SEPACorporate StrategyTax and Fiscal Implications of SEPA

Tax and Fiscal Implications of SEPA

Within corporate treasury and cash management, the impact of the single euro payments area (SEPA) will be substantial because it will affect all standards, processes and systems: the payment system will change because of IBAN and SWIFT payment standardisation; IBANs will have to be implemented within treasury systems (and all accounting systems); and some processes and payment methods will cease to exist because of the standardisation of all EU payments. New developments, such as e-invoicing and new SWIFT payment standards, will also be implemented and this will affecting the working practices of the companies and their employees.

This will all be a positive transformation of cash management with fewer disparate systems, lower cross-border costs and fewer processes (through a clearer choice of payment methods). These are all opportunities for the corporate world and the main benefits of SEPA for corporates and consumers who frequently make cross-border payments.

Cash Concentration and Cash Pooling

Most corporate treasuries use multiple in-country accounts with local banks and every country has its own cost structure, payment types, payment schemes, payment systems and value dates, etc. There are also national government policies and laws that corporates have to comply with in the course of doing business. Until now, corporates use all these processes and systems within their national treasury departments or centralized treasury departments to locate and distribute their cash positions. Daily sweeping of different currencies between cash pools and the management of the cash position has become a major focus of a cash manager’s day.

National government policies and laws will not change immediately because of SEPA; they will only adopt SEPA within their own defined structures. Corporates, on the other hand, will choose a set-up within a SEPA context that offers them the best tools. For corporates, this will include which country offers the lowest costs but also, for example, if Poland offers the best interest and intercompany laws, together with the best rates, it might be worth considering choosing a Polish bank as the cash management bank. The money will be swept automatically within one bank, within one tax regime and within one corporate payment scheme. This might even be an opportunity for local governments to help their national banks think progressively about their tax regimes.

Will SEPA Force EU Member States to Adjust Tax Laws and Policies?

As mentioned above, local government policies and laws will not change because of SEPA. They will, however, adopt SEPA within their own structure. Does this also mean that they will adjust their tax systems in such a way that a ‘single market for payments in which everybody will be able to make any payment as easily, safely, efficiently and inexpensively as within national borders, so that there are no obstacles to the free exchange of goods and services in the internal market’ is indeed achieved?

Looking at the EU Treaty, the largest member states have their own sovereignty regarding taxes (the exceptions are VAT and custom duties). But, within that sovereignty, the member states have the obligation to arrange their tax systems in such a way that the objectives of the EU – including the freedoms explicitly outlined in the EU Treaty – are respected. This has led to several European court cases where member state residents (both individuals and corporations) challenged local tax legislation successfully. Recent examples that have also had an effect on the European treasury landscape are Lankhorst Hohorst (the German thin cap rules) and Bosal (denial of interest costs deductions in connection to non-Dutch subsidiaries). In these cases, respectively, Germany and the Netherlands were forced to amend their tax legislation as it discriminated against non-resident tax payers.

In addition, the EU has also issued so called directives for specific situations where member states expect harmonization of a specific part of the tax legislation because the decision cannot be left to the member states and would be better served with ‘directions/directives from above’. In this case, what happens to sovereignty? These directives have to be adopted with the full consent of all member states. Also, consider the recent Interest and Royalty (I&R) Directive, which aims to avoid withholding tax in specific qualifying situations when interest or royalty payments are made from one EU member state to another.

Is the EU Tax Landscape Ready for SEPA?

Looking at some of the relevant European court cases and directives, we can see that harmonisation within the EU has accelerated in recent years. But does that mean we are ready for SEPA?

From a tax point of view, there are still differences between the tax treatment of local (i.e. within a member state) payments compared to the tax treatment of cross-border payments. A pessimist might even say that – from a tax viewpoint – we are as far from treating all payments within the eurozone as domestic as Apollo 13 was from landing on the moon!

Despite all the recent court cases and directives, when making cross-border payments within the eurozone, one will still encounter differences when it comes to withholding taxes (none or limited on local payments versus the full rate on cross-border payments) and obligatory tax documentation or obligatory tax filings (limited or even none for local payments versus the full package for cross-border payments).

Conclusion

An optimist might say that SEPA will force the EU member states to adjust their local tax laws and policies to achieve harmonization. That is indeed what will happen but one must also be realistic: we cannot expect this to happen overnight. Hopefully, however, it will not take years of court procedures before local tax laws and policies are changed or EU directives are adopted.

Whatever happens, SEPA will help in successfully challenging those local laws and policies that stand in the way of eventually treating all payments within the eurozone in the same way as domestic payments.

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