Tackling tax fraud and evasion in the EU - guide
27 June 2012by eub2 -- last modified 27 June 2012
Minimum sanctions for tax crimes, a cross-border tax identification number, an EU tax-payer's charter and stronger common measures against tax havens. These are some of the concrete ideas that the European Commission has put forward today to improve the fight against tax fraud and evasion in the EU. Taking a holistic approach, the EC Communication looks at ways to strengthen current measures and sets out possible new initiatives for eliminating fraud and evasion in Europe.
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Why has the Commission put forward a Communication on concrete ways to tackle tax evasion and fraud in EU?
In the current economic climate, Member States need every euro that they are due for fiscal consolidation and to rebuild their economies. Member States have, in some cases, almost reached the limit in the expenditure they can cut and taxes they can raise, while honest tax-payers must carry the burden of austerity. Meanwhile, substantial amounts of euros are lost from public finances due to tax evasion and avoidance, with the shadow economy estimated to be around one fifth of GDP on average (€2 trillion).
More clearly needs to be done to protect Member States' revenues and improve their tax collection capacities. In the March 2012 EU Council conclusions, Member States asked the Commission "to rapidly develop concrete ways to improve the fight against tax fraud and tax evasion, including in relation to third countries and to report by June 2012". The European Parliament also echoed the call for urgent action in this area in a resolution in April 2012.
Therefore, the Commission has undertaken a review of the measures currently in place, to see how they can be improved and intensified. It has also developed ideas of new initiatives that could help in the fight against fraud and evasion. The aim is to create a stronger, more coordinated approach to tackling tax evasion, aggressive financial and tax jurisdictions, and unfair tax competition.
Why is EU coordination in this area so important?
A strong unified stance is essential in tackling tax evasion and fraud when part of a Single Market, given the fact that cross-border differences are usually exploited in these activities. An EU approach ensures:
Clear consensus within the EU on the approach to be taken in ensuring Member States can collect the revenues they are due, and good cooperation between national authorities
The prevention of a patchwork of national approaches which can leave large areas uncovered, thus opening the way for tax planning schemes.
"Strength in numbers" when dealing with non-EU countries, to the benefit of all Member States
What is the scale of tax evasion and fraud in the EU?
Given the very nature of tax evasion and fraud, it is very difficult to put a precise figure on them. Nonetheless, the size of the shadow economy is estimated to be nearly one fifth of GDP on average across Member States, representing nearly €2 trillion in total.. Some studies estimate the level of tax evasion and avoidance in Europe to be around €1 trillion, and recent reports also suggest that tens of billions of euros are off-shore, unreported and untaxed.
Does the Communication address the problem of tax avoidance by companies and wealthy individuals?
Yes. The Communication specifically refers to the need for action to tackle the intentional exploitation of difference in tax systems which undermine Member States' tax rules and lead to the loss of revenues.
The Code of Conduct on Business Taxation is already an important instrument in this regard, with Member States committed to key principles and refraining from introducing measures that would allow harmful tax competition. The Commission is currently looking at how the Code can be further strengthened, and has started work to have its principles applied by key international partners.
The work that has been started to tackle double non-taxation (which allows aggressive tax planners to exploit loopholes between Member States' systems) will also be important in dealing with tax avoidance.
What measures are already in place in the EU to tackle tax evasion and fraud?
Over the past few years, the EU has pursued a very active policy on good governance in taxation at EU level, and internationally. Some examples of important measures are:
Savings Tax Directive: The Savings Directive is proof of the benefits of intra-EU cooperation, with on average 20 billion euros worth of savings information exchanged between Member States each year. This Directive creates an information exchange system for tax authorities to help identify individuals that receive savings income in a Member State other than their own. The core principle is that of automatic exchange of information. This means that Member States can collect data on the savings of non-resident individuals, and automatically provide this data to the authorities where the individual resides.
Savings Tax Agreements with Third Countries: The EU has savings tax agreements with 5 neighbouring third countries: Switzerland, Andorra, Monaco, Lichtenstein and San Marino. The aim of these agreements is to assist Member States in taxing citizens who have savings accounts in these countries. The agreements also seek to create a more level playing-field between Member States and their non-EU neighbours, by getting these countries to apply measures which are equivalent to those laid down in the EU Savings Directive. Talks are currently ongoing with other third countries (Singapore, Hong Kong, Macao) to promote the application of equivalent measures there too.
Administrative cooperation : There has been a considerable strengthening of administrative cooperation between Member States in recent years, enabling national tax authorities to benefit from exchanged data, information and experiences to better identify and address tax evasion and fraud. In the past couple of years, some important new legislation to further strengthen administrative cooperation has been adopted (Directive on Administrative cooperation in the field of taxation; Recovery of claims Directive…)
Code of Conduct on Business Taxation: The Code provides that Member States will refrain from introducing, or will amend, any harmful tax measures that unfairly undermine other Member States' revenue raising capacities. It has been very successful since it began to be applied in 1998, with over 100 harmful tax measures rolled-back. The Code also foresees the promotion of these principles on as broad a geographical basis as possible, and the Commission is currently in discussions with Switzerland and Lichtenstein to this end.
