The OECD may now be taking the plaudits for tackling "harmful" tax regimes around the world under the aegis of the base erosion and profit shifting project, but in many ways the ground had already been prepared for this by the European Union's Code of Conduct Group on Business Taxation, which still has an influential voice in the international campaign against tax avoidance. The work of the Code Group is the subject of this special feature, reports Tax News.
The Origins Of The Code
The Code of Conduct for business taxation was set out in the conclusions of the Council of Economics and Finance Ministers (ECOFIN) of December 1, 1997. By adopting this Code, the Member States have undertaken to roll back existing tax measures that constitute harmful tax competition and refrain from introducing any such measures in the future ("standstill").
While the Council, when adopting the Code, acknowledged the positive effects of tax competition, the Code was specifically designed to detect only such measures which unduly affect the location of business activity in the Community by being targeted merely at non-residents and by providing them with a more favorable tax treatment than that which is generally available in the member state concerned. For the purpose of identifying such harmful measures the Code sets out the criteria against which any potentially harmful measures are to be tested. covering legislative, regulatory and administrative measures which have, or may have, a significant impact on the location of business in the EU, these are as follows:
An effective level of taxation which is significantly lower than the general level of taxation in the country concerned;
Tax benefits reserved for non-residents;
Tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;
Granting of tax advantages even in the absence of any real economic activity;
A basis of profit determination for companies in a multinational group which departs from internationally accepted rules, in particular those approved by the OECD; and
A lack of transparency.
The EU's Finance Ministers formally established the Code of Conduct Group (Business Taxation) at a Council meeting on March 9, 1998, and although the Code is not legally binding, the Commission acknowledges that it clearly has "political force," and little time wasted in putting this force to work.
EU Coordination Centers And Other Harmful Regimes – The Code Group Gets To Work
Following the publication of a report in November 1999 in which the Group identified 66 tax measures with harmful features (40 in EU Member States, three in Gibraltar and 23 in dependent or associated territories) EU finance ministers resolved to push forward with the "harmful tax measures" initiative at their meeting in Brussels in July 2001. After this meeting, it was announced that the Commission was targeting 15 of the measures already identified as illegal state aids. Eleven of them were investigated, but four of them were branded illegal right away.
The national regimes which were to be investigated included the following:
Germany Special Fiscal Regime for Control and Co-ordination Centers of Foreign Companies;
Spain Special Fiscal Regime for Bizkaia Co-ordination Centers;
France Headquarters and Logistics Centers Regime;
France Régime des Centrales de trésorerie;
Ireland Tax Exemption on Foreign Income;
Luxembourg Co-ordination Centers Regime;
Luxembourg Finance Companies Regime;
The Netherlands Special Fiscal Regime for International Financing Activities;
Finland Åland Island Captive Insurance Regime;
United Kingdom Gibraltar Qualifying Offshore Companies Rules;
Gibraltar Exempt Offshore Companies Rules.
Many of these regimes were directed at attracting the headquarters companies of multinationals and usually allowed a very low rate of tax to be paid both by the company itself and often by its executives as well.
The four regimes which the Commission said must be halted immediately included the following:
Belgium Fiscal Regime of Co-ordination Centers;
Greece Fiscal Regime for Offices of Foreign Companies;
Italy Tax Incentives Linked to the Trieste Financial Services and Insurance Centre;
Sweden Foreign Insurance Companies Taxation Regime
The Code of Conduct Group has continued to monitor standstill and the implementation of rollback and reported regularly to the Council.
Harmful Measures In The EU's New Intake
In a report released in June 2003, the European Commission revealed that all of the incoming new members of the EU - with the exception of Estonia and Latvia - had corporate tax measures in place which could disrupt the EU's internal market.
Poland came in for criticism over a general lack of transparency, but tax breaks afforded by Malta to international firms also came under fire. In addition, the EC identified nine tax measures which it deemed "harmful" in Cyprus, one in the Czech Republic, two in Hungary, three in Lithuania, five in Slovakia, and one in Slovenia.
