Explanatory Memorandum to COM(2016)25 - Amendment of Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)25 - Amendment of Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation. |
|---|---|
| source | COM(2016)25  |
| date | 28-01-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The European Council Conclusions of 18 December 2014 cite 'an urgent need to advance efforts in the fight against tax avoidance and aggressive tax planning, both at the global and EU levels'. Since December 2014, the Commission has quickly launched the first steps towards an EU approach. In the meanwhile the OECD has finalized its work in defining the global rules and standards to these ends.
This Directive amending Council Directive 2011/16/EU as part of the Commission's Anti- Tax Avoidance Package, addresses the political priority of fighting against tax avoidance and aggressive tax planning. It also responds to the demands from the European Parliament. It is also in line with the initiatives announced in the Commission's Action Plan on a Fairer Corporate Tax System (COM (2015) 302) to tackle tax avoidance.
Businesses have traditionally viewed tax planning as legitimate on the grounds that they use legal arrangements to reduce their tax liabilities. However, tax planning has become more elaborate in recent years, developing across jurisdictions and shifting taxable profits towards states with beneficial tax regimes. This 'aggressive' form of tax planning can take a multitude of forms, such as taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing or avoiding tax liabilities. Its consequences include double deductions (e.g. the same expense is deducted in both the state of source and the state of residence) and double non-taxation (e.g. income is not taxed in either its state of source or in the recipient’s state of residence).
Unlike Small and medium companies or individual taxpayers, Multinational Enterprise (MNE) Groups are in a position that renders them capable of exploiting loopholes in domestic and international tax laws to shift profits from one country to the next in order to reduce their tax bill.
The global economic and financial crisis of the last years had made the public aware of the need to ensure that all contributors pay their fair share of tax payments. This should result in higher tax revenues that would contribute to the reduction of public sector deficits for the benefit of all.
In this context, tax authorities need comprehensive and relevant information on structure, transfer pricing policy and internal transactions with related parties of MNE Groups. With the aim to combat tax avoidance and aggressive tax planning, this Directive imposes transparency requirements on MNE Groups. It requires MNE Groups to provide annually and for each tax jurisdiction in which they do business certain information including the amount of revenue, the profit before income tax, the income tax paid and accrued, the number of employees, the stated capital, the retained earnings and the tangible assets. This information will enable the tax authorities to react to harmful tax practices through changes in the legislation or adequate risk assessments and tax audits. Increased transparency should also incentivize MNE Groups to pay their fair share of tax in the country where profits are made.
The new transparency requirements should ensure that the administrative burden imposed on businesses is minimized. EU MNE Groups should in principle not be obliged to submit the information to of all the EU Member States where they operates, but only to the tax authorities of their of residence. The Directive requires Member States, once they have received the country-by-country report, to share the information with the Member States in which, on the basis of the information in the report, companies of the MNE Group are either resident for tax purposes, or are subject to tax with respect to the business carried out through a permanent establishment.
Contents
- To ensure an appropriate balancing of reporting burden and benefit to tax administrations, only MNE Groups with total consolidated group revenue equal or higher than
- Tax Transparency Package (COM (2015) 136)
- Commission's Action Plan on a Fairer Corporate Tax System (COM (2015) 302)
- Consultations in the context of the Action Plan on tax fraud and tax evasion of the Recommendations (COM (2012) 722) and other fora
- Member States
To ensure an appropriate balancing of reporting burden and benefit to tax administrations, only MNE Groups with total consolidated group revenue equal or higher than
Now more than ever, cooperation between Member States’ tax authorities is crucial in order to tackle tax avoidance and aggressive tax planning. EU legislation provides for administrative cooperation between Member States' tax authorities, and sets out a series of instruments to help them to cooperate in collecting their due revenues, including exchange of information. However, the EU needs to continue reinforcing cooperation to ensure the proper functioning of the Internal Market in respect with fundamental rights as enshrined in the EU Charter of Fundamental Rights.
