Commission tackles harmful tax competition
The Commission proposed a Directive to eliminate withholding taxes on payments of interest and royalties between associated companies in different member states. Taxes levied at source either by deduction or assessment can involve time-consuming formalities, cash-flow losses and double taxation for companies engaged in cross-border business. The Commission therefore proposed that taxes on payments of interest and royalties should be levied only in the member states where the companies receiving the payments are located. Commissioner Monti says this would remove a 'significant tax handicap' to companies' cross-border operations.
A company must have a cross-shareholding of at least 25% to qualify as an associated company under the proposed Directive. The proposal includes provisions to ensure member states can act to deal with fraud or abuse and allows the exemption from source country taxation to be removed if the beneficiary qualifies for a special lower tax rate. Greece and Portugal would also be allowed to retain a withholding tax for a transitional period.
This proposal is one of a range of measures to be introduced following the debate in December 1997 by the ECOFIN Council on coordinated action at EU level to tackle harmful tax competition. As part of that package the Commission will shortly present a proposal for a Directive on minimum effective taxation of savings income. In addition, on March 9 1998 the ECOFIN Council created a committee for the application of its code of conduct on corporate taxation. The aim of the code is to reduce capital leaks linked to competition distortion and to lay the bases for rebalancing the taxation burden on capital with a view to reducing that on labour.
Commission publishes communication on EU accounting directives
An Interpretative Communication, covering certain key aspects of the Fourth and Seventh Company Law Directives, has been published by the Commission. Based on consultations with representatives of the member states and accounting professionals, the communication aims to provide authoritative clarification of certain issues to users of company accounts. It forms part of a new, international accounting strategy begun in 1995 to improve comparability of company accounts in different member states, and to integrate European accounting harmonization into the wider international context. The main areas covered are as follows:
- Consolidated accounts — the communication sets out the relationship between annual and consolidated accounts, the parent-subsidiary relationship and the exclusion of a subsidiary from the scope of the consolidated report;
- Environmental issues — environmental risks or liabilities resulting from past transactions or events qualify for recognition as a provision in the balance sheet if the company has a legal or contractual obligation to prevent, reduce or repair environmental damage or if the company's management has committed itself to doing so. A separate recommendation on environmental matters in financial reporting is also being prepared by the Commission;
- Relationship between the Directives and International Accounting Standards — according to the report of a special Task Force, the Directives and the International Accounting Standards (IAS) are compatible in all significant areas. However, the communication clearly states that where companies wish to produce consolidated accounts complying with the requirements of the IAS or the US Generally Accepted Accounting Principles, this can only be done if the consolidated accounts continue to conform to the EU Accounting Directives.
Commission clears creation of largest bank in Europe
On March 4 1998 the Commission announced that it would grant unconditional regulatory approval to the merger of Union Bank of Switzerland (UBS) and Swiss Bank Corporation (SBC), creating the United Bank of Switzerland, Europe's largest financial institution by asset valuation.
Following its examination of markets, such as mergers and acquisitions advisory services and equity underwriting and trading, the Commission concluded that the new entity would not dominate any market sector. It was noted that while the new entity had achieved a powerful position in Portugal in mergers and acquisitions advisory services and equity underwriting, any advantage gained through the merger would be temporary given the fluctuating nature of the mergers and acquisitions business. Furthermore, United Bank of Switzerland would continue to face competition from Merrill Lynch and Dresdner Kleinwort Benson in the equity trading sector. The merger has yet to be approved by the Swiss competition authorities, the US Federal Reserve Bank and the US Fair Trade Commission.
Samsung fined for late notification of takeover
The Commission's recent fine of Ecu33,000 on Samsung for late notification of its takeover of US-based AST Research sent out a clear signal to merging companies that they will be penalized for failure to comply with Merger Regulation procedures. This is the first time the Commission has used its powers under the Merger Regulation to fine a company for failing to notify a concentration falling within the Merger Regulation within the seven day time limit.
Samsung filed its official notification of the takeover with the EU authorities in May 1997. However, Merger Task Force officials realized during their investigation that the takeover was in operation as early as January 1997 and, after consultation with the EU Advisory Committee on Mergers and Acquisitions, the Commission decided to impose the fine. The Commission stressed that Samsung, a company with significant activities in Europe, should have been aware the proposed takeover should not have been implemented without authorization.
The relatively low fine of Ecu33,000 reflected several mitigating factors:
- the takeover did not raise any competition concerns;
- the parties did eventually notify the Commission;
- the infringement did not appear to be intentional, and Samsung acknowledged the infringement and cooperated fully with the Commission.
Allen & Overy