The European Commission’s taxation policy group is to continue its discussions on the tax deductibility of cross-border contributions to occupational schemes made by workers posted to another member state, said Michel vanden Abeele, director-general of DGXXI, which is responsible for taxation, when he addressed the EFRP/NAPF conference on pension taxation in Europe last month in Brussels.
The proposal had formed part of the European Union directive safeguarding the rights of a worker posted across borders to stay in their previous scheme, which was approved in June 1998, but the tax deductibility part failed to win unanimous support at Council, he said.
Since then, the taxation group had continued the discussions and “member states have shown a great deal of willingness to co-operate and take the issue forward”. Vanden Abeele said he supported this “minimal approach” as a first step and the quickest way forward. He added: “The general idea is that the tax deductibility of contributions should follow the rules of the state where the economic activity of the migrant worker takes place.”
Discussions would focus on the issues of the resulting pension payments and the possibility that the accrued capital is taxed. The aim was to present legislation within “the not-too-distant future – how soon will depend largely on the scope”.
The proposed directive on investment and prudential rules would accentuate the need to eliminate the fiscal obstacles encountered by pension institutions and life insurers when investing across borders. “A long-term objective is to facilitate the transfer of acquired pension rights by establishing tax rules in the area. It is likewise important to reach a co-ordinated approach to the tax treatment of pension payments,” said vanden Abeele.
Axel Börsch-Supan of the University of Mannheim, looking at the principles of tax policy in the pensions area, said the arguments for offering tax relief for pension contributions had been called paternalistic. “People are myopic – they will eat their dinner, so it may be necessary to tilt things towards old age. If they do not have enough in old age, they have to resort to the welfare state, when it is not efficient,” he said. The take-up of benefits at that point is difficult to achieve.
He pointed out how tax incentives had been used in the UK to get people to opt out of the state-earnings related scheme, while in the US, interest in pension provision mushroomed once tax relief was provided. There was a ‘savings substitution effect’ in providing tax incentives, which he said was about one-third substituted and two-thirds new savings.
Börsch-Supan favoured tax exempt contributions, tax exempt roll-up of investment income and gains, but taxation of the resulting pension, the so-called ‘EET’ approach. He said: “To overcome myopia it is better to use tax reliefs, as it is better to do it voluntarily through the tax system, than to do it by force by making pensions mandatory.”
The EET approach was endorsed by Dirk Hudig of Unice, the European umbrella organisation for smaller and medium-sized enterprises. He said: “This seems to be the best basis for consensus among member states.” Unice did not believe there was a single solution for supplementary pensions in the EU, but he added that member states must be encouraged to remove obstacles to their development. Tax incentives would play their part in this. “However, the differences in level of deductibility and other conditions may lead to tax discrimination, which impedes the free movement of workers,” he said. He proposed a multilateral approach, with the commission acting to facilitate a consensus on the most appropriate tax regime. Another solution would be a treaty, which member states could ratify if they wished.
The needs of the biggest European businesses, in particular the multinationals operating cross border, were voiced by Lyn Ellis of the Anglo Norwegian group Kvarener, who pointed out that what corporates wanted was removal of the obstacles to being able to pool their assets and liabilities in one pan-European pension fund. She said: “In this pool of assets, I would have one management management structure and one asset allocation structure. This is where we see some of the real ability to improve returns.” A 10 basis point reduction on a E2bn fund could yield a saving of E2m, which made it a project worth undertaking from a corporate’s perspective.
The harmonisation of benefits across Europe, was not on her agenda. “Benefits are not harmonised in the group’s UK scheme, so why across Europe?” But such a pan-European fund would need to be on the EET basis and to be well regulated. “We do need to have common investment rules, as there can be real problems if you have to have different rules for different parts of your assets.”
Kvaerner is one of the 20 or so multinational groups in the Pan-European Pension Group looking to remove the obstacles to a pan-European pension fund, being co-ordinated by consulting group William M Mercer. Geoffrey Furlonger of Mercer in Brussels told the conference that the group’s aim was to seek clarification from the European Court of Justice (ECJ) on tax rules on pensions.
He regarded this as a two-track process to support what the EC was doing at diplomatic and political levels. The second was the possibility of a test case before the ECJ. He said: “This was to obtain a clear decision from the court indicating the illegality under European law of the discriminatory treatment of cross-border contributions and cross-border accumulations of pension fund assets.” This is being researched. One idea was to focus on a case to test discrimination of cross-border pensions and investments. Another possibility was to test the obstacles to setting up a scheme in a jurisdiction with “a user-friendly pan-European vehicle”, such as Luxembourg.
Furlonger rejected allegations that the group was “an aggressive bunch of litigators, a confrontational group”. He said: “We are not about that at all, we are into clarification.” Nor did he think the process would be as long as critics of the approach claimed, saying: “The Saffir case took two years.”
Several public debt managers feel it is no longer their responsibility to keep up the stock of debt, said Hans Blommestein of the capital markets section of OECD in Paris. “They feel it it is their duty to reduce debt and to manage it on a risk-adjusted basis to achieve the lowest cost to the tax payer.” He cited US thinking, where the private sector has other choices, such as triple-A-rated paper, which will meet the needs of pension funds. “We have identified a number of countries with similar worries, as they feel pension funds and insurance companies have a legitimate concern,” he said, adding that in some countries, they must hold such publicly-issued debt.
Responding to the discussion, EFRP chairman Kees van Rees pointed to the development of the corporate loan market since the arrival of the euro. On the EET question, he thought there was a consensus towards building a model on this basis, as it was “economically sound”.
To harmonise overall rates of tax was not possible, but van Rees reiterated the need for companies to have access to a European pension fund. “Such a scheme is an aspect of the competitiveness of European industry. While not all companies will need it, it should be available to those that do.” The EFRP is preparing a report on setting up such a fund, and will publish it early next year.
Recalling the Barber case, van Rees said he was cautious about going to court. “It can take us to conditions we do not really like. Going to court on taxation is a rather risky affair. Pensions are a high-cost item for the European industry. It can no longer be ignored and we can no longer afford to muddle through.”