Preparation for the December European Council 8

2.XII.2008

16231/1/08 REV 1 (Presse 342)1

EN

2.XII.2008

16231/1/08 REV 1 (Presse 342)1

EN

2.XII.2008

CONTENTS1

PARTICIPANTS...... 6

ITEMS DEBATED

PREPARATION FOR THE DECEMBER EUROPEAN COUNCIL...... 8

REDUCED VAT RATES...... 10

TAXATION OF SAVINGS...... 12

HARMFUL TAX COMPETITION - CODE OF CONDUCT...... 14

MANAGEMENT OF THE EU BUDGET- ANNUAL REPORT FROM THE COURT OF AUDITORS 15

MEETINGS IN THE MARGINS OF THE COUNCIL...... 16

OTHER ITEMS APPROVED

ECONOMIC AND FINANCIAL AFFAIRS

–Facility providing support for the balances of payments of Member States in difficulties...... 17

–Deposit guarantee schemes...... 17

–Own funds requirements for banks...... 18

–Solvency of insurance companies – "Solvency II"...... 19

–Undertakings for collective investment in transferable securities (UCITS)...... 21

–VAT on insurance and other financial services...... 22

–Coordination of direct taxation systems - Exit tax...... 23

–Clearing and settlement...... 23

–Banking mobility - Common principles for bank account switching...... 24

EXTERNAL RELATIONS

–Conflict in Georgia: independent international fact-finding mission...... 24

–EU Special Representative for Central Asia...... 24

16231/1/08 REV 1 (Presse 342)1

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2.XII.2008

PARTICIPANTS

The governments of the Member States and the European Commission were represented as follows:

Belgium:

Mr Didier REYNDERSDeputy Prime Minister and Minister for Finance and Institutional Reforms

Bulgaria:

Mr Plamen ORESHARSKIMinister for Finance

Czech Republic:

Mr Tomáš ZÍDEKDeputy Minister for Finance, International Relations and Financial Policy Section

Denmark:

Mr Lars Løkke RASMUSSENMinister for Finance

Germany:

Mr Peer STEINBRÜCKFederal Minister for Finance

Estonia:

Mr Ivari PADARMinister for Finance

Ireland:

Mr Bobby McDONAGHPermanent Representative

Greece:

Mr Georgios ALOGOSKOUFISMinister for Economic Affairs and Finance

Spain:

Mr Pedro SOLBES MIRASecond Deputy Prime Minister and Minister for Economic Affairs and Finance

France:

Ms Christine LAGARDEMinister for Economic Affairs, Industry and Employment

Italy:

Mr Giulio TREMONTIMinister for Economic Affairs and Finance

Cyprus:

Mr Charilaos STAVRAKISMinister for Finance

Latvia:

Mr Atis SLAKTERISMinister for Finance

Lithuania:

Mr Rimantas ŠADŽIUSMinister for Finance

Luxembourg:

Mr Jeannot KRECKÉMinister for Economic Affairs and Foreign Trade, Minister for Sport

Hungary:

Mr János VERESMinister for Finance

Malta:

Mr Tonio FENECHMinister of Finance, Economy and Investment

Netherlands:

Mr Wouter BOSMinister for Finance, Deputy Prime Minister

Austria:

Mr Hans-Dietmar SCHWEISGUTPermanent Representative

Poland:

Mr Jan VINCENT-ROSTOWSKIMinister for Finance

Portugal:

MrFernando TEIXEIRA DOS SANTOSMinistro de Estado, Minister for Finance

Romania:

Mr Eugen TEODOROVICIState Secretary for the Treasury and External Public Finance

Slovenia:

Mr Franc KRIZANICMinister for Finance

Slovakia:

Mr Maroš ŠEFČOVIČPermanent Representative

Finland:

Ms Jyrki KATAINENDeputy Prime Minister and Minister for Finance

Sweden:

Mr Anders BORGMinister for Finance

Mr Mats ODELLMinister for Local Government and Financial Markets

United Kingdom:

Mr Alistair DARLINGChancellor of the Exchequer

Commission:

Mr Siim KALLASVice-President

Mr Joaquín ALMUNIAMember

Mr Charlie McCREEVYMember

Mr László KÓVACSMember

Ms Neelie KROESMember

Other participants:

Mr Lucas PAPADEMOSVice-President of the European Central Bank

Mr Philippe MAYSTADTPresident of the European Investment Bank

Mr Xavier MUSCAChairman of the Economic and Financial Committee

Mr Christian KASTROPChairman of the Economic Policy Committee

16231/1/08 REV 1 (Presse 342)1

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2.XII.2008

ITEMS DEBATED

PREPARATION FOR THE DECEMBER EUROPEAN COUNCIL

-Support for economic activity in Europe and response to the financial crisis

The Council noted the presentation by the Commission of a communication proposing a European economic recovery plan (16097/08). The Commission communication proposes a range of initiatives to promote recovery in the short term, within the framework of the Lisbon Strategy for Growth and Jobs, partly supported by the EU budget and partly based on coordinated action at national level.

