Taxation has a profound impact on occupational retirement provision in Europe; Pension funds are affected by taxation on retirement income, taxation on dividends and interest payments and value added taxation (VAT).
Taxation is mainly a matter of national competence. Cross-border tax regulations and initiatives do also exist. These are closely monitored by PensionsEurope.
Withholding tax procedures
PensionsEurope warmly welcomes that in order to lower tax-related costs for cross-border investors, the EC will put forward a legislative initiative by Q4 2022 as well as explore additional ways to introduce a common, standardised, EU-wide system for withholding tax (WHT) relief at source.
The obstacles with the WHT procedures pose a major barrier to cross-border investments in the EU and to build the CMU. In order to boost the economic growth in the EU, PensionsEurope calls on the European Commission to remove all the WHT barriers to cross-border investments. This means that the EU Member States shall respect the case-law of the Court of Justice of the European Union, reciprocally and automatically recognize pension funds, and simplify their WHT processes.
The WHT refund processes are complex, expensive, and long-lasting. Often they can last even 10 years and cost half of the expected refunds, as costly tax advice in foreign languages is needed. Since the legal outcomes are uncertain, given that the legal recourse involves several levels of jurisdiction, often pension funds do not assert their justified reclaims. Therefore, PensionsEurope calls on the EU Member States to ensure simple, transparent, and inexpensive WHT refund processes.
PensionsEurope has proposed to the European Commission to establish an EU tax register of recognised pension institutions in order that Member States can reciprocally and automatically recognise pension institutions. Furthermore, in many countries pension institutions invest cross border via specialised investments funds and/or vehicles to increase the economies of scale, and it is important to ensure a tax-neutral treatment of these investment structures as well.
The Slovenian Presidency of the Council of the EU 2021 has decided against penciling in any dates this year for legislative negotiations on a financial transaction tax.
PensionsEurope has repeatedly expressed its strong opposition to the FTT proposal, due to the disproportionate impact of this tax on pension beneficiaries, its indiscriminate application to all transactions and its dissuasive effect on non-EU based investors to enter the European financial market. In the view of PensionsEurope, the FTT does not address major market failures which led to the crisis. Rather, it may reduce market liquidity, increase the costs of financing and could also increase market volatility.
PensionsEurope strongly refuses the introduction of an FTT and invites the enhanced co-operating countries to dismiss the FTT. However, should the tax be introduced, then pension funds and financial institutions managing assets on their behalf should be exempt from its application. Pension beneficiaries, who are already severely affected by the crisis, should not pay for a financial crisis that neither they nor the pension funds caused.
PensionsEurope input to the European Commission consultation on VAT rules
In our input (of May 2021) to the European Commission, PensionsEurope supports the Commission’s objective to simplify the life of taxpayers operating in the single market and we welcome the review of the VAT rules. In general, we believe all pension fund participants should be protected from unnecessary VAT burdens, regardless the character of the schemes as well as the Member State in which the services are being received. The current exemption for special investment funds should be extended to all pension schemes.
Even though the VAT exemption is in place, in some countries there is a stamp duty (for instance 4%) that is not subject or exempt from VAT and there is no possibility of any deduction. We urge the EC to recommend Member States to exempt (at least) pension schemes from this duty (or decrease their duty to no more than 1%).
Finally, we believe that establishing a cross-border investment-friendly tax environment in the EU not only requires removing unfair tax treatment but also introducing tax incentives.
The International Financial Reporting Standards (IFRS) are a set of international accounting rules that try to harmonise worldwide how a particular transaction or event must be introduced in the annual financial statements of a company. They are issued by the International Accounting Standards Board (IASB), and replace the previous International Accounting Standards (IAS).
Particularly relevant for pension funds is the IAS 26 Accounting and Reporting by Retirement Benefit Plans, which outlines the requirements for the preparation of financial statements of retirement benefit schemes. Also IAS 19 Employee Benefits, revised in 2011, which outlines the accounting requirements of the sponsoring company (not by the funds themselves) of employee benefits, including post-employment benefit plans other than DC plans. IAS 19 was endorsed by the EU in June 2012, and it’s applicable to annual periods beginning on or after 1 January 2013.
Looking forward, the European Commission is currently assessing the implementation in the EU of IFRS 9 Financial Instruments and its subsequent amendments. At the IASB level, there are other account standards relevant for pension funds being discussed, including: (i) Accounting for macro hedging; (ii) Insurance Contracts - 2013 Revised Exposure Draft and (iii) the IASB discussion paper on a Review of the Conceptual Framework for Financial Reporting.
PensionsEurope actively participated in the revision of IAS 19 and will continue to monitor the latest accounting developments both at EU and at international (IASB) level. In this regard, at the beginning of 2019 PensionsEurope provided comments to EFRAG on accounting for pension plans with asset-return promise. We welcome EFRAG’s initiative to provide ideas and approaches for a more meaningful accounting of plans with asset-return promise, as the usual IAS 19 accounting approach does not always support “a true and fair view” on plans’ assets and liabilities. We will continue to closely follow this EFRAG project together with EFRAG’s other current projects through EFRAG Pension Plans Advisory Panel.