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February 19, 2015

Barnier’s successor unlocks SME-friendly reform of EU capital markets

By Isabella Grotto

The opening of a European Commission consultation on the establishment of a unified capital market across the Union has been almost universally welcomed, but is likely to ignite discussion around already controversial topics such as common reporting standards for SMEs and tax jurisdictional difference across member states.

In a green paper published this week, the Commission opened a three-month consultation period on the outline of a new capital markets union (CMU) aimed at improving access to non-bank finance for small businesses across the EU’s 28 member states.

Announcing the consultation, EU commissioner Jonathan Hill, in charge of financial stability, financial services and capital markets union, said: "We will identify barriers to growth and knock them down, one by one.

"A single market for capital will help money flow through the EU and put it to work in support of Europe’s businesses, particularly its SMEs."

Among the issues opened for consultation were financial reporting standards for SMEs and how to address the enduring jurisdictional differences in tax among Union members.

The CMU initiative is the first structural initiative under the Juncker administration’s investment plan for Europe, announced in November last year and designed to boost jobs and growth in the EU.

The focus of the plan lies heavily on small and medium-sized businesses, seen as vital to growth in the area.

"If SME securitisations could be returned – safely – even to half the levels they were in 2007 compared with today, this could be equivalent to some €20bn ($30.7bn) of additional funding," reads the green paper.

The Commission described the need for economic progress on matters including "insolvency and securities laws, tax treatments" as more pressing than ever and outlined plans to "make it easier for firms, particularly smaller ones, to raise funding and reach investors cross border".

IFRS dilemmaAmong the concerns highlighted by the green paper are information problems faced by SMEs, such as a lack of feedback from lenders when their credit applications are declined and poor promotion of alternative financing opportunities by banks themselves.

Similarly, while acknowledging the "key role" played by the IASB standards in simplifying large listed European companies’ access to global capital markets, the Commission expressed itself against extending IFRS to smaller entities.

"Imposing full IFRS on smaller companies, in particular those wanting to access dedicated trading venues, would, however, be a source of additional cost," it stated.

Instead, the Commission seemed to propose a new standard, equivalent to IFRS, for smaller enterprises conducting business in the Union.

"The development of a simplified, common, and high quality accounting standard tailored to the companies listed on certain trading venues could be a step forward in terms of transparency and comparability, and if applied proportionally, could help those companies seeking cross-border investors to be more attractive to them," it explained.

The green paper extended for consultation asked if there is value in developing a common EU level accounting standard for SMEs listed on multilateral trading facilities, aka MTFs, and under which conditions.

So far, standard setters have responded with caution, but as the consultation progresses it is likely to accelerate the debate on reporting for SMEs.

A spokesperson for the IFRS Foundation said: "A single set of financial reporting requirements can play a fundamental role in the creation of a CMU, providing comparable and transparent information that allows investors to make informed investment decisions without acting as an impediment to companies wishing to raise capital."

The spokesperson also said that IFRS had yielded "high levels of satisfaction" amongst investors and companies, and added that the foundation will to "co-operate closely" with the Commission, sharing its views on the green paper in due course.

Others were quicker to address the practical challenges of adopting standards for SMEs across the Union.

ACCA head of corporate reporting Richard Martin said: "’ACCA supported the endorsement of IFRS for groups traded on regulated markets in the EU, so it is logical that we would support, for perhaps smaller EU entities dealt with on other trading venues, a common set of standards, especially if this is based on international principles.

"There are, however, likely to be practical difficulties in achieving this common set for the CMU, as evidenced by the number of Member State Options in the recently revised Accounting Directive, and the continuing legal and economic differences between Member States."

Tax jurisdictionAnother topic touched upon by the commission’s green paper and likely to result in protracted discussion is that of tax jurisdiction within the Union.

The green paper states: "Differences in tax regimes across Member States can impede the development of a single market for capital," for example by hindering cross-border investments "such as pensions and life insurance".

Last year saw the European Commission take an active stance against tax practices it considers harmful, for example by openly criticising the now-defunct "double-Irish" scheme and by opening investigations into tax planning policies at Apple.

While shying away from directly promising changes to tax laws, the Commission stated: "Many experts and market practitioners agree that the barriers to an integrated capital market include divergences in areas such as tax, company and insolvency laws across the EU."

Despite recognising that such issues are "difficult as matters of policy to overcome", it added: "However, there is a need to explore whether there are targeted measures, even in difficult areas, which could materially contribute to the goal of CMU, and how to build consensus around them."

"The Commission will take action as necessary if any discriminatory rules are found," added the green paper. "Work is also continuing on simplifying withholding tax relief procedures related to post-trading."

On this issue, the Commission has asked participants to consider through the consultation what existing taxation barriers should be prioritised and how, in order "to contribute to more integrated capital markets within the EU and a more robust funding structure at company level".

ACCA head of tax Chas Roy-Chowdhury said the association "welcomes the fact that the European Commission is considering addressing the issue of divergent tax treatments, as this may be an impediment to the smooth functioning of capital markets."

He added: "We certainly consider that withholding tax for cross-EU dividend payments should be reduced to zero, as there cannot be a justification to such a tax in a single market. The ultimate destination country should be entitled to decide and levy the appropriate level of tax."

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