European Union and the Hunt for the Tax Cheat

This paper will look at the current developments within the European Union (EU) as it relates to tax information exchange and mutual assistance in the field of direct taxation. We will look at the so-called “Good Governance Package” that is on the agenda of the Council of the EU, the position of bank secrecy countries such as Austria and Luxembourg, the agreements with third countries and further developments.

Introduction

Many countries are currently busy concluding tax information exchange agreements (TIEAs) in order to be able to obtain relevant tax information for specific and justified purposes. Among participants of the process are member states of the EU. With respect to direct taxation, the upper hand is given to the Organasition for Economic Cooperation and Development (OECD) and the Council of Europe. The OECD and the Council of Europe have prepared the Convention on Mutual Administrative Assistance in Tax Matters (CETS 127)ⁱ, concluded 25 January 1988, which relates to both exchange of information and assistance in the recovery of tax.

The Convention came into force in 1995 and is mainly used in relation to countries outside the EU. The Convention will soon be updated. The legal basis for application of administrative assistance within the EU is Directive 77/799/EC when it relates to direct taxes, and Resolution 1798/2003/EC when it relates to indirect taxes and customsⁱⁱ. The increased exchange of information in the field of bank interest is based on Directive 2003/48/EC (Savings Directive). In order to apply this savings directive to countries neighbouring the EU member states, additional agreements have been made with Switzerland, Monaco, Andorra, San Marino and Liechtenstein. These additional agreements provide for a withholding tax instead of automatic information exchange. The savings directive ensures minimum effective taxation of savings in the form of interest payments made in one member state of the EU to beneficial owners who are individuals resident for tax purposes in another member state by means of automatic exchange of information.

For a transitional period, Belgium, Austria and Luxembourg have been given the option to levy a withholding tax (currently 20 per cent up to 30 June 2011, thereafter 35 per cent). The transitional period shall end at the first full fiscal year following the later of:

• date of entry into force of an agreement of the last of Switzerland, Liechtenstein, San Marino, Monaco and Andorra, with provisions that provide for exchange of information upon request as in OECD Model Agreement on Exchange of Information on Tax matters (OECD TIEA 2002);
• date on which the United States (US) is committed to exchange of information upon request as defined in OECD TIEA with respect to interest payments to beneficial owners within the EU.

The ‘Good Governance in the Tax Area’ Package[iii]

This package consists of many strands.

The anti-fraud agreement with Liechtenstein – COM(2009) 648 final

The aim is to combat fraud and other illegal activity which detrimentally affects their financial interests, and to ensure the exchange of information on tax matters. The draft agreement with Liechtenstein covers fraud as relates to both direct and indirect taxation. It provides for a definition of fraud that covers both natural and legal persons (i.e. companies) and includes not just false documents and false tax returns, but also the submission of incomplete tax returns. The text covers administrative cooperation in tax matters requiring the exchange of information that is foreseeably relevant to tax administrations. It allows parties to trigger administrative assistance that cannot be refused on the sole ground that the information is held by a bank or anonymous investment vehicle, and judicial assistance for acts that are punishable under the laws of the parties (not necessarily penal code);

The amendments to the Savings Directive are based on Commissions’ proposal COM(2008)727 and Staff document SEC(2008)2767

They seek to extend the coverage of the Directive to certain interest payments to EU residents which are channelled through intermediate tax-exempted structures established in non-EU countries by putting a withholding obligation on residual entities, extend the definition of ‘interest payment’, and include captive and discretionary structures in the beneficial ownership concept. A clear definition of residence of the beneficial owner is lacking, and the amendments also need to be implemented in relation with the five European, non-EU member countries and the 10 dependent and associated territories, as well as with other important financial centers (such as Hong-Kong, Singapore, Macao);

Cooperation between tax administrations– COM (2009)0029 final

The new directive will replace the existing mutual assistance directive 77/799/EEC of 19 December 1977, as amended by Directive 2004/56/EC of 21 April 2004. This directive is today the basis for the assistance that EU Member States provide each other. But even with the directive, there is not much actual assistance provided between the Member States. The directive incorporates the obligation to honour a request for information, allows mutual investigation teams and provides for spontaneous and automatic exchange of information. The legal basis for the Commission’s activity in this field is small.

