Proposal for a COUNCIL DECISION concerning the signature of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signature of the accompanying Memorandum of Understanding

(presented by the Commission)

EXPLANATORY MEMORANDUM

By its decision of 16 October 2001, the Council authorised the Commission to negotiate appropriate agreements with Switzerland, the United States of America, Andorra, Liechtenstein, Monaco and San Marino to ensure that these countries adopt measures equivalent to those to be applied within the Community to ensure effective taxation of savings income in the form of interest payments. The Commission was instructed to conduct these negotiations in close conjunction with the Presidency of the Council, and in close and regular consultation with the High-level Working Party set up by Coreper Decision of 13 June 2001 [1] and appointed by the Council as a special committee to assist the Commission in that task.

[1] OJ C 183, 29.6.2001, p. 1.

Following the decision of 16 October 2001, the Commission wrote to the above non-EU countries to request the opening of negotiations even though it was only after the ECOFIN Council's approval of a text of the draft directive, on 13 December 2001, that the negotiations could really begin. A large number of meetings at both political and technical level have since been held. In accordance with the Council decision of 16 October 2001, the Commission conducted the negotiations in close conjunction with successive Presidencies of the Council. It made regular oral progress reports to the Council and Parliament, and presented a communication on the negotiations with third countries on taxation of savings income to the ECOFIN Council on 3 December 2002. [2]

[2] SEC (2002) 1287 final, 27.11.2002.

On 3 June 2003 the Council stated that the draft agreement with Switzerland submitted by the Commission on 28 May 2003 constituted the final offer for an agreement between the EU and Switzerland. The Council minutes also state:

"The four elements of this agreement relating to savings taxation also constitute the basis for agreements between the European Union and Liechtenstein, Andorra, Monaco and San Marino...".

On 21 January 2003 the Council identified these four elements as:

"- Retention and withholding: Switzerland will apply the same rates of retention and withholding as Belgium, Luxembourg and Austria ...

- Revenue sharing: Switzerland will share the revenue of the retention tax and will accept the 75/25 division applied within the Community ...

- Voluntary disclosure of information

Review clause stating that "The Contracting Parties shall consult with each other at least every three years or at the request of either Contracting Party with a view to examining and - if deemed necessary by the Contracting Parties - improving the technical functioning of the Agreement. In any event when Belgium, Luxembourg and Austria change from withholding tax to automatic exchange of information in accordance with the Directive, the Contracting Parties shall consult each other in order to examine whether the changes to the Agreement are necessary taking into account international developments.

Switzerland grants exchange of information on request for criminal or civil cases of fraud or similar misbehaviour on the part of taxpayers...".

The Agreement with Andorra, which includes these four elements, is now being presented to the Council for signature and conclusion. It is accompanied by a Memorandum of Understanding between the European Community and its Member States, of the one part, and the Principality of Andorra of the other part. In accordance with the conclusions of the ECOFIN Council of 21 January 2003, the Memorandum of Understanding confirms that within the transition period provided for by Council Directive 2003/48/EC of 3 June 2003, [3] the European Community will enter into discussions with other important financial centres with a view to promoting adoption by those jurisdictions of measures equivalent to those applied by the Community. The Memorandum of Understanding also provides that the same measures will be implemented in good faith and that the Parties will not act unilaterally to undermine this arrangement without due cause. Should any significant difference between the scope of Council Directive 2003/48/EC and that of the Agreement be discovered, the Contracting Parties will immediately enter into discussions with a view to ensuring that the equivalent nature of the measures provided for by the Agreement is maintained. The Memorandum of Understanding also contains a commitment from the Principality of Andorra concerning the introduction in its legislation of the concept of the crime of tax fraud and provides that the Principality of Andorra and each Member State of the European Community wishing to do so will enter into bilateral negotiations to define the administrative procedure for exchange of information. The Memorandum of Understanding states that the Parties solemnly declare that the signature of the Agreement on taxation of savings and the opening of negotiations for a monetary agreement are a significant advance in cooperation between the Principality of Andorra and the European Union. Consequently, and in parallel with the bilateral negotiations to be conducted on the exchange of information procedure, the Principality of Andorra and each Member State of the European Community will hold consultations to define a broader framework for economic and tax cooperation. These consultations will be undertaken in a spirit of cooperation which take account of the efforts made by the Principality of Andorra in approximating its legalisation in the tax field, formalised by the signing of this Agreement. In particular these consultations may lead to the implementation of:

[3] OJ L 157, 26.6.2003, p. 38.

