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COMMISSION O F  T H E  EUROPEAN COMMUNITIES
COM(84) 603 final 
Brussels, 28 November 1984
COMMUNITY ACTION TO COMBAT INTERNATIONAL TAX EVASION
AND AVOIDANCE
(Communication from the Com m ission to the Council and to the European Parliament)
COM(84) 603 final

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C O M M U N IT Y  A C T IO N  T O  C O M B A T  IN T E R N A T IO N A L  T A X  E V A S IO N
A N D  A V O ID A N C E
(Com m unication from  the C om m ission to the C o u n cil an d  to the E uropean Parliam ent)
I. INTRODUCTION
1 . International tax evasion and avoidance unquestionably h av e im plications fo r 
the C om m unity and increasingly dem and a  C om m unity approach, as econom ic 
and financial integration advances. It i s  o b v io u s that w hen taxpayers escape 
their tax obligations distortions in  the conditions of com petition an d  capital 
m ovem ents can arise at the C om m unity lev el.
T hese problem s are particularly pressing at the moment. A ll M em ber States 
face budgetary difficulties. A gainst this background, tax avoidance an d  
evasion not o n ly  h av e direct repercussions - although the revenue effects are 
difficult to guage - but also  carry a  considerable psychological im pact i n  
terms o f the fairness o f taxation :  if  the general public has to b e called 
u p o n  to m ake w hat are often painful financial sacrifices, it i s  unacceptable 
that a  lim ited num ber o f taxpayers should m anage to a v o id  contributing to 
the com m on effort.
M oreover, the close lin k  between honesty o n  the part o f the taxpayers an d  
their le v e l o f taxation cannot b e denied. Taxpayers, indeed, h av e m uch le ss 
recourse to evasion and avoidance w h en  they consider their le v e l o f taxation 
to b e fair and reasonable, this can how ever o n ly  b e s o  if  tax obligations are 
fully respected b y  the taxpayers as a  w hole.
2 . From  another view point the need to av o id  the im position o n  undertakings o f 
new  constraints w hich m ight seriously affect their com petitiveness m ust n o t 
b e overlooked.
C are m ust therefore b e taken that the effects, o n  the com petitiveness o f 
undertakings, o f steps w h ich  m ight b e taken in  the fight against ev asio n  a n d  
avoidance are not out o f proposition w ith the desired objective.
3. I n  addition, the effect o f tax harm onization in  this context m ust b e stressed: 
all convergence in  the ru les governing taxation tends to reduce at the sam e 
time, the incentive to evasion and avoidance and the possibility o f su ch  
practices, w ithin the C om m unity.

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4 . T he com m unity has been studying the problem s o f tax evasion and avoidance 
for som e years.
I n  1 9 7 3  the C om m ission sent the C ouncil a  report o n  the tax arrangements 
applying to  holding com panies (1 ) that exam ined inter alia the use o f this 
type o f com pany for the purpose o f avoiding tax and suggested h o w  this 
problem  could best be rem edied.
O n  1 0 February 1 9 7 5  the C ouncil, acting o n  a  proposal from  the C om m ission, 
approved a  resolution (2 ) w hich, g iv en  the international dim ensions o f tax 
avoidance and evasion, stressed the need for closer collaboration between 
national tax administrations.
O n  1 9  December 1977, follow ing u p  its resolution, the C o u n cil adopted, o n  a  
C om m ission proposal, a D irective concerning m utual assistance b y  the M em ber 
States in  the field o f direct taxation (3).
S u ch  assistance consists essentially in  the exchange o f inform ation, either o n  
request or o n  the initiative o f the M em ber State possessing the inform ation.
T h e assistance arrangements w ere subsequently extended to embrace V A T  b y  
the D irective o f 6  Decem ber 1 9 7 9  (  4 ). Another D irective o f the sam e date 
introduced arrangements for m utual assistance in  the recovery of V A T  claim s
(5).
5 . T he problem s o f international tax evasion and avoidance are also the subject 
o f particularly close scrutiny b y  Parliament. I n  its resolution o f 1 7  N ovem ber 
1 9 8 3  o n  the harm onization o f taxation in  the Com m unity (6) Parliament once 
again called upon the C om m ission to step u p  action in  this field and to  
report o n  the state o f im plementation o f the D irective o f 1 9  Decem ber 1 9 7 7 .
T his Com m unication is  also addressed to Parliament in  response to that 
request.
(1 ) D oc. C O M (7 3 ) 1008 final o f 1 8  June 1 9 7 3
(2 ) O J  N o  C  3 5  o f 1 4  February 197 5 , p . 1
(3 ) O J  N o  L  336 of 2 7  December 197 7 , p . 1 5
(4 ) O J  N o  L  3 3 1  o f 2 7  December 1979, p . 8
(5 ) O J  N o  L  3 3 1  o f 2 7  December 1979, p . 10
(6 ) O J  N o  C  3  4 2  o f 1 9  December 1983, p . 7 3

