• Commission adopts Communication on proposal for a revised Code of Conduct for the effective implementation of the EU Arbitration Convention on transfer pricing disputes
• Treaty of Lisbon fully ratified by all 27 Member States
• ECJ rules transferring portfolio of reinsurance contracts is subject to VAT in the Member State of the transferor (Swiss Re Germany Holding)

• Approval of regional fiscal aid for Sicily
• Conditional and partial approval of German tax scheme for risk capital
• Clearance of Finish temporary tax incentive for productive investment
• Approval of Dutch Green Funds Scheme

• Council of Europe and OECD announce intention to strengthen their joint Convention on Mutual Administrative Assistance in Tax Matters
• European Parliament issues resolution on Pittsburgh G20 summit
• Council of European Union adopts codified version of Merger Directive
• EU-US agreements on extradition and on mutual legal assistance
• ECJ holds German legislation on deductibility of losses from letting or leasing of immovable property incompatible with EC law (Grundstücksgemeinschaft Busley/Cibrian)
• Commission refers Estonia to the ECJ over its discriminatory taxation of non-residents' pensions
• Commission refers Austria to the ECJ over discriminatory tax provisions in the field of science and research
• Commission requests Belgium to amend its discriminatory legislation on accounts keepers/settlement institutions and investment funds
• Commission recommends simplified procedures for claiming cross-border withholding tax relief
• Commission takes steps against Germany concerning its taxation of outbound dividend and interest payments to foreign pension institutions
• Commission requests Portugal to amend restrictive exit tax provisions for individuals
• Developments in the Netherlands: Supreme Court rejects cross-border loss compensation

• European Council adopts Directive on the VAT exemption in the final importation of certain goods
• Ecofin Council authorizes derogation from the EC VAT Directive for Germany and Poland
• ECJ rules advertising activities by a political party are not economic activities for VAT (SPÖ)
• Dutch Supreme Courts refers questions to ECJ regarding zero rated intra-Community supply
• Commission takes steps against the application of the reduced VAT rate on horses
• Commission refers Austria to the ECJ for the inclusion of car registration tax in the taxable base on which VAT is calculated for road vehicle supplies
• Commission has formally requested Finland and Austria to change their legislation on certain exemptions
• Commission asks France not to extend the application of a super-reduced rate for the first performances of a work
• Commission requires Greece to ensure in its legislation the refund of unduly paid VAT
• Commission calls on Hungary to change its VAT reimbursement rules
• Commission takes steps against Spain regarding the application of the travel agent’s scheme

• Proposed changes in Customs legislation affect customs value
• Advocate General opines minimum prices for tobacco products incompatible with EC Directive
• EU and South Korea initial free trade deal
• Eighth ASEM Customs DGs/Commissioners meeting
• Trade Barriers Regulation (TBR)
• EU and Uruguay settle complaint over taxation of imported spirits

1. Top News

Commission adopts Communication on proposal for a revised Code of Conduct for the effective implementation of the EU Arbitration Convention on transfer pricing disputes

On 14 September 2009, the Commission adopted Communication COM(2009) 472 final on the work of the EU Joint Transfer Pricing Forum (‘JTPF’) in the period March 2007 to March 2009, including a proposal for a revised Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC) of 23 July 1990 (the ‘EU Arbitration Convention’). On the same date, the Commission also published an accompanying staff working document containing a summary report on penalties in transfer pricing. 

Background
Whilst most bilateral double taxation treaties include a provision for a corresponding downward adjustment of profits of the associated enterprise concerned, they do not impose a binding obligation on the contracting States to eliminate the double taxation. The EU Arbitration Convention aims at improving the conditions for cross-border activities in the Internal Market. It establishes a procedure to resolve disputes where double taxation occurs between enterprises of different Member States as a result of an upward adjustment of profits of an enterprise of one Member State including, if necessary, reference to the opinion of an independent advisory body.

On 23 April 2004, the Commission adopted Communication COM(2004) 297 final on the work of the JTPF in the field of business taxation from October 2002 to December 2003, and on a proposal for a Code of Conduct for the effective implementation of the EU Arbitration Convention. The proposed Code of Conduct was adopted by the Council on 7 December 2004. The Code of Conduct applies in cases where a Member State's tax administration increases the taxable profits of a company from its cross-border intra-group transactions, for example, by making a transfer pricing adjustment. It ensures a more effective and uniform application by all Member States of the EU Arbitration Convention by establishing common procedures concerning:

• the starting point of the three-year period which is the deadline for a company suffering double taxation to present its case to the relevant Member State's tax administration;
• the starting point of the two-year period during which Member States' tax administrations must attempt to reach an agreement that eliminates the double taxation that is the subject of the complaint;
• the arrangements to be followed during this mutual agreement procedure, i.e. the practical operation of the procedure, transparency and taxpayer participation; and
• the practical arrangements for the second phase of the dispute resolution procedure provided for in the EU Arbitration Convention that must follow if there is no mutual agreement between the tax authorities within two years, i.e. the establishment and functioning of the advisory commission that must then arbitrate in the case.

The Code of Conduct also contains a recommendation to Member States to suspend the tax collection during cross-border dispute resolution procedures. It is also recommended that Member States extend those rules to double tax treaties concluded between Member States.

New proposal
The September 2009 proposal for a revised Code of Conduct is the result of a monitoring exercise performed by the JTPF, aiming to improve the smooth functioning of the EU Arbitration Convention by providing common interpretation on the following topics.

1. Admissibility of a case
Member States are recommended to consider that a case is covered by the EU Arbitration Convention when the request is presented in due time after the date of entry into force of accession by new Member States to the EU Arbitration Convention, even if the adjustment applies to earlier fiscal years.

2. Scope of the EU Arbitration Convention
The EU Arbitration Convention covers:

• all EU transactions involved in triangular transfer pricing cases among Member States, i.e. a case where, in the first stage of the EU Arbitration Convention procedure, two EU competent authorities cannot fully resolve any double taxation arising in a transfer pricing case when applying the arm’s length principle because an associated enterprise is situated in (an)other Member State(s); and
• any thin capitalization cases, i.e. profit adjustments arising from financial relations, including a loan and its terms, and based on the arm’s length principle.

3. Serious penalties
Serious penalties covered by Article 8(1) EU Arbitration Convention, whereby access to the EU Arbitration Convention may be denied, should only be applied in exceptional cases like fraud. In the staff working document containing a summary report on penalties in transfer pricing, the JTPF concluded that it is necessary to harmonize the different definitions of a serious penalty adopted by the 27 Member States.

