In this episode of Tax Notes Talk, Benjamin Angel, director of direct taxation at the European Commission’s Directorate-General for Taxation and Customs Union, discusses the EU’s biggest tax challenges and what lies ahead.
Sarah Paez: Thank you so much for being here, Mr. Angel. To get us started, could you tell us a little bit about yourself? How did you get into public service and come to lead direct taxation at the European Commission’s Directorate-General for Taxation and Customs Union?
Benjamin Angel: I was always attracted to the public service. I [started working with] the European Commission . . . a very long time ago in 1994. At that time we had only 12 member states and now we have 27 member states, so it has changed quite a lot. But I’m a relative newcomer in the field of taxation. I arrived here a year and a half ago.
Before my career was in economic, monetary, and financial issues. In my previous position, I was the director of the treasury and financial operation of the European Commission, but I do enjoy this field of taxation. I’m not only in charge of direct taxation, but also indirect taxation.
Sarah Paez: Just to launch right in on issues of taxation, the commission has had to delay the publication of a communication on business taxation, which, according to the roadmap, will lay out a new vision for corporate taxation to meet the needs of this increasingly globalized economy.
What can we expect from the upcoming communication on business taxation?
Benjamin Angel: This communication will normally analyze the main challenges we are facing. It will also announce policy initiatives in a number of fields, including supporting the recovery or helping to face our global challenges. Lots of those are OECD-related, but there are also new actions to deepen or fight against tax avoidance, tax evasion, and to step up our effort to ensure tax transparency.
You will have a lot of big tickets in this communication, which is the reason why it takes time to prepare the recipe. We want to be sure that we deliver a savory dish for all the tax lovers and that should be the case. That will be an interesting reading, I can ensure you.
Sarah Paez: Speaking of the recovery, one of the hot button issues facing the EU right now is how to propose and approve these new levies and taxes that we’re referring to as new own resources to pay for the spending incurred during the coronavirus pandemic.
What can you tell us about the commission’s expected proposals in June for an EU-wide digital levy, a carbon border adjustment mechanism, and the revision of the energy taxation directive?
Benjamin Angel: I’m in charge of only two of the three; I’m not in charge of the emissions trading scheme. But first a word on the package. What has been agreed between the European Council, the European Parliament, and the commission is that we should have new own resources. That will cover the cost of repaying the debts that the commission will take on the market to finance “Next Generation EU.”
In concrete terms, it does mean that we need more or less €15 billion a year from the package. Then what has to come from each element of the package is obviously a delicate and highly political discussion. If you take the emissions trading scheme, much will depend on the extension of the emission trading scheme to new fields. For instance, will there be an extension to transport? Will there be an extension to heating? For the carbon border adjustment mechanism, the key parameter will be first what sectors will be covered.
Initially the commission has been clear that we will cover a limited number of sectors and exclusively raw material at the beginning to gain experience with the process, with the possible extension to a more complex product down the road. A second element that will be key is what happens with free allowances under the emission trading scheme. Today free allowances are given to producers as a way to reduce the risk of carbon leakage.
That is a risk. Industries might move out of the European Union to countries where carbon requirements would be far lower or the risk that we substitute domestic production with imports facing lower carbon requirements. If we establish a carbon border adjustment mechanism by definition, the first natural question that comes up is what happened to the free allowances in the sectors concerned. It’s an issue for which the views tend to vary sharply.
The European Parliament itself has been quite split on this issue. Depending on the base of this appearance of free allowances, if such a decision is taken, the money generated by the carbon border adjustment mechanism will be significant or less significant because by definition, we need to ensure for the carbon border adjustment mechanism full World Trade Organization compatibility.
The key principle is that we should under no circumstances treat better domestic producers than we would treat the foreign producers of the product we import. That is a natural limit to what we can do with the carbon border adjustment mechanism and to how much can be generated in this package.
Then the second component is a digital levy. It isn’t absolutely a complex one in view of the long-standing ongoing discussion in the OECD and the U.N. given the change of the U.S. administration. We are working on a proposal that will have a different narrative than the one of the OECD.
The OECD work is clearly about trust. It’s not about taxing. It’s about sharing a taxable base primarily for the digital sector, even though there is a push now again to go for a much broader scope. Because we have had difficulties traditionally to tax the digital sector while there is no physical presence.
But for a number of reasons the OECD framework is affecting, at the end of the day, a very limited number of companies. The exact number will depend on the turnover threshold that is retained. But for Europe for instance, with the current turnover threshold at €50 million we’re talking of something like 40 companies. And if ever the turnover threshold were raised to €5 billion, we would be talking of around nine to 10 companies. We have thousands of companies operating in the digital sector in Europe. And the digital sector is somehow the main winner of some kind of structural change in our economy.