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I I . PRESEN T  S IT U A T IO N  A N D  PR O PO SA L S FO R R E IN FO R C IN G  C O M M U N IT Y  
A C TIO N
ô . T he action to be taken b y  the Com m unity concerns :
a) T he im provem ent, intensification and extension of collaboration :
—  between tax a d m i n i st rati ons i n  the C o r n m u n i ty /
- between the latter and their counterparts in  third countries ;
b ) the problem  of the use of tax shelters ;
c) the problem  of the transfer o f profits between com panies belonging to  
the same group ;
d ) the elim ination of double taxation.
Collaboration between M em ber S tates' tax adm inistration s
7 . A s  indicated at point A  above, the D irective o f 1 9  Decem ber 1 9 7 7  introduced 
arrangements for m utual assistance w ithin the com m unity based essentially o n  
the exchange o f inform ation.
A  provision w as included in  that D irective to facilitate im provem ents to the 
assistance m achinery. A rticle 10 states :  "T he M em ber states shall, together 
w ith the C om m ission, constantly m onitor the cooperation procedure (...) ana 
shall pool their experience, especially in  the field o f transfer pricing (...), 
w ith a v ie w  to im proving such cooperation and, w here appropriate, draw ing u p  
a body of rules in  the fields concerned."
That the drive against tax evasion and avoidance is  a stated policy objective 
in  all M em ber states has not prevented som e of them  from  failing to m eet 
the deadline of 1  January 1 9 7 9  for com pliance w ith the D irective. B elg iu m  
d id not adopt the act incorporating it into national law  until 8  A ugust 1980 
and the relevant law  in  F ra n ce is  dated 3 1  Decem ber 1981. I n  Italy ,  it w as 
not until 5  June 1 9 8 2  that a decree laying dow n the necessary m easures w as 
enacted. T he com m ission considers that Germ any has not yet com plied w ith 
the D irective and has accordingly instituted infringem ent proceedings under 
Article 1 6 9  o f the Treaty. T he case of Greece, w hich has also not yet 
incorporated the D irective into national law , is  at present being exam ined b y  
the Com m ission's departments.

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8. U nder these circumstances, it is  not surprising that the pooling of experience
provided for in  Article 10 o f the D irective h a s  revealed that the opportunities 
afforded under the Com m unity procedures are far from  being fully utilized.
T he M em ber States still seem  to b e operating m utual assistance o n  a  purely
bilateral basis, as envisaged under traditional bilateral conventions, show ing 
little awareness o f the possibilities for a  m ultinational exchange o f infor­
m ation w hich it w as the very purpose o f the Com m unity D irectives to 
establish and develop.
E v e n  m ore so  than in  the field o f direct taxation, such a  state of affairs i s  
regrettable in  the V A T  sphere, in  w hich there are n o  bilateral agreements 
and the D irective is  the o n ly  instrum ent o f international cooperation.
9 . T h e problem  is  therefore h o w  to m ake better use o f the possibilities opened
u p  b y  the D irectives and im prove m utual assistance. I n  this respect and w hile 
em phasizing that this im plies, in  the first place, a change o f attitude tow ards 
n ew  ideas w hich are n o  longer those o f a  tim e w hen relationships between 
states w ere solely bilateral, the C om m ission takes the v iew  that, am ong the 
different m easures that can be taken, efforts m ust be focussed o n  those
exam ined below .
It is  of course understood that it is  better to  av o id  any increase in  the 
obligations im posed o n  taxpayers in  sofar as administrations can them selves 
obtain the necessary inform ation.
O rganizational m easures at national le v e l
10. I f  the international exchange o f inform ation is  to function sm oothly, each
M em ber State m ust create the necessary conditions at national lev el.
M em ber States m ust first exhaust a ll the national sources o f inform ation 
relevant for determ ining taxes. T h is calls for close cooperation not o n ly
between the direct taxation and indirect taxation authorities w here the tw o
are separate but also between the tax administration and other admini­
strations (e.g. social security departments in  the case o f m edical fees o r 
public w orks department in  the case o f governm ent procurement).
1 1 . Com puterization o f data handling is  another important m easure. I f  stored at a  
central office ^  inform ation o f interest for the purposes o f international 
cooperation could be accessed immediately. M ost M em ber States h av e already