Council Directive 77/799/EEC 1 was the first response to Member States’ need for enhanced mutual assistance in the field of taxation. It was replaced by Council Directive 2011/16/EU 2 (DAC) that was intended to increase the effectiveness of the previous Directive. In recent years, the Directive has been amended by Directive 2014/107/EU (DAC2) and by Directive EU 2015/2376 (DAC3) providing tax authorities with further instruments to tackle tax fraud and evasion and aggressive tax planning, in the field of financial accounts, tax rulings and advance pricing arrangements.
The purpose of the present proposal is to ensure that Directive 2011/16/EU continues providing for comprehensive and effective administrative co-operation between tax administrations by providing for the mandatory automatic exchange of information regarding country-by-country reports.
This Directive is in line with the international developments. On 5 October 2015 the OECD presented its final reports on the Action Plan on Base Erosion and Profit Shifting (BEPS) which is a major initiative for modifying existing international tax rules. On 15-16 November 2015 the OECD package was also endorsed by the G20 leaders. The work on Action 13 of the OECD’s Action Plan on BEPS resulted in a set of standards for providing information on MNE Groups' transfer pricing positions, including the masterfile, the local file and the country-by-country report. The Directive contributes to the implementation in the Union of the country-by-country report.
Most Member States, in their capacity as OECD members, have committed to implementing the outputs contained in the Final Reports on the 15 Actions against BEPS. It is therefore essential for the good functioning of the Internal Market that Member States transpose political commitments under BEPS into their national systems in a coherent and sufficiently coordinated fashion. This should be the way ahead in order to maximise the positive effects for the Internal Market as a whole. If not, unilateral implementation of BEPS would risk national policy clashes and new obstacles in the Internal Market, which would continue to be fragmented in 28 constituent parts and suffer from mismatches and other distortions.
This initiative aims at achieving a certain degree of uniformity in implementing the BEPS Action 13 across the EU. The Directive also intends to foster fair competition between the different business operators and ultimately to protect the tax base of EU Member States.
The proposal has been specifically designed to allow the automatic information exchange on country-by-country reporting to build on the existing rules in Directive 2011/16/EU relating to the practical arrangements for exchanging information including the use of standard forms.
The Commission’s commitment to making such a proposal for the AEOI on country-by-country reporting is reflected in the Commission's 2016 Work Programme. 3
• Consistency with existing policy provisions in the policy area
The Package contained two main elements: (i) a proposal to introduce the AEOI between Member States on their tax rulings and (ii) an announcement that the Commission was assessing whether additional disclosure obligations of certain corporate tax information should be introduced.
This proposal does not preclude that the Commission decides in the future to propose imposing public disclosure obligations on companies.
This proposal is in line with the initiatives announced in the Action Plan to tackle tax avoidance.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The proposal modifies Directive 2011/16/EU as amended by Directive 2014/107/EU 4 and by Council Directive EU 2015/2376 5 by introducing a specific requirement for the AEOI on country-by-country report.
The modifications are contained in Article 1 of the proposal. In particular:
Article 3 (definitions) is amended.
Article 8aa requires Member States to oblige MNE Groups to submit the relevant information (the country by country report) and to automatically exchange that information received with the other Member States concerned.
Article 20 (6) refers to the standard form that will be used for the exchange and Article 21 (7) provides for the practical arrangements.
A new Article 25a on penalties is added.
A new Annex, including the definitions applicable to the proposal, the obligations for MNE Groups and the templates for the exchange of information, is added.
• Subsidiarity (for non-exclusive competence)
The subject-matter of these modifications falls within the same legal basis as Directive 2011/16/EU, i.e. Article 115 of the Treaty on the Functioning of the European Union (TFEU), which aims to ensure the proper functioning of the Internal Market. Article 115 TFEU provides for the approximation of such laws, regulations or administrative provisions of the Member States which directly affect the establishment or functioning of the internal market and make the approximation of laws necessary.
