated by the ‘Panama Papers’ revelations.

• This survey was conducted before the recent relaunch of the Common Consolidated Corporate Tax Base (CCCTB) by the European Commission. At the time, 1 in 2 tax professionals expressed familiarity with the initiative – perhaps explaining why almost a third of respondents were neutral when asked about the potential impact on corporate clients. Just over a third, however, held reasonably positive perspectives on the initiative.

• Seven in 10 respondents believe that their national tax system creates a debt bias, offering tax advantages to businesses choosing to finance investments through debt rather than equity.

3 Digitalisation of corporate taxes • Across Europe there is a clear trend towards digitalising tax administration, including for corporate tax. This shift is confirmed by 9 in 10 respondents.

• More than two thirds of our respondents believe digital changes will be beneficial for their business clients. Simplified processes, increased transparency as well as time and cost reductions are repeatedly cited as likely benefits.

• But tax professionals also raise a number of concerns related to digitalisation, highlighting the importance of proper preparation and implementation for both tax administrations and businesses.

5 Taxes in the EU

Fig 1. Generally, how easy or difficult is it for your corporate clients to comply with these taxes?

% Easy Difficult Don’t know 70

0 Corporate income taxes Social security contributions Social security contributions Payroll taxes Property taxes Taxes on goods and services Green taxes Other significant tax employee employer (eg. stamp duty land tax, (VAT) (eg. carbon taxes, air passenger duties) (as specified in question3) business rates)

VAT compliance is a challenge for most businesses Two thirds of our respondents regard VAT compliance as challenging for businesses – and half go further in identifying VAT as the single most difficult tax businesses have to deal with. While the overarching VAT framework is defined at EU level, rules may be applied differently in each member state.

A more mixed picture emerges when looking at other taxes. Views are fairly equally split on corporate income taxes, with only a small difference between those saying that they are easy, compared with those identifying them as difficult. For 1 in 3 respondents, corporate income taxes are the single easiest tax their business clients have to deal with. A fifth of our respondents disagree strongly, identifying corporate income tax as the most difficult one.

Feedback on so-called ‘green taxes’ is more nuanced, with about two thirds declaring that they do not know how easy or difficult these are to comply with. This may also reflect a general lack of familiarity with such taxes, with a similar number saying that they do not advise corporates very frequently on such matters.

6 % Easy Difficult Don’t know 70

However, there is broad agreement when it comes to payroll taxes. A majority of respondents say that the compliance burden for payroll taxes is relatively low. Social security contributions (employers/ D Single most IF F employees) also appear to be easier to deal with for businesses. Y I S C U difﬁcult tax A E L T Taxes on goods Corporate income taxes and VAT make up the highest share of and services (VAT) corporate taxes dealt with by respondents. A small number of tax professionals surveyed also support businesses on other taxes, ranging from personal, wealth and inheritance taxes, to customs and excise duties and other trade-related taxes.

D Single IF F Y I S C U easiest tax A E L T Corporate income tax

7 Why are corporate income taxes are perceived by some as being particularly difficult and by others as being reasonably straightforward? Maybe those who think corporate tax is easy are only thinking about the final tax return that has to be filed once a year. They don’t think about all the matters that have to be taken into account to file a return. Corporate income tax matters tend also to be handled by a small number of people – unlike VAT which is more visible as, for example, invoices have to be drafted and approved internally on a day-to-day basis by many people within the organisation. Global Corporate Tax Leader, Germany

Harmonisation between EU member states when it comes to some taxes is quite high, yet significant differences persist in practice – and in particular in the way tax authorities and tax payers interact. This is not easy to level out because it is often directly related to the cultural background of each member state. Tax partner, Spain

Strong call to reduce tax complexity Over 4 in 5 respondents identify the complexity of tax law as the number one compliance burden for businesses in Europe. Just under a third also point to the difficulties associated with the complex nature of their client’s tax set up and a similar number flag issues associated with the burden of having to provide proof or evidence.

Conversely, simplicity of tax laws is seen by about half of our respondents as a key enabling factor to facilitate compliance. Other supportive factors identified include limited time costs for businesses and the straightforward nature of their clients’ tax affairs. 1 in 10 also mentioned the efficiency of the local tax offices as being significant.