4. Cross-border dispute resolution procedures, domestic litigation and interest charged
When a case is dealt with under the EU Arbitration Convention, Member States are recommended to take all necessary measures to ensure that the suspension of tax collection during cross-border dispute resolution procedures under the EU Arbitration Convention can be obtained by enterprises engaged in such procedures, under the same conditions as those engaged in a domestic appeal/litigation proceedings although these measures may imply legislative changes in some Member States. Furthermore, Member States are recommended to apply one of the following approaches:

• tax to be released for collection and repaid without attracting any interest, or
• tax to be released for collection and repaid with interest, or
• each case to be dealt with on its merits in terms of charging or repaying interest (possibly during the mutual agreement procedure process).

5. Advisory commission and independence of arbitrators
Several points pertaining to the functioning of the EU Arbitration Convention were clarified as regards rules on the deadline for the setting-up of the advisory commission and the criteria for establishing the independence of arbitrators.

The Commission noted that the following issues need further discussion: the possibility of setting up a permanent and independent secretariat and the interaction between the EU Arbitration Convention and Article 25.5 of the OECD Model Tax Convention. The proposal for a revised Code of Conduct has to be adopted by the EU Council of ministers.

Treaty of Lisbon fully ratified by all 27 Member States

The Treaty of Lisbon, officially signed by the Heads of the Member States on 13 December 2007, has finally been fully ratified. Under EC law, the Treaty had to be ratified by all 27 Member States before coming into force. The last country to ratify the Treaty was the Czech Republic, which completed the process on 3 November 2009, after receiving the same exemption as Poland and the United Kingdom from 'protocol 30' in the Lisbon Treaty's Charter of Fundamental Rights. Germany ratified the Treaty on 25 September, but only after extra parliamentary safeguards demanded by the constitutional court were approved. Poland ratified the Treaty on 10 October, a week after the Irish voted ‘yes’ in a second referendum held 16 months after the Treaty was rejected in a first referendum. The Treaty is expected to enter into force officially on 1 December 2009.

ECJ rules transferring portfolio of reinsurance contracts is subject to VAT in the Member State of the transferor (Swiss Re Germany Holding)

On 22 October 2009, the ECJ delivered its decision (which had been eagerly awaited by the financial sector) in the Swiss Re case (C-242/08), following a reference for a preliminary ruling made by the German Supreme Court (Bundesfinanzhof) on 4 June 2008, and the Opinion of Advocate General Mengozzi on 13 May 2009. The question in this case was whether the transfer of a portfolio of life insurance contracts is subject to VAT in the transferor's Member State.

The German based company, Swiss Re Germany Holding GmbH (‘Swiss Re’), operates in the reinsurance sector. In 2002, Swiss Re transferred 195 reinsurance contracts to a Swiss-based transferee (S) that belonged to the same group of companies as Swiss Re. The other parties to those contracts with Swiss Re were insurance companies established outside Germany, both in  Member States and in third countries. The contracts were transferred in return for payment of a sum by S, which was calculated, inter alia, by ascribing a negative value to 18 of the 195 contracts. For the purposes of determining the final price of the transfer, the value of those 18 contracts was accordingly deducted from the total value of the other 177. The transfer of the reinsurance contracts was completed only upon the consent of the parties which had concluded those contracts with Swiss Re. S took over from Swiss Re the rights and obligations under the contracts which were transferred.

The German tax authorities argued that the transfer of the portfolio was subject to VAT, arguing that the transfer qualified as the transfer of goods and no VAT exemption was applicable. Swiss Re appealed that decision. After several proceedings, the Federal Finance Court decided to refer questions to the ECJ for a preliminary ruling.

In its decision, the ECJ first stated that the transfer of a portfolio of contracts cannot be regarded as a supply of goods given that the contracts are not tangible goods. As a consequence, the ECJ stated that the transfer of the portfolio has to be regarded as a supply of services. Furthermore the ECJ considered that the transfer of a portfolio of insurance contracts cannot be regarded as a banking transaction and, more important, is not a (re)insurance transaction as mentioned in Article 9, second paragraph under e, fifth indent and Article 13 B, under a of the Sixth EC VAT Directive (currently Article 56, first paragraph under e and Article 135, first paragraph under a respectively of the EC VAT Directive). According to the ECJ, the transfer also could not be regarded as a combination of the VAT exempted financial transaction and guarantee transaction as mentioned in Article 13B, under d, under 3 and 2 Sixth EC VAT Directive (currently Article 135, first paragraph under d and c of the EC VAT Directive). The latter because, in the view of the ECJ, applying a VAT exemption is only possible when the services provided form a distinct whole, fulfilling in effect the specific and essential functions of the service that is exempted.

As a consequence, the ECJ ruled that the financial exemptions of Article 13 B Sixth EC VAT Directive (currently Article 135, first paragraph of the EC VAT Directive) do not apply and, moreover, the place of supply of the service has to be determined by the main rule (place of supply of transferor) given that no exception from Article 9, second paragraph Sixth EC VAT Directive (currently article 56 EC VAT Directive) is applicable. Finally, it is interesting to see that the ECJ also declared that the fact that 18 contracts had been transferred taking a negative value into consideration, does not impact the aforementioned decision.

One of the most important lessons that can be drawn is, contrary to what was the general view in most Member States, that the transfer of a portfolio of (re)insurance contracts can regarded, at least under certain circumstances, as a ‘normal’ service for which no VAT exemption applies. The future will reveal to what extent, what kind of contracts and under what conditions, this conclusion can be drawn. In that respect, and certainly because, in principle, the (re)insurance practice does not benefit from a VAT taxed input, the question can also be raised if the transfer of a portfolio of contracts, as in this case, should perhaps be regarded as a transfer of a going concern, which is treated in many of the Member States as being out of the scope of VAT based on Articles 19 and 29 of the current EC VAT Directive. We await in anticipation.

2. State Aid/WTO

Approval of regional fiscal aid for Sicily

On 30 September 2009, the Commission approved an EUR 2.4 billion tax scheme for investment in the region of Sicily. Based on investments done, a credit will be awarded that may be set off against payments for tax and social security. Companies will be required to maintain the investment (i.e. the operations invested in) for a 5-year period after completion of a project (3-years for small and medium sized enterprises). The scheme will apply from 2009 to 2013. Sicily qualifies as an area of the EU that suffers from a very low standard of living and high unemployment, allowing for targeted State aid in line with EU policy on regional aid.

Conditional and partial approval of German tax scheme for risk capital

On 1 October 2009, the Commission authorized a German proposal providing income tax benefits for private individuals who provide risk capital to companies, subject to some minor amendments. The benefit will be available upon realization of capital gains upon the sale of any participation in future should normal return of investment be insufficient and the maximum benefit will be limited to around EUR 22,500 per investor. On the other hand, however, the Commission could not accept provisions providing business tax benefits to venture capital companies (‘VCCs’) and provisions allowing for the carry forward of losses – despite a full acquisition – by certain target companies acquired by such VCCs. One of its main concerns was that the VCCs would be required to have their domicile and management in Germany. The latter would be in direct violation of both the freedom of establishment (Articles 43 and 48 EC) and the Commission’s risk capital guidelines.