To ensure the proper functioning of the internal market, the EU needs to ensure fair competition and a level playing field between SME, non-EU and EU MNE Groups. MNE Groups have the possibility to engage in aggressive tax planning practices due to their cross border activities. For this reason, all MNEs, both EU Groups and non-EU Groups, should be subject to the reporting obligation. Without this element this initiative would be less effective in achieving the ultimate objective of ensuring the proper functioning of the Internal Market.
This proposal complies with the principles of Subsidiarity as set out in Article 5 paragraph 3 of the Treaty on the European Union.
Access by Member States to country-by-country reporting can therefore only be achieved effectively through action at Union level. The objective of ensuring that all Member States receive country-by-country reporting cannot be sufficiently achieved through non-coordinated action taken by each Member State individually. Moreover, the exchange of information that potentially affects the tax bases of more than one Member State requires a common and compulsory approach. It should be taken into account that as MNE Groups normally operate in different Member States, the cross-border element is inherent in the proposed action.
• Proportionality
The specific problem identified as the object of a policy response is the lack of transparency on corporate structures with cross-border relevance and important level of activity, which has negative effects, notably on the proper functioning of the Internal Market. The policy response is limited to addressing MNE Groups operating in several States, either within the European Union or with non-EU jurisdictions. Thus, the proposal represents the most proportionate answer to the identified problem. It is also based on the automatic exchange of basic information allowing each Member State where the company operates to receive information. The proposed amendments consequently do not go beyond what is necessary to address the issues at stake and, in that way, to achieve the Treaty's objectives of a proper and effective functioning of the Internal Market.
This proposal complies with the principles of proportionality as set out in Article 5, paragraph 4 of the Treaty on the European Union.
• Choice of the instrument
The present proposal will expand further the scope of Automatic Exchange of Information (AEOI) in the EU. An EU initiative is needed both from an internal market perspective and in terms of efficiency and effectiveness:
– An EU initiative ensures a coherent, consistent and comprehensive EU-wide approach to AEOI in the internal market. It would mean a single reporting approach across Member States which would lead to costs savings both for tax administrations and companies.
– An EU legal instrument would also ensure certainty for tax administrations and companies within the EU.
– An EU legal instrument would contribute to the development of the international standard of AEOI on country-by-country reports as discussed and agreed at the OECD.
– An EU legal instrument based on the DAC would involve the use of the IT arrangements already in place or under development to facilitate information reporting under the DAC. Under this Directive, EU Member States share information in specific formats using a specific communication channel. These formats could easily be extended so as to be usable also for the additional items now proposed for inclusion. As Member States have invested considerable time and money in developing these formats, there would be economies of scale if Member States also exchanged information on the new items using these formats.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
Consultations in the context of the Action Plan on tax fraud and tax evasion of the Recommendations (COM (2012) 722) and other fora
In its resolution on 21 May 2013, 6 the European Parliament welcomed the Commission's Action Plan and its Recommendations, urged Member States to follow up their commitments and embrace the Action Plan, and emphasised that the EU should take a leading role in global discussions on the fight against tax fraud, tax avoidance and tax havens, in particular in relation to promoting the exchange of information.
The European Economic and Social Committee adopted an opinion on 17 April 2013. 7 The Committee endorsed the Commission's Action Plan and supported its efforts to find practical solutions aimed at reducing tax fraud and tax evasion.
Over recent years, Member States have worked in the Code of Conduct Group to improve the exchange of information regarding cross-border rulings and in the area of transfer pricing. Conclusions of this Code of Conduct Group have been communicated to the Council on a regular basis in the form of reports. 8
Most Member States are members of the OECD and have participated in lengthy and detailed discussions on the anti-BEPS Actions, including on the elaboration of technicalities, between 2013 and 2015. The OECD organised extensive public consultations with stakeholders on each of the anti-BEPS Actions. Furthermore, the Commission has debated internally and with OECD experts several BEPS topics, in particular where the Commission has had doubts about the compatibility of certain ideas and/or proposed solutions with EU law.