It is our opinion that the issue of taxing the digital sector goes somehow well beyond what is being taxed and what’s being discussed in the OECD. What is being discussed with the OECD is extremely important and we are extremely supportive of this process. We want it to succeed, but it is not because it would be an agreement in the OECD covering a handful of companies. That’s it. No one else should not do anything about any other company anywhere in the world. I think that would be an excessive view.
We are therefore preparing a proposal that will be articulated with the OECD that will have different purposes, and that will help also addressing our requirement, which is to generate a sufficient number of own resource for the union budget. This is a mandate that we have received from the head of state and governments, and ministers, and the European Parliament.
Sarah Paez: You and many member leadership of the EU and the EC have said that if an agreement is not delivered on the two-pillar approach at the OECD level, that the EU will come forward with its own proposal. But from what you told me, it sounds like now if the agreement is not to the EU’s liking, or if it does not cover the amount of companies that the EU would like to see covered, that you will still be coming forward with a proposal.
Is that true? And how might that affect smaller businesses, ones that have lower turnover than say these really large multinational corporations? Because I believe that there was some concern among these startup companies who felt that maybe that they would be threatened by a digital levy of some sort. What would you say to that?
Benjamin Angel: I think the way you described the issue is the way we used to view it until the summer of last year. Around that time the head of state and governments decided that the digital levy should be one of the components for financing the union budget. The origin and international agreement has been mandating that we create a digital levy.
We are no longer operating under Plan A that is the OECD and Plan B of, “Let’s do something if the OECD does not deliver.” We are operating under a double Plan A. It is extremely important that an international agreement is found on both pillars. We also need for other reasons to construct some other form of taxation that would affect the digital sector for other reasons than the ones which are under discussion at the OECD for funding our budget. And this has nothing to do with whether the OECD will succeed or not.
We are reasonably confident that OECD will succeed. I think the Biden administration is a game changer in this discussion. But the OECD agreement is about sharing a taxable base. It’s not about generating income for the union budget. And with the current discussion, it will not only affect a very small number of companies, it would also lead to a rather limited redistribution of taxable income. This is not a criticism. I think it is a major step and as such the step matters more than the initial level.
But it does not fit the requests that we have received. The requests that we have received are that we need some form of taxation of the digital sector for financing the union budget. Today you have a very different form of taxation of the digital sector. You have a form that is related to the corporate income tax. And this is very much the heart of the discussion in the OECD. But there are other taxes in the digital sector.
For instance, some companies in the digital sector are subject in some member states to a digital levy on their turnover for financing artistic creation. Some member states today have a digital services tax. Everyone has a value-added tax, which is also affecting the digital sector. I think while defending and pushing as much as we can at the OECD, we should not fall into the trap of considering that the OECD is leading to the only form of taxation that exists in the world. That’s not the case.
It’s major progress to put in place a formulary apportionment, but obviously there are different forms of taxation affecting these companies today and there will still be tomorrow, being it taxation on turnover, the energy efficiency of their building, or their computers. We have to keep in mind again that the number of companies potentially affected in Europe is considerably bigger than the ones under discussion at the OECD.
This is nothing to do with the digital levy with what you may have read a few years ago about the U.N. wanting to tax Google, Amazon, Facebook, and Apple (GAFA). This is not what we’re discussing. Taxing the GAFA is what the OECD is about, or rather sharing the taxable base of the GAFA and the other key players.
What we’re discussing here is adding a fair taxation of the digital sector and its diversity so as to take into account the fact that it is a structural beneficiary of the ongoing economic transition. This has been even more highlighted in the recent period, but it was there even before the pandemic. Now the [pandemic] has just made it more visible. Will it affect small companies? Let’s see.
We have to wait for the final arbitrage of the commission first, and then member states when they see the proposal. But it is rather unlikely that we target small- and medium-sized enterprises and the startups. In between the SMEs and the digital giants that are targeted by the OECD, there are actually a huge number of companies in Europe.
Sarah Paez: Let’s switch gears to tax evasion, tax avoidance, and what the commission is doing to prevent those. You’ve said that the EU code of conduct group for business taxation must be reformed to be more transparent and more effective in preventing distortive measures and tax regimes in EU member states.
How will the commission spur this reform and what types of initiatives or proposals are planned?
