Tax Treaties

‘Fair and Effective’ Corporate Tax for the EU

By Commissioner Moscovici, EU Commission (24/08/2017)

We are witnessing a generational shift in corporate taxation, in the EU and worldwide. Improvements are being agreed at a pace and scale that would have been unheard of a decade ago. Internationally, the corporate tax framework has changed dramatically. Impressive work has been done to raise the bar of tax good governance, re-shape the norms of fair taxation and push the boundaries of tax transparency. Over 85 countries have committed to the new Common Reporting Standard, to curb bank secrecy worldwide. A similar number of countries have signed up to the OECD's BEPS Inclusive Framework – to block opportunities for corporate tax avoidance and ensure fair tax competition. These new global norms do demand a change in business models: in the corporate sector, the financial sector and in many countries' approach to taxation. A key challenge is to ensure that these changes can be implemented smoothly, consistently and clearly, to minimise disruption and maximise the benefits for all countries and taxpayers involved.  The EU has been a standard-setter in this regard.

We have given high priority to coordinating the way in which Member States implement their international tax commitments, to avoid loopholes, prevent clashes between national approaches and ensure minimal disruption to businesses. Our work has been guided by the international agenda, but not limited to it. We have gone further where needed, to ensure a strong, fair and stable corporate tax framework for the Single Market.

Our goals are to secure fairer and more effective corporate taxation across the EU, and to work with our international partners for similar improvements worldwide. To achieve this, we have launched a highly ambitious reform agenda, which is advancing at top speed. In less than two years, the Commission has presented five major corporate tax packages – boosting tax transparency, reinstating the link between taxation and economic activity, and shutting down opportunities for aggressive tax planning. Even more significantly, Member States are adopting the new proposals, quickly and consensually. As a result, all of the OECD BEPS actions are now been covered at EU-level, through either hard or soft law. The Common Reporting Standard is also enshrined in EU legislation and we have signed ambitious new transparency agreements with five of our closest neighbours (Andorra, Liechtenstein, Monaco, San Marino and Switzerland). Most significantly, we have not limited our agenda to simply fixing what needs to be fixed today - we are also looking towards the future. With the Common Consolidated Corporate Taxation (CCCTB), which we re-launched in October, the EU is developing a more long-term and sustainable framework for fair, competitive and growth-friendly corporate taxation.

The EU has put a strong emphasis on tackling tax abuse and ensuring fairer taxation for all. However, we have been very mindful of the impact of corporate tax reforms on the business community too. Corporate taxation must be aligned to the realities of today's economy and modern business models. It should support, not hamper, companies that want to grow, innovate and expand. It should provide a stable, certain and open environment, which businesses need to thrive. It should also ensure fair competition and a level playing field for all companies, regardless of their nationality or size. This is reflected strongly in our tax agenda. We know that 28 national responses to BEPS would create new tax obstacles, legal uncertainty and administrative burdens for companies in our Single Market. That is why we have been so intent on ensuring a coordinated, coherent and legally-robust EU approach. We know that the majority of EU businesses have suffered unfair competition and a higher tax burden, due to the aggressive tax planning of their rivals. That is why we have given such high priority to combatting abusive tax practices. Finally, we know that for businesses, a tax framework that supports sustainable growth and investment is more attractive than one designed purely to chase mobile profits. Through the CCCTB, we are pursuing a corporate tax system in Europe that will reward growth-friendly financing and investment, encourage cross-border activity and ensure a level-playing field for all companies. Once it is in place, I believe that the CCCTB will be a model for others to follow – particularly countries seeking to attract and retain foreign direct investment and innovative businesses.

In the EU, we have taken our international tax commitments seriously, and followed through with concrete action and binding law. It is only reasonable that we expect others to do the same. Given the global nature of tax avoidance, our efforts to address this problem must be echoed by our international partners. Otherwise, Member States remain exposed to external threats of base erosion and undue competitive disadvantages. 

Therefore, the EU has a new External Strategy for Effective Taxation, to promote tax good governance standards worldwide. The Strategy benefits our international partners, as well as our Member States, because it provides a clear, consistent EU position on tax matters and is transparent on how we will pursue this. Our first focus is on partnership, dialogue and cooperation. We believe that the best results come from pulling together towards the same end goal. So we continue to work closely with other countries to achieve a higher level of tax good governance internationally. We do this, amongst other things, through active participation in global fora such as the G20, UN and OECD, through our regional and bilateral agreements with other countries, and through our support to developing countries.

