Direct taxation: Commission proposes strengthening co-operation to combat fraud

Tuesday, September 9 2003, 1:55

The European Commission has presented a proposal that aims to speed up the flow of information between the tax authorities of Member States by permitting them to co-ordinate their investigative action against cross-border tax fraud and allowing them to carry out more procedures on behalf of each other. The proposal which relates to direct taxation (income tax, company tax and capital gains tax) would update and rectify weaknesses in the existing Directive on Mutual Assistance, 77/799/EEC. Modern technology and increased cross-border activity have made it more important than ever for information exchange and co-operation between tax administrations to be improved. A Council report on tax fraud of June 2000 noted that the existing EU directives and regulations were inadequate for the combat of fraud, which in the direct tax area involves, in particular, problems of under-invoicing and over-invoicing (transfer pricing). ;This proposal would complement other recently adopted EU legislation in the field of information exchange the agreement on savings income (see IP/03/787) and the Regulation on strengthening administrative co-operation in the VAT area (see MEMO/03/36).

"The progressive removal of cross-border tax obstacles for individuals and businesses operating within the Internal Market must not provide increased opportunities for tax dodgers and cheats" commented Commissioner for Taxation, Frits Bolkestein. "Every taxpayer must pay what he or she owes and strengthened co-operation between Member States is the best way to ensure this".

Faster and more effective co-operation

The proposal aims to speed up the operation of mutual assistance between Member States and make it more effective. It contains four elements:

    it introduces the possibility for Member States to conduct simultaneous control checks of the locally based activities of taxpayers operating in several countries of the EU and to share the information obtained with each others

    it would ensure that, when a State has to initiate enquiries in order to obtain information needed by another country's tax agency, it would treat the enquiry as it were acting on its own behalf (because the procedures are generally less complicated in domestic cases and the information should thus be provided more quickly)

    it would ensure that a Member State that has been requested to supply information would, if requested, carry out certain administrative procedures on behalf of another Member State such as serving the taxpayer with an amended assessment

the proposal would clarify certain ambiguities in the existing Directive 77/799/EEC in order to eliminate some current differences of interpretation of the Directive by Member States.

The proposal is based on Article 95 of the Treaty (co-decision by Council and Parliament).

Council report on tax fraud

A Council Ad Hoc Group that reported to the Council of Ministers in June 2000 (Council documents 8053/00 and 8668/00) stressed the need to improve and expand administrative co-operation in the direct and indirect tax field to combat fraud. The report contained several recommendations for legislative and administrative action by Member States and the Commission. Inter alia, it recommended that the Commission should make proposals for amendments to legislative provisions that currently impede administrative co-operation between Member States. The present proposal is the Commission's response as far as direct taxation is concerned and is based on detailed technical discussions with Member States' experts during 2001 and 2002.

While, by its very nature, it is difficult to put an exact figure on the size of the fraud problem, the Council Ad Hoc Group noted that some Member States had identified the following types of direct taxation fraud:

  • false invoicing (of goods and services) with the aim of increasing costs for tax purposes or replacing undocumented costs

  • non-declaration of purchases made, either on domestic markets or in the Community market, with the aim of not declaring the corresponding sales and in that way evading taxation

  • non-declaration of purchases with deliberate displacement of imports to other

  • Member States and resulting black-market sales

  • failure to show in the accounts and declare VAT refunds granted under the 8th Directive

  • under-invoicing or over-invoicing ;of goods and services

  • non-declaration of income earned abroad from work, savings or services

  • failure to submit tax returns and treatment as deductible of costs unrelated to a business, particularly stakeholders' private expenses

  • inclusion in the accounts and declaration of costs for tax purposes (inoperative services) in connection with payments to non-residents located in tax shelters

  • use by taxpayers of a fictitious tax domicile, with the purpose to evade fulfilling their tax obligations in their country of domicile for tax purposes.

    Other recent EU legislation in the field of information exchange

    The Council agreed on 3 June 2003 as part of a package of three measures to tackle harmful tax competition on a Directive to ensure effective taxation of savings income (see IP/03/787). Under the Directive, each Member State will ultimately be expected to provide information to other Member States on interest paid from that Member State to individual savers resident in those other Member States. But for a transitional period, Belgium, Luxembourg and Austria will be allowed to apply a withholding tax instead of providing information, at a rate of 15% for the first three years (2005-2007), 20% for the subsequent three years (2008-2010) and 35% from 2011 onwards.

    The Council reached political agreement on 18 February 2003 on a Regulation proposed by the Commission in 2001 (see IP/01/857). This will both strengthen co-operation between Member States' tax authorities to combat fraud relating to value added tax (VAT) and extend the scope of the Mutual Assistance Directive (77/799/EEC) to allow Member States to exchange information concerning taxes levied on insurance premiums. Before the Council can formally adopt the Directive, the European Parliament must provide its opinion which it is likely to do in Autumn 2003.

    The text of the proposal for a Council and Parliament Directive amending Directive 77/799/EEC concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation is available on the Europa internet site:

    http://europa.eu.int/comm/taxation_customs/whatsnew.htm

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