PRESENTATED BY :<br />SOUMITA PATRA 67<br />DIPTAKSHYA BANARJREE 76<br />AVIJIT BHATTACHARYYA 91<br />SOUMALYA SEN 120<br />SREEJI S NAIR 100<br />
INTRODUCTION<br /><ul><li>Euro is the official currency of the European Union.
Eleven member states have adopted it collectively known as Eurozone.(Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, etc.)
Taking official estimates of 2007 GDP, the Eurozone is the 2nd largest economy in the world.
The euro was introduced to world financial markets as an currency in 1999 and launched coin and Banknote on 1st, January 2002.
All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty
The euro sign (€) is the currency sign used for the euro the official currency of the European Union(EU).
The design was presented to the public by the European Commission on 12th December , 1996.
The international three-letter code (according to ISO standard ISO 4217) for the euro is EUR</li></li></ul><li>Maastricht Treaty<br /><ul><li>Also known as Treaty on European union
Signed on 7 February 1992 between members of European community
Led to the creation of EURO.</li></li></ul><li>EUROPEAN MONETARY UNION<br /><ul><li>EMU is the agreement among the participating member states of the European Union to adopt a single currency and monetary system.
Eleven countries have been selected as the members of EMU. As part of the EMU, these eleven countries now make up the world's second-largest economy, after the United States
Greece and Sweden, failed to meet the convergence requirements in time to join the EMU in the first round. Sweden failed to satisfy two of the conditions:
laws governing Sweden's central bank were not compatible with the Maastricht Treaty and the currency exchange rates in Sweden were not sufficiently stable for the previous two years. Greece failed to meet all of the requirements</li></li></ul><li>European Monetary Institute:<br /><ul><li>The European Monetary Institute (EMI) was the forerunner of the European Central Bank(ECB).
It encouraged cooperation between the national banks of the member states of the EU
Further budget constraints are required in countries ( Italy and Belgium) meet the requirements of the pact.</li></ul> <br />
CONVERGENCE CRITERIA<br /><ul><li>Price stability: Inflation rate should not exceed 1.5% that of three best performing member state.
Annual government deficit: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3%
Government debt: the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year.
Long-term interest rates. In practice, the nominal long-term interest rate must not exceed by more than 2 percentage points that of, at most, the three best-performing Member States</li></li></ul><li>SWITCH TO THE EURO AT VARYING SPEEDS<br />Banking for individuals will probably switch to Euros at a last stage <br /><ul><li>Done largely in local currency up to final changeover
Corporate banking may well start using earlier</li></ul>Adoption of Euro in corporate sector<br /><ul><li>Plan of large companies to adopt euro as company currency
Expected their customers and suppliers to use Euros in transactions
Internationally oriented medium sized companies will probably also turn quickly to new currency in many of their functions
Smaller domestically oriented companies, self employed and households will keep more or less to national currency until euro coins or notes and coins are introduced</li></li></ul><li>Public sector in Germany brings up rear<br /><ul><li>German public sector didn’t planned to switch to euro until end of 2001
Possible to make non cash payments in Euro ex. tax
Companies were particularly concerned to pay income and corporation tax returns in DEM until 2001
Preferred to use Euro right earlier</li></ul>Shortening of cash changeover phase in Germany<br /><ul><li>In order to minimize the burden on the retail sector
Banks and retailers continue to give out DEM coin they receive as can be used for any vending machine</li></li></ul><li>THE LEGAL FRAMEWORK FOR THE CURRENCY CHANGEOVER<br />Based on two regulations<br /> First regulation <br /><ul><li>Based on article 235 of the EC treaty took effect on </li></ul> June 20th ,1997 applied to all EU countries<br /><ul><li>The existing contracts will remain in force with all rights and obligations provided no other agreement has been made after the advent of new currency
Neither investors nor debtors holding long term contracts will enjoy advantage or suffer disadvantage through changeover of currency</li></li></ul><li>Second regulation<br /><ul><li>Based on article 109 of the treaty-on the introduction of the euro was passed during the May 1998
Established principle that who wants to use the euro can but no one can be forced to
Determines the legal status of euro vs. the national currencies
Euro EG opened company,stock exchange,accounting¤cy law to the Euro
Paved way for changeover on the financial markets & exchanges</li></ul>that lead companies to adjust their accounts,equity capital structures<br />
THE EUROPEAN CENTRAL BANK<br />EUROPEAN ECONOMIC AND MONETARY UNION (EMU):<br />EMU consists three stages <br />1ST Stage(1 July 1990 to 31 December 1993):<br /><ul><li>The Treatyof Maastricht in 1992 establishes the completion of the EMU as a formal objective and sets a number of economic convergence criteria, concerning the inflation rate, public finances, interest rates and exchange rate stability.