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set up such central offices, but too many of them are not equipped with the 
necessary technical resources.
Limits to the exchange of information
12. Article 8(2) of the Directive of 19 December 1977 stipulated that the
provision of information may be refused where it would lead to the disclosure 
of a commercial, industrial or professional secret or of a commercial process 
or of information whose disclosure would be contrary to public policy.
W hen the Directive was adopted, a statement was entered in the Council 
minutes to the effect that after five years, acting on a proposal from the 
commission, the council would consider whether it was necessary to maintain 
this provision.
The Commission is currently seeking from Member States the information 
necessary for a re-examination of this provision limiting the exchange of 
information.
Simultaneous checks
13. W here the campaign against tax avoidance and evasion is concerned, the most 
important sector from both an economic and a tax angle is most probably 
the corporate sector, and in particular associated enterprises. The only 
effective way to counter the tax evasion and transfers of profits which are 
facilitated by close cooperation between enterprises is to step up colla­
boration between tax administrations. The Directive of 1 9 December 1977 
already provides for the spontaneous exchange of information in such situa­
tions (see Article 4(l)(d)), but more direct cooperation measures are 
becoming increasingly necessary in this field. Some sporadic measures have 
already been taken but they now  need to be more systematically organized at 
Community level.
Some administrations, each acting within the limits of its territorial com­
petence, have carried out simultaneous checks on associated enterprises in  
different countries with the intention of exchanging the information obtained. 
Simultaneous checks of this kind need to be conducted more often and 
coordinated at Commuunity level. The more administrations taking part, the 
more effective they would be.

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O ne obstacle to cooperation of this sort is  the fact that checks o n  enterprises 
are not sanctioned by law  o r practice in  som e countries. T he first step in  
those countries m ust be to provide for possibility of such checks.
It should not in  any case b e forgotten that sim ultaneous tax checks could 
also b e in  the interests o f the enterprises them selves since in  som e instances 
discussions between administrations m ay w ell avert double taxation at the 
very outset.
14. I t w ould also be a welcome step if M em ber states m ade greater use of the 
possibilities afforded b y  Article 6  of the Directive, under w hich officialsr J may 7from  another M em ber State^be present w hen tax checks are carried out b y  a 
national tax administration.
Payment sabroa d
15. W here checks not only o n  enterprises but also o n  other taxpayers are
concerned, one efficient technique that could be w idely applied does not 
appear to be used sufficiently.
Paym ents abroad usually have tw o features in  com m on :  first, the identity o f 
the foreign recipient is know n to the payer, and second, payments m ade are 
deductible from  taxable incom e. T his situationcould be turned to account fo r 
tax control purposes by m aking the deduction conditional o n  the payer 
inform ing his tax administration of the recipient's identity. T he tax admi­
nistration could centralize such inform ation and process it u sing computers 
(see point 1 1 ).
S u ch  a technique could b e used m ore systematically than at present and w ith 
virtually unlim ited coverage. It w ould permit automatic, or at least spon­
taneous, notification in  the case of important classes o f incom e such as 
royalties, com m ission payments, rebates, l aan interest, attendance fees, etc.
I t w ould also be a useful tool in  the crackdown on certain practices such as 
the "black" econom y and the hiring out o f labour across frontiers, w hich are 
particularly w idespread at a time o f serious econom ic difficulties.
16- A t the same time, enterprises could be required to attach to their tax return 
details o f transactions w ith associated enterprises abroad :  their nature, sum s 
paid or received, etc.

