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TAX EVASION AND AVOIDANCE: Questions and Answers
Commission Européenne - MEMO/12/949 06/12/2012
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Brussels, 6 December 2012
TAX EVASION AND AVOIDANCE: Questions and Answers
See also IP/12/1325
Why has the Commission presented an Action Plan on Tax fraud and evasion?
Every year, an estimated €1 trillion1 in public money is lost in the EU due to tax evasion and avoidance.
Member States suffer a serious loss of revenue, and a dent to the efficiency and fairness of their tax systems. Some businesses find themselves at a competitive disadvantage compared to those that find ways to avoid paying their fair share. The cross-border nature of tax evasion and avoidance, along with Member States' concerns to maintain competitiveness, make it very difficult for purely national measures to have the full desired effect. Tax evasion is a multi-facetted problem requiring a multi-pronged approach, at national, EU and international level.
In March 2012, the 27 EU Heads of State asked the Commission to develop ideas and solutions to improve the fight against tax fraud and tax evasion. In April, the European Parliament also called for urgent action in this area. As a first response, the Commission adopted a Communication in June 2012 outlining how tax compliance could be improved and announced the preparation of today's Action Plan (see IP/12/697 and MEMO/12/492). The Action Plan today contains over 30 measures to be developed now and in years to come. If all 27 EU Member States cooperate together, it will help to increase the fairness of their tax systems, secure much needed tax revenues and help to improve the proper functioning of the Single Market. In addition, the "strength in numbers" of the EU acting as a united block can carry much more weight in achieving faster and more ambitious progress at international level and in discussions with OECD and G20.
What measures are already in place in the EU to fight tax fraud and evasion?
The EU has built its standards of good governance in taxation on 3 pillars: transparency, information exchange, and fair tax competition. These are principles that must be respected by the Member States, and that the EU also seeks to promote internationally to the widest extent possible.
In terms of transparency and information exchange, administrative cooperation between Member States has been considerably strengthened in recent years. Thanks to EU rules in this field, national tax authorities benefit greatly from their mutual exchange of data, information and experiences, in order to better identify and address tax evasion and fraud. Important new legislation has been adopted in recent years to further strengthen administrative cooperation, including a new Directive on Administrative Cooperation which will enter into force on 1 January 2013. The EU Savings Directive is proof of the benefits of intra-EU cooperation. On average, information on 20 billion euros of taxable income is exchanged between Member States each year and five non-EU countries (including Switzerland and Liechtenstein) as well as ten dependent or associated territories of MS outside the EU (including Jersey, Guernsey, the Isle of Man, the Cayman Islands and Aruba) participate in the EU network of cooperation in this field through agreements providing for equivalent or the same measures as those of the EU Savings Directive.
To promote fair tax competition, the EU has the Code of Conduct on Business Taxation (see below). The Commission is currently in discussions with Switzerland and Liechtenstein to promote the principles of the Code beyond EU borders.
In June 2012, the Commission set out 25 concrete measures to fight more effectively, at national and EU level, against tax fraud and evasion (see IP/12/697). Some of these measures are already underway e.g. in July the Commission proposed a Quick Reaction Mechanism (QRM) against VAT fraud. The VAT strategy presented last December also looked specifically at how to tackle VAT fraud in better way.
In the Country Specific Recommendations for 2012, 10 Member States were encouraged to do more at national level to fight tax evasion and improve compliance. The Commission is always ready to provide targeted support and technical assistance to any Member State that needs it to strengthen its tax system against evasion, and improve tax collection.
What is set out in the Action Plan to strengthen the EU stance on evasion and avoidance?
As a starting point, Member States are urged to use, to full effect, the powerful tools already at their disposal. They should properly apply EU rules on administrative cooperation and information exchange, and rapidly agree on key proposals that could help recapture billions of euros. These include the revision of the EU Savings Tax Directive, a negotiating mandate to update the existing EU savings taxation agreements with Switzerland and other European third countries, and the Quick Reaction Mechanism to fight VAT fraud.
The Code of Conduct on Business Taxation should also be reinvigorated, to better address instances of harmful tax competition. Its scope could also be widened e.g. to cover wealthy individuals.
In the short term, EU measures will include a Taxpayers' Code to improve compliance and standardised forms for information exchange. The Commission will review the anti-abuse provisions in the Directives on Parent-Subsidiary, Mergers and Interest and Royalties.
In the medium and long term, measures will include an EU Tax Identification Number (TIN), an EU tax web portal, guidelines for tracing money flows and possibly common sanctions for tax offences.
What is the Code of Conduct on Business Taxation?
The Code of Conduct is the EU's main tool for ensuring fair tax competition in the area of business taxation. It sets out clear criteria for assessing whether or not a tax regime can be considered harmful. All Member States have committed to adhering to the principles of the Code. This means refraining from introducing tax measures deemed to be harmful and changing those that are found to be so. The Code of Conduct Group oversees the application of the Code, assesses regimes to determine whether or not they are harmful, and reports back to the EU's Council of Finance Ministers on developments in this area at the end of each Presidency. Since the Code of Conduct was established in 1997, over 400 tax regimes have been assessed within the EU and the overseas countries and territories and around 100 have been eliminated when assessed as harmful.
