Tuesday, June 28, 2016

EU blocking UK trade deal may end EEA

Now that we have seen a lot of responses to the Brexit referendum, we have seen a lot of fearsome scenario's. I personally expected the UK to immediately start to make friends with EFTA. To date however it is still unclear whether the UK will travel this road. There are basically three options for the UK:
1. the Norwegian model
2. the Swiss model
3. the Canadian model

Norwegian model
The Norwegian model involves joining EFTA and the EEA. From the media this seems like an unpopular model since it would mean that the UK would still have to follow many EU regulations and would still have to pay contributions to a number of EU programs. The plus side is that it would continue UK access to the European common market place. In addition to Norway, this model is also used by two other EFTA members: Iceland and Liechtenstein.

Swiss model
The Swiss model also includes EFTA membership, however Switzerland is no member of the EEA. Instead it has a number of bilateral agreements for trade with non-EFTA members.

Canadian model
Canada is no EFTA member and therefore cannot join the EEA. Instead it is now working on an elaborate trade agreement with the EEA called CETA.

Both the Swiss and Canadian model would require a new trade agreement between the UK and EEA. A number of politicians however seem rather reluctant to give the UK a good deal. They hope that a bad deal - even if it hurts themselves as much as it hurts the UK will stop other countries from leaving the EU.

Tragically it may actually push some of the UK's trading partners out of the EU and/or EEA. Ireland
will be a major victim and although support for the EU is currently strong, that support may waver when other EU countries block a good deal with the UK. Although the focus now is mostly on the EU, the EEA is also in danger. Iceland and Norway may favor relations with the UK over the EEA and adopt the Swiss model instead, allowing them to make their own trade agreement with the UK, rather than wait for an EEA deal that may never come.

EFTA may even try to negotiate an alternative deal with the EU that much more resembles the CETA or TTIP agreement than the current EEA agreement. Such a deal would create a ready alternative to EU membership for all members considering leaving the union.

Sunday, June 26, 2016

Will the EU collapse after Brexit?

Now the UK has voted to leave the EU, the question arises which nation is next. Austria is a likely candidate as well as Denmark and the Netherlands.

The reason is simple. For the UK one of the main reasons to leave the EU is that it had become a transfer union, transferring large amounts of British pounds to southern and eastern member states. The UK was a large net-contributor to the EU. They demanded a reform. The EU rejected those demands. And the rest is history in the making.

Without the UK other states will have to contribute even more to keep the flow of money going. And without the UK there will be one large EU member less to vote against further increasing that flow of money.

Tensions have already risen about this before the Brexit referendum. Now the exit is open. Austria, Denmark and the Netherlands (Nexit) will leave sooner or later. The post-Brexit budget discussions are a likely trigger. And when it happens the pressure increases even more and even more countries will follow: Finland, Sweden. France has always been self-centered and won't hesitate to follow once it suits them. Germany will not be able to avoid the discussion once its direct neighbors start leaving. The EU will fold ... unless it manages to reform in time.

Get rid of the transfer union before it's too late.

Friday, June 24, 2016

Can Scotland #Bremain?

While the UK as a whole voted to leave the EU, a majority in Scotland, Northern Ireland and Gibraltar voted to remain in the EU. As the results sink in voices appear to break up the UK.

The Scots consider a new referendum about leaving the UK as in their earlier referendum one of the arguments to stay in the UK was that leaving would mean leaving the EU as well. That point is no longer valid. This means that a new referendum might be more successful than the last one.
In Northern Ireland Sinn Féin called for a referendum to reunite with Ireland. Such a referendum however seems pointless as those in favor of the union with the UK have the majority in Northern Ireland.
At the same time Spain sees an opportunity to try to regain Gibraltar. It is likely that Spain will at least demand some concessions regarding Gibraltar in exchange for a new trade agreement with the UK.

A split between Scotland and England seems inevitable. At the same time it would be preferabele if a way can be found to do this that leaves Scotland within the EU. We need to come up with some creative ideas on how to make this work out.

I have two ideas on how to do this, both have their problems, but with enough will from the Scots, other Brits and the EU, anything may be possible.

The ideas are:
1. England and Wales leaving the UK
2. Only part of the UK leaves the EU

1. England and Wales leaving UK
The first option is the disintegration of the UK. Although this sounds rather radical, it does not necessarily have to be that way. If we look at the Island of Man, which is not a part of the UK nor the EU, we can see how two countries can work together closely. The Island of Man is working closely together with the UK and both fall under the British crown. The relation between the new British Kingdom and the Kingdom of Scotland, could be very similar. The creative part in this construction is where at least in name England and Wales leave the UK and not Scotland. That way Scotland can remain part of the EU. Unknown is whether Northern Ireland and Gibraltar would prefer to remain in the EU and go with Scotland or stay with England and Wales.
And England and Wales may need some convincing. They have no intention to initiate a split with Scotland and would require a good deal in exchange to agree to such a scenario. Part of this deal could be for England and Wales to remain a part of the European Economic Area (EEA), which could require EFTA membership or a new unanimous agreement between the EU, EFTA and the new British Kingdom.