- bilateral economic cooperation programmes to promote integration of the Andorran economy into the European economy;

- bilateral cooperation in the tax field to determine the conditions under which withholding tax on income derived from financial services and products levied in the Member States can be eliminated or reduced.

The Commission considers that the text of the Agreement is in accordance with the negotiating directives adopted by the Council on 16 October 2001. The Council gave its political agreement to the texts of both the Agreement and the accompanying Memorandum of Understanding on 11 May this year.

The Commission proposes that the Council approve the attached proposals:

- for a decision on the signature of the Agreement providing for measures equivalent to those laid down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments, and on the approval and signature of the accompanying Memorandum of Understanding, and

- for a decision on the conclusion of the above Agreement under the procedures set by Article 300 of the Treaty establishing the European Community.

Article 300(2) of the Treaty establishing the European Community stipulates that the Council shall act unanimously when the Agreement covers a field for which unanimity is required for the adoption of internal rules. As the internal rules in the field covered by this Agreement have been adopted on the basis of Article 94 of the Treaty, the Commission considers that the Council should act unanimously to approve the proposals for a decision. According to the ECOFIN Council conclusions of 21 January 2003, the Council agrees too that the Agreement with the Principality of Andorra should be adopted on the basis of unanimity.

Proposal for a COUNCIL DECISION concerning the signature of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signature of the accompanying Memorandum of Understanding

THE COUNCIL OF THE EUROPEAN UNION

Having regard to the Treaty establishing the European Community, and in particular Article 94 in conjunction with the first subparagraph of paragraph 2 of Article 300 thereof,

Having regard to the proposal from the Commission [4],

[4] OJ C , , p. .

Whereas:

(1) On 16 October 2001 the Council authorised the Commission to negotiate with the Principality of Andorra an appropriate agreement for securing the adoption by the Principality of measures equivalent to those to be applied within the Community to ensure effective taxation of savings income in the form of interest payments.

(2) The text of the Agreement which is the result of the negotiations duly reflects the negotiating directives issued by the Council. It is accompanied by a Memorandum of Understanding between the European Community and its Member States, of the one part, and the Principality of Andorra of the other part.

(3) Subject to the adoption at a later date of a Decision on the conclusion of the Agreement, it is desirable to sign the two documents that were initialled on 1st July 2004 and have confirmation of the Council approval of the Memorandum of Understanding.

HAS DECIDED AS FOLLOWS:

Sole Article

Subject to the adoption at a later date of a Decision on the conclusion of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments, the President of the Council is hereby authorized to designate the persons empowered to sign, on behalf of the European Community, the Agreement and the accompanying Memorandum of Understanding and the Letters from the European Community referred to in Article 19, paragraph 2 of the Agreement and in the last paragraph of the Memorandum of Understanding.

The text of the above mentioned Memorandum of Understanding, attached to this Decision, is approved by the Council.

Done at Brussels,

For the Council

The President

Annex

MEMORANDUM OF UNDERSTANDING

between the European Community, the Kingdom of Belgium, the Czech Republic, the Kingdom of Denmark, the Federal Republic of Germany, the Republic of Estonia, the Hellenic Republic, the Kingdom of Spain, the French Republic, Ireland, the Italian Republic, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Grand Duchy of Luxembourg, the Republic of Hungary, the Republic of Malta, the Kingdom of the Netherlands, the Republic of Austria, the Republic of Poland, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic, the Republic of Finland, the Kingdom of Sweden, the United Kingdom of Great Britain and Northern Ireland

and

the Principality of Andorra

MEMORANDUM OF UNDERSTANDING

between the European Community, the Kingdom of Belgium, the Czech Republic, the Kingdom of Denmark, the Federal Republic of Germany, the Republic of Estonia, the Hellenic Republic, the Kingdom of Spain, the French Republic, Ireland, the Italian Republic, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Grand Duchy of Luxembourg, the Republic of Hungary, the Republic of Malta, the Kingdom of the Netherlands, the Republic of Austria, the Republic of Poland, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic, the Republic of Finland, the Kingdom of Sweden, the United Kingdom of Great Britain and Northern Ireland