It is not really ‘necessary’ (subsidiarity principle) that the Commission presents legislation in this field[iv]. Member States are largely free to design their direct tax systems in a way that best meets their domestic policy objectives and requirements. For value-added tax (VAT), this is different. This new directive would create new practical tools to enhance administrative cooperation as well as introduce two important new elements for reinforcing EU action at international level.

First, it would introduce a most-favoured nation clause whereby Member States would be obliged to provide another Member State the level of cooperation that they have accepted in relation to a third country. Second, the proposal would prohibit Member States from invoking bank secrecy for non residents as a reason for refusing to supply information concerning a taxpayer to his or her Member State of residence.

Cooperation in the field of tax recovery – COM(2009) 0028 final

This proposal aims to increase the efficiency of assistance so as to enhance tax administrations’ capacity to recover unpaid taxes, and thus contribute to the fight against tax fraud. The proposal will replace Directive 2008/55/EC with new provisions to reinforce recovery assistance. The main objectives are an extension of its scope, preferential use of EC legislation for the recovery assistance requests between EC Member States, reinforcement of possibilities to request mutual assistance and the speeding up of treatment of mutual assistance requests.

Mandate to EU Commission to negotiate anti-fraud agreements with Andorra, Monaco, San Marino and Switzerland

In these agreements, general principles of good governance should be implemented, including provisions similar to those applicable within the EU under State aid rules, as well as specific provisions on transparency and exchange of information for tax purposes. The existing agreement with Switzerland contains provisions relating to administrative assistance and to mutual legal assistance in criminal matters under the scope of indirect taxes (VAT and excise duties) and custom offences, corruption and money laundering. Direct taxation is excluded from the scope of the existing agreement. That will be part of the new agreement to be negotiated. The aim here is to combat fraud and other illegal activity and to ensure administrative cooperation through the exchange of information on tax matters.

Further Developments

It is clear that the EU needs to carry forward discussions with other third countries, in particular Singapore, Hong Kong and Macao, in the light of the new consensus on transparency and exchange of information, and to explore with these jurisdictions the application of appropriate equivalent measures to those contained in the Savings Directive.

The European Commission has adopted a proposal for a recast of the regulation on administrative cooperation in the field of VAT, extending and reinforcing the legal framework for the exchange of information and cooperation between tax authorities. One of the key elements of that proposal is the creation of a legal base to set up EUROFISC, a common operational structure allowing Member States to take rapid action in the fight against cross-border VAT fraud. It can be expected that in a few years that database will also be made available for direct taxes.

Conclusion

The EU and its Commission are moving forward towards greater transparency and improved cooperation. The European Commission, however, has limited means to instigate further progress. The legal basis is small and direct taxation is not within the realm of the Commission or Council of Ministers. The efforts so far are for better cooperation, streamlining procedures and use of databases. Real development must come from bilateral agreements between the sovereign states or from the multilateral treaty models of the OECD or the OECD/Council of Europe jointly. Directives aim at harmonisation, but have no direct enforcing effect.

[i] Database Council of Europe http://conventions.coe.int/

[ii] The Legal difference between the instrument of a directive and the instrument of a resolution is that a resolution has direct effect, whereas a directive needs to be implemented. It follows that a directive is addressed to the member states and a resolution to the persons. A member state cannot rely on the provisions of the directive against an individual ( no inverse direct effect). Case law ECJ: C-152/84 Marshall I, para 48, C-91/92 Dori, para 24 and C-192/94 El Corte Ingles, para 15. The binding nature of a directive exists only in relation to ‘each Member State to which it is addressed’.

[iii] COM(2009) 201 final, 28 April 2009

[iv] In response to a question of Viviane Reding to the Commission (91966^E0953), the Commission answered in 1996 that direct taxes are within the jurisdiction of Member States and that the fight against tax fraud is therefore mainly a task of the national authorities.

Leo Neve LL.M
Owner & Managing Partner