However, the EU's long experience in pushing for better tax governance globally has shown that sometimes collaboration is not enough on its own. We need to get tough on those that continue to reject basic international standards of transparency and fair taxation. We need a common and effective means to dissuade those that actively encourage tax avoidance and blatantly erode our Member States' tax bases. This is where the new EU listing system comes into play. The common EU list of non-cooperative tax jurisdictions should be a wake-up call for countries that consistently refuse to play fair on tax matters. Unlike many other blacklists, both within and outside Europe, the new EU listing process is designed to be transparent, objective and fair.

For a start, the EU list will be based on clear and internationally recognised criteria, which have been unanimously agreed by our Member States. These criteria are based on the two central pillars of tax good governance: transparency and fair tax competition. The transparency criteria mirror those for the new international blacklist that the OECD is developing. Has the jurisdiction received a "largely compliant" rating from the Global Forum? Has it committed to the Common Reporting Standard for the automatic exchange of financial account information? Has it signed the international agreement for the multilateral exchange of this information (MCMAA) or committed to bilateral information exchange with all EU Member States? If the answer is "yes" to two or more of these questions, then we are satisfied. If not, we will have issues to discuss with the countries concerned. The transparency criteria will be stricter from 2019 when, to get a green light, all three of the conditions will have to be met. This simply reflects the standards to which EU Member States themselves are bound.

The fair taxation criteria are equally straightforward. Countries should respect the principles of fair tax competition set out in the EU's Code of Conduct on Business Taxation and should have signed up to the BEPS Inclusive Framework. In addition, they should not facilitate offshore structures or arrangements, aimed at attracting profits which do not reflect real economic activity. These criteria should not pose any risk for those that are truly committed to the international agenda for fair, transparent and effective taxation.

I would point out that, in this listing process, we take full account developing countries' constraints. We appreciate that some countries may be willing, but unable, to meet the necessary good governance standards at this stage. We have made allowances for this, for example by ring-fencing Least Developed Countries without financial centres from screening. The EU list is not intended for countries that sincerely wish to improve their tax good governance, but need more time or support to do so. The purpose of our list is to target countries that can do better – but won't.

Another merit of the EU listing process is that it will give third countries plenty of opportunity to engage with us on tax matters of mutual interest. The new list is very much intended as a last resort mechanism – to be used when all other collaborative attempts have failed. We want to offer non-EU countries every chance to react, adapt and respond to our concerns. Member States are currently fine-tuning the details of the screening process. It is clear already, however, that it should be fair, understandable and transparent for the countries concerned.

Finally, the EU listing process will strongly support the international tax good governance agenda. We have tied our criteria tightly to transparency and fair taxation standards which have been agreed by the G20. We will draw on the work in the BEPS Inclusive Framework and Global Forum when considering which countries to screen and to list. In addition, the EU remains in close and regular contact with the OECD as the listing process moves forward, to ensure coherence between our approach and their new transparency blacklist.

The EU first list will be ready in late 2017. There are still a number of important decisions to be finalised – notably on the countries to screen and the sanctions that will apply to listed jurisdictions. These questions are being carefully deliberated by our Member States, to ensure that the final outcome is the right one. With regard to countermeasures, the Commission has already presented some suggestions to Member States for consideration. There are a number of paths that can be taken. For example, consequences for listed countries could be built in to EU legislation, similar to the measures that currently exist in our anti-money laundering rules. Another possibility is to tie the use of EU funds more closely to our tax good governance agenda. In this respect, the Commission has already revised the Financial Regulation, to prevent EU funds from being channelled through tax havens. We are also working with the International Financial Institutions to ensure that they do the same. Finally, Member States may draw inspiration from their current national sanctions – such as withholding taxes or non-deductibility of costs – for future EU countermeasures. Ultimately, it is for Member States to decide the exact consequences of being on the EU list, which they are expected to do in the coming months. With each new step in the listing process, the EU is committed to communicating clearly and sensitively with all countries concerned, while continuing to interact with our businesses at home, so that they have the legal certainty and clarity which is so necessary in corporate tax policy.