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Fighting tax evasion and avoidance is essential to secure greater fairness and economic efficiency in the EU’s internal market. The public has become more sensitive to tax fairness issues in the context of increased pressure on public finance at times when large multinational enterprises can reduce the amount of corporate income tax to single-digit percentages. Corporate income tax avoidance is thought to deprive EU Member States’ public budgets of billions of euros every year.
Aggressive tax planning, harmful tax regimes and tax fraud all rely on an environment of opacity, complexity and non-cooperation. Taxation is at the core of countries’ sovereignty, and the interaction of different national tax rules remains a source of discrepancies and frictions. This may lead to harmful tax competition. Some enterprises rely on the complexity of tax rules and the lack of cooperation between Member States to shift profits in order to minimise their taxes. Large multinational companies may engage in aggressive tax planning due to their presence in several jurisdictions, which SMEs and natural persons typically do not have. This can lead to distortions of the internal market and the level playing field between taxpayers.
On 18 March 2015, the Commission presented a package of measures to boost tax transparency, concentrating on the most urgent issues and including a proposal for the automatic exchange of information on cross-border tax rulings between Member States. The package is complemented by the Action Plan adopted on 17 June. The main objective of the initiative is to explain the Commission’s vision for a fair and efficient corporate tax system in the EU and beyond.
The Commission wants to move to a system on the basis of which the country where a business’ profits are generated is also the country of taxation (see A New Start for Europe: Political Guidelines for the next European Commission - July 2014). An impact assessment is being prepared under the aegis of the Communication and Action Plan to assess whether and how further corporate tax transparency, exposing enterprises to more intense scrutiny on the part of authorities or by different stakeholders, would contribute to this objective. Such scrutiny would rely on information being made available either to tax authorities or to the public. More specifically, it could ensure compliance with tax laws, dis-incentivise tax avoidance and increase pressure on States to take appropriate measures. The corresponding detailed objectives would be:
- To increase pressure on enterprises to geographically align taxes paid in a country with actual profits, through enhanced scrutiny and decisions of either citizens or tax authorities (“enterprises should pay tax where they actually make profit”);
- To increase public or peer pressure on countries to take measures that contribute to more efficient and fairer tax competition between Member States, thus ensuring that the country where profits are generated is also the country of taxation (“Member States should stop harmful tax competition”);
- To assist tax authorities in orienting their tax audits in view of targeting tax evasion and avoidance, i.e. business decisions whereby tax liabilities are circumvented (“help tax authorities orientate their audits on enterprises”);
- To align corporate tax planning practices with multinational enterprises’ own commitment / statement to corporate responsibility, such as their contribution to local and social development (“enterprises should act as they communicate in terms of contribution to welfare through taxation”);
- To ensure that enterprise structures and investments are more founded on economic motivations and not exclusively on corporate tax-related motivations (“enterprises should structure their investments based on real economic reasons, not just to avoid taxes”);
- To remedy market distortions based on corporate intransparency and multinational companies’ comparative advantage over SMEs when engaging in aggressive tax planning (“fairer competition between multinational enterprises and SMEs”)
This consultation will help the Commission gather and analyse the necessary evidence to determine possible options to attain those objectives.
Transparency on taxes paid to governments, in the form of country by country reporting, already exists for financial institutions established in the EU under the Capital Requirement Directive1 with a view to regain trust in the financial sector. Large extractive and logging industries will also soon have to report their payments to governments on a country-by-country basis under the Accounting Directive2 and the Transparency Directive3. The latter aims mainly to allow local communities of resource-rich countries to know about payments made to their governments, so that these can be better held to account.
The increased public concern regarding fair taxation in today’s difficult economic environment is also felt beyond the European Union. Base erosion and profit shifting (BEPS) have preoccupied governments around the world. OECD and G20 countries will finalise by the end of 2015 a 15-point Action Plan on these issues as part of a BEPS Project. Once agreed, it should lead in the coming years to legal requirements in each participant jurisdiction and to tax treaties, possibly including a multilateral instrument – however, it must be noted that OECD and G20 countries are not obliged to follow or implement the recommendations of the BEPS project, and that not all EU Member States are OECD members. Some of the recommendations will be connected to corporate transparency (e.g. actions 5, 12, 13). Assuming that all G20 and OECD countries will implement BEPS action 13 on country-by-country reporting, very large multinational enterprises with turnover above €750m would have to provide a Country-By-Country Report (CBCR) to the relevant tax authority from 2017 onwards. Tax authorities would then share the CBCR submitted to them with the objective to perform a more substantial risk assessment in the area of transfer pricing. The information provided would not be available to the public.
This consultation wants to gather views in particular on the following:
- Transparency by whom? Transparency could be required from different kinds of companies, varying e.g. in size, location and extent of cross-border business. Light has been shed recently on cases involving non-EU multinational enterprises operating through branches or subsidiaries in the EU. A key question is whether these enterprises should, if feasible, be covered by any EU attempt to extend corporate tax transparency. In view of this, the consultation aims inter alia to examine the risks implied by a distorted level playing field between EU and non-EU enterprises.
- Transparency towards whom? Enhanced transparency could be vis-à-vis tax authorities or could include the wider public.
- Transparency of what type of information? The type of information to be disclosed might concern tax rulings, CBCR, statements or other types of information given by enterprises - there is a range of possibilities in terms of the degree of detail and scope of information that could be sought.
This consultation document sets out a number of tentative options. One of the key questions to be considered in relation to these options is whether (i) to follow up or implement the new OECD recommendation in the context of action 13 either at national or EU level which would mean to improve information exchange between tax authorities and (ii) whether to disclose certain tax information to the public, for example by extending requirements on country-by-country reporting currently in place for financial institutions to all other sectors. Respondents are encouraged to propose other relevant options if they wish. This public consultation also seeks views on the potential impact of enhanced tax transparency.
Aggressive tax planning (see also: Tax planning)
In the Commission Recommendation on aggressive tax planning (C(2012) 8806 final), aggressive tax planning is defined as “taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. Aggressive tax planning can take a multitude of forms. Its consequences include double deductions (e.g. the same loss is deducted both in the state of source and residence) and double non-taxation (e.g. income which is not taxed in the source state is exempt in the state of residence)”.
Base Erosion and Profit Shifting (BEPS Project):
Tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. The OECD has developed specific actions to give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time giving enterprises greater certainty by reducing disputes over the application of international tax rules, and standardising requirements.
According to the OECD glossary of tax terms, tax avoidance is defined as the arrangement of a taxpayer’s affairs in a way that is intended to reduce his or her tax liability and that although the arrangement may be strictly legal is usually in contradiction with the intent of the law it purports to follow.
According to the OECD glossary of tax terms, tax evasion is defined as illegal arrangements where the liability to tax is hidden or ignored. This implies that the taxpayer pays less tax than he or she is legally obligated to pay by hiding income or information from the tax authorities.
Tax planning (see also: Aggressive tax planning):
According to the OECD glossary of tax terms, tax planning is an arrangement of a person’s business and/or private affairs in order to minimize tax liability.
It entails any communication or any other instrument or action with similar effects, by or on behalf of the Member State regarding the interpretation or application of tax laws: Under this definition, all sorts of rulings are covered irrespective of its qualification within a Member State. The definition is therefore not limited to those communications in which there is exercise of discretion by a tax authority.
1 Art 89 of the Directive 2013/36/EU of the European Parliament and of the Council 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC ↩︎
2 Chapter 10 of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC ↩︎
3 Article 6 of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC↩︎