The treaty enters into force on the 1 November 1993.</li></ul>2nd stage(1 January 1994 to 31 December 1998):<br /><ul><li>The European Monetary Institute is established as the forerunner of the European Central Bank</li></li></ul><li><ul><li>On 16 December 1995, details such as the name of the new currency (the euro) as well as the duration of the transition periods are decided.
New exchange rate mechanism (ERM II) is set up to provide stability between the euro and the national currencies of countries that haven't yet entered the eurozone
The 11 initial countries that will participate in the third stage from 1 january 1999 are selected.
On 1 June 1998, the European Central Bank (ECB) is created</li></ul>3rd Stage(1 January 1999 and continuing)<br /><ul><li>From the start of 1999, the euro is now a real currency, and a single monetary policy is introduced under the authority of the ECB. </li></li></ul><li>
ECB FUNCTIONING MECHANISM<br />ECB working procedures are segregated into three parts:<br />1. GOVERNMENTAL<br />2. EXECUTIVE SECTION<br />3. GENERAL BODY<br />
FUNCTIONS OF EUROPEAN CENTRAL BANK (ECB) <br /><ul><li>To maintain Price stability
Issuance of euro banknotes</li></ul>ECB’S MINIMUM RESERVE SYSTEM<br />The main features of the minimum reserve system, which was specified in November 1998 are:<br /><ul><li>The reserve base will comprise bank deposits, debt securities issued and money market paper. Repos, deposits and debt securities with a maturity of more than two years will not be subject to minimum reserve requirements.
The reserve ratios will be in the range of between 1.5% and 2.5%.</li></li></ul><li>REASON BEHIND MINIMUM RESERVE<br /><ul><li>The ECB expects a stabilization of money market rates, with the help of reserves
Minimum reserve are seen as a means to create a structural liquidity shortage thus strengthening the role of the ECB as a supplier of liquidity.
Minimum reserves are intended to improve the control of monetary expansion by increasing the interest-rate elasticity of money demand.</li></ul>THE DISTRIBUTION OF ECB PROFIT<br /><ul><li>80% profit distributed to the participating central bank
20% allocated to the ECB’s reserves.</li></li></ul><li>IMPLICATION OF FINANCIAL MARKETS<br />Consequences for the bond markets<br /><ul><li>Outstanding bonds denominated in currencies of participating </li></ul> countries, in ECU.<br /><ul><li> Bonds issued by governments, banks, company and other issuers.