Clearance of Finish temporary tax incentive for productive investment

On 14 October 2009, the Commission cleared Finish tax scheme that would allow for doubling depreciation rates of new buildings for factories and workshops (up to 14%) and of equipment and machinery used there (up to 50%). Given that this benefit will be available regardless of the sector of industry, location or size of a company, the Commission ruled that this was a generally available benefit aimed at stimulating investment that did not constitute State aid. The benefit will be restricted to the fiscal years 2009 and 2010.

Approval of Dutch Green Funds Scheme

On 14 October 2009, the Commission authorized a revised version of the Dutch Green Funds Scheme. Under this scheme, tax advantages may be granted to individuals who invest in specialized investment funds that focus on environmentally friendly projects, meeting certain conditions. Projects covered by the scheme are, amongst others, those for development and maintenance of nature, generation of renewable energy, sustainable construction of houses and the establishment of filling stations for alternative fuels.

3. Direct Taxation

Council of Europe and OECD announce intention to strengthen their joint Convention on Mutual Administrative Assistance in Tax Matters

On 25 September 2009, the OECD and the Council of Europe announced their intention to improve international cooperation to combat tax evasion. The standards set by the joint 1988 Council of Europe and OECD Convention on Mutual Administrative Assistance in Tax Matters will be updated to reflect the new consensus for closer international co-operation. New rules are aimed to remove obstacles to effective cooperation and exchange of information, especially those related to bank secrecy legislation. They will also open the convention to countries which are not members of the Council of Europe or the OECD and therefore, transform it into an instrument to fight tax evasion worldwide.

The Convention, which was jointly developed by the Council of Europe and the OECD, entered into force in 1995. It provides a legal framework for trans-border cooperation while respecting national sovereignty and the rights of taxpayers. Interest in the convention has grown, and almost half of the 16 countries have signed or ratified the Convention in the past five years. The Convention is expected to be revised before the G20 meeting in March 2010.

European Parliament issues resolution on Pittsburgh G20 summit

On 8 October 2009, the European Parliament issued a resolution on the Pittsburgh G20 summit of 24 and 25 September 2009. The Parliament stressed the importance of establishing sound public finances and of ensuring long-term fiscal sustainability in order to avoid imposing too heavy a burden on future generations.

Moreover, the Parliament recognised the substantial, but yet insufficient, achievements in fighting non-cooperative jurisdictions (tax havens), and encouraged the OECD Global Forum on Transparency and Exchange of Information to improve tax transparency and the exchange of information so that countries can fully enforce their tax law to protect their tax base. It supported the G-20 in its use of measures to counter tax havens from March 2010 in cases of non-cooperation.

The Parliament also welcomed the progress made in the field of bank secrecy and, in particular, the expansion of the OECD Global Forum on Transparency and Exchange of Information noting, however, that several jurisdictions that had promised to implement standards have not yet delivered. The Parliament called for an effective system to prevent, detect and pursue tax evaders and highlighted the importance of creating a standardised system of reporting.

Council of European Union adopts codified version of Merger Directive

Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the ‘Merger Directive’) has been substantially amended several times over the past 19 years. On 20 October 2009, the Council of the European Union announced that it had adopted the codified version of the Merger Directive, in the interest of clarity and rationality. The new codified version replaces the various acts incorporated in the Merger Directive, but fully preserves its content.

EU-US agreements on extradition and on mutual legal assistance

On 23 October 2009, the Council of the European Union announced Decision 7746/09 approving the conclusion of two agreements with the United States of America (‘US’): one on extradition and the other on mutual legal assistance. Both agreements were negotiated in the aftermath of the terrorist attacks of 11 September 2001 as a means to improve the co-operation in criminal matters between the Member States and the US. Both agreements contain so-called non-derogation clauses, by which all grounds of refusal and safeguards already contained in the existing bilateral treaties between the Member States and the US are maintained. The agreements were signed on 25 June 2003, and will enter into force on 1 February 2010.

Agreement on mutual legal assistance
The agreement on mutual legal assistance increases the possibilities to exchange financial information between Member States and the US in the context of criminal investigations. Under certain conditions, it will be possible to ask, to a larger extent than is currently the case, whether a suspect holds a bank account in the other country and to request details of his financial transactions. Besides law enforcement bodies, administrative authorities, such as banking supervisory authorities, will also be able to obtain information when they are considering launching criminal investigations and/or prosecutions. In addition, the agreement contains provisions which will enable the setting up of joint investigative teams as well as the use of video conferencing for taking testimonies of witnesses or experts in criminal proceedings. Finally, the agreement includes guarantees for the protection of personal data.

ECJ holds German legislation on deductibility of losses from letting or leasing of immovable property incompatible with EC law (Grundstücksgemeinschaft Busley/Cibrian)

On 15 October 2009, the ECJ rendered its judgement in the Grundstücksgemeinschaft Busley/Cibrian case (C-35/08), following the German Tax Court (Finanzgericht) of Baden-Württemberg’s request for a preliminary ruling on 31 January 2008 (see EU Tax Alert, edition no. 55, May 2008). This case was decided without the Opinion of Advocate General Sharpston.

Ms Busley and Mr Cibrian Fernandez are siblings and Spanish nationals who have been resident in Germany since birth. In the period from 1997 to 2003, they received income from employment and were liable to tax in Germany on the whole of their income. In 1990, the applicants’ parents – also Spanish nationals – started to build a house in Spain, which was completed in 1993. The applicants’ mother and father died in 1995 and 1996, respectively. On their father’s death in November 1996, the applicants became proprietors of that house in their capacity as joint heirs (Erbengemeinschaft), but never lived there. The house was let from 1 January 2001 and sold in 2006.

In their tax returns submitted to the Finanzamt for the period from 1997 to 2003, the applicants requested (i) that the decreasing-balance method of depreciation provided for in Paragraph 7(5) of the Law on Income Tax (Einkommensteuergesetz), as applicable in the period from 1997 to 2003 (the ‘EStG’), be applied to the house in question, and (ii) that the limited offsetting of losses provided for at point 6(a) of the first sentence of Paragraph 2a(1) of the EStG not be applied. The Finanzamt rejected those requests and applied the latter provision, together with the straight-line method of depreciation provided for in Paragraph 7(4) of the EStG, on the ground that the house in question was not situated in Germany. The applicants therefore brought an action before the referring court, claiming that the tax treatment of the income from their house in Spain infringed Articles 39 and 43 EC. The referring court took the view that this action could not succeed under German law, since the house in question was not situated in Germany. However, it had doubts as to the compatibility with Article 56 EC, and of Paragraph 2a(1), first sentence, point 6(a), and Paragraph 7(5) of the EStG, and decided to refer the matter to the ECJ for a preliminary ruling.