2. Only part of the UK leaves the EU
The second option seems even more far-fetched. It is common for EU members to have part of their country not in the EU. Denmark for instance has Greenland outside the EU. Such a construction is not used for parts of countries that are located within Europe, but with enough will we can imagine such a construction being created. Such a construct would keep the UK intact although it would require a greater level of autonomy for Scotland. Scottish ministers may be assigned to handle EU affairs for all of the UK. Again there is no telling what place Northern Ireland and Gibraltar would choose for themselves in such a construct.
The EFTA solution is off the table here as only states can join EFTA. So for England and Wales to join the EEA in such a construction, the EFTA and/or EEA agreement will have to be amended.

Update with some parts from an article from Reuters:
According to the article Scottish First Minister Nicola Sturgeon vowed today to protect Scotland's EU membership and said a fresh independence referendum was possible after Britain voted to leave the EU. "We will seek to enter into immediate discussions with the EU institutions and with other EU member states to explore all possible options to protect Scotland's place in the EU". "A second (Scottish) independence referendum ... is very much on the table" she said.
Scots rejected independence in the 2014 referendum by 55-45 percent and at the time the vote was considered a decisive verdict for a generation. Since then support for independence has not shifted significantly, according to polls.
But on Thursday, the United Kingdom voted overall to leave the EU, but Scots voted by 62-38 percent to remain. Sturgeon's SNP says many Scots opted against independence in 2014 because they believed that was the only way to guarantee EU membership.
The SNP argues Thursday's outcome changes the case for independence, and many Scots may reassess their 2014 vote. Sturgeon said on Friday a new referendum was "highly likely".
After meeting ministers in her devolved government on Saturday, Sturgeon said Scotland would not allow its EU membership to be taken away and would seek to build broad-based support at home and abroad to maintain it.
Other EU governments are wary of encouraging the Scottish overtures, despite some increase in sympathy around the bloc for the position pro-European Scots now find themselves in.
EU diplomats stressed that Scotland faces many hurdles to joining a bloc consumed by Brexit and that several veto-holding member states, notably Spain, fear a Scottish secession could boost their own separatist movements.
The Scottish Greens, the parliamentary kingmaker for Sturgeon, said any new vote should be decided by "clear public appetite", but included the independence option.
"It is too soon to say whether and when a further referendum on Scottish independence will take place, but in the wake of the EU referendum result few people will doubt that it must be on the table," a spokesman for the party told Reuters.

Willie Rennie, leader of Scotland's pro-EU Liberal Democrats, said in a statement he had committed his party to backing Sturgeon's EU negotiation process, but had received a guarantee this was not a ruse for a new independence drive.

Tuesday, June 21, 2016

EU countries tackle tax avoidance

The 28 EU member countries have reached an agreement on a package of measures against tax avoidance. The agreement became definitive last night after the EU ministers of finance reached an agreement last Friday.

