COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 01.10.1997 
COM(97) 495 final 
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 
Towards tax co-ordination 
in the European Union 
A package to tackle harmful tax competition 

INTRODUCTION 
1. Following the informal meeting of ECOFIN Ministers in Mondorf-les-Bains on 
13 September 1997, the Council Presidency has announced its intention to hold an orientation 
debate on taxation in the formal meeting of 13 October. At the invitation of the Presidency, 
the Commission is submitting this paper as a basis for discussion. It builds on the discussions 
in Mondorf-les-Bains and in the Taxation Policy Group by outlining a proposal for a tax 
package to curtail harmful tax competition including a code of conduct. A draft for a code, as 
it has emerged from discussions in the Taxation Policy Group, is annexed to this 
communication. 
2. On the basis of the global approach to taxation policy that was launched in April 1996 
at the informal ECOFIN meeting in Verona, the package seeks to develop a co-ordinated 
approach to harmful tax competition. There is a need for action at the European level in order 
to reduce distortions to the Single Market; to prevent significant losses of tax revenue; and to 
reverse the trend of an increasing tax burden on labour as compared to more mobile tax bases. 
Progress on the package would help to reverse this trend and so enable tax structures within 
the Community to develop in a more employment-friendly way. The special European 
Council on Employment on 20-21 November will be able to give particular attention to the 
implications for employment of trends in taxation systems. The Commission's Guidelines for 
Employment which will be discussed at the Employment Summit in November will also 
include recommendations on making taxation systems more employment friendly. 
A GREATER NEED FOR CO-ORDINATION 
3. Tax competition in itself is generally to be welcomed, as a means of benefiting 
citizens and of imposing downward pressure on government spending. However, unrestrained 
competition for mobile factors can both bias tax systems against employment and make an 
orderly and structured reduction in the overall tax burden more difficult. It also reduces the 
room for manoeuvre to meet other Community objectives, such as the protection of the 
environment. Furthermore, tax competition can hamper efforts to reduce budget deficits, 
which is not only a necessary end in itself but is also needed in order to comply both with the 
Maastricht criteria and with the Stability and Growth Pact. Market integration, without any 
accompanying tax co-ordination, is putting increasing constraints on Member States' freedom 
to choose the appropriate tax structure, including by broadening the tax base and lowering the 
rates. 
4. As was noted in Mondorf-les-Bains, trends over the last 15 years show an increasing 
tax burden on labour. The implicit tax rate (that is, tax revenues divided by the appropriate 
base) on employed labour has increased by more than 7 percentage points, whereas the same 
rate for other factors of production (capital, self-employed labour, energy, natural resources) 
has decreased by more than 10 percentage points (figure 1). Within the labour factor, the 
burden of taxation is shifting to the least skilled and less mobile employees, while 
highly-skilled employees are increasingly mobile and responsive to tax differentials. 
Furthermore, small firms and craft industries - which are so important for job creation - are 
penalised compared to larger enterprises which have easier access to the opportunities 
provided by tax differentials and tax competition. 
Implicit Tax Rates in the EU 1981-1995 
% 40 Labour Em ployed 
Other Factors 
year 
Source: Eurostat 
Figure 1 
5. Tax competition may be one important factor in this shift in the tax burden to the less 
mobile base of labour. The high rate of mobility of certain bases may have forced Member 
States to reduce taxation on such bases below the levels that they consider desirable, and 
necessitated corresponding increases in taxation on less mobile bases. This trend in tax 
structures should be reversed. A growing body of evidence now points to a strong negative 
effect of high labour taxes on the level of employment and growth in Europe. It has been 
estimated that several percentage points of the current rate of unemployment are due to this 
increase in the taxation of labour. 
6. While capital liberalisation is beneficial, the abolition of barriers to capital movement, 
together with exemptions from taxation, enhance opportunities to avoid reporting revenues. 
Cross-frontier fraud affects all taxes, including consumption taxes although these are 
harmonised to a much greater extent than are direct taxes. 
7. The contribution of tax policies to Community objectives must increasingly be seen 
within the context of the developing Single Market. The Single Market and EMU are 
essential for growth and prosperity; however, they also increase the importance of taxation as 
a competitive factor. As regulatory barriers in the Single Market are dismantled, taxation is 
increasingly identifiable as a key factor influencing economic decisions. And as the 
introduction of the single currency eliminates exchange rate risks and reduces transaction 
costs, the differences between national tax systems will become more visible and will have an 
even greater influence on decisions on the allocation of capital, and therefore the efficiency of 
those decisions. 
