Jeremy Woolfe relates the European Commission’s latest plans for getting pension funds involved in the CMU
Double taxation, which, according to official estimates, is costing EU cross-border investors about €8bn a year, is now in line for dismantling if the European Commission gets its way. Tackling the issue is among a number of initiatives designed to bring down long-standing barriers to the movement of investment across the Continent.
Speaking at a meeting organised by Better Finance, an industry group for pension beneficiaries, Valdis Dombrovskis, the EU’s new maestro for the Capital Markets Union (CMU), stated that tax regimes had a “strong influence” on investment decisions. The former prime minister for Latvia warned that double taxation could “penalise” dividend income, interest payments and capital gains on cross-border investments.
“The process for reclaiming withholding taxes when these are subject to double taxation can be off-putting,” he said, “so much so that the cost of reimbursements foregone in Europe is estimated at around €8bn a year. So we are we’re working hard with member states to determine how we can make the whole process simpler.”
Dombrovskis had previously listed, as recent advances for the CMU’s enabling actions, proposals to overhaul the prospectus regime, to restart securitisation markets and to support socially minded investments. Taxation issues have apparently been brought forward in priority – the European Commission’s plan to study “discriminatory tax obstacles” to pension funds’ cross-border investment was recently scheduled to be dealt with some time next year.
It has now been separately announced that the Commission will make a proposal to improve dispute resolution for double taxation later this year, “probably towards the end of October”. With it will be a new proposal on the Common Consolidated Corporate Tax Base (CCCTB) to provide a single set of rules for companies to calculate their taxable profits. The forthcoming announcements will also cover the debt-equity bias obstacle to efficient capital market financing.
The target for the reforms is to stimulate the EU’s Investment Plan, which focuses on removing impediments to investment. Aims include mobilising at least €315bn in three years, and among the plan’s components is the European Fund for Strategic Investment (EFSI). EC president Jean-Claude Juncker, in his recent State of the Union address, announced that the EFSI, as of September 2016, had already raised €116bn and funded 200,000 small companies and start-ups, providing more than 100,000 new jobs. He therefore proposed doubling the fund’s duration and financial capacity.
The Commission president would doubtless be aware that the total sum locked up in Europe’s pension funds has the potential to boost that target vastly. Furthermore, moves from the pensions sector could defuse criticism of the EFSI that, to date, many of its projects – as managed by the European Investment Bank – would have materialised anyway, with little or no contribution from the fund.
The censure comes from Breugel, the think tank, which also notes that typical financing up to the present contributes to motorway and wind-farm developments. All this is against a background that serious capital flow from Europe’s giant pension holdings into the EFSI has yet to start in volume. PensionsEurope, among others, has echoed this sentiment. The industry group says its members’ funds are not involved in the EFSI. It also makes the point that they can and do place investments in not-dissimilar infrastructure projects, but they do so at the national level. Dombrovskis, asked to provide an example of any single major contribution from a pension fund into CMU-related funding, could only reply: “We are working in this direction.”
Six months ago, the Commission was painting a sunny picture, forecasting a significant rise of input from the institutional investment sector over the (then) next six months. This would have followed steps to tackle certain “regulatory or administrative bottlenecks”. Clearly, it is working at break-neck speed with legislative reform to make good the glacially slow progress of its forebears. The next steps are for the EU national governments to go along with the strategy. If they do, the Commission’s wish for the floodgates to open – to make feasible the release of pension and other institutional funding into the EFSI – would be achieved.