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.1 7 . Information on holdings
In  the interests of obtaining fuller information on tax situations, it would be 
very useful if taxpayers were required to provide certain information not only 
when income is readied but also at the time when the economic links that 
wilt subsequentfiy^mcSme are established. For instance, a requirement that 
the tax administration be informed as a matter of course of the acquisition 
of a substantial holding in a foreign enterprise (or vice versa) would result in 
the centralizing of information on all relationships between enterprises. If 
each Member State gathered such information, a clear picture could be 
compiled of inter-company links, including indirect holdings through a 
company established in  a tax shelter. Such a system would obviously permit 
better monitoring of profit transfers from the outset.
18. This communication has so far considered measures to improve mutual
assistance for the correct determination of taxes. Steps should also be taken 
to prevent taxpayers from evading their tax liabilities. This is why the 
Commission takes the view  that arrangements similar to those already in  
force in the VAT field should be introduced for the enforced recovery of 
claims in respects of taxes on income and wealth tax. In  due course, it w ill 
present a proposal for this purpose.
Collaboration between the Community and non-member countries
19. M oves to establish or improve cooperation with non-Community countries in  
the matter of administrative assistance face daunting problems. In  its 
resolution of lO February 1975 on the measures to be taken by the 
Community in  order to combat international tax evasion and avoidance (l), 
the Council recognized the international dimension of the problem and stated 
that collaboration with third countries should be strengthened.
OD ÖJ" 1N o~ C  35 of 14 Febtuary 1975, p. 1.

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Three m oves are now  in  progress at Com m unity lev el or in  other international 
organizations.
20. I n  1979 Finland, Iceland, N orw ay and Sw eden approched the C om m ission w ith 
a request to open negotiations w ith a v iew  to their participation in  the 
exchange of inform ation provided for in  the C om m unity D irectives. I n  a  
recommendation for a C ouncil D ecision of 20 February 1980 (1), the 
C om m ission asked the C ouncil for authorization to conduct those negotiations.
T he C ouncil has not yet responded as m ost M em ber States argue that the 
assistance clauses included in  their bilateral conventions w ith non-Com m unity 
countries are sufficient. I f  this were a valid argument, it w ould necessarily 
hold for relations between M em ber States too.
Then again, their stand has not prevented the M em ber States from  taking 
part in  the negotiations on a multilateral C ouncil o f E urope C onvention o n  
adm inistrative assistance in  tax matters (see point'-’I  ). U nder the circ­
umstances, there is little or n o  justification for the lack of a positive 
response to the request from  the aforementioned countries.
A ccordingly, the C om ission urges the C ouncil to take a decision at the 
earliest opportunity.
2 1  .  T he C ouncil o f E urope has taken the initiative of draw ing u p  a multilateral 
C onvention o n  administrative assistance in  tax matters for signature by its 
M em ber States and b y  the M em ber States o f the O E C D .
T he C om m ission welcomes this initiative provided it results in  an effective 
im provem ent in  cooperation w ith non-Com m unity countries. I t has alw ays 
m aintained that the w ider the geographical scope, the m ore effective the 
drive against international tax evasion and avoidance w ill be.
T he draft C onvention, w hich is currently being discussed by a committee o f 
experts, covers a w ider range of matters than the community arrange- 
m ents.The assistance provided for covers the entire range of taxes and social 
security contributions. W hat is  more, it extends not only to the exchange o f 
information but also to the recovery of tax claim s and the service of 
documents.
(1) D oc. C O M (80)68 final o f 20 February 1980.