Benjamin Angel: There are ongoing discussions covering both the domestic and international parts of the code of conduct. For the domestic part of the code of conduct, the one that applies to EU member states, the commission proposed in July to reform the mandate to the code of conduct.
The current mandate is very old. It was established in 1997. It’s never been revised. It focuses primarily on preferential measures, or treating foreign companies any better than the way you treat your domestic companies so as to artificially attract them. The code has been very effective in addressing distortive tax regimes, which were producing harmful effects.
But somehow it has reached a bit of a limit of what it can achieve for a number of reasons. Some member states have learned with experience how design regimes, which can sometimes be very distortive, but without any preferential feature, which makes the code of conduct relatively powerless to address it.
We want to broaden the mandate of the code of conduct to the general aspect of the tax regime to make it possible to have a discussion along member states on whether a given regime is producing harmful effects even though it is not constructed in a preferential way. This discussion has started. We have had several rounds already with member states. It’s a difficult discussion. It’s not a surprise. We did not expect this discussion to miraculously come to an overnight conclusion. It will certainly take many more months before we get there.
Today the idea is already supported by the vast majority of member states. We need to move from the vast majority of member states to some form of consensus. That’s the challenge of the coming months. I don’t think that anyone should fear anything because the discussion remains a collective discussion, but it would somehow lure more effective multilateral discussion of problematic tax regimes.
And as such, it remains one of our priorities. As we get the external parts of the code of conduct, we also have a number of important changes which are coming up. First we will need to start implementing new criteria, which we’re already agreed on in principle. One of them is, for instance, checking the presence of an accessible register of beneficial ownership in third countries. We are starting to send letters to some third countries.
We will not start the exercise of asking third countries to take commitment now. It has been agreed that as long as we are in the pandemic we will refrain from requesting third countries to take new commitments. But we are flagging to the third countries that it’s coming up. And we will start enforcing it once the pandemic is over and once all member states have also done their own work.
That is a standard principle that we always follow. We never ask third countries to do things that would not be asked to our member states first. Unfortunately, some of them are late in transposing the requirement existing in the legislation. But it’s coming up and it will be a big change.
The other important change that is coming up is more attention to effectiveness. Our approach so far is a bit too legalistic. That is we look at the legal framework. We say, “Oh, there is this problem with the legal framework. Can you please change it?” And we ask third countries to subscribe to the international agreement on the exchange of tax information, which is a must-do. But we don’t really pay attention to the question. By the way, when our member states make a request for tax information, do they get an answer? And that is certainly something we have to pay more attention to in the future.
It is effectiveness of the implementation of the requirement. It will call for some effort, but it is also a step that we intend to take. Third, once there is an agreement on pillar 2 and once we have transposed pillar 2 into the European Union, the commission will certainly push for making a requirement on third countries to subscribe to the pillar 2 OECD common agreement. We will use again the mechanics of the listing, not to impose unilaterally our rules, but to encourage vigorously third countries to subscribe to good international practices. In that sense, the experience we have I think can be quite a powerful tool.
The last thing that is coming up is a broadening of the geographic scope. So far, we are covering a little bit less than half of the planet, 95 countries. We will start the discussion next week on broadening the geographic scope. It doesn’t mean that we will start approaching new third countries immediately. Again, because of the pandemic we will take our time. But it means that we will start the discussion on what are the next countries that we will screen. Once we have an agreement and the pandemic is behind us, we will start screening them effectively.
Sarah Paez: Just a note for our listeners, the pillar 2 agreement would be on a global minimum effective tax rate. But yes, that sounds like a very full plate in terms of the EU blacklist for noncooperative jurisdictions and the code of conduct group for business taxation.
There has been some talk in the EP, as I’m sure you’re aware of, of holding member states accountable in a similar way that third countries are held accountable for harmful tax practices. Has there been any discussion or movement on that within the commission in terms of a country like Malta having not met the benchmark of clearing better tax practices? Is there any sort of discussion about maybe not sanctioning member states, but somehow holding them accountable to make sure that they’re not engaging in any type of harmful tax practices?
Benjamin Angel: Malta has received a partially compliant note from the Global Forum on Transparency and Exchange of Information for Tax Purposes on issues related to the easiness of access to the information campaigns register for beneficial ownership. The concerns of the global forum were not on the willingness of Malta to answer the requests, but rather on the timeliness of the answers.
We take it very seriously. As soon as we received the information that there was such a rating from the global forum, which is unprecedented for one of our member states, the commission organized discussion with Malta to make sure that the problems identified are addressed. You have to know also that the global forum rating is very backward looking now, so de facto when a rating comes up usually it relates to a situation which is at least two years old. Meanwhile, many things have been already implemented in Malta.