The ECJ noted that a situation in which natural persons residing in Germany and liable to unlimited taxation in that Member State inherit a house situated in Spain falls within the scope of Article 56 EC. It is therefore not necessary to consider whether Articles 39 and 43 EC apply, as argued by the applicants in the main proceedings. The ECJ observed that, for the purposes of establishing the basis of assessment for income tax for a taxable person in Germany, the losses incurred in respect of the income from, inter alia, the letting of an immovable property situated in Germany can be taken into account in full in the year in which they arise, whereas rental losses from an immovable property situated outside Germany are deductible only from subsequent positive income derived from letting that property (Paragraph 2a(1), first sentence, point 6(a) of the EStG).

Furthermore, a person who is liable to tax in Germany can apply the decreasing-balance method of depreciation to an immovable property situated in Germany (Paragraph 7(5) of the EStG) whereas only the straight-line method of depreciation is applicable to immovable property situated outside Germany (Paragraph 7(4), first sentence, point 2 of the EStG). The decreasing-balance method of depreciation has the effect of deferring taxation by bringing forward depreciation being liable to result, in the early years, in a rental loss figure that is considerably higher and, in consequence, in a considerably lower tax burden for that person (i.e. creating a cash-flow advantage) than those resulting from the straight-line method of depreciation. It follows that the German tax legislation at dispute imposes a restriction on the exercise of the free movement of capital since the tax position of a natural person residing and liable to unlimited taxation in Germany who, like the applicants in the main proceedings, has an immovable property in another Member State, is less favourable than it would be if that property were situated in Germany.

The ECJ rejected the justifications presented by Germany, based on the principle of territoriality and the socio-political objective of promoting the development of the German immovable property market. The Court held that Article 56 EC precludes the income tax legislation of a Member State under which individuals who are resident and liable to unlimited taxation are entitled to have (i) losses from the letting or leasing of an immovable property deducted from the taxable amount in the year in which those losses arise, and (ii) the income from such property assessed on the basis of the application of the decreasing-balance method of depreciation, only if the property in question is situated on the territory of that Member State.

Commission refers Estonia to the ECJ over its discriminatory taxation of non-residents' pensions

On 29 October 2009, the Commission decided to refer Estonia to the ECJ over its discriminatory taxation of pensions paid to non-residents. The decision concerns non-resident pensioners with a modest global income which does not exceed the tax exemption allowances applicable to pensioners in Estonia (EEK 63,000 or around EUR 4,026). If such taxpayers receive almost all their income in Estonia, they can benefit from the Estonian personal allowances and do not have to pay tax on their income. However, non-resident taxpayers who earn less than 75% of their global taxable income in Estonia cannot benefit from the personal deductions available to residents. Therefore, under Estonian rules, pensions paid to low-income non-residents are taxed at a higher rate than pensions paid to low-income resident taxpayers.

The Commission is of the opinion that, in these particular circumstances, the Member State of residence is not in a position to take the taxpayer's personal circumstances into account. Therefore, Estonia should calculate the tax amount due in Estonia taking into account his entire his income and make the same personal deductions available to resident and to non-resident taxpayers. The Commission considered that the restrictive application of personal allowances in the Estonian legislation constitutes a discrimination prohibited by Article 39 EC concerning the free movement of workers, as the favourable treatment is not extended to non-resident taxpayers who are effectively in the same situation as resident pensioners.

Commission refers Austria to the ECJ over discriminatory tax provisions in the field of science and research

On 29 October 2009, the Commission decided to refer Austria to the ECJ over its discriminatory treatment of certain foreign non-profit institutions in respect of tax benefits in the field of science and research. According to the Austrian rules, donations to certain institutions established in Austria such as universities, art colleges and science academies may be deducted as operating expenses, but similar donations to comparable institutions abroad may not be deducted. This makes it less attractive to donate to foreign institutions than domestic ones, even if these institutions pursue the same goals. The Commission is of the opinion that by restricting the tax deductibility of donations to foreign research and educational institutions established in Austria, Austria violates the principle of the free movement of capital protected under Article 56 EC and Article 40 EEA.

Commission requests Belgium to amend its discriminatory legislation on accounts keepers/settlement institutions and investment funds

On 8 October 2009, the Commission sent a reasoned opinion to Belgium in which it formally requests it to amend its tax legislation. The Commission takes the view that these regulations are incompatible with the basic freedoms laid down in Articles 49 and 56 EC. Accordingly, investors are encouraged either to invest in Belgian companies or investment funds or to use the services offered by Belgian undertakings such to benefit from the more favourable tax rates. If Belgium does not reply satisfactorily to the reasoned opinion within two months, the Commission may refer the matter to the ECJ.

Under Belgian tax legislation, dividends on bearer shares that, since their issue, have been held in an open deposit with a Belgian bank subject to the control authority for the Belgian financial sector and dividends on dematerialised shares held in securities accounts in Belgium are subject to a withholding tax of 15%. However, dividends on bearer shares or dematerialised shares held under similar arrangements with a financial institution established in another Member State are subject to a withholding tax of 25%. Furthermore, dividends distributed by Belgian investment companies are subject to a withholding tax of 15%, while dividends distributed by equivalent investment companies in other Member States are subject to a withholding tax of 25%.

Commission recommends simplified procedures for claiming cross-border withholding tax relief

On 19 October 2009, the Commission adopted a recommendation that outlines how Member States could make it easier for investors resident in Member States to claim withholding tax relief on dividends, interest and other securities income received from other Member States. The recommendation also suggests measures to eliminate the tax barriers that financial institutions face in their securities investment activities while at the same time protecting tax revenues against errors or fraud. The recommendation is designed to provide guidance to Member States in how to ensure that procedures to verify entitlement to tax relief do not hinder the functioning of the Single Market.

This recommendation:

• encourages Member States to provide relief at source rather than by refund any withholding tax relief applicable to securities income under double taxation treaties or domestic law;
• encourages Member States to apply quick and standardised refund procedures where they cannot provide relief at source, for example because the investor has not provided all necessary information, and lists possible elements of such refund procedures;
• encourages Member States to accept alternative proof of investors' entitlement to tax relief besides certificates of residence;
• suggests how Member States can involve financial intermediaries in making claims on behalf of investors and, in particular, how the procedures could operate where there is a chain of financial intermediaries, in different Member States, between the issuer of the securities and a beneficiary;
• encourages greater acceptance by Member States of electronic rather than paper information;
• suggests that Member States apply a risk-based approach to setting requirements of proof of entitlement to tax relief;
• suggests how Member States could set up single or joint audits or even external audits to investigate the compliance of financial intermediaries with obligations created in line with the recommendation;
• suggests follow-up discussions with Member States on the implementation of this recommendation.
• encourages greater use of existing channels for exchange of information between Member States and the exploration of new channels.

This recommendation is based on the 2006-2007 reports of the EU Clearing and Settlement Fiscal Compliance Experts' Group (FISCO), following up on an extensive stakeholders' consultation, and has been discussed on several occasions with the financial services industry and tax administrations in Member States.