The Council approved its contribution to the proceedings of the European Council on 11 and 12December. The Council's contribution is set out in 16095/1/08REV1.

The Council began by approving a contribution concerning a European economic recovery plan and responses to the financial crisis. In particular, the Council supports a stimulus amounting to 1,5% of EU GDP. Measures adopted to support activity in the Member States must be coordinated and take account of the different circumstances of the Member States. States may choose the most appropriate measures from a menu comprising expenditure and revenue measures, giving priority to those which will have the greatest short-term impact. The revised Stability and Growth Pact, with all the flexibility it affords, is the appropriate framework for budgetary policy in Europe, consistent with the objective of long-term sustainability of public finances, since it is important for the European Union to avoid unsustainable levels of debt over the long term.

As regards responses to the financial crisis, the Council specifically emphasised the need to establish, without delay, national schemes to support the banking sector, in respect of guarantees, but also and especially recapitalisation plans. Where the latter are concerned, the Council is awaiting the publication by the Commission of guidelines based on principles including: distinguishing between sound and distressed banks; avoiding any measures which would deter banks from seeking private capital, in particular as regards policy on dividends and on the cost of State intervention; ensuring that measures are consistent with the shared objective of banks effectively financing the real economy; lastly, it was agreed that sound banks will not need to submit restructuring plans to the European Commission, which is responsible for aid control. The Commission is requested to work closely with the European Central Bank on all these issues.

The Council also emphasised the full implementation of the Ecofin roadmaps on action in response to the financial crisis. In recent months, the Council has, on a very short timescale, determined its position on four key draft directives:solvency of insurance companies ("SolvencyII" directive), banks' capital requirements, the functioning of UCITS (undertakings for collective investment in transferable securities), and bank deposit guarantee systems. TheCouncil reached agreement on these directives at this Ecofin meeting, which will enable the Presidency to continue the negotiations begun with the European Parliament. These contacts, which have been positive, raise the prospect of the four directives being adopted at first reading.

At the same time, work on improving EU-wide supervision of financial undertakings has largely been completed. The dates set, for the end of 2008, have been adhered to, as regards the strengthening of supervisory committees, their mode of functioning, which has been improved, and the inclusion of a European dimension in the mandates of national supervisors. With the creation of colleges of supervisors for European financial groups operating in more than one State, and the role which they will play in many supervisory decisions, Europe is taking an important step towards supervision which is more geared to the highly-integrated nature of European financial markets. Lastly, the Council agreed to maintain close European coordination in order to ensure sound preparation for the next international summits following the Washington summit on 15November. This will enable Europe to continue to point the way to effective reform of the world financial system.

REDUCED VAT RATES

The Council examined a draft Directive revising the rules on reduced rates of VAT (value-added tax) .

The Presidency noted that there was no unanimous agreement on the proposed compromise at this stage. It pointed out that the proposed Directive was an element in the responses to the economic slowdown identified in the Commission communication to the European Council (see page 6) and would therefore be one of the measures raised at the next European Council.

The proposal is intended to allow Member States to apply reduced rates – indefinitely – to certain locallyprovided services.

The present VAT rules (Directive 2006/112/EC) require Member States to apply a normal rate of VAT to most goods and services (a normal minimum rate of 15 % is applicable until the endof2010). Member States may apply a reduced rate (minimum 5 %) to certain goods and services, and derogations are provided for in certain cases and/or for certain Member States.

These derogations include:

provisional derogations for Member States which, before 1992 (when the general VAT rates system was introduced), applied rates lower than the present reduced rates;

reduced rates applied on a temporary basis (until the end of 2010) to certain locally-provided services;

other derogations of a limited duration, provided for in the Acts of Accession of those Member States which acceded to the EU in 2004 (applicable until the end of 2010).

In 2006, the Commission was requested to commission an independent body to assess the likely impact – on job creation, economic growth and the proper functioning of the internal market – of reduced rates applied to locally-provided service[s]1.