8 A wish list for change

Rationalise the different Ensure stability of tax reduction systems the tax code

Simpler and comprehensible Ensure consistency between rules for smaller companies legislation and implementation

Go digital We need real and genuine simplification

Lower tax rates to enhance Enhance communication countries’ competitiveness with the tax office To be designed, not actual icons

9 This feedback is echoed by respondents when asked to identify the single most important change they would make to their national tax system. Several key themes emerge. Many highlighted the need to simplify the tax code – while ensuring stability of the tax system. Calls for simplification ranged from those advocating the removal of the plethora of different exemptions to those pressing for a reduction in reporting obligations. Others noted the need for lower rates (but with fewer deductions) to ensure the competitiveness of businesses, with SMEs singled out by some respondents.

In Italy, the tax law is changed each and every year. Tax compliance procedures then also change. Year after year the system becomes messier and less comprehensible. Tax professional, Italy

A number of respondents focused on the role of tax authorities, calling for improved lines of communication between businesses, their advisers and local tax offices. Others expressed a desire for improved policymaking and greater stability of the tax code.

We need consistency between the law and interpretation guidelines. We also need stability of tax laws to allow long-term planning; clear rules to reduce unfair competition and a limitation to the amount of personal judgement tax officials have when engaging in tax audits. Tax professional, Greece

10 Policy perspectives

Fig 2. Awareness of debates around aggressive tax avoidance

% Familiar Unfamiliar 100

0 Luxleaks Panama Papers OECD Base Erosion and EU Common Consolidated Profit Shifting (BEPS) initiative Corporate Tax Base (CCCTB)

Awareness of major tax policy debates is generally high Unsurprisingly, our respondents are well aware of major policy debates currently taking place centred on aggressive tax avoidance. This is particularly the case for the most recent Panama Papers revelations, although awareness of the Luxleaks debate which attracted attention in late 2014 appears to have receded somewhat.

Respondents are particularly familiar with the G20 and OECD tax reform proposals designed to address base erosion and profit shifting (BEPS). Despite significant awareness of the initiative, respondents found it more difficult to predict the business impact, with 4 in 10 saying the outcome would probably be neither positive nor negative.

A common global policy on tax avoidance, such as the OECD BEPS initiative, is laudable. But we need common and simultaneous implementation by countries so as to remove the temptation for multinationals to finesse one tax system against another. Tax director, UK

11 Fig 3. What impact do you think the OECD BEPS proposals would have on your corporate clients?

Neither positive Positive nor negative Negative

Don’t know 4% 20% 40% 35%

International tax policies guided by the OECD and by EU anti-tax avoidance initiatives mean nothing is crystal clear for our clients. Decisions by the European Court of Justice in combination with ever-changing national tax law in the EU member states, makes tax planning or building a tax strategy for our clients a huge challenge. Tax partner, the Netherlands

Fig 4. Impact of CCCTB

% 40

33.3%

30 28.7%

20 17.5%

9.4% 10 7.6% 3.5%

0 Very positive Fairly positive Neither positive Fairly negative Negative Don’t know nor negative

12 It is important to ensure that the BEPS rules do not have a negative impact on SMEs that only operate locally, which are after all the largest number of businesses in the EU. Tax partner, Spain

The EU’s Common Consolidated Corporate Tax Base (CCCTB) initiative, which would – if adopted – determine a business’s aggregate taxable profit and how it should be apportioned between the member states in which the business operates, was less well known to respondents with just over half of them stating that they felt familiar with the initiative at the time this research was carried out. Despite this, just over a third thought that the impact, on balance, would be positive for their clients. Just under a third were neutral – perhaps reflecting their unfamiliarity with the initiative – and a sizeable minority expect the proposals to have a negative impact.

The CCCTB initiative should aid simplicity, for both EU and non-EU investors. However, the basis on which profits and losses are to be divided between EU member states may take some time to agree. Tax partner, Spain

Debt bias – a common phenomenon Fig 5. Debt bias across Europe Tax systems containing a debt bias offer tax advantages No Yes 21.1% 70.7% to corporations which finance their investments through debt allowing for the deduction of interest payments. By contrast, the payments in relation to share capital, such as dividends, are not tax deductible. This favours debt Don’t know over equity for corporate financing. 8.2%

Across Europe, 7 in 10 respondents believe that their national tax system favours debt over equity financing.

13 14 Digitalisation of corporate taxes

Fig 6. Are there any moves towards Fig 6. What impact will a move towards digital digital tax administration? tax administration have for businesses?

% 80 69.6%

Yes 60 92.4%

19.6% No 20 4.7% 10.1%

0 Don’t know Positive Neither positive Negative 2.9% nor negative

Clear trend towards ‘making tax digital’ Across Europe, there is a pronounced trend towards digitalising tax administration. This is confirmed by our respondents, with 9 in 10 confirming moves towards digital tax systems for corporate taxes in their jurisdictions.