Background
The domestic tax laws of Member States usually provide for withholding taxes on dividend and interest income paid to non-resident investors. Those withholding taxes are often reduced under Member States' bilateral double taxation conventions, when the two treaty partner countries involved agree on sharing taxing rights. In certain circumstances, some Member States even unilaterally reduce withholding taxes or apply exemptions on securities income paid to foreign investors.

However, Member States' procedures to verify claims for withholding tax relief are often so complicated and time consuming that investors may forego the relief to which they are entitled or even be discouraged from investing across borders. Furthermore, the procedures often do not take into account the present-day multi-tiered financial environment where there may be a chain of financial intermediaries, based in several countries, between the issuer of the securities and the investor. In fact, a study by the Commission services shows that the costs related to these present reclaim procedures are estimated at a value of EUR 1.09 billion annually whereas the amount of foregone tax relief is estimated at EUR 5.47 billion annually. The amount of cross-border holdings within the EU was USD 16.7 trillion 2006, composed of USD 6.4 trillion in equity securities and USD 10.3 trillion in debt securities. The EU accounts for more than 50% of the worldwide amount of such holdings, with respect to both the origin and the destination of the investments.

Commission takes steps against Germany concerning its taxation of outbound dividend and interest payments to foreign pension institutions

On 29 October 2009, the Commission sent Germany a formal request to amend its legislation which leads to discriminatory taxation of foreign pension institutions. The Commission's request takes the form of a ‘reasoned opinion’, i.e. the second step of the infringement procedure of Article 226 EC. If Germany does not reply satisfactorily to this reasoned opinion within two months, the Commission may refer the matter to the ECJ.

In Germany, dividends paid by German companies to German Pensionskassen are either subject to a reduced withholding tax rate, or the Pensionskasse can benefit from a partial refund of the withholding taxes. However, similar institutions established elsewhere in the EU and the European Economic Area cannot benefit from this reduced rate or partial refund. For another category of German pension institution, the Pensionsfonds, the dividends received are taken into account in the annual tax assessment procedure. Therefore, they are taxed on a net basis at the general corporate tax rate of 15%. However, dividends paid from Germany to similar foreign institutions are subject to a final withholding tax of 25% on the gross dividend, without the possibility of deducting any costs. The same rules apply to interest payments paid to Pensionskassen and Pensionsfonds. Therefore, the taxation of interest paid to similar foreign pension institutions is also addressed in the reasoned opinion.

If a Member State levies a higher tax on dividends or interest paid to foreign pension funds, these funds might be dissuaded from investing in companies in that Member State. Equally, companies established in that Member State might have difficulty attracting capital from foreign pension funds. The higher taxation of foreign pension funds may thus result in a restriction of the free movement of capital, as protected by Article 56 EC and Article 40 EEA. The Commission is not aware of any justification for such restriction.

Commission requests Portugal to amend restrictive exit tax provisions for individuals

On 29 October 2009, the Commission requested Portugal to amend its tax provisions which impose an exit tax on individuals. The provisions are incompatible with the free movement of persons. The Commission's request is in the form of a ‘reasoned opinion’ and Portugal needs to reply satisfactorily to the reasoned opinion within two months, or the Commission may refer the matter to the ECJ.

According to Article 10 (9) a) of the Portuguese Individual Income Tax Code (Código do imposto sobre o rendimento das pessoas singulares – ‘Código do IRS’), capital gains or losses arising in the case of an exchange of shares is included in the shareholder's taxable income of the calendar year in which he ceases to be resident in Portugal. The gain or loss is determined by calculating the difference between the market value of the shares received and the book value of the shares handed over. However, if the shareholder who engages in an exchange of shares maintains his residence in Portugal, the value of the shares received is the value of those handed over; a taxable gain will only arise if there is an additional payment in cash.

In addition, Article 38 (1) a) of the Código do IRS provides that the transfer to a company of assets and liabilities related to an economic or professional activity by a natural person is tax exempt if the legal person to which the assets and liabilities have been transferred has its seat or place of effective management in Portugal, whereas such a transfer is taxed if the legal person has its seat or place of effective management abroad.

The Commission considers that such immediate taxation penalises individuals who decide to leave Portugal or transfer assets abroad, by introducing less favourable treatment for them compared to that for those who remain in the country or transfer assets to a resident company. The Portuguese rules in question are, therefore, likely to dissuade individuals from exercising their right of free movement and, as a result, constitute a restriction of Articles 18, 39 and 43 EC and the corresponding provisions of the EEA Agreement. The Commission's opinion is based on the EC Treaty as interpreted by the ECJ in its judgment of 11 March 2004, in De Lasteyrie du Saillant (C-9/02), and on the Commission's Communication on exit taxation (COM(2006)825) of 19 December 2006.

Developments in the Netherlands: Supreme Court rejects cross-border loss compensation

On 2 October 2002, the Dutch Supreme Court gave its decision in a case concerning cross-border loss compensation, rejecting the deductibility of German losses. In 2002, the interested party, X BV, formed a tax group (fiscale eenheid) with a German subsidiary, A GmbH. In 2002, it was possible to form a tax group with a German subsidiary, but due to a change in law as from 1 January 2003, this was no longer possible. Therefore, the tax group ended in 2003 by virtue of law. X BV and A GmbH failed to request for a tax group in the first three months of 2003, which is, according to Dutch law, a formal condition to obtain a tax group and intra tax group loss compensation as from 1 January 2003.

X BV tried to deduct a loss of A GmbH stemming from 2003, based on EC law in its corporate income tax return. The tax inspector and Lower Court in Haarlem denied the deductibility of this loss. The Dutch Supreme Court decided to answer the material question in this case, although (i) we may doubt whether X BV’s claim was formally admissible as no request for a tax group was filed, and (ii) the Dutch Supreme Court already had referred a question to the ECJ for a  preliminary ruling pending on (partially) the same matter.

The Dutch Supreme Court only looked at the issue of cross-border loss compensation in the case at hand, and not at the issue of whether a cross-border tax group must be allowed on the basis of EC law. Therefore, following the ECJ decisions in Marks & Spencer II (C-446/03) and Lidl Belgium (C-414/06), the Supreme Court decided that the Netherlands cannot be forced to allow X BV to deduct the losses of A GmbH. The Netherlands does not need to meet all justification grounds of the mentioned case law cumulatively. It has to be taken into account that  in the proceedings, X BV did not state that the loss incurred by A GmbH was a final loss. The Supreme Court also noted that according to the ECJ’s judgment in the Columbus Container Services case (C-298/05), the Netherlands cannot be forced to apply to foreign subsidiaries the system of cross-border loss compensation combined with a recapture rule, the same system which the Netherlands uses for foreign permanent establishments. According to the Supreme Court, the Netherlands may treat foreign losses incurred by permanent establishment and companies differently.