Malta's tax regime in particular came under the microscope, and the Commission described the seven "harmful" tax measures that it wanted the Maltese Government to abolish as part of its attack on tax measures in the ten acceding nations that it fears will distort the single market; the first three measures identified by the Commission concerned offshore trading and non-trading companies, offshore insurance firms and offshore banking companies.
Whilst Malta has agreed with the Commission's verdict on these measures, the Government said that they were repealed in 1996, with a transitional period put in place until September 23, 2004.
Other measures singled out by the Commission as harmful included:
International Trading Companies: these were considered harmful by the Commission as they created an effective tax rate of 4.2 percent for non-residents (the standard rate being 35 percent);
Dividends from (other) Maltese companies with foreign income: this was deemed to establish a favorable holding regime for non-residents, providing for a tax exemption on income derived from a subsidiary based in a country with significantly lower taxes than Malta without the appropriate anti evasion measures in place;
Investment Service Companies: this measure gave deductions not available to other resident firms, and the Commission claimed that this could seriously affect the location of business activity, especially in the financial services sector;
Non-resident Companies - This measure allowed the taxation of foreign income to be delayed, in some cases indefinitely.
The Platform For Good Tax Governance
On April 28, 2009, the Commission adopted a Communication identifying actions that EU member states should take to promote "good governance" in the tax area. This culminated in the announcement by the EC on April 23, 2013, of the so-called Platform for Tax Good Governance which aims to ensure that effective action is taken against in tackling tax havens and aggressive tax avoidance within a coordinated EU framework.
Members of the Platform are the tax authorities of all Member States and 15 organizations representing business, civil society and tax practitioners. Representatives from accession countries and from the OECD may be invited to the Platform as observers.
The Platform follows the progress made on two Commission Action Plan on Tax Avoidance Recommendations, which foresee a strong EU stance against tax havens that goes beyond current international measures, and seek to block the opportunities for businesses to avoid paying their "fair share" of tax. Member states will be encouraged to identify "tax havens" and place them on national blacklists, and to reinforce the anti-abuse provisions in bilateral tax treaties, national legislation and EU corporate legislation.
The Code Group And Offshore
While most of the "harmful" coordination center regimes have long since been swept away, the Code Group has continued to play particularly close attention to the corporate tax regimes of the United Kingdom's three Crown Dependencies – Guernsey, Jersey and the Isle of Man – all of which have at some point offered tax benefits to non-resident "offshore" companies.
In accordance with the roll-back provisions of the Code of Conduct on Business Taxation, all three jurisdictions were obliged to phase out their offshore company formats, and effectively dissolve the boundary between their "offshore" and "onshore" economies.
A range of options were explored, but the three territories eventually decided to implement broadly similar tax regimes which came to be known as "zero-10" under which a 0 percent corporate income tax was introduced for all companies, and a 10 percent rate applied to firms operating in certain sectors (these include all 'financial services' businesses in Jersey, certain banking activities in Guernsey and 'financial institutions' in the Isle of Man).
The Isle of Man led the way by introducing its zero-10 regime in 2006, followed by Guernsey in 2008 and Jersey in 2009.
The EU's campaign against harmful tax competition has also been directed at the British Overseas Territory of Gibraltar, which has resulted in the elimination of offshore company forms, including the Qualifying Companies, dissolved in January 2005, and the Exempt Companies legislation, which was phased out by January 2011. However, Gibraltar's proposed replacement corporate tax regime triggered a long and complex series of legal disputes between the jurisdiction, Spain and the European Commission which brought into question its right to determine its own taxes and whether Gibraltar was benefiting from illegal "state aid" under EU rules by having a more advantageous set of tax rules than the UK.