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T he C onvention concerns the com m unity in  tw o w ays. In  areas not yet a s 
covered b y  com m on rules, M em ber States'positions ought to be coordinated 
(Article 1 1 6  o f the Treaty). W ith  this in  m ind, the C om m ission departments 
have sent the C ouncil tw o w orking papers that have been discussed at expert 
level.
I n  areas already covered b y  C om m unity instruments, it is  for the C om m unity 
to participate in  the m u lti la t e r a l C onvention  . T o  this end, the 
C om m ission recently transmitted a recom m endation for a D ecision to the 
Council(l). S ince the negotiations have reached an advanced stage, it is  
essential that the C ouncil take its decision as soon as possible.
22. T he U N  is  also taking an interest in  com bating international tax evasion and 
avoidance b y  m eans of cooperation between national adm inistrations. A  
special U N  group o f experts recently completed the drafting of directives 
that are to be addressed to the tax authorities. T hese directives concern 
cooperation in  the exchange of inform ation, the use o f tax havens, banking 
secrecy, the abuse of conventions and the collection of taxes.
T he U N  has o n  num erous occasions w itnessed a clash of interests between 
the industrialized countries and the developing countries, the m ore so  as 
m any developing countries are already tax havens or are m o v in g  in  that 
direction.
T ax shelters
25. T he use o f letter-box com panies established in  tax havens (i.e. com panies
w hich d o  not engage in  any genuine econom ic activity but m erely collect and 
hold certain "passive item s o f incom e" such as dividends, interest and 
royalties) w as discussed in  the 1 9 7 3  report o n  holding com panies.
I n  that report, the C om m ission stressed that the problem  o f letter-box 
com panies established w ithin the C om m unity could not be isolated from  the 
problem  o f letter-box com panies in  general and that only concerted action 
extending beyond the com m unity fram ework could provide a balanced solution. 
U ntil such time as action could b e undertaken along those lines, m ore lim ited 
m easures were all that could be envisaged.
(1) D oc. C O M (83)685 o f 2 2  N ovem ber 1 9 8 3

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A t the time, the commission looked at a number of such measures already 
operative in some Member States under which certain tax effects were 
applied to payments made to a tax haven from a Member State (e.g. 
charging a withholding tax on royalties, shifting the burden of proof). A  
more thorough examination revealed that the generalized application of such 
measures on the basis of common rules would hardly be feasible.
24.. In  recent years, a number of countries have introduced (France, Japan,
Canada and recently the United Kingdom), another unilateral but much more 
general measure that has been in force in the United states since 1962 and 
in Germany since 1971. In  essence, the measure is to tax a resident taxpayer 
on the "passive items of income" accruing to his letter-box company 
established in a tax haven even if such income is not distributed, the amount 
of tax payable being in proportion to the taxpayer's stake in the company.
A ny legislation directed against tax havens (even on the limited scale 
discussed above) would involve problems of definition and demarcation. These 
problems, already highly complex at a theoretical level but even more so 
when it comes to their practical application, concern not only the definition of 
"tax haven" but above all the definition of taxable "passive items of 
income", it being understood that any obstacle to the genuine international 
activity of companies must be strictly avoided.
If the measures were implemented with varying success from one national 
administration to another, something that may even occur within a Member 
State, this might engender fresh distortions of competition, making matters 
worse, not better.

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25. I n  the final analysis the C om m ission considers that for the
tim e being C o m m u n ity  m easures'  to combat the use o f tax havens 
m ust relate to supervision and m utual assistance, in  particular w ithin the 
fram ework o f the spontaneous exchange of inform ation provided for in  A rticle 
4  of the D irective of 1 9  Decem ber 1977. T he aforementioned im provem ent in  
that m achinery is one exam ple.
Transfer o f p ro fits
2 6 ·. O ne particularly im portant current form  of international tax evasion is  the 
transfer o f profits between com panies belonging to the sam e group b u t 
situated in  different countries. B y  over-stating or under-stating in  a ll m anner 
of w ays transactions carried out across frontiers but w ithin the group, 
companies are able artificially to transfer profits from  one country to 
another so  as to m inim ize the tax burden on the group as a w hole.
T he C om m ission has alw ays been alive to this problem  (l). A rticle 10 o f the 
1 9 7 7  D irective o n  m utual assistance (see point 4) provides for a pooling o f 
experience in  this field in  particular, w ith a view  to draw ing u p  com m on
rules w here appropriate. T he O E C D , in  its 1 9 7 9  report, looked at the
problem s of the transfer o f profits w ithin m ultinationals and presented
"guidelines" for reso lv in g  them . H ow ever, that report is  in  the nature of a 
recommendation only and leaves the O EC D 's M em ber States w id e discretion.
B efore any new  initiatives are launched in  this field, there is a case for 
w aiting until M em ber states have gained sufficient experience in  applying the 
O E C D  guidelines. There is  n o  doubt though that the C om m unity needs bin d in g  
rules, not only in  order to reinforce m easures to combat the transfer o f
profits but also in  order to ensure that com panies can count o n  the sam e 
principles being applied throughout the C om m unity. A t the sam e tim e, this 
w ould reduce the risk  of double taxation.
N evertheless, because of the m anifold com plex problem s to be resolved and 
the sometimes divergent traditional approaches, the conflicting interests o f 
M em ber States and their reluctance to subm it to rules in  this area, w e w o u ld  
be deluding ourselves if w e expected substantial progress in  the near future. 
In  the meantime, w e m ust prevent unilateral, uncoordinated m easures b y  
M em ber States opening u p  a w idening divergence. N ational m easures planned 
in  this field be notified to the C om m ission and to the other M em ber States
(1) see "Action Programme for taxation">  doc. COM(75) 391 final of 23 July 1975.

