If 2009 was the year of fiscal stimulus and 2010 was the year of recovery ? however weak ? then 2011 was arguably the year of the sovereign debt crisis.
In no other region has the crisis hit harder and faster (thus far, at least) than Europe.
The impact for multinationals is clear ? nothing is certain any more, and close monitoring is key.
In this article, we examine the effect of the crisis on the tax policymaking abilities ? and results ? of a range of key European countries.
Economic indicators ? alongside sporadic shows of civil disobedience and, in some cases, rioting ? demonstrate just how far and how quickly the European picture has deteriorated this year.
For 2012, the International Monetary Fund (IMF) estimates zero to 1.6% growth in the region, warning of a ?lost decade? and the start of a ?dangerous new phase? of the financial crisis. Across the Eurozone as a whole, unemployment hovers around 10%; in Spain, it is 21.2%.
In July 2008, the jobless rate for Organisation for Economic Co-operation and Development (OECD) member countries as a whole was 6.1%.
In Italy, the Eurozone?s third-largest economy, sovereign debt in 2010 was running at 120.3% of gross domestic product; in Greece it was 143% and in Ireland 95%; and, just like the United States, Italy?s debt was downgraded by Standard & Poor?s in September 2011.
A few weeks later, S&P also downgraded Spain. After S&P?s mistaken (non-) downgrading of France in early November, one must wonder how many similar announcements have been pre-prepared in obituary-like fashion.
Simply put, many European governments need money, and they need it quickly.
Outside the macroeconomic figures, and alongside the unprecedented ?Arab Spring,? the year has also delivered rioting in Greece and the United Kingdom, with persistent trouble also continuing to flare in the Parisian suburbs.
The crisis has also created some unusual side stories.
For example, the tiny nation of Slovakia, a former communist country and the poorest member of the European Union, became arguably the most powerful nation in the economic world for a couple of days in October.
That?s when its parliament rejected an EU-sanctioned bailout for Greece, which required unanimous support; Slovakians were frustrated about subsidizing the lifestyles of Greece?s wealthier citizens.
The impact on tax policy and legislation
Never an easy business to manage, tax policy has been massively impacted by the sovereign debt crisis in a manner hitherto unpredicted or imagined.
In many cases, countries have tried to take a proactive approach to managing their debt burden, ahead of the market forcing them into reactive measures.
In the United Kingdom, for example, around 23% of 2010?s deep austerity measures were delivered via the tax regime, as opposed to spending cuts.
A new top marginal personal income tax rate of 50% (up from 40%) was accompanied by restrictions on tax relief on pension contributions, the removal of personal allowances for higher rate taxpayers and an increase in valueadded taxes (VATs) for everyone.
At the same time, the British Government continued to drive forward on the tax competition agenda, continuing reform of the controlled foreign corporations (CFC) regime and reducing headline corporate tax rates, among other related measures.
In regard to the austerity program, many questioned ? and continue to question ? whether the cuts were too much, too soon.
Indeed, much debate is currently occurring on the future of the 50% personal income tax rate, with the conservative UK Government wanting to reduce it in order to keep the brightest and best within its own borders.
In Ireland, to continue the comparisons, gross debt as a percentage of gross domestic product (GDP) will peak in 2012 (a year earlier than previously thought) at around 113%, before falling back to 106% by the end of 2015, according to economists.
But even taking that reduction into account, Ireland?s December 2011 budget reflected its need to keep the pressure on taxpayers, with VAT being raised by 2% to 23% from 1 January 2012.
Germany fares better, with sovereign debt in 2010 standing at around 84% of GDP and enough confidence to grant a recent ?6 billion tax cut.
In other cases, policy measures have been far more urgent and unplanned, reacting to immediate market demands and/or the cries of other Member States or bodies such as the EU, OECD and IMF.
Greece (and Ireland before it) both fall firmly into this category, unveiling urgent and painful increases in the tax burden for individuals and corporations alike.
And just like the period of stimulus before it, the measures taken by many countries have fallen into a number of key categories:
- Temporary ?solidarity surtaxes? on high net worth individuals, targeting the politically popular sentiment toward taxing ?those most able to pay?
- Increases in headline corporate tax rates, easier and quicker to introduce than trickier base-broadening measures, not to mention less damaging politically.
- Restrictions on net operating losses, removing many of the 2008-9 stimulative measures in this area
- Increasing the tax burden on unearned income such as dividends and interest ? again, taxing those most able to pay
- Increases in VATs ? either by increasing standard or reduced rates or by broadening the VAT base by capturing more goods and services at the higher rate. Examples include soft drinks and restaurant bills in Greece and theme park entry in France, both of which target comparatively wealthy tourists
- Specific enforcement and disclosure measures designed to increase tax collection levels
Around the region
This article reviews the tax-related austerity measures in five European countries ? Italy, France, Greece, Spain and Portugal, with a brief mention of the United Kingdom and Ireland, both of which moved to introduce severe austerity measures (whether proactively or reactively) far earlier.