and

the Principality of Andorra

When an Agreement providing for measures equivalent to those laid down in the Council Directive 2003/48/EC of 3 June 2003 on taxation of income from interest payments (hereinafter referred to as "the Directive") was concluded, the European Community, the Kingdom of Belgium, the Czech Republic, the Kingdom of Denmark, the Federal Republic of Germany, the Republic of Estonia, the Hellenic Republic, the Kingdom of Spain, the French Republic, Ireland, the Italian Republic, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Grand Duchy of Luxembourg, the Republic of Hungary, the Republic of Malta, the Kingdom of the Netherlands, the Republic of Austria, the Republic of Poland, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic, the Republic of Finland, the Kingdom of Sweden, the United Kingdom of Great Britain and Northern Irelandand and the Principality of Andorra signed this Memorandum of Understanding supplementing this Agreement.

1, The signatories to this Memorandum of Understanding consider that the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in the Directive and this Memorandum of Understanding is a acceptable agreement protecting the legitimate interests of both Parties. Consequently, they shall apply in good faith the measures agreed and shall refrain from taking any unilateral action which might jeopardise this Agreement without reasonable cause. If a serious discrepancy is discovered between the scope of the Directive adopted on 3 June 2003 (Council Directive 2003/48/EC) and that of the Agreement, in particular as concerns Articles 4 and 6 of the Agreement, the Contracting Parties shall consult each other forthwith in accordance with Article 13, paragraph 4 of the Agreement to ensure that the equivalent nature of the measures provided for by the Agreement is safeguarded.

2. The European Community undertakes to enter into, within the transitional period provided for in the abovementioned Directive, discussions with other major financial centres to ensure that measures equivalent to those of the Directive are applied by these jurisdictions.

3. With a view to applying Article 12 of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in the Directive , the Principality of Andorra undertakes to introduce into its legislation during the first year of the application of the agreement, the concept of the crime of tax fraud, consisting at least of the use of documents which are false, falsified, or recognised as being incorrect in terms of their content, with intent to deceive the tax authorities in the field of taxation of savings income. The signatories to this Memorandum of Understanding note that this definition of tax fraud concerns only needs relating to the taxation of savings, within the framework of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in the Directive , and is without prejudice to developments and/or decisions relating to tax fraud under other circumstances and in other fora.

4. The Principality of Andorra and each Member State of the European Community wishing to do so shall enter into bilateral negotiations to define the administrative procedure for the exchange of information.

5. The signatories to the present Memorandum of Understanding solemnly declare that the signing of the agreement on the taxation of savings, together with the opening of negotiations for a monetary agreement, constitute a significant step in the deepening of cooperation between the Principality and the European Union.

In this context of deepening relations, in parallel with the bilateral negotiations provided under point 4, the Principality of Andorra and each Member State of the European Community shall enter into consultations with a view to defining a wider field of application for economic and fiscal cooperation. These consultations will take place in a spirit of cooperation that takes account of the efforts for alignment in the fiscal area achieved by the Principality of Andorra and solidified by the signature of this agreement. In particular, these consultations might lead to the implementation:

- of bilateral programmes for economic cooperation in order to promote the integration of the Andorran economy into the European economy,

- of bilateral cooperation in the area of taxation aimed at examining the conditions in which withholding taxes levied by the Member States on receipts from the provision of services and financial products, might be eliminated or reduced.

Drawn up at........................, on ........................ in duplicate in the Catalan, Danish, Dutch, English, Finnish, French, German, Greek, Italian, Portuguese, Spanish and Swedish languages, each of these languages being equally authentic.

The, Czech, Estonian, Hungarian, Latvian, Lithuanian, Maltese, Polish, Slovak and Slovenian language versions shall be authenticated by the Contracting Parties on the basis of an exchange of letters. They shall also be authentic, in the same way as for the languages referred to in the preceding paragraph.

Signatures