Background
In April 2009, the European Commission issued a Communication on "Good Governance in Tax Matters" with the intention to launch a debate about concrete actions that could be taken to better promote the principles of good governance in the tax area (transparency, exchange of information and fair tax competition). The aim of the Commission to improve synergies between tax and development policies becomes concrete with the Council Directive 2011/16/EU of 15 February 2011.
European Parliament Report
The Report of the Plenary sitting of the European Parliament on 4 February 2011 on tax and development, regarding cooperation with developing countries on promoting good governance on tax matters, welcomes the Commission's initiative to strengthen the capacities of good tax governance for development and highlights the need for a regulatory framework designed to support international tax cooperation, administrative transparency and economic growth.
Moreover, taking into account the difficulties encountered by developing countries in raising tax revenues, the report points out that tax erosion represents a considerable financial loss for developing countries and that the measures to combat tax havens and tax evasion are one of the EU priorities with a view to providing developing countries with effective help in gaining access to their tax revenues. Furthermore, it recalls the need to take appropriate measures in that respect at European and international level in accordance with the commitments given by the G20.
Context
The Directive lays down the rules and procedures under which Member States must cooperate with each other with a view to exchanging information relevant to the administration and enforcement of national laws concerning a range of specified taxes. It also lays down provisions for the exchange of information by electronic means, as well as rules and procedures under which the Member States and the European Commission are to cooperate on matters concerning coordination and evaluation. This Directive applies to all taxes of any kind levied by, or on behalf of a Member State's territorial or administrative subdivisions including local authorities. It does not apply to VAT and customs duties, to excise duties covered by other EU legislation on administrative cooperation between Member States or to compulsory social security contributions. This Directive entered into force on 11 March 2011.
Moreover, the new Directive repeals the old one; each EU Member State has to inform the Commission of its "competent authority" before 10 April 2011. The Commission will inform all the Member States accordingly and will proceed to the publication of the list of "competent authorities" in the OJEU.
Exchange methods of information
The methods of exchange of information will be realised according to the context of the Directive as follows: exchange of information on request; mandatory automatic exchange of information; spontaneous exchange of information and presence in administrative offices and participation in administrative enquiries.
Exchange of information with third countries
In case the competent authority of the Member State receives "foreseeably relevant information" from a third country concerning taxes, it may, as this is allowed pursuant to an agreement with that third country, provide such information to the competent authorities of Member States for which that information might be useful.
Articles 5-7, section I, chapter II, organise the procedure for the exchange of information on request. At the request of any Member State, the requested competent authority shall communicate any information which it has in its possession or which it obtains as a result of administrative enquiries that it will be obliged to carry out.
The conduct of the requested administrative enquiry is organised under the same procedure, as it would when acting on its own initiative or at the request of another authority in its own Member State. In case the requested authority takes the view that no administrative enquiry is necessary, it shall immediately inform the requesting authority reasoning for its decision. If the communication of original documents is needed, the requested authority shall proceed to their communication provided that it is not contrary to the provisions in force in the Member State. The time for the communication is limited to six months from the date of receipt of the request. The time limit can be limited to two months only in case the requested authority is already in possession of the information asked.
The provisions of the Directive are in line with the new article 26 MTC of the OECD (2005) which applies the "foreseeably relevant" standard and states no domestic interest limitation of article 26 (4), whereas, it regulates at the same time the bank secrecy in article 26(5).
Mandatory automatic exchange of information
Article 8, section II, specifies the scope and conditions of mandatory automatic exchange of information. The competent authority of each Member State shall communicate to the competent authority of any other Member State information regarding taxable periods from 1 January 2011 that is available concerning residents in that other Member State, on specific categories of income stipulated in the article.
For the period prior to 1 January 2014, Member States shall inform the Commission of the categories in respect of which the information is available and of any subsequent changes. Moreover, before 1 July 2016, Member States shall provide the Commission on an annual basis with statistics on the volume of automatic exchange of information on the administrative and other relevant costs and benefits relating to exchanges that have taken place and any potential changes for both tax administrations and third parties.
