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European Commission Proposes Actions To Improve Governance In Tax Matters

by Ulrika Lomas, Tax-News.com, Brussels

04 May 2009


The European Commission has adopted a communication identifying actions that EU member states should take to promote "good governance" in the area of taxation, including more transparency, exchange of information and "fair" tax competition.

László Kovács, Commissioner for Taxation and Customs, said: “EU member states cannot afford to act alone when designing policies to prevent their tax revenues disappearing to tax havens or non cooperative jurisdictions. If they do not cooperate with each other, including in international fora, their actions to protect their revenues will not produce effective results”

The European Commission has called on member states to adopt “as soon as possible” its proposals on administrative cooperation in the assessment of taxes, which are aimed at preventing member states from “invoking bank secrecy laws as a justification for not assisting other EU tax authorities.”

The Commission’s communication also noted the need for the scope of the Savings Tax Directive to be extended to “intermediate tax-exempted structures” such as trusts and foundations, and to income equivalent to interest obtained through investments in some innovative financial products.

The Commission also called on member states to continue the campaign to eliminate “harmful” business tax measures under the Code of Conduct for Business Taxation.

The Code of Conduct for business taxation was set out in the conclusions of the Council of Economics and Finance Ministers of December 1, 1997. The Code was specifically designed to target measures which “unduly affect the location of business activity in the Community” by giving non-residents more favourable tax treatment than that generally available to resident companies – in other words, offshore tax systems.

A number of offshore and low tax jurisdictions in Europe have been forced to undergo major reforms in recent years as a result of the EU Code of Conduct, as well as pressure from the Organization of Economic Cooperation and Development. These include the British Dependent Territories of Guernsey, Jersey and the Isle of Man, which have all reduced corporate tax to 0% for most non-financial companies regardless of residence. Ireland’s corporate tax reforms in the 1990s also came under EU scrutiny, but it has been able to retain its 12.5% corporate tax rate – which remains one of the most favourable rates in the EU – after sweeping away some of its ‘offshore’ tax regimes. However, the Commission’s latest communication is likely to worry Irish eurosceptics who have long suspected that the powers that be in Brussels are bent on introducing harmonized corporate tax rates.

The Commission communication goes on to identify ways in which policies can be coordinated so that EU partners “would commit to good governance principles.” This also extends to EU-level agreements with third countries and development cooperation incentives. The Commission also calls for “coordinated action” against jurisdictions that refuse to apply these good governance principles.

The communication goes on to propose “counter-measures towards non cooperative jurisdictions in the tax area,” more discussions with third countries in the framework of the Savings Tax Directive, the conclusion of more tax agreements containing information exchange provisions, and the reallocation of funds towards developing countries that are “implementing satisfactorily their commitments.” The natural converse to this last proposal is that development funds will be withdrawn from those countries that do not measure up to the EU’s tax standards.

The EU’s communication comes in response to the conclusions of the recent Group of 20 Summit where it was agreed that the major nations would “take action against non-cooperative jurisdictions.”

“With the financial crisis, the need for national governments to safeguard their tax revenues is more acute than ever,” the Commission argues.

A comprehensive report in our Intelligence Report series examining offshore confidentiality is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report1.asp

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