While countries refine their tax policy on an ongoing basis, they don?t typically announce multibillion revenue raisers on a daily basis.
A review of these five countries demonstrates the absolute severity of the European crisis, with the vast majority of key changes in these five countries occurring in the very short time period of early August to the present day.
Greece
From a tax perspective, Greece was also the first to unveil significant measures in 2011.
In a move necessary to receive a next phase of IMF and Eurozone funding, the Greek parliament on 30 June approved a range of measures that together make up an austerity plan of massive spending cuts and tax increases.
Tackling widespread tax evasion in Greece was one specific point made by the IMF in the days and weeks running up to the austerity measures being passed.
In this regard, of particular interest is the amendment to the tax law providing for deemed income arising from the possession of sailboats, which is added to one?s personal income for tax purposes.
A comfortably-sized sailboat ? for example, 15 meters (around 50 feet) will now add a total of EUR 81,000 to the deemed income of the owner, moving them into the highest tax rate (45%) for any marginal income.
Alongside many other measures involving higher earners ? and foreshadowing similar moves in other European countries ? Greece also introduced a special solidarity contribution imposed on individuals whose taxable income earned during the five fiscal years from 2010?14 exceeds a ?12,000 threshold.
The maximum special solidarity contribution on incomes exceeding ?100,001 is 4%.
A special contribution is also imposed for fiscal year 2010 on the basis of the deemed income deriving from the use of private cars, private yachts, aircraft and/ or swimming pools.
On top of all that, an annual levy of ?500 is imposed on freelancers and sole proprietors (?300 for those established in tourist destinations or in cities with a population less than 200,000 inhabitants).
Tourists were also targeted by the new measures, with various soft drinks and restaurant services now being taxed at the standard rate of 23% and not the reduced rate of 13%.
Interestingly, the measures announced by Greece in late June did not have an impact on corporations, although this segment of taxpayers was affected by a new law in late March 2011 that subjects the profits distributed or capitalized by Greek SAs, Ltds and other similarly taxed entities (including those repatriated or credited by the Greek permanent establishments of foreign enterprises to their head office or other permanent establishments located outside Greece) to a 25% withholding tax, increased from 10%.
This rate applies to distributions and capitalizations that are approved by the competent corporate bodies from 1 January 2012 onward.
Italy
Italy?s debt crisis was arguably the first in Europe to drive the fall of a government for the reason of economic performance, some two weeks before the change of government in Spain for much the same reason, from the Socialist Party to the conservative Popular Party.
Perhaps more surprisingly, one of the first countries to suffer a similar experience was actually Canada, with the governing party experiencing a loss-of-confidence vote some six months earlier.
Early August 2011 saw additional changes in the taxation of unearned income in Italy ? such as a new 20% flat rate of tax on income from financial investments and an increase in the taxation of dividend income earned from companies located in named ?blacklist? tax havens.
Although Italy saw no new measures which would compete, say, with the 10% increase in the top marginal rate of personal income tax in the United Kingdom, and few measures that would have an impact on the immediate decision-making process of a multinational company, they did introduce new taxes on energy producers alongside some changes to the taxation of dividends.
September 15, 2011 also saw the introduction of a ?solidarity surtax? of 3% for individual taxpayers with annual income in excess of EUR 300,000 in years 2011-2013.
This surtax (which is itself tax deductible) represents one of many from other countries and came alongside related measures on individuals such as increased taxes on bonds of both short and longer duration.
These measures all came in advance of the fall of Mr. Silvio Berlusconi from power, to be replaced by the ?technocrat? government led by Mr. Mario Monti, a former European Commissioner, in mid-November 2011.
Mr. Monti has certainly wasted no time in setting out a range of new austerity measures, including a series of tax measures, issuing Law Decree No. 201 on December 6, 2011, which will now pass through the parliamentary process.
The range of planned tax increases, pension changes and spending cuts will collectively add up to savings of around ?30bn over the next three years, of which some ?18bn will be generated by tax increases, and of which about ?10bn will be put back into the economy through measures to promote growth, including the introduction of a range of incentives designed to secure work for women and young people.
Following the 1% VAT rise to 21% in September 2011, the new proposals contained a further 2% rise to 23%, matching rates proposed in fellow cashstrapped countries Ireland and Portugal.
Although the implementation date of this change is expected to be September 2012, it is possible that it may be reversed if economic conditions improve in Italy.