I cannot guarantee the situation is perfect. I don’t speak on behalf of the Maltese authority certainly, but what I can tell you is that we will monitor it very closely. I’m aware obviously that the EP would like some kind of system of scoring the state on tax practices, which is something nongovernment organizations do on a regular basis.
There has been discussion between Commissioner [Paolo] Gentiloni and the competent committee in the EP where the commissioner has expressed openness to examine the question. We will assess what is possible.
We have also a new kid in town here, which is the recently created EU tax observatory. It is a new body created by the commission with a financing for the European Parliament, which operates on a completely independent base and which would be aided by wealth tax expert Gabriel Zucman.
One possibility could be that this independent body is entrusted with this task if such a decision is taken. I cannot make any promise at this stage. We’re looking into it, but what I always remind the EP when I get the question is that we never ever ask third countries to do things that are not mandatory on our member states. It doesn’t mean that the situation in our member states is perfect.
It may happen that some of them are in the situation where they breach some part of the union legislation. When it is a case we open infringement procedure and if need be we bring them to court. But we are not in a situation where we would be more demanding for third countries than we are domestic. Nevertheless, the situation is not perfect in the EU. There are clearly practices here and there that we deem problematic.
The EC is pointing at them regularly via the process of the so-called country-specific recommendations. While the Council of Ministers itself has endorsed for six countries that there are practices which are qualified as aggressive tax planning. Clearly it is not a secret. You will find the EU document endorsed by member states saying that there is a problem in this member state. We want them to change.
We are using also the process of establishment of the national plan under the recovery and resolution fund to engage with those member states to incentivize them to also do the right thing. We will continue this cooperative discussion as member states to make sure that they adjust their tax practice when it be.
Some like the Netherlands have already announced important changes to the tax legislation. We are not in a situation where we preach in the middle of the desert and no one listens. Certainly we wish the six would address the aggressive tax planning issues that have been identified quickly. There is good progress for most of them, but insufficient progress at the same time. That’s the reason why the discussion continues.
Sarah Paez: Speaking of what member states can do to crack down on aggressive tax planning within their own borders, I wanted to ask you a little bit about the commission’s work on the eighth directive on administrative cooperation and taxation known as DAC8.
DAC8 expands information exchange to crypto assets and electronic money. The commission just had opened a consultation into DAC8. What is the status of DAC8? And why do you think it’s important for the EU’s fight against tax fraud and tax evasion?
Benjamin Angel: We are trying to improve year after year the exchange of tax information between member states [to] better equip them to fight tax evasion and tax fraud, and each year bring a new dimension. Last year with DAC7, we foresaw an obligation for internet platforms to communicate information on the activities of the seller. That can be you and I on Airbnb or an Uber driver or whatever. This is important from a taxation point of view.
Now in DAC8, we want to address a growing segment of the financial activity. That is a segment for which there is insufficient transparency on the activity at the moment. There is an important ongoing work in the OECD. The commission has also proposed a legal framework for crypto assets. What does it mean in terms of the calendar?
First, we have the public consultation that is ongoing. I encourage all those that listen to the podcast to participate to this public consultation. It’s an important step for us in the establishment of any legislation.
Once we have the result of this public consultation, but also once there is a stabilization of the OECD discussion at a point which is very clear and likely to move in a relatively stable point also in the discussion on the new MiCA regulation, then we will propose a new directive which will build on what is agreed in the OECD and potentially compliment it. Because very often we do the OECD and more that is, we take the OECD as a basis and we add a level of ambition.
That’s what we have done for DAC7 for instance. DAC7 for the activity of the sellers on internet platforms. You have an OECD agreement that covers services. We have covered goods and services, so we have gone beyond. We might do the same for DAC8.
The other thing that DAC8 will do is harmonize sanctions. In the seven directives that exist today, there is usually a formula which is member states must foresee dissuasive and proportionate sanctions. And while we do have this proportionate sanction in the majority of cases, we have identified a number of cases for which we have legitimate questions.
We need to clarify a bit further the sanction and bring some kind of harmony on a practice which is a bit too divergent at the moment. That would be the second target of DAC8. We may have others because we use each new DAC each year to fix also some problems that were experienced in the practice of the existing DAC. We’ll see. It’s a work in progress.