The Code's criteria for identifying harmful measures include:
What does the Action Plan say about the Code of Conduct in improving the EU's fight against tax evasion and avoidance?
The criteria to be used to determine if a non-EU country is a "tax haven" or not will largely reflect those set out in the EU's Code of Conduct (in addition to the OECD's requirements on transparency and information exchange). This would send a clear signal that the EU expects its international partners to comply with the same minimum standards of good governance as Member States themselves comply with.
Beyond this, the Action Plan also calls on Member States to use the Code of Conduct to better effect, as part of the effort to tackle evasion and avoidance. To ensure that the Code meets its original goal of preventing harmful tax competition, the Commission recommends that, for example, Member States refer topics more quickly to Council for political decisions when necessary. In addition, the scope of the Code of Conduct should be expanded to include special tax regimes for wealthy individuals and which could be considered harmful to the Single Market.
How does the Commission intend to follow-up to the Action Plan?
The Commission will proceed in preparing the upcoming proposals and initiatives within the timeframe set out in the Action Plan. Already in the first half of 2013, it will launch consultations on the Taxpayers' Code and work to promote EU good governance standards internationally, notably through the OECD. The Commission will also continue to push for rapid agreement amongst Member States of the important proposals already on the table, most notably the revised Savings Directive, negotiating mandates for stronger savings taxation agreements with Switzerland and others, and the Quick Reaction Mechanism for VAT fraud.
Beyond this, the Commission also intends to closely monitor the progress made by Member States in the implementation of today's Recommendations and the work in relation to tax evasion, avoidance and tax havens. The Platform for Tax Good Governance will be established to provide the opportunity for regular feedback by Member States, and the Commission will maintain pressure when the momentum is considered to be insufficient. This continuous monitoring will feed into an official report within 3 years on the application of the recommended measures and their impact.
What is the added value of a common EU approach to tax havens?
The criteria for identifying tax havens and measures to address them vary greatly from one Member State to another. This means that, in a Single Market, business and transactions involving tax havens can be routed through the Member States with the most lenient provisions. As a result, the real level of protection automatically coincides with the lowest common denominator i.e. those with a more ambitious approach are easily undermined in their efforts to clamp down on tax havens.
A common EU approach to defining and reacting to "tax havens" would therefore be much more effective than a patchwork of national approaches. A minimum standard applied by all Member States would prevent tax evaders and avoiders from taking advantage of different national approaches in order to access the "tax havens".
Added to this, a common EU approach has "more bite". It leaves third countries with no doubt about what is considered by Member States to be uncooperative behaviour, and the consequences of this. Acting as a block of 27 undoubtedly, representing 500 million citizens, has more weight than a series of unilateral measures.
Finally, with a strong, common approach the EU can continue to be a central player in the good governance campaign internationally. With the high standards it applies internally, and the robust criteria it applies in its relations with non-EU countries, it can push for more ambitious measures to be agreed globally through international forums such as the OECD.
What does the Commission recommend for a stronger, common approach on tax havens?
Member States are encouraged to adopt a common set of criteria to identify countries which do not respect minimum standards of good governance ("tax havens"). These criteria would help Member States to determine whether a non-EU country should be added to their national blacklists. Such common listing by all Member States in itself will send a strong signal. Additional measures which could be used in relation to non-compliant jurisdictions are also set out as part of the recommended common approach to tax havens.
The Commission also recommends positive measures that should be taken in relation to non-EU countries (particularly developing ones) committed to complying with the EU minimum standards of good governance.
What standards would apply in assessing whether a non-EU country should be considered a tax haven or not?
A non-EU country would be considered to comply with minimum standards of good governance if it effectively applied the OECD standards on transparency and information exchange, and did not operate harmful tax measures. The criteria used by EU Code of Conduct on Business Taxation would be the basis for assessing whether a non-EU country's tax measures are harmful or not. Tax measures which give more favourable treatment to non-resident taxpayers than what is generally applied within that country would be considered potentially harmful, but there are other criteria as well. Examples would be offering a lower rate of corporate tax to foreign investors, or giving tax advantages to business operations that require no real economic activity or substantial presence within that country.
What would be the consequences for countries on Member States' blacklists?
First of all, appearing on Member States' blacklists would seriously undermine a jurisdiction's reputation as a trustworthy and recognised international partner. Furthermore, Member States are encouraged to renegotiate, suspend or even terminate the Double Tax Convention (DTC) that they have with a blacklisted country. This could have serious consequences for the non-compliant jurisdiction. DTCs help to avoid double taxation and are valued highly by potential foreign investors, so a state without a DTC is much less attractive for investors. Essentially, it could become much less attractive for people and companies to use these jurisdictions to avoid taxes at home.
Beyond this, Member States are also advised to avoid promoting business with uncooperative jurisdictions and to take additional complementary actions where appropriate.
What positive measures does the Commission recommend Member States take to encourage compliance with EU good governance standards?