But by the same token, it is also possible that a further 0.5% VAT rise may occur in January 2014 (to 23.5%) if economic conditions deteriorate further.
A further key measure introduced in this latest austerity package ? which, incidentally, had previously been abolished some years before by Mr. Berlusconi ? is a new municipal tax on real estate.
This new, unified property tax, has been brought forward from 2014 to 2012, taxes the house of residence at a 0.4% rate, with a Euro 200 tax allowance and additional allowances for each person aged under 26 years of age residing in the property.
Alongside the new tax, there will be a revaluation of the official land registry data, with the official value of properties (which is utilized by banks and insurance companies) rising by some 80%.
Increases in income taxes, VAT and property taxes were not the only austerity measures to hit individuals; the package also included a new tax on checking accounts that have a monthly balance of more than 5,000 euros and also added a tax surcharge on pensions of more than 200,000 euros a year.
Italians owning property outside of Italy will also pay a new levy and finally, there will be additional annual tax of 0.4% on funds declared during previous tax amnesties in Italy, with that rate increasing to 1% in 2012 and 2013.
Spain
With Italy?s austerity measures beginning as far back as early August, identifying the next European country to announce tax-related austerity measures is a particularly close call, given the massive range of policy developments seen throughout the region in the second half of August.
On 19 August, Spain announced a temporary increase in the tax burden on large enterprises operating within its borders, accompanied by restrictions on the treatment of corporate losses and a reduction of the annual amortization of goodwill.
Although the headline corporate tax rate of 30% was maintained, the tax rate applied to determining interim payments of corporate income tax between October 2011 and December 2013 was increased.
So while the final tax burden of corporations remains unchanged, larger companies ? those with turnover in excess of ?60 million ? are now required to make interim tax payments at a 27% rate as opposed to an earlier 21% rate, accelerating cash flow for the government.
For the Spanish loss regime, the former 15-year loss carryforward period is extended to 18 years, but companies with turnover between ?20 million and ?60 million may now only offset net operating losses (NOLs) up to a maximum amount of 75% of the positive taxable base.
This figure decreases to 50% for companies with turnover in excess of EUR 60 million, echoing similar recent measures in France and Germany.
Also affecting corporations was that for 2011 to 2013, the negative book-to-tax adjustment as a result of the deductibility of financial goodwill in the acquisition of non-resident entities was reduced from 5% to 1%.
Spain also mirrored Italy?s two-year surcharge on individuals, reinstating the Spanish Wealth Tax, which was abolished as recently as 2008, a year in which it raised ?2.1 billion from around 1 million taxpayers.
To say that the new tax, levied at rates ranging from 0.2% to 2.5%, was hotly contested within Spain is perhaps an understatement.
With the recent change of government from the Socialists to the conservative Popular Party, this tax will no doubt again be hotly debated in the coming months.
Late December brings more change In its first raft of measures since sweeping to victory in November, Spain?s new centre-right government on 30 December admitted that the public deficit for 2011 would equal around 8 percent of GDP, well above the official target of 6 percent, triggering a new wave of austerity measures, with a total of 16.5bn Euros to be cut in 2012.
Tax increases announced on 30 December total 6 billion Euros and will focus on higher personal income taxes across all income bands, for tax years 2012 and 2013.
The changes include:
- Increases in personal income tax ranging 0.75%, for those with the lowest incomes to as much as seven percentage points higher for those earning above EUR 400,000. This increase comes on top of the previously announced 2.5% wealth tax.
- Like Italy and Portugal, Spain will also see an increase in property taxes for properties deemed to be of above average value.
- The withholding tax on dividends and interest derived by non-Spanish residents is increased from 19% to 21%.
- Capital gains derived by nonresidents without a permanent establishment in Spain are now also subject to a 21% tax rate, where they were previously taxed at a 19% rate.
Spain also imposes a tax on the remittance of profits made by Spanish permanent establishments of foreign entities, which is in addition to the corporate tax applicable to permanent establishments.
The remittance tax rate is also increased from 19% to 21%.
Also effective as of 1 January 2012 (and up to 31 December 2013), the general withholding tax rate applicable to Spanish corporations on domestic payments is increased from 19% to 21%.
The increased tax rate is also applicable to domestic payments made by Spanish permanent establishments of foreign entities.
France
It was only five days later, on 24 August 2011, that Fran?ois Fillon, the French Prime Minister, unveiled a broad range of tax measures designed to reduce the country?s deficit.
While France, with total public debt in 2010 around 82% of GDP, has the luxury of time to make proactive efforts to reduce its debt load, it is interesting nonetheless to see that the broad range of measures enacted just two months after the German-Franco powerhouse of Europe freely enounced Greece for its financial mismanagement.
This demonstrates just how quickly events in Europe have developed.