4. VAT

European Council adopts Directive on the VAT exemption in the final importation of certain goods

In a press release dated 19 – 20 October 2009, the Council of the European Union announced that it had adopted, on 1 October 2009, a new Directive determining the scope of Article 143(b) and (c) of Directive 2006/112/EC as regards the VAT exemptions on the final importation of certain goods on the common system of VAT. In the interests of clarity and rationality, the new Directive aims at codifying Directive 83/181/EEC of 28 March 1983, superseding the various acts incorporated in it, while fully preserving the content of Directive 83/181/EEC.

Ecofin Council authorizes derogation from the EC VAT Directive for Germany and Poland

At the Council for Financial and Economic Affairs (‘Ecofin Council’) of 19 and 20 October 2009, the Council announced it had adopted, on 6 October 2009, Decision 13502/09, authorising Germany to continue to apply a measure derogating from Article 168 of the EC VAT Directive. This decision empowers Germany to exclude VAT borne on goods and services from the right of deduction when the goods and services in question are used more than 90% for the private purposes of a taxable person or of his employees, or, more generally, for non-business purposes. This Decision will be applicable from 1 January 2010 until 31 December 2012.

At the same time, the Council announced it had adopted, on 6 October 2009, Decision 13501/09, authorising Poland to apply a measure derogating from Article 287 of the EC VAT Directive. This Decision gives Poland the right to exempt taxable persons whose annual turnover is no higher than EUR 30,000 instead of EUR 10.,000 under the current rules. This Decision will be applicable from 1 January 2010 until the date of entry into force of the provisions of a directive amending the amounts of the annual turnover ceilings below which taxable persons may qualify for VAT exemption or until 31 December 2012, whichever date is the earlier.

ECJ rules advertising activities by a political party are not economic activities for VAT (SPÖ)

On 6 October 2009, the ECJ gave its judgment in the SPÖ Landesorganisation Kärnten (“SPÖ”) case (C-267/08). SPÖ is a legal entity that purchased advertising material for the elections and supplied this material for consideration to various district and local organisations. Furthermore, it organised an annual ball. Only a small proportion of the expenses made by SPÖ was covered by the consideration paid for the advertising material by the district and local organisations and the tickets for the ball. The resulting losses were offset with money received from public funds, membership contributions, membership subscriptions and donations.

In its preliminary questions, the referring Austrian Court inquired whether the advertising activities performed by SPÖ had to be regarded as economic activities for VAT purposes. In its judgment, the ECJ indicated that the only income obtained on a continuing basis by SPÖ was the income received from public funds and the membership contributions, which income was used to cover the losses made by the advertising activities. The ECJ concluded, therefore, that SPÖ was carrying out a communication exercise in the light of its political objectives. By doing that, the SPÖ did not participate in any market. Therefore, the advertising activities carried out by SPÖ were not economic activities for VAT purposes.

Dutch Supreme Courts refers questions to ECJ regarding zero rated intra-Community supply

On 9 October 2009, the Dutch Supreme Court decided to refer a preliminary question to the ECJ in a case regarding an intra-Community supply of goods. In the case at hand, a Dutch supplier supplied goods to a Belgian company. The latter sold on the goods to a second Belgian company. The goods were collected in the Netherlands and transported to the final Belgian customer. The goods were transported on behalf of or by the first Belgian company. The question raised by the Dutch Supreme Court in this case is how must the supply  (i.e. supply 1 from the Dutch company to the first Belgian company or supply 2 from the first Belgian company to the second Belgian company) to which the intra-Community transport has to be related be determined. This question is relevant as result of the EMAG case (C-245/04), in which the ECJ clearly decided that if the goods are transported from one Member State to another only once, only one intra-Community supply could be indentified, also when for VAT purposes multiple supplies can be distinguished.

Commission takes steps against the application of the reduced VAT rate on horses

On 8 October 2009, the Commission decided to refer Austria, France, Germany and Luxembourg to the ECJ because those Member States still applied a reduced VAT rate to horses, and had failed to amend their legislation in time. According to the Commission, the exemptions from Annex III of the EC VAT Directive do not apply to pet horses or racehorses. These kinds of horses are not intended for animal or human consumption, nor do they concern agricultural inputs as indicated in the exemptions. The Commission referred the Netherlands to the ECJ for the same matter in the Commission v Netherlands case (C-41/09), which is still pending before the ECJ.

Commission refers Austria to the ECJ for the inclusion of car registration tax in the taxable base on which VAT is calculated for road vehicle supplies

On 8 October 2009, the Commission decided to refer Austria to the ECJ. In the case of road vehicles supplies, Austria includes the registration tax of cars in the taxable amount for VAT purposes. The Commission indicated that the registration tax levied in Austria is basically identical to the Danish registration tax as examined by the ECJ in the De Danske Bilimportører case (C-98/05). In this case, the ECJ ruled that, in the context of a contract of sale providing that the dealer will supply a vehicle registered for a price which includes the registration tax he paid before supplying the vehicle, the amount of the registration tax must not be included in the taxable amount of the VAT charged on the sale of the vehicle. The registration tax is charged because of the registration of the vehicle and not because of the supply. Furthermore, the registration tax is paid by the supplier of the vehicle on account of the purchaser. The Commission referred Poland to the ECJ for the same matter in the Commission v Poland case (C-228/09), which is still pending before the ECJ.

Commission has formally requested Finland and Austria to change their legislation on certain exemptions

On 8 October 2009, the Commission formally requested Finland and Austria to amend their legislation on certain exemptions indicated in Article 132 of the EC VAT Directive, because they are not in line with that Directive. All entities of public interest, except those which are liable to income tax for commercial activities, are exempted from VAT in Finland. This is contrary to Article 132 of the EC VAT Directive, which provides for an exemption of certain specific activities that are in the public interest.

Likewise, the Commission takes the view that the Austrian exemption for services closely linked to sport or physical education supplied by non-profit-making organisations, and the exemption for the rendering of certain cultural services, go beyond what is allowed under the EC VAT Directive. The first is, without any restriction, applicable to all activities carried out by associations of public interest, whose objective is to exercise or promote sport. The second applies to all running business of theatres, museums, zoos, nature preserves and botanical gardens. Furthermore, the Commission is of the opinion that Austria should broaden the application of its VAT exemption rules for certain supplies by non-profit organisations to their members, fund raising activities, and the rendering of services by independent groups.

Commission asks France not to extend the application of a super-reduced rate for the first performances of a work

On 8 October 2009, the Commission sent a reasoned opinion to France in which it asks not to extend the application of the super-reduced rate for the first performances of a work. On the basis of the standstill clause of Article 110 of the EC VAT Directive, Member States which were applying lower VAT rates than the minimum rate of 5% on 1 January 1991 are allowed to maintain those VAT rates. However, the scope of those super-reduced rates cannot be extended.