Sarah Paez: I wanted to talk about this concept of unanimity in tax voting matters and what some see as this push from the commission for ending unanimity in tax matters. I believe it was last year, the EU proposed the creation of a value-added tax comitology committee in December. And that would give the commission power in overseeing the adoption of some VAT areas.
Some officials and observers have said this could mean that some VAT issues effectively will be agreed through qualified majority voting. What do you think of this assessment? And do you think the comitology committee will be a step forward in tax matters?
Benjamin Angel: The commission would strongly prefer the taxation is treated like any other field in the treaty that is ordinary legislative procedure. The fact that we still use unanimity and that the parliament has virtually no rule is an anomaly. Taxation is a bit of a dinosaur of the treaty. There is no quick fix to this.
I can probably anticipate your next question, which is the possible use of Article 116 of the treaty, which is under ordinary legislative procedure that is qualified majority and most considered in parliament. The commission has flagged its intention to make a proposal making use of Article 116, but there is a lot of misreading of this article.
This article is not allowing to circumvent unanimity requirement existing on taxation. If I may add, unfortunately this article forced us to address some problems in some member states stemming from regime that would produce distortive effects or practices that would produce distortive effects.
We could not adopt a DAC8 or a digital levy or whatever you can think of using this article. The only way to move away from the unanimity requirement would be to change the treaty. I guess it’s fair to say that the appetite for treaty changes anywhere in Europe is pretty low today. The reason being that the number of member state treaty changes call for referendums, and the experience with referendums has not been always the easiest one to put it mildly.
Now on your specific question, I would not link the issue of the VAT committee to the issue of unanimity versus qualified majority voting (QMV). VAT rules are adopted by unanimity. They will remain adopted by unanimity. The problem that we are trying to address is very technical and narrow somehow, which is the existence of different interpretation of some element of the existing VAT directive. We have a VAT committee, which takes interpretation, which are not binding and therefore some member states follow them, some don’t.
And we ended up with another launch of cold cases and the Digital Criminal Justice having to enter sometimes and to really nitty gritty field , which may be relevant for specific plaintiffs of the case, but not necessarily of a general nature. Because the idea behind the proposal of the commission is not to push for QMV. It is just to facilitate the adoption of binding common interpretation. It would still need to be endorsed by member states.
It is true that the mechanics for endorsing it by member states would not be based on unanimity, but would be based on the ordinary procedure existing for comitology, but that’s really not the issue. This is not our grabbing. This is not trying to push at all costs. It’s just trying to make sure that it’s extremely complex piece of legislation, which is the VAT today, which is almost a thousand-page piece of legislation.
We equip ourselves collectively. When I say we, I say the European member states with a mechanism that allows us collectively come up with common interpretation to the benefit of those which have to apply the rules, be it the companies or the member states themselves because the member states suffer also in all cross-border cases. Well, they implement different interpretations of the same rule.
Sarah Paez: We’ve covered upcoming and current initiatives that the commission is working on related to taxation. Are there any others that the commission is planning specifically this year?
Benjamin Angel: We will also have an important revision of the energy taxation directive, which is coming up in June at the same time as a digital levy and the carbon border adjustment mechanism. It is an extremely important piece of legislation because taxation of energy de facto affects the whole economy in one go.
The existing directive is horribly outdated. It set minimum rates of taxation and those minimums have never been indexed since 2003. So you can imagine how relevant those minimums are today.
There is a need for reshaping this directive and also making it fit better with the priorities of the Green Deal. This directive gives also today indirect subsidies to fossil fuels, which is not exactly the priority of the moment if I may. We want to make it more effective and smarter from a green point of view. And that is, and all the big rendezvous coming up in June.
Sarah Paez: With the end of the coronavirus pandemic at least on the horizon, I wanted to ask you for fun: What’s a place you’ve always wanted to visit?
Benjamin Angel: It’s a bit difficult to answer for a reason which is not the one you think. The reason is I’m a compulsive traveler. I have already visited more than 100 countries, which I guess is more than the average. My to-do list is shrinking year after year, but they are still places which I would like to visit, obviously some which I have dreamed of visiting for decades. Somehow it’s never the right moment. Like Yemen, for instance. It looks like a very beautiful country, but unfortunately it never reached a situation where it’s safe to visit.
I will have to wait patiently for the end of the pandemic and look at the countries which will allow vaccinated people to travel. But rest assured that as soon as I have as the possibility, I will enjoy traveling again because like everyone I miss it a lot.
Sarah Paez: Yes. I very much understand that. Well, thank you again so much for joining us on the podcast, Mr. Angel. I really appreciate your time with us.
Benjamin Angel: Thank you very much.