As published on icaew.com, Thursday 25 February, 2021.
Fair and effective taxation in the single market continues to be hampered by insufficient sharing of tax information, according to a recent report issued by the European Court of Auditors.
In a report assessing the effectiveness of the system between 2014 and 2019, the European Court of Auditors (ECA) estimates that between €50bn and €70bn in revenues are lost to corporate tax avoidance, a figure that reaches some €190bn if special tax arrangements and tax collection inefficiencies are also included. While EU rules have granted tax administrations access to significant volumes of tax data, the information exchanged is often of limited quality or poorly used.
The report is based on audits carried out in Cyprus, Italy, The Netherlands, Poland and Spain.
While the collection of taxes remains the responsibility of the tax authorities of individual member states, the ECA report notes that in recent years significant efforts have been made to make tax systems across the EU more transparent, accountable and effective. It highlights the system put in place to exchange tax and financial accounts information as central to such efforts, built around the (repeatedly tightened) 2011 Directive on Administrative Cooperation (DAC).
The legislative framework for the exchange of tax information is seen as being transparent and logical by the ECA. According to the report, where data is accurate, complete and timely, the system can work well and exchanges on request and spontaneous exchanges are effective. Simultaneous controls on taxpayers of common interest by two or more member states were also flagged as successful tools to assess the taxation of cross-border transactions.
However, the report also highlights significant gaps in the framework when it comes to stemming tax avoidance and evasion. Cryptocurrencies, for instance, are not subject to mandatory reporting and remain largely untaxed.
The report identifies several issues with implementation, including the limited use that member states make of the significant volume of information exchanged automatically. Of particular concern is the lack of focus on tackling poor data quality and limited support in the field of data analysis. Of those member states visited by the Court, most member states do not audit reporting entities to ensure the quality and completeness of data before it is shared with other EU tax authorities.
Member states are only required to report readily available data, which has led to large differences in the categories of information shared across the EU. Another ‘data completeness’ issue identified by the ECA is the failure to often match tax identification numbers across member states thereby hampering the ability of authorities to identify relevant taxpayers and correctly assess their related taxes.
The lack of a uniform set of performance indicators across the EU to measure the effectiveness of the tax information exchanged makes it more difficult to assess how the system is working, according to the report. It also makes it more difficult to have a full view of the areas most affected by tax avoidance and evasion, seen as key to taking appropriate corrective measures.
Deficiencies in the Commission’s monitoring are highlighted, particularly a lack of on-the-spot visits in member states and only limited assessment of how effective and deterrent sanctions for non-compliance are. The Court also calls for a more proactive role for the Commission in providing guidance to help countries analyse the data that is received to help raise the relevant tax revenue.
The Court makes several recommendations to improve the effectiveness of tax data exchange. While directed primarily at the five member states visited and the Commission, the suggested actions have wider relevance too.
The Commission is invited to take more direct and effective actions to address problems with poor quality data, backed up by new legislative proposals to ensure that all relevant income information is subject to data exchange. Action on this is needed by the end of 2022, according to the Court. Better guidance, greater sharing of best practices and more monitoring is also required. A common framework for measuring the benefits of the system should also be established by the Commission, together with member states.
Turning to member states, the report stresses the importance of ensuring that data exchanged is complete and of sufficient quality. Systematic risk analysis procedures should be in place to deal with incoming information to make better use of the tax data exchanged.