In the second half of 2014, the Italian Presidency of the Council launched the idea of an EU - BEPS Roadmap and the Presidency encouraged consistency with parallel OECD initiatives, while respecting EU law. This approach was endorsed by the High Level Working Party on Taxation and pursued by the subsequent Presidencies. Discussions on the EU - BEPS Roadmap continued into 2015. The aim was to contribute to the OECD debate and pave the way towards a smooth implementation of the future OECD Recommendations, whilst taking account of EU specificities.
The Commission's public consultation on tax transparency provided stakeholders with the possibility to comment on different aspects of corporate transparency in particular on the basis of country-by-country reporting. The possible options presented were mainly focused on public reporting by enterprises but included the exchange of information between tax administrations as required by BEPS Action 13. The Commission received in total 422 responses, of which most provided useful feedback regarding either public or non-public tax transparency measures. As regards BEPS Action 13, although business were not keen on tax authorities exchanging such information the majority of other respondents were in favour.
This Directive is in line with international developments at the level of the OECD and its work on BEPS where most EU Member States participate. The European Commission has also been heavily involved and other jurisdictions and stakeholders were consulted widely.
• Impact assessment
After its report on Addressing Base Erosion and Profit Shifting was published in early 2013 and the so-called Action Plan on BEPS was endorsed by the G20 Leaders in September 2013, the OECD embarked on a 2-year period of intensive work which led to the delivery of 13 reports, in November 2015. These reports lay down new or reinforced international standards as well as concrete measures to help countries tackle BEPS. In this framework, OECD/G20 members are committed to this comprehensive package and to its consistent implementation.
Many Member States, in their capacity as OECD Members, have, in some areas very urgently, embarked on the transposition of the output of the BEPS project into their national laws. Considering this, it is critical to make fast progress on agreeing rules for coordinating the implementation of the conclusions on BEPS in the EU. In the light of a great risk of fragmentation of the internal market, which would possibly result from uncoordinated unilateral actions by Member States, the Commission is putting forward, in this proposal, solutions for achieving coherence a certain degree of uniformity in implementing the BEPS Action 13 across the EU.
The Commission has made every effort to respond simultaneously to both the urgency to act, and the imperative need to avoid that the functioning of the internal market is compromised either by unilateral measures adopted by Member States (whether OECD members or not) acting on their own, or lack of action by other Member States altogether. The possibility of proposing soft law was also considered as an option but was discarded as inappropriate for securing a coordinated approach.
To provide up-to-date analysis and evidence, a separate Staff Working Document (SWD) accompanying the proposal provides an extensive overview of existing academic work and economic evidence in the field of base erosion and profit shifting. This is based on recent studies, amongst others, by the OECD, the European Commission and European Parliament. The SWD highlights the drivers and most common identified mechanisms which, according to the OECD reports, are linked to aggressive tax planning. It summarises the conclusions of an in-depth review of key mechanisms for aggressive tax planning on a basis of analysis per Member State, as carried out on behalf of the Commission in 2015. The SWD outlines how implementation of BEPS Action 13 through this proposal complements other initiatives to implement the OECD BEPS reports in the EU and contribute towards a common minimum level of protection against tax avoidance.
Against this background, no impact assessment was carried out for this proposal on the following grounds: there is a strong link to the OECD BEPS work in particular with BEPS Action 13; the SWD supplies a significant body of evidence and analysis; stakeholders were extensively involved in consultations on the technical elements of the proposed rules at a previous stage; and, in particular, there is an urgent current demand for coordinated action in the EU on this matter of international political priority.
4. BUDGETARY IMPLICATIONS
The impact of the proposal on the EU Budget is presented in the financial statement accompanying the proposal, and will be met within available resources. The costs of the additional IT tools to facilitate the communication of information between Member States would be funded out of the FISCALIS 2020 programme provided for in Regulation (EU) 1286/2013 which provides financial support for activities to improve administrative cooperation between tax authorities in the EU.