8. Achieving a properly functioning Single Market remains an overriding priority for 
Community action in the field of taxation. There is, however, also an urgent need to consider 
how taxation policies can contribute to job creation in Europe at a time when the fight against 
unemployment is the Union's key priority. 
9. Within the framework of European models of a social market economy, views may 
differ as to the emphasis to be given to the "social" and "market" elements. Unless there is 
some tax co-ordination there will be increasing threats: both with regard to the social 
dimension, because of the redistributive effect of the increasing taxation of labour, in 
particular of less-skilled labour; and with regard to the market element, because of the effect 
of tax distortions to the Single Market. 
10. It is also clear that tax policies must take account of the Union's global 
competitiveness and of international obligations under World Trade Organisation rules. 
Globalisation and vastly expanded trade and capital flows magnify the risks of harmful tax 
competition. At the same time, technological innovation and the development of electronic 
commerce enhance the mobility of certain forms of economic activity, particularly in the 
services sector and in the movement of capital, and may increase the impact of tax 
differentials on business decisions. 
11. In this changing environment, harmful tax competition will become an increasing 
source of conflict among Member States unless greater co-ordination can be achieved within 
the EU. This co-ordination should in principle be achieved at a world-wide level and, indeed, 
the OECD and G7 are currently considering the issue. However, the chances of a satisfactory 
solution being reached at the OECD will be greatly improved if EU Member States act in a 
more co-ordinated way. And the closer degree of economic integration, EMU, and the 
existence of Community rules on competition and state aids create a fundamental need to 
ensure better co-operation within the Union. 
A PACKAGE TO TACKLE HARMFUL TAX COMPETITION 
12. The informal meeting in Mondorf-les-Bains considered how best to respond to the 
need for progress and greater co-ordination. As a result, the Commission has been invited to 
present the outline of a tax package which would enable progress to be made in parallel on a 
number of fronts. The Commission is making these proposals having full regard to the 
principle of subsidiarity and to the particular difficulties posed in the area of taxation by the 
requirement for unanimity between Member States. These considerations mean that any 
package that is proposed must balance as far as possible the interests of different Member 
States. This implies a spirit of openness and compromise. In the light of the discussions in 
Mondorf-les-Bains and of the Taxation Policy Group meeting on 18 September, this 
communication therefore sets out possible components for such a package on the basis of 
which a political agreement may be reached by the end of the year, as indicated by the 
Presidency. 
13. The possible components of the package are the following: 
• a code of conduct for business taxation and in parallel a Commission communication on 
fiscal state aids; 
• measures to eliminate distortions to the taxation of capital income; 
• measures to eliminate withholding taxes on cross-border interest and royalty payments 
between companies; and 
9 measures designed to eliminate significant distortions in the area of indirect taxation. 
Each of these components is described below. 
A Code of Conduct for business taxation 
14. A code of conduct for business taxation will be a key element of the package. This 
will help to prevent economic distortions and an erosion of tax bases within the Community. 
It will take the form of a non legally-binding instrument that engages Member States at a 
political level to respect principles of fair competition, and to refrain from tax measures that 
are harmful. The code would incorporate a review and monitoring process, and would be 
capable of later development and refinement in the light of experience. This will also help to 
evaluate the need for other instruments in the field of business taxation. 
15. Following the informal discussions in Mondorf-les-Bains, which noted the substantial 
progress that had been made on this issue, the Presidency invited the Commission to provide 
the Council with a text for the code of the conduct. The draft code annexed to this paper has 
been developed through the intensive and constructive work of the Taxation Policy Group in 
its four meetings so far this year, most recently at its meeting of 18 September. Although this 
text is put forward in its own name, the Commission would like to acknowledge the 
considerable debt that it owes to co-operative efforts of the Member States in that Group. 
16. There is a wide degree of support for the approach suggested by the Commission, and 
for a code to be adopted in the form of a non legally binding instrument. However, if the code 
is to perform its role in effectively tackling harmful tax competition, it needs to be supported 
by a strong political commitment from the Member States. That commitment could be made 
in a Council resolution endorsing the code submitted to it by the Commission. In order to 
allow for an agreement on the code at the December ECOFIN Council, the Commission 
invites Ministers to give clear orientations on the draft at the 13 October meeting; further 
technical work could, if necessary, be undertaken by the Commission through appropriate 
contacts with Member States in the run-up to the December meeting. 