Where Member States agree on the automatic exchange of information for additional categories of income and capital in bilateral or multilateral agreements that they conclude with other Member States, they shall communicate those agreements to the Commission which shall make those arrangements available to the other Member States.
Spontaneous exchange of information
Articles 9-10 of section III specify the conditions of spontaneous exchange of information which in certain circumstances apply:
- If the competent authority of one Member State has grounds for supposing that there may be a loss of tax in any other Member State;
- If a person liable to tax obtains a reduction in tax in one Member State which would give rise to an increase in tax or to liability to tax in another Member State;
- If business dealings between a person liable to tax in one Member State and a person liable to tax in another Member State are conducted through one or more countries in such a way that a saving of tax may result in one or the other Member State or both;
- If the competent authority of a Member State has grounds for supposing that a saving of tax may result from artificial transfers of profits within a group of enterprises;
- If information forwarded to one Member State by the competent authority of the other Member State has enabled information to be obtained which may be relevant in assessing liability to tax in the latter Member State.
Presence in administration offices and enquiries
Apart from the exposed categories, there are other forms of administrative cooperation described in chapter III of the Directive.
These forms of cooperation can be realised through mutual presence in administrative offices and participation in administrative enquiries or through simultaneous controls, with administrative notification or by sharing best practices and experiences.
Transposition
Article 29 stipulates that Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive with effect from 1 January 2013. However, they shall also bring into force the laws, regulations and administrative provisions necessary to comply with article 8 concerning the mandatory automatic exchange of information with effect from 1 January 2015.
CCCTB and Council Directive 2011/16/EU
Examining the Council Directive proposal on a Common Consolidated Corporate Tax Base (CCCTB), one quickly notes the lack of effective EU rules to tackle cross-border tax avoidance transactions.
Essentially, a CCCTB provides a common set of rules for calculating taxable profits within the EU as a whole and then apportions taxable profits to Member States based on a specific method of apportionment. The Member State would then tax the apportioned profits following their own corporate tax rates.
Separately, the proposal includes measures to avoid the artificial transfer of profits from within the EU to low-tax jurisdictions outside the EU. In particular, there is a general anti-abuse rule which states that "artificial transactions carried out for the sole purchase of avoiding taxation shall be ignored for the purpose of calculating the tax base".
Furthermore, disallowance of deductions for interest paid to non-cooperative secrecy jurisdictions can be seen, in addition to the existence of the benchmark for determining cooperation based on the new Directive 2011/16/EU. On the other hand, the Directive only requires exchange of information when requested for a specific tax payer, which is obviously irrelevant, if the requesting state does not know which taxpayers have offshore dealings.
It is clear that the CCCTB as proposed will significantly reduce the ability of multinational groups to avoid tax through artificial intra-group transactions either within the EU, as there are transactions which would be ignored and profits which would be attributed to where real commercial substance is, or from outside the EU, as the proposed anti-abuse rules would apply. This would function as a counter-weight to the current EU legislation, under which the principle of freedom of establishment in the EU is one of the key facilitators of cross-border tax avoidance by multinationals. On the other hand, the implementation of a CCCTB will involve the loss of national sovereignty over tax policy.
Global Forum on transparency and exchange of information
These recent developments in international taxation are in line with the Global Forum on transparency and exchange of information for tax purposes. The Global Forum has been a multilateral framework the works of which, in the area of transparency and of exchange of information, have been carried out by both OECD and non OECD economies.
It has to be noted that on 28 January 2011 the Global Forum issued 10 reviews (Australia, Barbados, Denmark, Guernsey, Ireland, Mauritius, Norway, San Marino, the Seychelles and Trinidad and Tobago) in order to evaluate the jurisdictions' commitment to tax transparency and to examine whether information is made available and accessible to foreign tax authorities. These reports follow eight others released in September. This programme of peer reviews extends to 2014. The exercise for Cyprus will be completed in two phases. The first phase will be accomplished in the second half of 2011 and the second phase will be executed during the second half of 2012.
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