Over two thirds believe this trend is broadly positive: greater digitalisation is perceived to be good news for European businesses. Simplification, time and cost reduction, increased transparency and efficiency gains are seen as some of the key benefits of tax administration going digital.

Although only a small minority are pessimistic, a number of tax professionals shared concerns that the benefits of digitalisation will only be realised if reform is properly prepared and implemented.

15 Going digital: why and how

Digital systems make it easier to Digital filing would deal with tax administrations benefit from simplified rules

We need to avoid rushing It is less bureaucratic to digitalisation without proper preparation

Easier communication, easier The necessary IT systems processing, easier compliance need to be in place first

16 For large corporates, digitalisation makes a lot of sense as they should have the infrastructure in place to handle this. For SMEs, it may just be another burden, particularly if comprehensive digital reporting is required more than once a year. Tax director, UK

Digitalisation of tax administration brings a number of benefits. The transmission of documents is more efficient and quicker. Tax authorities can check data sooner and in more detail, thereby facilitating their ability to detect mistakes or fraud. But there are also risks. Data needs to be safeguarded against potential hackers. Specific software is sometimes needed to work with tax authorities’ IT systems: this comes at a cost for business. Global Corporate Tax Leader, Germany

A digital system has been in operation in Ireland for over a decade. But new requirements for the submission of financial statements in xbrl format are causing some difficulties. Tax professional, Ireland

We already use digital forms in Sweden. It has facilitated things for us. Tax professional, Sweden

e-Governance and digital tax accounts can simplify the procedures for the tax authorities, reduce compliance burdens for entrepreneurs and help challenge fraud. Tax partner, the Netherlands

17 Ten tenets for a better tax system

The tax system should be:

1 Statutory: tax legislation should be enacted by statute 6 Constant: changes to the underlying rules should be kept and subject to proper democratic scrutiny by parliament. to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules 2 Certain: in virtually all circumstances the application of and this justification should be made public and the the tax rules should be certain. It should not normally be underlying policy made clear. necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax 7 Subject to proper consultation: other than in exceptional affairs. circumstances, governments should allow adequate time for both the drafting of tax legislation and full 3 Simple: the tax rules should aim to be simple, consultation on it. understandable and clear in their objectives. 8 Regularly reviewed: the tax rules should be subject to 4 Easy to collect and to calculate: a person’s tax liability a regular public review to determine their continuing should be easy to calculate and straightforward and relevance and whether their original justification has cheap to collect. been realised. If a tax rule is no longer relevant, then it should be repealed. 5 Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the 9 Fair and reasonable: the revenue authorities have a duty simplicity and certainty of the tax system by targeting it to exercise their powers reasonably. There should be a to close specific loopholes. right of appeal to an independent tribunal against all their decisions.

10 Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade.

ICAEW Tax Faculty icaew.com/en/about-icaew/what-we-do/technical-releases/tax

18 About the research

The results of this survey are taken from an online questionnaire completed by 173 tax professionals across the EGIAN network in 29 European countries. The survey ran from 8 June to 31 July 2016. The survey adhered to the Market Research Society (MRS) code of conduct. Additional commentary on the results has also been provided by a number of EGIAN members from different EU member states. We have avoided attributing individual remarks throughout in order to protect respondents’ anonymity.

We would particularly like to thank the following EGIAN member networks and associations for their participation in this survey:

AGN International INPACT International

Baker Tilly International Morison KSi

BKR International Nexia International

Crowe Horwath International PKF International

DFK International Prime Global

IAPA Russell Bedford International

19 EGIAN

EGIAN’s membership is made up of 23 truly global organisations which offer audit, accounting and business advisory services. The combined turnover of the members is in excess of US$30 billion. EGIAN provides a forum for the members to develop common positions on specific technical and legislative issues and to debate these issues with key professional stakeholders and regulators such as the European Union, CESR (The Committee of European Securities Regulators), FEE (The Federation of European Accountants) and IFAC (The International Federation of Accountants). EGIAN is also an important information source for its members on European level developments which affect their own members’ businesses. egian.eu twitter.com/egian_eu

ICAEW is a world leading professional membership organisation that promotes, develops and supports over 147,000 chartered accountants worldwide. We provide qualifications and professional development, share our knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession.

As leaders in accountancy, finance and business our members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together we contribute to the success of individuals, organisations, communities and economies around the world.

Because of us, people can do business with confidence.

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