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so  that they can g iv e their opinions. The procedure laid dow n in  the proposal 
for a D ecision sent to the C ouncil by the C om m ission on 3  December 1981(1) 
w ould provide an appropriate framework.
Elim ination of double taxation
27. The grow ing cooperation between national tax administrations increases the 
risk  of double taxation, especially in  the case o f transactions between 
connected enterprises, w hich also produce distortions in  the conditions o f 
competitition. For this reason, the C om m ission has alw ays em phasized the 
close link that exists between m easures against tax avoidance and the 
prevention of double taxation (2).
A s things stand, double taxation can be eliminated only be initiating the 
amicable procedure provided for in  bilateral conventions. H ow ever, this 
procedure does not actually guarantee elim ination of double taxation if the 
two administrations concerned are unable to come to an agreement.
T o r e m e d y  this, the C om m ission sent to the C ouncil in  1976 a proposal for a  
D irective(3) aimed at establishing a procedure that w o u ld  guarantee the 
elim ination of double taxation in  all cases.
Follow ing a communication from  M r. TU G EN D H A T o n  fiscal m easures aim ed 
at the encouragement of cooperation between undertakings of different 
M em ber States (4) discussion on the proposal has m ade considerable headw ay 
w ithin the C ouncil, m ost of the problem s have been settled and the last few  
matters of detail outstanding could be resolved shortly. H ow ever, one 
important problem  rem ains, the choice of the legal instrument to be used. 
M ost M em ber States are in  favour of a multilateral convention based o n  
Article 220 of the Treaty, whereas the C om m ission, in  the belief that all 
the conditions laid dow n by Article lOO are met, considers that only the 
adoption of a directive w ould be in  keeping w ith Com m unity law .
(1) O J N o  C  3 4 6  of 3 1  December 1981, p. 6 .
(2) See "General considerations" in  the proposal for a directive on the exchange o f 
information, doc. COM (76)ll9 final of 3 1  M arch 1 9 7 6
(3) O J N o  C  301 o f 2 1  December 1976, p. 4.
(4) D oc. S E C (84)77 of 1 7  January 198 4 .

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III. CON CLU SIONS
28. The Commission considers that the time has come to impart fresh impetus 
to the drive against international tax evasion and avoidance.
29. That means first, strengthening mutual assistance within the Community. This 
can be achieved largely by making fuller use of the possibilities for col­
laboration afforded by the existing Directives, which, for the moment at 
least need be supplemented only as regards the enforced recovery of claims 
in respect of direct taxation.
30. Second, if practices which increasingly ramify not only beyond national 
frontiers but also beyond the frontiers of the Community are to be ef­
fectively combated, the Community's assistance arrangements must be 
extended to include other countries, and in particular the Community's major 
trading and financial partners. This is w hy the commission urges the Council 
to take an early decision on the request received from the Nordic countries, 
whose participation in the Community mutual assistance procedures would add 
considerably to their effectiveness. Similarly, the Council must expedite its 
response to the recommendation for a Decision authorizing the Commission to 
conduct the negotiations on the multilateral Council of Europe Convention.
31. A s regards the introduction of measures to resolve the problems of substance, 
whether the use of tax shelters or transfer pricing ^considerable caution is 
called for, if the Community's competititive position is not to be weakened 
or legitimate interests injured. It would also be wise to wait until unequi­
vocal lessons can be drawn from the application of the O EC D  directives.
32. Lastly, the Êbm m ission w ould reinterate the view it has always held, namely 
that measures to combat tax evasion and avoidance and those to eliminate 
double taxation complement each other. Accordingly, the early establishment 
of an arbitration procedure would not only answer the need for fairness with 
regard to companies operating across frontiers but would also encourage 
those companies to act in a more responsible manner in tax matters.