It will be equivalent to 50% of the dollar bond market and 130% of </li></ul> yen bond market<br /><ul><li> Scope for financing and investment provide new opportunities for </li></ul> market participants<br /><ul><li>The three largest country make up more than three-quarters of the </li></ul> aggregate bond market<br /><ul><li>Growth of overall market being neglected as the countries continue </li></ul> to consolidate the government finances.<br />
Yields not uniform<br /><ul><li> Highly liquid segment maintained by a single borrower </li></ul> compared to the U.S bill market<br /><ul><li> Yields determined by monetary and fiscal policy
The development of economy and international capital flows </li></ul> due to inflation expectations<br /><ul><li> Yields differential between sovereign issuers will small
Countries were expected to revalue were rewarded with lower </li></ul> yields<br /><ul><li> EMU having no currency risk and credit standing will be the </li></ul> main risk factor<br /><ul><li> Individual countries have no longer control on their own </li></ul> money supply<br />
Benchmark bonds<br /><ul><li> Highly liquid at the lowest possible yields
Supranational institutions and foreign issuers
Sovereign borrowers from emerging economies </li></ul>Corporate bonds<br /><ul><li>France is only which has corporate bonds
There is no difficulties for European investors
Increased Demand from Institutional investors</li></li></ul><li>Currency changeover in the bond markets<br /><ul><li> ECU claims and liabilities will be converted to euros at the rate of</li></ul> 1 ECU= 1 euro<br />New reference interest rates<br /><ul><li> EURIBOR is replaced by FIBOR, PIBOR and EONIA
ECB calculates overnight rate(EONIA) charged by references bank</li></ul>Consequences for the equity markets<br /><ul><li>Second largest equity market all over the world
Pronounced differences in accounting, legal and tax regulation</li></ul>A “big bang” in asset allocation<br /><ul><li> Households, institutional investors and public institutions have </li></ul> already begun to change<br /><ul><li> Rising of capital and increase in occupational pension funds</li></li></ul><li>The changeover in the equity markets<br /><ul><li>Share capital and the par value of share redenominated in euros
Public company’s should have share capital of at least 50000</li></ul>euros<br /><ul><li> Convert par value share into euros</li></ul>Consequences for the futures and options markets<br /><ul><li>Existing will modernized and new ones will be launched
Products become more standardized and transparent
Liquid and trading volume increase and costs will fall
Electronic trading is the another benchmark</li></ul>Competition between the financial centers <br /><ul><li>“Home” currency will disappear and national regulatory system</li></ul> come under pressure<br /><ul><li> London Stock Exchange and Deutsche Borse AG announced an </li></ul> alliance which will allow customers to trade on both exchanges<br />
OPPORTUNITIES OF MONETARY UNION<br /><ul><li>Broader Investment & Financing Opportunities
Investment & Reserve Currency</li></li></ul><li>ONE EUROPE ONE TAX<br />FORMATION OF A COMMON TAX BASE IN THE EUROPEAN UNION<br />
HARMONISATION CORPORATE INCOME TAX IN THE EU<br />The European Commission’s plan to submit the proposal is the outcome of a working program launched in 2004 and which represents the conclusions drawn from the findings of an extensive study published in 2001.<br />The European Commission has launched several platforms for comprehensive harmonization solutions starting from 1962 till date.<br />The Commission’s certain moves are described in the following reports:<br /><ul><li>Neumark Report (1962)
Programme for harmonization of Direct taxes(1967)
Bolkestein Report (2001)</li></li></ul><li>PROBLEMS IN TAXATION <br />Different Measures of Tax Burden <br />Macro-economic parameters vs. company specific data <br />Actual parameters vs. Notional parameters <br />High Compliance Cost<br />Economic Distortion<br />Political Issues <br />
ROADS TO REFORM<br />Evaluations of any proposal on the harmonization of corporate income tax or its assessment base will differ depending on the objectives of taxation reform and on what it is supposed to deliver.<br /> <br />The objective of tax neutrality i.e., efficient and incentive-neutral taxation, is a general requirement of any regime. Investment decisions should not be distorted. And it is equally important to avoid double taxation or no taxation of incomes.<br />Indirectly linked to this is the aim to ideally simple and transparent taxation. This should involve the minimum possible compliance costs for companies and the minimum possible administrative costs for the tax authorities. Moreover, in order to determine the basis of taxation for the Member States involved, intra-group transactions within the corporate groups have to be simulated by means of transfer pricing systems.<br />It is also necessary to secure to the states, appropriate share of the tax base and guarantee them tax revenues. For each State uses the part of its tax receipts to provide public goods that companies also use.<br />
