“EU competitiveness must be one of the watchwords of the future European Commission”. The Luxembourg Bankers' Association (ABBL) will have an opportunity to repeat the message from the financial sector, just a few weeks before the European elections, during its annual press conference on Monday 22 April. Among the issues identified by the association, taxation takes top place.

“In this area, for the past fifteen years or so, compliance has been the common thread: establishing or re-establishing taxation where it should take place,” ABBL secretary general , said in an interview ahead of the press conference. “The banks are playing the game. With the generalisation of the automatic exchange of information, financial institutions have become a kind of auxiliary to the tax authorities.”

The emphasis now needs to be on “competitiveness and qualitative growth,” stated Seillès, who also chairs the European Banking Federation’s tax committee. “We have environmental and digital transitions to finance. Investments are needed. To achieve this, banks must be able to play their full role in financing the economy. Taxation can be both a brake and a lever.”

Taxation of financial transactions

On the subject of tax constraints, Seillès mentioned the taxation of financial transactions, with the plan for enhanced cooperation at European level. Even if Luxembourg is not involved, he is calling on Brussels to pull the plug: “A strong and courageous message from the next commission would be to acknowledge that after ten years, the member states have not reached agreement on such a tax. And therefore to withdraw the legislative proposal”.

For the financial sector representative, this initiative contradicts the ambition to integrate Europe’s capital markets, by creating fragmentation. “Sweden introduced a tax on financial transactions in the early 1990s. It caught up with them: the tax reduced the liquidity of the Stockholm stock market”. But that hasn’t stopped other countries, such as France, Spain and Hungary, from introducing one in the meantime.

Withholding tax procedures

Another obstacle to cross-border investment within the EU is the slow and complex procedures for claiming withholding tax. “If a resident of country X buys a security issued in country Y, the dividend or coupon payment is taxed at source and if there is a tax delta, it can take years to recover this amount. This is enough to dissuade investors”, stated Seillès.

Supported by the Belgian presidency of the EU, the European Faster project aims to simplify these procedures. In principle, the financial industry is applauding, except that the text is accompanied, at Germany’s request in particular, by a myriad of additional obligations for paying agents. The ABBL is opposed to the draft as it stands. “As it stands, rather than ‘faster’, it should be called ‘slower’,” he scoffed. The Belgian presidency hopes that the 27 member states will reach agreement on the text in May.

Modernising VAT

Among the priorities it would like to see in the work programme of the next European Commission, the ABBL mentioned modernising the VAT treatment of financial services. “Banks pay VAT on the services they receive, but mainly provide tax-exempt services. This means that there can only be a limited deduction of input VAT”, said Seillès.

Added to this financial burden is “a distortion of competition for banks, compared with new entrants who are fully within the scope of VAT.” Another problem is legal uncertainty. “Although theoretically harmonised, the current system is proving to be disparate in practice. We are therefore working on the basis of interpretations from the Court of Justice of the EU,” he said. “It’s a technical project, perhaps not the most obvious, but in our view necessary if we want to activate the tax lever.”

Exchange of tax information

Eight variants in nine years: the scope of the DAC Directive, the European instrument for the exchange of tax information, expands almost every year. “It’s time to take a break,” said Seillès. “Before considering any further extension of the scope of the exchange, we need to take a critical look at how the data is actually used by the tax authorities.”

Do we need all the details currently exchanged, such as the categories of income generated by the bank account? Wouldn’t it be enough to know that an account exists and its balance? The secretary general of the ABBL called for thought to be given to the proportionality of the exchange: “However legitimate this principle may be, it must be weighed against the protection of personal data and privacy. Given the mass of data exchanged, I also see a field of tension with the GDPR, which creates legal uncertainty.”

Common corporate tax base

Don’t say CCCTB any more, say BEFIT. The European Commission has put a new spin on its old project for a common consolidated corporate tax base. The ABBL remains reluctant. “A common tax base could be beneficial if its sole aim were to simplify administration,” according to Seillès. “As it stands, this project adds complexity. At the same time as it creates problems of reconciliation with OECD standards, it overlaps with the national order: we would still have a communal tax, for example.”

The potential distribution key for tax revenues is also a major concern for Luxembourg, in that it could disadvantage small export-oriented economies. “In this scenario, the value created in Luxembourg would be taxed elsewhere. This would raise quite fundamental questions about the level of Luxembourg’s revenues, and therefore the levers our government would have in the future.”

We have a government that is willing to take full advantage of tax levers.

Camille Seillès, secretary general, Luxembourg Bankers' Association (ABBL)

Among the reasons for satisfaction, Seillès cited the Frieden government’s willingness to “take full advantage of fiscal leverage”. The ABBL has welcomed the modernisation of the investment tax credit, which it sees as a significant step forward. “These new measures, in support of digital transformation and ecological and energy transition projects, seem to us to be in line with the imperatives of the moment. What we are interested in is the actual practice of this scheme, so in practice, to what extent the public authorities are granting the benefit of the new law.”

One point of regret for the ABBL remains the fact that the new tax regime applies only to local authority income tax (IRC) and not to municipal business tax (ICC), which accounts for a third of companies’ overall tax burden. “This is perhaps an avenue for reflection that we can put in the hands of the current government.”

Originally published in French by and translated for Delano