WRITTEN QUESTION E-3366/00

by Erik Meijer (GUE/NGL) to the Commission

(27 October 2000)

Subject: Avoiding tax by spreading high incomes over different Member States

1. Is the Commission aware that highly paid residents of Member States of the European Union have the opportunity of having their income paid in different Member States so that in each individual Member State they have a relatively low income and consequently, as a result of a progressive tax rate, are assigned at a low tax bracket?

2. Can the Commission confirm that this system of salary split has been used for some time by senior managers of major international companies who allegedly work in a different country every day of the week, and that it is now being used to an increasing extent by other highly paid executives of the firms in question as a means of obtaining personal tax relief?

3. Does the Commission agree that the option of spreading a tax liability over different Member States can only be justified if work is demonstrably being performed in different Member States, and that it should not result in persons benefiting from greater tax relief than the one to which they would have been entitled in one Member State?

4. Do all Member States make it obligatory for residents to state on their tax returns taxable income in other countries, with details of the amount per country, and is it possible to use this information as a way of counteracting unintentional tax immunity?

5. What does the Commission intend to do to preclude future abuse of existing schemes, for example, by harmonising the tax systems of Member States in such a way that tax concessions that are currently granted are offset by:

(a) increasing each tax base to a proportion of the grand total of the income received in different Member States, or

(b) levying in one Member State a sum equal to the improperly obtained tax concession and subsequently spreading it over the Member States concerned?

Answer given by Mr Bolkestein on behalf of the Commission

(7 December 2000)

The salary split described by the Honourable Member is the result of arrangements made under bilateral tax treaties between Member States on the sharing of the tax base and avoiding double taxation when taxpayers are involved in cross border activities. These bilateral tax treaties are as a rule based on the Organisation for economic cooperation and development (OECD) model double taxation convention.

As regards directors' remuneration, Article 16 of the OECD model convention states that: Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the boards of directors of a company which is resident of the other Contracting State may be taxed in that other State.

Concerning income from employment, Article 15(1) of the OECD model convention states that: Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Where a taxpayer's income is taxed in a Member State other than his state of residence, Member States, under these bilateral tax treaties, essentially apply one of two methods to avoid double taxation: the credit method (income taxed in the source state is included in the taxable income in the state of residence but foreign taxes are credited against residence state taxes)

or the exemption with progression method (income taxed in the source state is excluded from the taxable income in the residence state but may be taken into account in calculating the amount of tax on the remaining income in the residence state).

In certain circumstances, it is possible, as the Honourable Member suggests, that where a Member State applies the exemption method to employment income derived by a resident from other states, the salary split results in a level of taxation which is lower than if the income were earned only in that Member State.

In the absence of harmonisation at Community level, direct taxation falls in principle within the competence of the Member States, subject to respect for the provisions of the Treaty. It is therefore primarily for the Member States concerned to address any problems of tax avoidance under domestic and treaty rules. The Honourable Member raises however a further point requiring Community involvement. The lack of effective exchange of information between Member States may lead to a level of taxation below that which would be due under the tax rules of a Member State. This question is touched upon in a report of the Ad hoc working party on tax fraud of 22 May 2000 (FISC 67), which was approved by the Ecofin Council of 5 June 2000. The recommendations in the field of administrative co-operation and mutual assistance contained in the report include the Stepping up of information exchange between Member States regarding in particular the following situations mldr income paid to delocalised taxpayers, particularly sports personalities, artists and multinational business executives. The Council called on the Commission to submit possible proposals based on all the recommendations unanimously agreed.

The Commission is at present considering the steps which could be taken to give effect to the recommendations made by the Ad hoc working group on this subject.