Theoretical Solution TO THE PROBLEM ?<br />Source Principle: When a State levies taxes only on income obtained within its jurisdiction, it is the Source Principle<br /> <br />Residence Principle: When a State taxes the worldwide income of a taxpayer resident within its jurisdiction, we use the term Residence Principle.<br /> <br />Consistent implementation of the residence principle combined with the imputation of subsidiaries’ income to the parent company would theoretically be a possible alternative to CCCTB.This option would retain the separate calculation of profits , and differences in the tax rates would not give rise to distortions in Investment decisions.<br /> <br />
Common consolidated corporate tax base (ccctb)The COMMON CONSOLIDATED CORPORATE TAX BASE (CCCTB)<br /> <br />Basic Concept: It is a proposal comprises creation of a uniform EU-wide tax base permitting the consolidation of profits and losses. So far the European Commission envisages offering companies the CCCTB as an additional option, enabling them to choose between the previous national system and the new regime. The total profit calculated this way would then have to be allocated by means of an apportionment system.(i.e., with reference to certain key variables)to the Member States were the corporation is active. <br />
STARTING EFFECTS OF CCCTB <br />1.The European Commission plans to submit a proposal by the end of 2008 on harmonizing the corporate income tax base. Helps the multi jurisdictional corporations as they can apply it as an alternative Taxpaying scheme.<br /> <br />2. The Companies could potentially cut their tax compliance ( as per certain accepted standards) cost.<br /> <br />3. CCCTB involves a considerable curtailment of the Member States Tax autonomy (independence).<br /> - This requires unanimity among the member states <br />4. The CCCTB concept is not a self-contained approach; rather, it allows various methodological designs.<br /> <br />5. The CCCTB requires an allocation mechanism with which to ‘share out’ an enterprise’s consolidated tax base among Member States.<br /> <br />6. An apportionment formula involves incentive effects for both companies and Member States. <br />7. It safeguards the principles of taxation at source. <br />
ALLOCATION MECHANISM:THE MOST TRICKIEST PORTION<br />The European Union wants to fairly divide the tax base among the Member States.<br />It is necessary to apportion the tax base because companies operating under a CCCTB regime combine the profits of all their subsidiaries. Since this will enable full offsetting of profits and losses, all else being equal, overall tax revenues are likely to fall.<br />VARIOUS ALLOCATION APPROACHES:<br />Benefit Factor Formula- Profits should be allocated to relative use of public services provided by the State<br />Factor Location Formula- Apportionment of Profits should be based on the where Physical Factors of Production are located.<br />Source of Profits Formula- Apportion Profits based on where the economic activities has taken place. <br />
MACRO- VERUS- MICRO FACTORS<br />MACRO FACTORS- CONSUMPTION & GROSS DOMESTIC PRODUCT<br />MICRO FACTORS- CAPITAL, PAYROLL & TURNOVER/ SALES<br />Both alternatives have their advantages and drawbacks. The European Commission gives preference to an apportionment formula based on MICRO-FACTORS following the UNITED STATES & CANADA as the role models for the Tax System.<br />
LIMITATIONS OF CCCTB<br />High Administrative costs for the Participating Countries- Have to administer two system in tandem.<br />Third Country regulations impose heavier administrative burden- Parallel Use of Different System<br />No incentive-neutral taxation<br />Tax Competition intensifies<br />Real impact on tax revenues are in vague<br />Restriction on the Member States’ Autonomy<br />
CONCLUSION :<br />The concept for a CCCTB is a good idea, provided the Member States are prepared to accept the loss of their autonomy.<br />The main problem is with the international taxation i.e. the equitable sharing of tax revenues among the Member States.<br />Achieving a consensus between 27 Member Countries for the common tax base will be difficult<br />Tax legislation is subject to constant changes and developments. Ideas for new products and innovative technologies creates a need to adjust taxation systems.<br />Last but not the least, it is to be seen that how corporate income tax is integrated into Income tax in general <br />