European Commission adopts Tax Package

1. Communication on Tax Good Governance in the EU and beyond

The Communication aims to further strengthen how the EU can promote transparency and fair taxation. This includes a reform of the Code of Conduct, review of the EU list of non-cooperative jurisdictions for tax purposes and improved coordinated defensive measures by Member States. The Communication also outlines the EU’s approach to assisting developing countries in the area of taxation, in line with the 2030 Sustainable Development agenda.

Of particular relevance the Communication notes the following: 

The Communication does not cover the issues related to digital taxation or minimum effective taxation in detail, however, it notes that “The ongoing international discussions on the reform of corporate taxation, steered by the OECD, could have a major impact on the accepted limits of tax competition in the future. In particular, if minimum effective taxation becomes a global standard, there will be a new floor on how low countries can go in using their tax rates to attract foreign businesses and investment. This will clearly have to be integrated into the EU’s actions on fair tax competition, within a reformed Code of Conduct.”

Where no OECD agreement is reached, the Communication notes: “if there is no consensus on minimum taxation at global level, this concept needs to be introduced in the Code as an EU standard, to modernize and clarify the concept of harmful tax competition and to ensure that all businesses pay their fair amount of tax when they generate profits in the Single Market.”

The Commission will present a dedicated action plan on business taxation scheduled for the end of the year, which will take stock of the discussions at the OECD on these issues.

The Communication also proposes “the scope of the Code should be widened, to cover all measures which pose a risk to fair tax competition” and includes reference to favourable regimes for high value residents: “… the Code does not cover special citizenship schemes or measures to attract expatriates or wealthy individuals, even though these are often a back door to unfairly attracting business and investment from other countries.”

The Communication recommends that requirements for strict economic substance and transparency for third countries with zero taxation should be formally integrated into the Code: “The Code should also be updated to ensure that all cases of very low taxation are examined – inside and outside the EU. The EU already requires third countries with zero or no taxation to implement strict economic substance and transparency standards, to avoid being put on the EU list. These requirements should be formally integrated into the Code, so that there is full coherence between the criteria applied within the EU and in relation to third countries.”

With regard to the review of the EU list of non-cooperative jurisdictions for tax purposes, the Commission will review the listing process to ensure that all risk areas have been covered. To facilitate this, the scoreboard used to select the most relevant jurisdictions to screen will also take into account the new methodology to identify high-risk third countries for anti-money laundering and terrorist financing purposes, to ensure that the two listing processes are mutually reinforcing.

The Communication sets out the intention to continue to monitor jurisdictions that have already been reviewed and cleared from the list of non-cooperative jurisdictions to ensure ongoing compliance: “… it is important to closely monitor the jurisdictions that have already been cleared under the EU listing process. This will ensure that the reforms are effectively implemented and there is no backtracking. The Commission will conduct this monitoring and report to the Member States. It will also coordinate with the OECD to ensure that the EU and international monitoring processes are as aligned as possible.”

This is of particular importance in respect of the upcoming tax filing deadlines in both Jersey and Guernsey, where information gathered for the first year of the application of the economic substance law in both Islands must be submitted to the Revenue Services for review. The ongoing monitoring by the EU to ensure continued compliance by jurisdictions which implemented these rules is expected to give rise to far more scrutiny of the information included in the tax filings for the current year, and going forward. It is therefore important to ensure that a thorough analysis has been undertaken of the position of companies under this new law, and that the support for this analysis is appropriately included in the tax filing.

3. Revision of the Directive on administrative cooperation (DAC7)

The EC has proposed to amend this Directive, to extend the EU tax transparency rules to digital platforms. Member States will automatically exchange information on income/revenue generated by sellers on digital platforms. This will not only allow national authorities to identify situations where tax should be paid, but will also reduce the administrative burden placed on platforms, who have to deal with several, different national reporting requirements.