17. As a matching commitment to the political agreement of Member States to the code, 
many Member States have urged the Commission to re-examine its policy in the field of fiscal 
state aid and to make full use of its powers under the Treaty rules, in order to help combat 
harmful tax competition. As announced in the Action Plan for the Single Market, the 
Commission will continue vigorously to apply the state aid rules, including for fiscal aids. In 
the tax area, it will, in considering the common interest, take into account negative effects of 
aid that are brought to light by the Taxation Policy Group. In accordance with the Treaty, the 
Commission will, in co-operation with Member States, review its past decisions and may, if 
necessary, propose that Member States amend or abolish aid as required by the development 
or the functioning of the Single Market. In addition, the Commission will respond positively 
and associate itself with the commitment entered into by the Member States in the code of 
conduct, notably by presenting separately and under its own initiative a communication that 
clarifies and refines its policy on the application of the state aid rules to fiscal measures in the 
light of developments in the Single Market. In this way the Commission intends to make this 
policy as transparent as possible, so ensuring that its decisions are predictable and that equal 
treatment is guaranteed. 
Taxation of capital income 
18. Capital income is the most mobile tax base of all. Action at the Community level is 
needed in order to counter current and potential distortions to the Single Market, and to 
prevent significant losses of tax revenue. The Council recognised these risks at the time of 
discussions on the 1988 Directive on the Liberalisation of Capital Movements, giving rise to 
the Commission's 1989 proposal for the taxation of income from individual savings. The 
adoption of the Euro will soon remove one remaining disincentive to cross-border investment, 
so increasing still further the need for action. 
19. There is a clear call from all sides for renewed action on the taxation of income from 
savings. However, progress in this difficult and sensitive area will require a spirit of 
compromise. The Commission therefore proposes an evolutionary approach. As a first step, 
it calls upon Member States to make a political commitment in the December ECOFIN 
meeting based on a number of agreed key principles, coupled with a commitment to enter 
swiftly into constructive discussions on a proposal which would be based on these principles. 
The Commission for its part undertakes to come forward with such a proposal at an 
appropriate time. The principles to which Member States could be invited to subscribe would 
be based on the following elements: 
I. A common solution is needed in order to prevent undesirable distortions. A minimum 
solution in the form of a directive is preferable to the current situation, which can lead to 
non-taxation. 
II. That solution should be limited to interest paid in a Member State to individuals who are 
not resident for tax purposes in that State but who are resident in another Member State. 
III. As a first step, Member States should accept the so-called "co-existence model" in order 
to ensure at least some degree of effective taxation of non-residents' income from 
savings within the Community. Every Member State should either operate a minimum 
withholding tax or provide information on savings income to other Member States. (This 
would not, however, prevent a Member State from having both systems). 
IV. All arrangements should take into account the need to preserve the competitiveness of 
European financial markets in a global context. The Community should also promote an 
extension of the agreed solution beyond its borders. 
V. Withholding tax on interest payments made to residents of other Member States should, 
in principle, be levied by the paying agent. Although some refinement of this principle 
might be necessary, this rule would allow easier identification of the beneficiaries. The 
arrangements for checking the fiscal residence of beneficiaries should not be too 
cumbersome, again in order to maintain global competitiveness. 
VI. Where a Member State does not use the exchange of information option, it should apply 
the withholding tax at least at a minimum level. This minimum tax rate should be 
specified at a level which is sufficient to ensure an acceptable level of taxation of 
crossborder savings. 
Interest and royalties 
20. As noted in the Action Plan for the Single Market, withholding taxes on interest and 
royalty payments between companies create difficulties for economic operators engaged in 
cross-border business. They can involve time-consuming formalities, result in cash flow 
losses, and sometimes lead to double taxation. Priority should therefore be given to their 
elimination. In the light of the discussions at the informal meeting in Mondorf-les-Bains and 
in the Taxation Policy Group, the Commission believes that the elimination of withholding 
taxes on interest and royalty payments between companies should form part of the taxation 
package. As part of the package, Member States could make a political commitment to work 
towards the early adoption of a directive for which the Commission will make a new proposal. 
Indirect tax elements 
21. The Commission is fully aware that a number of Member States are not convinced of 
the usefulness of including indirect taxation measures in the package. However, some 
Member States have equally stressed the need for some parallel action in indirect taxation 
areas if the approach to the resolution of taxation problems in the EU is to be a balanced one. 