Eventually, Gibraltar settled on – and the EU largely accepted – a new corporate tax regime whereby all companies pay corporate tax at 10 percent, except for energy and utility providers, who pay a 10 percent surcharge and are therefore subject to corporate tax at 20 percent. This has applied since January 1, 2011.
However, the Code Group has continued to pay close attention to the tax regimes of the Crown Dependencies and Gibraltar. Indeed, these jurisdictions faced an anxious wait to find out whether their new tax regimes passed muster as far as the Code Group was concerned.
In the case of the Isle of Man, the Code Group gave the all clear in December 2011 after island's attribution regime for individuals (ARI) was repealed with effect from April 2012. The removal of similar provisions in the corporate tax regimes of Guernsey and Jersey also put those jurisdictions in the clear.
In Gibraltar's case, the Conduct Group judged the previous exemption for inter-company loan interest to be harmful, a measure which the European Commission considered a form of state aid. Thus, Gibraltar abolished the exemption in an Act on July 1, 2013. The new bill also abolished the exemption for royalties income.
However, Gibraltar isn't in the clear yet. On October 1, 2014, the Commission announced that it is to expand its investigation into tax rulings provided to companies by Gibraltar, as part of its ongoing in-depth investigation into the territory's corporate tax regime. And the Commission is reviewing the territory's tax ruling regime under the EU Code of Conduct for Business Taxation.
The Code Group And The EU Blacklist
On November 8, 2016, the Council agreed on the criteria and the process for the establishment of an EU list of non-cooperative jurisdictions in taxation matters. Screening is due to be completed by September 2017, so that the Council can endorse the list of non-cooperative jurisdictions by the end of 2017. Screening is intended to be a continuous and regular process, and it be conducted and overseen by the Code Group supported by the Council's secretariat. Letters were subsequently dispatched to 92 third-country jurisdictions, requesting information in accordance with Council Conclusions of November 8, 2016 on the criteria for and process leading to the establishment of the EU list.
This particular project appears to have ruffled feathers in the world of offshore, however, as evidenced by Bermuda's angry response to the Code Group's request for information.
In June 2017, Bermuda's Minister of Finance, Bob Richards, said the territory had received an email from the Code of Conduct Group with a questionnaire, to formulate which territories should be included on a proposed blacklist of tax havens by the end of 2017. The territory said the questionnaire seeks information on the way Bermuda conducts its business internationally. The deadline for Bermuda's response was set for July 7, 2017, and failure to respond would lead to the island being deemed "non-compliant," the Government said.
According to Richards, the questionnaire had been designed to lead to a predetermined conclusion that Bermuda is a tax haven that is harmful to the global economy, and the EU in particular, and therefore should be placed on an economic blacklist. He also expressed his belief that the EU questionnaire is another example of the scapegoating of the island by high-tax, developed countries, who are "aided and abetted by certain members of the press to further domestic political objectives."
Richards also pointed out that an earlier attempt by the EU to blacklist Bermuda in 2015 failed after the Organisation for Economic Co-operation and Development and the Financial Action Task Force, which combats money laundering, concluded that Bermuda was not "harmful" in its conduct, or in the application of its laws in the global economy.
It remains to be seen what the results of the Code Group's work in this area are when the EU blacklist emerges.
Future Of The Code Group
The Code of Conduct Group on business taxation would still appear to have an important role to play in the EU's overall anti-avoidance strategy, as evidenced by its leadership of the tax blacklist project. Indeed, its remit has expanded recently, into areas such as anti-abuse measures, transparency and the exchange of information in the area of transfer pricing, administrative practices, as well as links to third countries.
Furthermore, the fact that the EU Council working group overseeing the code of conduct appointed a new chairperson, Fabrizia Lapecorella, at the beginning of February 2017 to serve a two-year term indicates that the EU has no intention of scaling back the work of the Code Group for the foreseeable future. Indeed, with anti-avoidance and harmful tax regimes now firmly on the agenda at multinational level, the Code Group is likely to continue have a major influence over tax policy in the EU and beyond for some time to come.