On the basis of that study, the Commission considered that a new framework would be needed to rationalise and simplify the rules currently in force, while leaving a degree of latitude to the Member States in the use of reduced rates.

Last December, the Council agreed that in 2008 it would conduct a policy debate on the impact and usefulness of reduced rates. The Commission submitted an initial proposal for a Directive in July2008. In addition, the Commission is currently preparing a communication on the application of reduced VAT rates to environmental goods and services.

TAXATION OF SAVINGS

The Council addressed the taxation of savings income and adopted the following conclusions:

"1.As provided by Article 18 of Directive 2003/48/EC on taxation of savings income in the form of interest payments, on 15 September 2008 the Commission published an evaluation report on the Directive following its first three years of operation.

2.In keeping with the conclusions of the Ecofin Council on 14 May 2008, the Council (Working Party on Tax Questions – Direct Taxation) addressed the functioning of the Directive, on the basis of the Commission's evaluation report. It took note with great interest of its principal conclusions, in particular its finding that, while efficient within the limits of its current scope, the Directive does not measure up to the ambitions expressed in the unanimous Council conclusions of 26 and 27 November 2000.

3.Consequently, and in accordance with Article18, on 13November 2008 the Commission submitted a proposal for a Directive amending Directive 2003/48/EC.

4.Given the importance attached to this issue by the Ecofin Council at its meetings on 4March and 14May 2008, the Working Party on Tax Questions immediately began scrutiny of this proposal for a Directive. It reviewed the measures which are designed to reduce the potential for circumvention currently offered by recourse to intermediate entities or to products which are not covered by the Directive, even though they may have similar characteristics to those which are. It took good note of the objective of the Commission not to increase excessively the administrative costs for operators. It also mentioned the exchange of information mechanism and the transitional withholding tax regime. Finally, it called the attention of the Commission to the importance of dependent and associated territories and third countries applying in parallel the same measures or measures equivalent to those set out in the Directive.

5.Under these circumstances, the Council:

–welcomes the proposal for a Directive submitted by the Commission;

–calls for rapid progress of the discussions on the proposal for a Directive;

–invites the Commission to continue its negotiations and exploratory talks with financial centres outside the European Union;

–requests the future Presidency to report back to it on the progress of the discussions in the spring of 2009.

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Directive 2003/48/EC requires Member States to exchange information on interest paid in one Member State to savers resident in another Member State, so as to allow the interest to be taxed in the Member State of tax residence.

It has been applicable since 1July 2005.

For a transitional period[1], Belgium, Luxembourg and Austria may instead impose a withholding tax on interest paid to savers resident in other Member States. The tax rate is 15% for the first three years of the transitional period, 20% from 1 July 2008 to 30 June2011 and 35% thereafter. The three Member States must transfer 75% of the tax revenue to the Member State of tax residence, retaining 25% to cover their own administrative costs. The Directive contains provisions designed to eliminate double taxation.

The Directive applies only to natural persons and not to companies.

It covers the taxation of savings income in the form of interest payments, including income from deposit accounts, government securities and corporate bonds, as well as collective undertakings that invest more than 40% of their assets in debt securities (more than 25% as from 2011).

Similar measures to those provided for in the Directive are also applied in Andorra, Liechtenstein, Monaco, San Marino and Switzerland, under specific agreements concluded with the EU. The same measures are also applied in ten dependent and associated territories of the Netherlands and the United Kingdom (Guernsey, Jersey, the Isle of Man and seven Caribbean territories) under specific agreements concluded with each of the Member States.

HARMFUL TAX COMPETITION - CODE OF CONDUCT

The Council adopted the work programme of the Code of Conduct Group for the next 18 months. The programme clarifies the Group's operating rules and sets it new areas of investigation.

The Council adopted the conclusions contained in 16410/08.

After a brief exchange of views, it also adopted the following conclusions:

"With regard to the Code of Conduct, the Council:

–notes the progress achieved by the Code of Conduct Group (Business Taxation) during the French Presidency as set out in its report (16084/1/08 REV 1 FISC 166);

–asks the Group to continue monitoring standstill and the implementation of rollback;

–invites the Group toreport on its work to the Council before the end of the Czech Presidency."

The Code of Conduct, which relates to business taxation, concerns measures that significantly affect or are likely to affect the location of economic activities in the EU. The Code of Conduct Group is charged with evaluating:

–the rollback of tax measures judged to be harmful (where a favourable tax regime in one Member State attracts businesses from other Member States);