The package restricts interest deduction and introduces a levy to prevent that untaxed activities can be transferred to a country with a lower tax rate. It also includes a general anti-abuse clause. Another measure prevents the transfer of passive income to a daughter company with a lower tax rate. Furthermore it also addresses shopping between different fiscal systems.
The package follows earlier OECD agreements and a plan presented by the European Commission at the end of januari. This agreement follows almost five months later. Minister Dijsselbloem, chairman of the council of finance ministers: "The struggle against tax avoidance was one of the subjects at the top of our agenda this half year. It was not easy because the interests and opinion differences were large. But we succeeded in making agreements that me and my 27 colleagues will now transform into legislation in our own countries."
According to the minister it is important for the EU to lead the struggle against tax fraud and tax avoidance. "Large companies honestly paying taxes is crucial for the willingness of citizens to contribute their share as well. Revelations such as LuxLeaks and Panama Papers have hurt citizens' confidence in a fair tax system. I hope that confidence will return now we are closing escape routes for internationally operating companies."
Below the main points from the European tax avoidance guideline:
Limiting interest deduction
Companies can deduct interest over loans from their profit. Large, often internationally operating companies can loan internally which enables them to deduct interest in countries with a high interest rate and let it end up in a country with a low tax rate.
The proposed limitation ensures that companies can deduct a maximum of 30 percent of their gross profit in interest from their profit starting 1 januari 2019. This measure tackles tax base erosion.
Exit levy
The measure ensures that a company can not move its assets to another country untaxed. When moving a company or business (or an intellectual property) a tax must be paid over the value the company has created in the country it leaves, so the value is taxed where it is created.
This ensures that when a company creates an asset and moves it to a low tax haven, tax will need to be paid over the unrealized profits. Example: a pharmaceutical company develops a new medicine in country A and deducts all the cost there. Then before launching the medicine on the market the rights are moved to country B. The exit levy ensures that country A must tax the value created at the moment of transfer.
General abuse prevention measure
The general abuse prevention measure prevents the creation of artificial constructions which have as main purpose to avoid taxation. When international companies use artificial constructions to lower their tax base or transfer profits a member state can use the abuse prevention measure to look through the construction. The measure should prevent abuse where other measures do not apply.
CFC measure
This measure is aimed at controlled foreign companies (CFCs). It prevents movement of passive income to a daughter company in a low tax country. When a company moves capital or intellectual property to a low tax country the mother company must pull the profits from this capital to itself. As a result the member state of the mother company may tax this profit at their tax rate.
Hybrid mismatches
As a result of differences in tax systems countries can have different opinions on the fiscal treatment of a company or loan. This creates the risk that companies can use a double tax deduction or interest or yield is not taxed while the corresponding transfer can be tax deductible. This measure addresses when EU member state allow or refuse such deductions.
The EU member states have asked the European Commission to come up with a proposal by October 2016 to solve this problem for money transfers from and to countries outside the EU in line with tax avoidance measures discussed within the OECD.

Monday, June 20, 2016

EU landen pakken belastingontwijking aan

De 28 landen van de Europese Unie hebben een akkoord bereikt over een pakket maatregelen tegen belastingontwijking. Het akkoord werd afgelopen nacht definitief, nadat de EU-ministers van Financiën het vrijdag al onder voorbehoud eens waren geworden. Het voorbehoud liep vannacht af.