A key element of the measures ? to be included in the second Amended Finance Act for 2011 ? was the alignment of France?s loss utilization to that of Germany, marking a first step in the harmonization of the corporate tax regimes of the two countries.
The carryback of losses will be limited to the sole profit of the previous year (instead of the last three years), the excessive portion of losses not carried back being carried forward.
The carryforward of losses is also limited to 60% of the current year profit in a given offsetting year, with that limitation applicable to the portion of profit in excess of ?1 million.
The amount not used for a given year would still be permitted to be carried forward indefinitely.
The announced measures also included an increase from 5% to 10% for the taxable portion of long-term capital gains realized upon the disposal of shareholdings qualifying for the French participation-exemption regime, which will be included in the Finance Bill for 2012 and is thus applicable to fiscal years ending after 31 December 2011.
Finally, in the same manner as both Spain and Portugal, France announced the creation of an exceptional contribution of 3% on high incomes, assessed on taxable income above ?500,000.
Again introduced as part of the Finance Bill for 2012, this new tax would be withdrawn as soon as the target of reducing the deficit by 3% is met.
While the austerity measures of August 2011 were of interest in their own right, they were also followed by the 7 November announcement that companies with turnover in excess of ?250 million will pay a five percentage point surtax on their corporate taxes in 2012 and 2013, resulting in a headline corporate tax rate of 36.1%.
A temporary two-year measure, it does increase France?s effective corporate tax rate by 1.7 percentage points, although the resulting rate falls far short of that of the United States or Japan, who themselves recently put in place a similar surtax (see article on page 84).
Portugal
August?s roll call of country measures was made complete by the announcement of a raft of austerity tax increases by the country?s Minister of Finance on the 31st day of that month.
The new austerity measures, which would be effective for a single year only (i.e., 2012) are comprised of:
- The introduction of a solidarity surtax (taxadicional de solidariedade) levied at a 2.5% rate for personal income taxpayers who are in the highest bracket of income (exceeding ?153,300 annually)
- An increase of the current state surtax (derrama estadual), to be levied at 3% (currently 2.5%) on income derived by resident entities over ?1.5 million (currently over ?2 million)
- An increase in personal income tax (imposto sobre os rendimentos de pessoas singulares ? or IRS) from 20% to 25% on stock market capital gains derived by resident individuals
- An increase in the withholding tax, from 215% to 25%, levied on investment income (being increased to 30% when payments are made to tax haven entities)
- A reduction of the daily tax-free meals allowance for employees, from ?6.41 to ?5.12
- A reduction of the standard deduction for pension income, from ?6.000 to ?4.104
- A reduction ? and in certain cases an elimination ? of the temporary exemption from municipal property tax payable on residential properties
- A reduction of deductions concerning health expenses, health insurance premiums and alimony payments
- Introduction of a cap of 75% of the annual taxable profit to use tax losses carried forward from previous years
In the same manner as measures announced in Ireland and Greece before it, the Portuguese proposals have been necessary in order to ensure compliance with a number of general economic policy conditions set forth in the May 2011 Memorandum of Understanding on Specific Economic Policy Conditions between Portugal, the European Union, the European Central Bank and the International Monetary Fund.
They accompany earlier measures of a similar nature, also in 2011, such as an annual surtax on individual income and a proposed widening of the VAT base by including more goods and services in the standard rate of 23%.
Conclusion
From a high-level review of these five countries, it is evident that uncertainty is a key theme permeating the European tax landscape today.
Alongside longer-term developments of issues, such as the Common Consolidated Corporate Tax Base (CCCTB), a Financial Transaction Tax (FTT) and significant changes in VAT and energy taxation, it is clear than Europe as a region is suffering from a period of unparalleled economic uncertainty.
Some measures put in place are clearly of a limited timespan, others are more permanent and demonstrate alignment with wider trends.
But across the five countries, there are definite areas of commonality, and so these measures provide a good indication of what can be expected from other governments who may be forced to follow suit at some point in the future.
As these five countries demonstrate, change can be extremely quick to unfold and the measures typically put in place can have a significant impact on both corporations and their consumers.
Exceptionally close monitoring of the direction of policy-making and proactive financial and economic modeling of potential outcomes is a good way to achieve some sense of preparation in such an environment.
Note: In each case, the countries listed above have issued many additional tax measures over the course of the last 12 to 18 months.?This article has focused on selected key austerity measures only. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment.
Contact
- Rob Thomas, +1 202 327 6053, rob.thomas@ey.com
This article was first published in the Ernst & Young?Global Tax Policy and Controversy Briefing?which can be accessed using the link below:
real housewives of disney nascar phantom of the opera agoraphobia awakenings andrew lloyd webber obscura
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.