Double non-taxation: The public consultation on double non-taxation which was launched in February 2012 (see IP/12/201) closed at the end of May. The Commission is now compiling and analysing the feedback from this consultation to decide the most appropriate measures to take in tackling this problem, which is frequently exploited by aggressive tax planners and tax avoiders.
VAT Strategy presented last December looks specifically at how to tackle VAT fraud in better way and follow up action will be taken on this basis both in 2012 and 2013. Already, a coordinated strategy to improve the fight against VAT fraud has been implemented since 2008, including measures to strengthen administrative cooperation between tax administrations. An important outcome of this strategy was the creation of Eurofisc, a network of national officials to detect and combat new cases of cross-border VAT fraud.
Tailored support to Member States: The Commission is always ready to provide targeted support and technical assistance to any Member State that needs it to strengthen its tax system against evasion, and improve tax collection. In Greece, for example, Commission services are actively engaged in helping build a more robust tax system to deliver quality revenues.
What does the Communication say needs to be done to strengthen the efficiency of current EU measures?
First and foremost, the proposal to strengthen the EU Savings Directive should be agreed by Member States. This would significantly enhance the capacity to prevent tax evasion by closing loopholes in the current legislation that are being exploited by tax evaders. Likewise, Member States should rapidly agree on the mandates which would allow the Commission to negotiate stronger savings tax agreements with Switzerland, Liechtenstein, San Marino, Monaco and Andorra. Eurofisc will be extended to cover direct, as well as indirect, taxes, while the Communication also calls on Member States to make better use of the administrative cooperation measures that have been adopted in recent years.
What new measures at EU level are set out in the Communication?
The Communication sets out a series of new measures that will be introduced, or should be further explored, to improve the EU approach to fighting evasion and fraud. These fall broadly into three main categories:
Improving information exchange
Automatic exchange of information should be promoted wherever useful. In order for the information that is exchanged to be pertinent and ready for immediate use, it is important to improve the identification of taxpayers. In this context, the Commission will analyse the idea of a cross-border EU tax identification number, while Member States should give greater mutual access to relevant parts of each other's databases.
Improving compliance
Tax compliance can be improved by providing taxpayers with better information on EU and national tax rules. The Communication mentions several tools that could facilitate this, including a single Tax Webportal with information on all taxes, for all taxpayers. There should also be measures – at national and EU level – to encourage tax compliance. The Commission will develop a taxpayers' charter, in the spirit of Corporate Social Responsibility.
Strong deterrent measures are also an important part of the fight against evasion and fraud. In this context, the Communication suggests the possibility of common minimum rules and sanctions for certain types of tax offences. In the next few weeks, the Commission will propose criminal law measures to protect the EU's financial interests against fraud.
Tackling evasion and fraud trends
Quickly identifying new trends and schemes in tax fraud and evasion is crucial to effectively stamp out this activity. In addition to extending Eurofisc and its Early Warning System to cover direct taxes (see above), the Commission will also propose a Quick Reaction Mechanism for VAT fraud. Teams of auditors focussed specifically on cross-border tax fraud are also suggested. Before the end of 2012, the Commission will come forward with a strategy to tackle aggressive tax planning in the EU. It will also examine ways to improve access to information on money flows through off-shore bank accounts.
What should be done at national level to combat tax evasion and fraud?
Within the framework of the 2012 European Semester, the Commission has recommended to the Eurozone as a whole, and to 10 Member States specifically, to improve their administrative capacity to collect taxes and tackle tax evasion. These recommendations should be reflected in national reforms. The Commission will monitor the progress in this area, and also provide technical assistance to Member States in enhancing their administrative capacity and tax compliance.
What improvements could be made in relations with non-EU countries as part of the fight against evasion and fraud?
It is important to push international partners to apply equivalent measures to the EU's high good governance standards. Member States should swiftly agree on the renegotiation mandate for savings agreements with Switzerland, Lichtenstein, San Marino, Monaco and Andorra (see above), while savings agreements with relevant dependent and associated territories should also be updated.
Shared interests and objectives should become the basis for closer trans-Atlantic cooperation and further cooperation with international organisations in eliminating tax evasion.
A common EU stance against tax havens should be reinforced. Before the end of 2012, the Commission will present a set of measures and tools for coordinated action, broadly based on the "carrot and stick" approach to tax havens and a more unified stance against uncooperative jurisdictions.
What is the timing for delivering on the ideas set out in the Communication?
The Commission will start work immediately on developing the ideas set out in the Communication. Some proposals will be presented already in the next month or so (e.g. quick reaction mechanism for VAT fraud), while work will continue in areas where it is already under way (e.g. providing technical assistance to certain Member States, pushing for agreement on the revised Savings Directive and mandates etc).
Before the end of 2012, the Commission will present an Action Plan on fighting fraud and evasion together with its initiative on tax havens and aggressive tax planning.
Source: European Commission