The Commission encourages Member States to use "carrots" as well as "sticks" in encouraging non-EU countries to comply with the EU good governance criteria. Countries which comply with the EU criteria should be removed from national blacklists, if they are on them, and Member States should consider concluding a DTC with these countries. They should also consider cooperating more closely with non-EU countries committed to complying with the EU standards, especially developing countries. This could include offering technical assistance e.g. by seconding tax experts, to those countries that want and would benefit from it.
How would the proposed EU approach differ from the current international (OECD) approach to tax havens?
The EU approach, which the Commission recommends, is based on three pillars of good governance: transparency, information exchange and fair competition. This goes further than the criteria currently applied internationally, which focus mainly just on the first two pillars.
On transparency and information exchange, the criteria in the Recommendation are the same as those applied within the OECD Global Forum on transparency and exchange of information. The Global Forum set certain standards and requirements for transparency and information exchange, which should be respected in order for a country to be considered as meeting the international standards. Through the Global Forum, an international peer review process is carried out to see whether the necessary rules and regulations are in place and working in each state. This peer review process is still on-going.
The main difference in the recommended EU approach lies in the criteria linked to "fair competition". Member States would examine whether a non-EU country's tax regime was in line with the principles of the EU's Code of Conduct (see above), in assessing whether or not it should be blacklisted as a tax haven. This would encourage non-EU countries to respect the same high standards of good governance that apply within the EU itself.
Aggressive Tax Planning
What is "aggressive tax planning"?
Aggressive tax planning is when individuals or companies exploit legal technicalities of a tax system or mismatches between national tax systems with a deliberate intent to minimise the tax they pay. For example, aggressive tax planners may "treaty shop", using the DTCs between different countries to escape taxation in any of these countries. Aggressive tax planning is usually done within the letter of the law, but does not respect the spirit of the law. It tends to stretch the interpretation of what is "legal" to the maximum extent, and minimise the taxes paid by the "planner" to a level below what could be seen as a fair share.
Why is the Commission putting specific focus on this problem?
Aggressive tax planning has become increasingly problematic for Member States for a number of reasons.
First, tax planning has taken on an inherently cross-border nature, and the changing shape of the economy has allowed tax planning to become ever more sophisticated. In a globalised economy, where tax bases are less tangible and more mobile, it has become impossible to impose effective national provisions against aggressive tax planning without the risk of businesses relocating. This is a cross-border problem that requires cross-border solutions.
Second, tax planners exploit mismatches and loopholes between national systems and different DTCs. Coordinated action is needed to close these loopholes and strengthen common defences.
Third, the economic crisis has led Member States –and their citizens – to re-examine their national tax systems closely. With ordinary citizens facing tax hikes and spending cuts across Europe, it is difficult to justify the fact that some manage to avoid paying their fair share simply because they have the means to engage in complex tax planning. Tackling aggressive tax planning can contribute to the overall fairness of a tax system.
Example: Profit participating loans are a type of loan which is often considered as debt in its country of source and as share capital in the country where the payment is made. This is a typical case of mismatch whereby two tax systems characterise the same payment differently for tax purposes. Taxpayers commonly arrange their tax affairs in a way that allows them to take advantage of this mismatch to benefit from (i) having the 'interest' deductible on one side of the border (state of source); and (ii) receiving a tax exempt 'dividend' on the other side of the border (state of residence).
What common measures could Member States apply to help to tackle aggressive tax planning?
Member States are encouraged to review their DTCs to ensure that they do not create opportunities to escape taxation completely. They should seek to include a clause in their DTCs (with each other and with non-EU countries) saying that they will only refrain from taxing certain income if it is taxed by the other contracting party. This would prevent double non-taxation.
Member States are also encouraged to adopt a common General Anti-Abuse Rule. This would allow them to ignore artificial arrangements used essentially for tax avoidance purposes and to tax on the basis of actual economic substance.
In addition, the Commission will seek to review the anti-abuse provisions in the Parent-Subsidiary, Interest and Royalties and Merger Directives to determine whether it should take action to strengthen these clauses in 2013.
Does corporate social responsibility have a role in reducing aggressive tax planning?
Corporate Social Responsibility (CSR) refers to actions taken by companies beyond their purely legal obligations, to contribute to society. The economic crisis and its social consequences have made Member States and citizens more aware of the need for fair burden sharing in consolidation efforts. Public attention has also become increasingly focused on the social and ethical performance of enterprises, including on issues such as the level of taxes they pay, bonuses and executive pay. The perception is that recovery efforts must take place on a two way street: Member States should support businesses in getting through the hard times, but equally businesses must contribute fairly to the recovery efforts. Aggressive tax avoidance can be considered contrary to the principles of corporate social responsibility (CSR). Paying taxes is one of the important positive impacts that enterprises have on the rest of society. Last year the Commission presented a package on CSR with measures to improve transparency and promote sustainable business among multinationals. This included more openness about taxes, royalties and bonuses paid worldwide (see IP/11/1238 and MEMO/11/730).
Annex: List of measures foreseen in the EU Action Plan