On December 6, 2012, the European Commission presented an action plan to deal more effectively with tax evasion and tax avoidance in the European Union (EU). The action plan also deals with aggressive tax planning and tax havens. To this end, two recommendations for immediate and coordinated action have been made to the Member States. The Commission’s plan offers a series of measures which Member States can implement in order to better protect their tax bases and collect billions of euros of missed tax. This memorandum provides more information on the Commission’s action plan.
The essence of the action plan
The Commission has estimated that tax evasion and tax avoidance costs Member States approximately EUR 1 billion on lost revenue annually. In addition to lost revenue, this type of behavior also undermines the fairness of taxation. Tightening measures at the national level will, in itself, not have the desired effect; the Commission is of the opinion that a coordinated European approach will be more effective in tackling tax evasion and tax avoidance. The action plan is a first step.
Recommendations
The action plan contains two recommendations dealing with:
1. tax havens outside the EU. Member States are encouraged to apply EU-wide good governance standards and to blacklist countries that fail to meet these standards. The standards referred to relate to the availability and access to information and ensuring that any exchange thereof is effective, and to the presence of harmful profit tax regimes. With regard to countries that fail to meet these standards, the strategy Member States should employ when renegotiating tax treaties with these countries should be one of suspension or termination of the treaty as a means to force these countries to adopt good governance;
2. aggressive tax planning, such as double deductions and double non-taxation. This recommendation provides a way to repair the legal inconsistencies and loopholes used by a number of businesses to avoid having to pay the full amount of tax owed. Member States are encouraged to tighten their tax treaties to avoid the situation of no tax being levied. Member States should also introduce a common general anti-abuse measure that would allow them to ignore all artificial tax avoidance constructions and base their taxation on economic reality. In this respect, the Commission has indicated that the anti-abuse rules contained in the Interest and Royalties Directive, the Merger Directive, and the Parent-Subsidiary Directive will be revised in 2013. With regard to the latter Directive, a special point of consideration will be the mismatches arising from hybrid loans and hybrid entities.
Other measures
Other measures included in the action plan are a European code to improve the relationship between taxpayers and tax authorities, an EU tax identification number and common guidelines on tracking money flows.
To speed up the EU activities relating to harmful tax competition, Member States have been urged to give new impetus to the activities on the EU Code of Conduct for business tax rules. If, in the near future, Member States fail to agree on effective solutions and implement them, the Commission is prepared to introduce legislative proposals as a means of forcing the Member States to take action. The Commission also recommends expanding the scope of the Code of Conduct to include special tax rules for wealthy individuals and expats.
In conclusion
To ensure that progress is made on the action plan, the Commission will provide new monitoring tools and ‘score boards’ in the fight against tax fraud and tax avoidance. A new platform for good governance will oversee and report on how Member States are implementing the recommendations.
The action plan and the recommendations will now be presented to the EU Council of Finance Ministers and the European Parliament. It will then be up to the Member States to implement, in full or in part, the action plan, which, by the way, is non-binding.