As from 1986, France had applied a super-reduced VAT rate of 2.10% instead of 5.50% on the first 140 performances of a work, provided that drinks were not served during the performances. In January 2007, the French legislation was amended such that it no longer contained the requirement that drinks could not be served during the performances. The Commission is of the view that this extension is not allowed under the standstill clause.

Commission requires Greece to ensure in its legislation the refund of unduly paid VAT

On 8 October 2009, the Commission addressed two reasoned opinions to Greece concerning its treatment of requests for the refund of unduly paid VAT. The first reasoned opinion concerns the follow up of the Karageorgou joint cases (C-78/02 to C-80/02). In these cases, the ECJ decided that VAT which is mentioned by a person on an invoice for rendering services to the State may not be classified as VAT if that person erroneously believes that he is rendering services as a self-employed person whilst in reality, an employer-employee relationship exists. Greece, however, did not adopt a legal or administrative instrument to ensure the reimbursement of the VAT.

In the second reasoned opinion, the Commission takes the view that Greece has failed to fulfil its obligations under EC law, because Greece did not adopt the appropriate legal and administrative measures to enable the exercise of the right of reimbursement in respect of VAT charged on road assistance services. As the ECJ held in the Commission v Greece case (C-13/06), such services are exempt from VAT. Even though Greece amended its legislation in this regard, it precluded reimbursement of the VAT paid on the basis of the repealed provisions.

Commission calls on Hungary to change its VAT reimbursement rules

On 8 October 2009, the Commission asked Hungary to amend the provisions of its VAT legislation that preclude Hungarian taxpayers from claiming reimbursement of input VAT if the VAT on the underlying supply has not been paid. Under the Hungarian VAT law, taxable persons who have excess input VAT are allowed to either carry forward this VAT to the next period or to ask for an immediate refund of the VAT. A refund is not allowed, however, if the VAT charged has not yet been paid by the supplier.

The Commission argues that this system is contrary to the principle of fiscal neutrality. Furthermore, the contested provisions only applied to input VAT. VAT on supplies is due at the time of the VAT return, regardless of the question whether the VAT has actually been paid to the supplier by the purchaser. Therefore, the Commission concludes that the Hungarian system constitutes an infringement of Article 183 of the EC VAT Directive.

Commission takes steps against Spain regarding the application of the travel agent’s scheme

On 8 October 2009, the Commission requested Spain to modify its legislation with regard to the application of the special VAT margin scheme for travel agents. The grievances raised by the Commission are the following. First, the scheme can be applied for if the customer is not a traveller, but a taxable person who will resell the travel services. Second, the scheme is excluded for certain sales made by retail travel agents acting in their own name. Third, the travel agent is allowed to mention on the invoice a flat amount which is unrelated to the actual VAT charged to the customer and which is deductible for the customer. Finally, the travel agents are given the option to determine an overall taxable amount for each tax period.

5. Customs Taxes and Excise Duties

Proposed changes in Customs legislation affect customs value

A draft of the Implementation Provisions of the Modernised Customs Code (‘MCCIP’) has been published. This MCCIP is set to replace the Implementing Provisions to the Community Customs Code (‘IPCCC’). According to the draft texts of the MCCIP, it will no longer be possible to determine the customs value on the basis of the so-called ‘first sale for export’ and royalty payments should almost always be included in the customs value.

First sale for export
Under the current Article 147 of the IPCCC, the customs value of a good may, in a chain of subsequent sales before importation of the good into the European Union, be derived from the first sale pursuant to which the good is imported into the EU. For example: A Chinese manufacturer sells good to a company in Hong Kong. This Hong Kong company sells the goods to a Dutch buyer. Under the operation of Article 147, it is possible to determine the customs value on the basis of the transaction between the Chinese and the Hong Kong companies. When the MCCIP enters into force as it is proposed, the first sale for export can no longer be applied. In that case, the customs value must be determined on the basis of the transaction between the Hong Kong company and the Dutch buyer. As a result, the customs value will rise and more customs duty will be due.

Royalties and licence fees
Under the current IPCCC, royalties and licence fees must be included in the customs value of a good if they are related to the good imported and are a condition of sale for that good. If the seller and licence holder are not related, parties and seller is free to select a manufacturer and the seller cannot demand payment of a royalty from the buyer, the royalty payment is not a condition of sale and is not to be included in the customs value. The current draft of the MCCIP provides for an additional condition: it states that a condition of sale also exists if the goods may not be produced or sold without the royalty being paid directly or indirectly to the licensor. From this additional condition, it follows that the obligation to pay a royalty to the licence holder will almost always lead to the conclusion that it is a condition of sale and should, therefore, be included in the customs value. As a result, the customs value will rise and more customs duty will be due.

Advocate General opines minimum prices for tobacco products incompatible with EC Directive

On 22 October 2009, Advocate General Kokott delivered her Opinion in the combined cases Commission v France, Austria and Ireland (C-197/08, C-198/08 and C-221/08). The cases concern the fact that French, Austrian and Irish legislation include rules fixing minimum prices for tobacco products. The Commission takes the view that, in the light of the ECJ’s previous case law, those rules infringe Article 9(1) of Council Directive 95/59/EC of 27 November 1995 on taxes other than turnover taxes which affect the consumption of manufactured tobacco.

The second and third subparagraphs of Article 9(1) of Directive 95/59 provide that:
‘Manufacturers, or, where appropriate, their representatives or authorised agents in the Community and importers of tobacco from non-member countries shall be free to determine the maximum retail selling price for each of their products for each Member State for which the products in question are to be released for consumption.
The second paragraph may not, however, hinder implementation of national systems of legislation regarding the control of price levels or the observance of imposed prices, provided that they are compatible with Community legislation’.

France, Austria and Ireland argue essentially that, contrary to the Court’s previous case law, the fixing of minimum prices does not infringe Directive 95/59 and in all events, is justified on health protection grounds. In that regard, they rely, inter alia, on Article 6 of the World Health Organisation Framework Convention on Tobacco Control, headed ‘Price and tax measures to reduce the demand for tobacco’, which provides as follows:

1. ‘The Parties recognise that price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons.
2. Without prejudice to the sovereign right of the Parties to determine and establish their taxation policies, each Party should take account of its national health objectives concerning tobacco control and adopt or maintain, as appropriate, measures which may include, amongst others, implementing tax policies and, where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption’.

Advocate General Kokott is of the opinion that the fixing of minimum prices infringes Directive 95/59 and recommended that, therefore, the ECJ should rule that France, Austria and Ireland have failed to fulfil their obligations under Article 9(1) of Council Directive 95/59.