Harmful tax competition between Member States in the VAT area is possible insofar as 
divergences in the application of the current transitional VAT system impact on transnational 
economic activities or on activities in a neighbouring Member State. Operators can exploit 
these divergences by using clever "tax engineering". The large disparities between Member 
States in the tax treatment of energy products also create tax distortions and curtail Member 
States' freedom of action in taxation policy. The Commission puts forward the following 
proposals for consideration firstly because they will in their own right contribute to the 
elimination of tax distortions and secondly because they can contribute towards balancing the 
package. At the same time the Commission is flexible as regards those measures and leaves it 
to the Council to determine whether this broad approach is a useful method of achieving a 
compromise. If the Council agrees, principles could be elaborated for discussion at the next 
meeting of the Taxation Policy Group, with a view to allowing a political engagement to be 
made by the end of the year. 
I. VAT Committee. The Commission proposes that the alteration already proposed to the 
status of the VAT Committee, making it a regulatory committee assisting the 
Commission in adopting implementation measures of the 6th VAT directive, could, in so 
far as situations of double taxation or non-taxation will be dealt with according to this 
new procedure, be part of the package. 
II. Taxation of investment gold. A solution to the problem of distortions in the gold trade 
in the Community, caused by the great divergence in VAT treatment of gold 
transactions across the Community, could be found by providing for an exemption 
from VAT for transactions in gold for investment purposes, and taxation of other 
gold, especially of that used for industrial purposes. 
III. Passenger transport. This has also been mentioned by some Member States as an area 
of concern. 
IV. Taxation of energy products. A political agreement between Member States could allow 
the application of certain elements of the existing draft directive (COM (97) 30 final). 
This could involve agreement on revisions to existing minimum levels of taxation for 
mineral oils and the introduction of minimum levels of taxation for energy products 
other than mineral oils. It could equally encompass the derogations provided for in the 
draft directive, for example for natural gas in the case of emerging markets. 
V. FISCALIS. The Commission proposes that agreement be reached on the establishment 
of the FISCALIS programme of co-operation between the Member States against fraud 
in the indirect taxation area. 
WAY FORWARD AND CONCLUSION 
22. There is clearly a pressing need to make progress in the field of taxation and to ensure 
a more effective co-ordination of taxation policies, both in the light of the development of the 
Single Market and of the need to reduce the level of unemployment within the Community. 
Tackling the issue of harmful tax competition, which threatens both to reduce revenues and to 
distort taxation structures, should be central to this process. Within this context, and as 
requested by the Council Presidency, the code of conduct is being put forward, together with 
other elements to form a taxation package, in order to facilitate reaching political agreement at 
the ECOFIN meeting on 1 December. The Commission believes that such a political 
agreement will be a crucial first step in the evolving process of co-ordination. 
23. Finance Ministers are therefore requested 
• to confirm the scope of the taxation package to tackle harmful tax competition that 
should go forward for a political agreement before the end of this year; 
• to endorse the draft code of conduct that is attached to this paper with a view to its 
adoption in December 1997; 
to give a first reaction to the principles put forward for a minimum solution on the taxation 
of savings; and 
to instruct their personal representatives in the Taxation Policy Group to continue to work 
constructively in order to enable the Commission to develop all the elements of the 
taxation package to be submitted to the ECOFIN Council for a political agreement in 
December. 
10 
ANNEX 
DRAFT CODE OF CONDUCT FOR BUSINESS TAXATION 
Political Commitment 
A. While recognising the positive effects of fair competition, and the need to maintain 
world-wide competitiveness, the Council notes that unrestrained tax competition for 
mobile forms of business increasingly threatens to cause economic distortions and to 
erode tax bases within the Community. It underlines its concern in this area, especially 
in relation to measures that provide operating support to international finance and 
services activities. The Council condemns the use of tax measures that harm the 
Community interest, including the effective operation of the Single Market, and it 
accordingly encourages Member States neither to introduce nor to retain such 
measures. 
B. To this end, it requests the Member States to adopt and implement the following 
principles and rules of behaviour. These rules, which fully respect the principle of 
subsidiarity, are wholly without prejudice to the application of Community law. They 
identify tax measures that are potentially harmful; and provide a framework within 
which Member States can commit themselves to follow the principles of fair 
competition. 
Scope 
C. This code covers those business tax measures which affect, or which may affect, the 
location of business activity in the Community in a significant way. Business activity in 
this respect includes all activities carried out within a group of companies. The code 
also covers those special tax regimes for employees which have a similar effect on the 
location of business activity. The tax measures covered by the code include legislative 
provisions, regulations and administrative practices. 
D. Within this field of application, the Council recognises certain types of tax measure as 
potentially harmful. These have one or more of the characteristics described in §E 
below. Although not every measure that is indicated in that paragraph will be harmful, 
each of the characteristics merits consideration. 