In het pakket maatregelen wordt de renteaftrek beperkt en komt er een heffing zodat activiteiten waarover nog geen belasting is betaald, niet onbelast kunnen worden verplaatst naar een land met een lager belastingtarief. Ook wordt een algemene anti-misbruikbepaling tegen kunstmatige constructies ingesteld. Een andere maatregel voorkomt dat bedrijven het zogeheten passief inkomen verplaatsen naar een dochterbedrijf in een land met een lager belastingtarief. Verder wordt het shoppen tussen verschillende belastingstelsels aangepakt.
Het pakket maatregelen komt voort uit eerdere afspraken in OESO-verband en een eind januari door de Europese Commissie gepresenteerd plan. Nog geen vijf maanden later ligt er nu een akkoord. Minister Jeroen Dijsselbloem, voorzitter van de Raad van ministers van Financiën: ,,De strijd tegen belastingontwijking was een van de onderwerpen bovenaan onze agenda dit halfjaar. Het was niet eenvoudig want de belangen en meningsverschillen waren groot. Maar we zijn er in geslaagd afspraken te maken, die mijn 27 collega’s en ik nu eigen land gaan omzetten in wetgeving.’’
Volgens de minister is het belangrijk dat de EU voorop loopt in de strijd tegen belastingfraude en belastingontwijking. ,,Dat grote bedrijven eerlijk hun belasting betalen is cruciaal voor de bereidheid bij burgers om ook hun deel bij te dragen. Onthullingen als LuxLeaks en Panama Papers hebben het vertrouwen bij burgers in een eerlijk belastingsysteem geen goed gedaan. Ik hoop dat het vertrouwen terugkeert nu we de ontsnappingsroutes voor internationaal opererende bedrijven aan het afsluiten zijn.’’
Hieronder de belangrijkste punten uit de aangenomen Europese anti-belastingontwijking richtlijn:
Renteaftrekbeperking: Bedrijven mogen de rente die zij betalen over leningen aftrekken van de winst. Grote, vaak internationaal opererende bedrijven kunnen interne leningen verstrekken en daardoor de rente op leningen aftrekken in een land met een hoog belastingtarief en de rentebaten laten neerslaan in een land met een laag belastingtarief.
De voorgestelde renteaftrekbeperking zorgt ervoor dat bedrijven maximaal 30 procent van hun brutowinst aan rente mogen aftrekken van de winst. Deze maatregel gaat het uithollen van de belastinggrondslag tegen.
Exitheffing: De maatregel zorgt ervoor dat een bedrijf zijn activa niet onbelast kan verplaatsen naar een ander land. Bij verplaatsing van een bedrijf of bedrijfsonderdeel (of een intellectueel eigendom) moet belasting worden betaald over de waarde die het bedrijf heeft opgebouwd in het land waaruit het vertrekt, zodat de winst belast wordt waar de waarde is gecreëerd. Dit voorkomt dat een bedrijf goederen of diensten na de ontwikkelingsfase verplaatst naar een laag belast land zonder dat over de niet-gerealiseerde winsten wordt ‘afgerekend’. Bijvoorbeeld: een farmaceutisch bedrijf ontwikkelt een nieuw medicijn in land A en trekt alle kosten daar af. Vervolgens worden de rechten op het medicijn vlak voor het op de markt gebracht wordt, verplaatst naar land B. De exitheffing regelt dat land A verplicht is belasting te heffen over de in land A gecreëerde waarde, op het moment van de overdracht.
De algemene anti-misbruikbepaling: is een extra slot op de deur dat voorkomt dat belastingplichtigen kunstmatige constructies opzetten met als voornaamste doel om belasting te ontwijken. Als blijkt dat internationale bedrijven met kunstmatige constructies de belastinggrondslag uithollen of winsten verschuiven, dan kan een lidstaat door middel van de algemene antimisbruikbepaling zorgen dat er door de constructie heen wordt gekeken. De antimisbruikbepaling moet er voor zorgen dat misbruik onmogelijk wordt, ook als CFC en switch over niet van toepassing zijn.
De CFC-maatregel: voorkomt dat bedrijven passief inkomen verplaatsen naar een dochterbedrijf in een land met een laag belastingtarief. Als blijkt dat een bedrijf vermogen (of intellectueel eigendom) parkeert in een land met een laag belastingtarief moet de lidstaat van het moederbedrijf de winst uit dit vermogen naar zich toetrekken.
Deze maatregel voorkomt dat bijvoorbeeld het intellectueel eigendom van een product wordt verplaatst naar een land met een laag belastingtarief. In dat geval mag de lidstaat van het moederbedrijf deze winst belasten tegen het eigen belastingtarief.
Hybride mismatches: Door verschillen tussen belastingstelsels kan het gebeuren dat landen verschillend oordelen over de fiscale behandeling van een bedrijf of een lening. Hierdoor ontstaat de kans dat bedrijven dubbel gebruik kunnen maken van belastingaftrek of dat ze over ontvangen rente of een opbrengst geen belasting betalen terwijl elders over de betaling die ertegenover staat een aftrek plaatsvindt. Met deze maatregel wordt dit probleem binnen de EU aangepakt in de vorm van afspraken welke lidstaat aftrek moet toestaan of juist moet weigeren.
De lidstaten hebben verder de Europese Commissie gevraagd om in oktober 2016 met voorstellen komt om dit probleem ook op te lossen voor geldstromen van en naar landen buiten de Europese Unie in lijn met de in de Organisatie voor Economische Samenwerking en Ontwikkeling (OESO) besproken maatregelen tegen belastingontwijking.

Thursday, June 16, 2016

Will Brexit revive EFTA?

23 June will tell us whether the UK will choose to leave the EU. Such a Brexit would likely lead to the UK rejoining EFTA, which it had left in 1973 to join the EEC, the precursor to the EU. The EFTA still survives today, but is overshadowed by the EU.

After a positive referendum outcome the UK will need to renegotiate its agreements with its trading partners. The easiest and least painful way for all involved is for the UK to simply rejoin EFTA. Access to the European Economic Area (EEA) is restricted to EFTA and EU members and as such joining EFTA would be the only way for the UK to remain in the EEA. Such would allow a smooth transition for both the UK and its trading partners.

Consequently this move could shift EFTA out of the EUs shadow. More states aspiring to gain access to the EEA could attempt to join EFTA. This idea has already been discussed with respect to a number of countries, including Turkey, Morocco and Israel. With the UK joining EFTA it would be much more attractive for these countries to join EFTA.

As the EU seems to be in shambles, new member admission has been halted. That may lead potential EU members to join EFTA, especially since EFTA membership would not hinder countries from joining the EU at a later point in time. Such countries include Bosnia, Serbia and Montenegro. Finally as Moldova and Ukraine are trying to tie closer relations to the EU they may consider the EFTA road to the EEA as well.

Further growth for EFTA could come as the EU might continue to dissolve. With one of its net-contributors leaving, other countries would have to bear more of the weight of the EU on their shoulders. Countries like the Netherlands, Finland, Denmark, Germany and Austria can simply decide that enough is enough and leave the ship before it sinks. This may be especially true if it turns out that the UK leaving the EU will not be as disastrous for the UK as some politicians would like us to think.