EU and South Korea initial free trade deal

On 15 October 2009, EU Trade Commissioner Catherine Ashton and Korean Trade Minister Kim Jong-hoon initialled a free trade agreement (‘FTA’). This FTA is the most important ever to have been negotiated between the EU and a third country. The deal, estimated to be worth up to EUR 19 billion in new trade for EU exporters, will remove virtually all tariffs between the two economies, as well as many non-tariff barriers. The agreement will create new market access in services and investment. The deal will also facilitate major advances in areas such as intellectual property, procurement, competition policy and trade and sustainable development. The FTA signals an important upgrade of the EU-South Korea relationship, together with a new Framework Agreement.

One of the key benefits of the deal for the European Union is the quick elimination of EUR 1.6 billion in duties for exporters to Korea. The agreement also tackles key non-tariff barriers including regulations and standards in industries of European interest, such as the automotive, pharmaceutical and consumer electronics industries. Services sectors such as telecommunications, environmental, legal, financial and shipping are expected to see some of the greatest benefits, with substantial commitments from Korea to liberalise these sectors.

The initialling of the FTA signifies the closing of negotiations with a stable legal text, which the Commission will formally present to the Member States early in 2010. Following the signature of the agreement by the EU Presidency and the Commission, the FTA will be presented to the European Parliament for approval. Entry into force of the agreement is then expected in the second half of 2010.

Eighth ASEM Customs DGs/Commissioners meeting

The 8th ASEM Customs Directors General (‘DGs’)/Commissioners Meeting was held in Heraklion, Greece on 15 and 16 October 2009, This conference was held in the context of Asia-Europe Meeting (‘ASEM’), a dialogue initiative founded in 1996 for European and Asian countries with the aim to strengthen cooperation and enhance mutual understanding among the currently 45 member countries. Members include the 27 Member States, the Commission, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Mongolia, Myanmar, Pakistan, the Philippines, Singapore, Thailand, Vietnam and the ASEAN secretariat. The on-going ASEM dialogue has a broad thematic basis, placing particular emphasis on politics, security and economy, education and culture.

The 8th ASEM Customs DGs/Commissioners Meeting, following the 7th meeting in Yokohama in 2007, discussed customs and customs-related trade issues of common interest and are to agree on a concrete working programme for 2010-2011. Priorities are trade facilitation and supply chain security, standardization and simplification, combating counterfeiting and piracy, the role of customs in protecting the society and the environment, and the fight against fraud.

Trade Barriers Regulation (TBR)

What is the Trade Barriers Regulation (‘TBR’)?
EU companies face trade barriers every day in their international operations. These can include restrictions on sales in export markets, discriminatory taxation systems or difficulties in acquiring and enforcing patent rights in foreign countries. Such barriers hurt companies, workers and consumers. The TBR is an instrument in effect since 1995, aimed at helping EU businesses overcome trade barriers and thereby develop their activities overseas. The TBR is specifically designed to remove obstacles to trade in third countries, as well as to tackle unfair foreign trade practices that cause injury within the EU internal market.

How can the TBR help?
Very often, EU companies or professional associations alone can do little to tackle foreign government measures that negatively impact their business. That is why the EU has developed an instrument to provide direct access to the Commission, who can then investigate the matter and seek the elimination of the challenged obstacles to trade. Any EU company or association of companies can use the TBR to complain about obstacles to trade in third countries (e.g. import bans), or about foreign trade practices causing injury on the EU market (e.g. foreign subsidies). Any Member State may lodge a complaint in respect of any obstacle to trade. TBR investigations may lead to a variety of solutions, including bringing the case to the WTO should it prove impossible to reach a satisfactory settlement with the third country concerned. The Commission always aims to reach a negotiated solution, as this means companies and consumers see benefits more quickly than in the case of protracted and costly litigation.

Success stories of the TBR
Since its entry into force in 1995, the TBR has proven an effective tool to remove obstacles to trade and to help EU exporters to penetrate third country markets. The following are just a few examples of the success stories of the TBR:

• Colombian tax law discriminates against imported motor vehicles (Complaint brought by Volkswagen AG): Colombia’s VAT system was designed in such way as to discriminate against certain foreign cars and to unfairly protect local manufacturers. Following a TBR complaint, the Commission raised the issue with the Colombian authorities who agreed to eliminate the tax discrimination. Thanks to the TBR, EU car exporters secured a level playing field vis-à-vis their competitors established in Colombia.
• Lack of transparency and discrimination in the Turkish pharmaceuticals market: (Complaint brought by the European Association of Pharmaceutical Industries and Associations – EFPIA): Turkey maintained a number of regulations affecting the sale of imported pharmaceutical products. In 2003, following a complaint under the TBR and a Commission investigation, the Turkish authorities modified their system in order not to penalise imported products.
• Lack of protection of wines with geographical indication Bordeaux and Médoc in Canada (Complaint bought by Conseil interprofessionnel du Vin de Bordeaux): Canada refused to protect Bordeaux and Medoc as geographical indications (‘GIs’). The Commission negotiated an agreement with Canada which led to these terms being protected as GIs.

EU and Uruguay settle complaint over taxation of imported spirits

On 5 October 2009, the Commission decided to close an investigation into Uruguay's taxation regime on spirits, following the removal of unfair barriers to the sale of European spirits in the country. The investigation had been opened under the EU Trade Barriers Regulation (‘TBR’) following a complaint by the Scotch Whisky industry. The Commission's enquiry led to changes in the Uruguayan legislation without the need to resort to WTO dispute settlement.

On 2 September 2004, the Scotch Whisky Association lodged a complaint alleging that sales of Scotch whisky in Uruguay were hindered by various obstacles to trade, notably a discriminatory excise tax. During the investigation conducted by the Commission, the Uruguayan authorities expressed their willingness to seek a mutually satisfactory solution, and proposed to settle the case on the basis of various elements, notably the legislation on excise taxes.

The main trade barrier subject to investigation was the discriminatory excise tax in Uruguay (Impuesto Especifico Interno: ‘IMESI’). Instead of using the actual transaction value of the spirits at the point of first sale as the taxable base, the spirits were divided into groups on a price-per-litre basis. They were then assigned a price (determined by the Uruguayan authorities) upon which the excise tax was levied, putting the EU products in the highest-priced category. In the new legislation, in light of the agreed settlement to the case, the tax is determined by adding a fixed value to a tax on value of the product, which means that there is a single tax rate and the discrimination is removed. The volume and value of exports of Scotch whisky to Uruguay have increased by more than 30% since the entry into force of the revised legislation.

Aside from the issue of taxation, other barriers included (1) lack of transparency and predictability of Uruguayan excise taxes in general, (2) exclusion of whiskies matured for three or more years from the lowest category of taxation (by EC Regulation as of July 2000, all EU whiskies must be matured for at least three years, whereas all whiskies produced in Uruguay are aged less than three years), (3) requirement to affix tax stamps on imported whiskies, (4) requirement to pre-pay excise taxes at the time of customs clearance. All of these barriers have been addressed.