Communication COM (2012) 351 of 27 June 2012
In our newsletter of July last year, we informed you that on 27 June 2012 the European Commission issued Communication COM (2012) 351 on concrete ways to reinforce the fight against tax fraud and tax evasion including in relation to third countries. 

Moreover, we informed you that it was the intention of the Commission to come forward before the end of the year with an action plan based on a proportionate impact assessment, which would identify specific measures, together with the initiative on tax havens and aggressive tax planning, setting out concrete steps to enhance administrative cooperation, supporting the development of the existing good governance policy, the wider issues of interaction with tax havens and of tackling aggressive tax planning and other aspects, including tax-related crimes.

An Action Plan to strengthen the fight against tax fraud and tax evasion of 6 December 2012
On 6 December 2012, the European Commission published “An Action Plan to strengthen the fight against tax fraud and tax evasion”. This Action Plan contains practical actions that are recommended for adoption by Member States in the two key areas of tax fraud and tax evasion. 

Up to this point, the main measures taken by the European Union have concerned eliminating the risk of double taxation, whereby individuals or companies would be subject to the national taxation regimes of two Member States.

Amazon and Starbucks
However, as recent media controversy involving the corporate taxation of multinational companies such as Amazon and Starbucks has demonstrated, the non- taxation of companies has now become a hot issue. Such companies benefit from low corporate tax rates in their country of establishment, and they are not taxed on the substantial profits generated in Member States which impose higher rates.

Two formal Recommendations
The Action Plan includes two formal Recommendations, one on ‘measures intended to encourage third countries to apply minimum standards of good governance in tax matters’ and the other on ‘aggressive tax planning’. 

These non-binding Recommendations form part of a broader action plan to strengthen the fight against tax fraud and tax evasion and are intended to contribute to the work being carried on tackling these issues at international level.

First Recommendation - measures to encourage third countries
The first Recommendation regarding measures to encourage third countries to apply minimum standards of good governance in tax matters foresees a strong EU stance against tax havens. In its bid to encourage third countries (such as Hong Kong with respect to trading companies) to subscribe to the EU principles of transparency, the exchange of information and the abolition of harmful tax measures, the Commission spells out two minimum standards.

The first criterion establishes that a third country would be deemed to comply with these minimum standards where it has adopted the legal, regulatory and administrative measures intended to comply with the standards of transparency and exchange of information set out in the Annex to the Recommendation (“Annex on standards of transparency and exchange of information”).

The second main criterion requires that the third country does not operate harmful tax measures in the area of business taxation. Broadly speaking, a measure is considered harmful if it provides for a significantly lower effective level of taxation, including zero taxation, than those levels which generally apply in the third country. Such a level of taxation may operate by virtue of the nominal tax rate, the tax base or any other relevant factor.

Blacklists at national level/Renegotiate, suspend or terminate double tax treaties
Third countries failing to comply with the minimum standards should be included in a blacklist published by individual Member States. Similarly, where a Member State has concluded a double taxation convention with a third country not in compliance with the above measures, it should seek to renegotiate, suspend or terminate the convention.

Although the Recommendation does not specifically employ the term “tax haven”, its text can be seen as a direct response to the June Communication, which recommended action be taken regarding third countries regarded as tax havens. Tax havens have been defined by the OECD as jurisdictions characterised by a lack of effective exchange of information, a lack of transparency and no requirement for substantial economic activities, often granting preferential tax benefits to non-residents. 

The EU tends to mirror OECD action in this area, and the OECD has developed a black list of tax havens. However, in terms of the EU Recommendation, the blacklists which are to be adopted will be adopted at national level and not at European level. It will therefore be the decision of each Member State as to whether or not a specific jurisdiction will feature on its blacklist.

Second Recommendation – against aggressive tax planning
The second Recommendation, on aggressive tax planning, addresses those practices which reduce tax liability through strictly legal arrangements, but which seek to evade the intention of the law.
The second Recommendation therefore addresses the recently raised issue of the double non-taxation of companies, aiming to prevent the artificial shift of profits from one Member State to another in order to benefit from low corporate tax rates. 

Artificial arrangements
The Recommendation clarifies that an arrangement may be regarded as artificial where it has been put into place for the essential purpose of avoiding taxation, it “lacks commercial substance” and avoids taxation where “it defeats the object, spirit and purpose of the tax provisions that would otherwise apply”.

National authorities are encouraged to establish whether the taxation of companies is assessed according to any artificial arrangement with reference to criteria set out in the Recommendation. This may be assessed by comparing the amount of tax paid by a company, having regard to the arrangement, with the amount that the same company would owe in the absence of the arrangement. 

Introduction of subject-to-tax requirement
Member States are urged to introduce a subject-to-tax requirement both in their unilateral double tax relief rules and in their bilateral tax treaties, whereby income is only to be allocated to a certain State when this income is actually taxed there. The other State would thus retain the right to tax in situations where there would otherwise be double non taxation.

Introduction of a General Anti-Abuse Rule (GAAR)
Moreover, the Commission recommends that Member States incorporate a General Anti-Abuse Rule (GAAR) in their domestic legislation in order to counteract ‘aggressive tax planning practices’ which fall outside the scope of specific anti-abuse measures.

Review of anti-abuse provisions in Directives 
Finally, the Commission mentioned that it will review the anti-abuse provisions of the Interest and Royalties, Mergers and Parent-Subsidiary Directives.

The way forward
The Commission will publish a report on the application of its Recommendations within three years.

However, the Commission has noted its intention to undertake a revision of the Parent Subsidiary Directive and review the anti-abuse provisions of the Interest and Royalties, Mergers and Parent Subsidiary Directives in 2013.

Please note that the Action Plan only contains Recommendations from the Commission to the Member States. Member States will have to implement the proposed measures before they can have any direct effect for European taxpayers.

However, given the current political and economical climate, it seems likely that many Member states will follow some of these Recommendations in the very near future.

We therefore expect the proposals made by the Commission to have a significant impact on the position of European (corporate) taxpayers.

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