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Letter from Brussels: Tax targeting continues

Pressure to clean up the financial sector has led to copious legislation from Brussels.

EU legislative packages in process at one stage or another now cover infrastructure investments, venture capital, prospectus rules, insolvency, securitisation, occupational pensions (IORP II), and pan-European personal pension products.  

As for IORP II, three trialogue meetings involving governments, the Parliament and the Commission had been held by May. While held in secret, there could be contention behind the closed doors. Differing positions on aspects such as transparency means there is work to do.

But the hottest topic of all is country-by-county reporting. This move to crack down on corporations shifting profits to low tax jurisdictions, the compliance threshold for multinational companies will be €750m of annual global consolidated net turnover. 

The Commission holds that publishing profits separately by national jurisdiction will provide institutional investors with convenience in gathering data. 

The proposed rules are expected to come into force through an amendment to the 2013 Accounting Directive, plus an addition to its delegated acts. The Commission has chosen to implement these measures through accountancy rules rather than tax regulation as the latter would require unanimous acceptance by all EU member states. 

Included in the initiative are plans to revamp the current list of non-equivalent jurisdictions, mainly offshore territories. 

Unsurprisingly, the proposal has stimulated a healthy crop of grousers. One caution, from BusinessEurope, a business lobbying organisation, finds that making the EU a lone front-runner in terms of public disclosure would “risk undermining our attractiveness as a location for investment”. Markus Beyrer, the organisation’s director general, has overseas investment in mind. 

On the other hand, the German Green Party MEP Sven Giegold faults the Commission’s proposal as too soft. He says that national authorities will have a disproportionate influence on the success or otherwise of the proposed rules.

Despite differing views, the Netherlands, which currently chairs the rotating presidency of the EU Council, is optimistic. It is pushing for a speedy agreement on the initiative from member state governments before Slovakia assumes the presidency in July.

On another key issue, the Securitisation Directive, the Commission’s overall intention is to stimulate interest in synthetic structures such as collateralised debt obligations. They have suffered from a poor reputation given the role they played in the financial crisis, but securitisation is seen as a necessary weapon in the campaign to popularise non-bank sources of lending to stimulate the economy.

The European Banking Authority says transactions that are genuinely used by institutions to transfer the credit risk of their lending activity off-balance sheet have performed relatively well. It notes that “sophisticated investors”, such as insurers and pension funds, routinely carry out in-depth due diligence.

The Commission’s initiative, as adopted in September 2015 comprises a Securitisation Regulation, to include due diligence, risk retention and transparency rules. Additionally, there is a proposal to amend the Capital Requirements Regulation, to make the capital treatment of securitisations for banks and investment firms more risk-sensitive. The measures were cleared, rapidly, by national governments, in December 2015. 

A draft report from the European Parliament’s legislative co-ordinator, Paul Tang MEP, was expected by early June. Another participant in the debate is the EU-US Financial Markets Regulatory Dialogue, which is expected to review the issue of securitisation at its trans-Atlantic co-ordination meeting in July.

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