11 
E. The Council recognises as being potentially harmful those tax measures which provide 
for a significantly lower effective level of taxation, including zero taxation, than that 
which generally applies in the country in question. Such regimes may operate by virtue 
of the nominal tax rate, by virtue of the tax base, or otherwise. These measures should 
further be evaluated in the light of whether: 
(i) particular benefits are given only to non-residents of the country in question; or 
they are given only in respect of transactions carried out with non-residents; 
(ii) benefits are otherwise ring-fenced from the domestic economy so they do not 
affect the national tax base; 
(iii) benefits are available without there being any real economic activity; 
(iv) the basis of profit determination in respect of activities within a multinational 
group of companies departs from internationally-accepted rules, notably those agreed 
upon within the OECD; 
(v) the measure lacks transparency, including where benefits are given by relaxing 
statutory rules at administrative level in a way that is not public. 
Provision and review of information 
F. In accordance with the principles of transparency and openness, Member States will 
inform each other of their existing and proposed tax measures which fall within the 
scope of the code as described at §C-E above. In addition, Member States may seek 
information from other Member States on any tax measure which appears potentially to 
fall within the scope of those paragraphs. The Council requests the Commission, to 
which Member States will also provide this information, to co-ordinate its exchange 
between the Member States. 
G. Member States will, moreover, have the opportunity to discuss and comment on the tax 
measures of other Member States within the framework of a follow-up Group, which 
will be open to all Member States. This review will enable consideration to be given to 
the effects that these measures may have within the Community. Such a process, which 
should take into account the factors identified at §E above, will enable Member States 
to make a better evaluation of whether particular tax measures are harmful. The 
Council requests the Commission to carry out the preparatory work for the meetings of 
the Group, which will take place as necessary, and to oversee the exchange and review 
process. The Group will transmit a report of the review of each measure to the Council 
for its consideration and, if it deems appropriate, for publication. 
H. The Council emphasises the need to assess carefully the effects which tax measures 
have on other Member States; and, in so far as they are used to support the economic 
development of particular areas, to evaluate the extent to which the measures are 
effective in achieving their aims. 
12 
Standstill 
I. Member States will respect the principles outlined above when determining their 
policy, and should have regard to the review process in assessing whether any new tax 
measures or practices are harmful. The Council accordingly calls on them, as part of 
the code of conduct, not to introduce new tax measures which are harmful to the 
Community interest, including the effective operation of the Single Market. 
Rollback 
J. Member States will also review their existing laws and established practices, having 
regard to the principles outlined above and to the review process. The Council calls on 
them to amend such laws and practices as necessary, with a view to eliminating any 
harmful measures within [a determined period that is precisely defined but also allows 
for the reasonable expectations of business]. 
Anti-avoidance and tax evasion 
K. The Council stresses its commitment to full co-operation in the fight against tax 
evasion and avoidance, notably in the provision of information to other Member States 
in accordance with national legislation. 
L. The Council notes that anti-abuse provisions or countermeasures contained in tax laws 
and in double taxation conventions play a fundamental role in counteracting tax 
avoidance and evasion. Member States should apply such measures in accordance with 
Community law. 
State aids 
M. The Council notes that some, although not all, of the tax measures covered by this 
code fall within the scope of the provisions on state aid in Articles 92-94 of the 
EC Treaty. It further notes that the implementation of the code should in practice 
reduce the need for Community intervention under the state aid rules in the tax field. 
Without prejudice to Community law, it requests the Commission to provide guidance 
on the application of the state aid rules to fiscal aids and to commit itself to their 
rigorous application, taking into account negative effects of aid that are brought to light 
in the application of this code. 
13 
Geographical extension 
N. The provisions of this code should apply within the Community, as defined in 
Article 227 of the EC Treaty. Furthermore, the Council considers that it would be 
beneficial if the principles supporting fair competition were adopted as widely as 
possible. To this end it encourages Member States to stimulate their adoption at an 
international level, and in particular to give active support to their adoption in their 
dependent or associated territories. 
Follow Up 
O. In order to help to ensure the even and effective implementation of the code, the 
Council invites the Commission, acting in the capacity as described in §F-H above, to 
report to it annually. 
Revision clause 
The Council shall review the provisions of this code when it has been in operation for 
two years. It will at that stage consider whether the provisions of §E should be 
extended to include a Member State's general business tax regime where the level of 
taxation is significantly lower than the Community average. 
14 
ISSN 0254-1475 
COM(97) 495 final 
DOCUMENTS 
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Catalogue number : CB-CO-97-513-EN-C 
ISBN 92-78-25638-2 
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