Communication from the Commission to the Council - Towards tax co-ordination in the European Union - A package to tackle harmful tax competition
Date: 1997-10-01
Institutions: European Commission
Subjects: code of conduct, competition, fiscal policy, tax harmonisation

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 

Following  the  informal  meeting  of  ECOFIN  Ministers  in  Mondorf-les-Bains  on 
1. 
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 

Tax  competition  in  itself  is  generally  to  be  welcomed,  as  a  means  of  benefiting 
3. 
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 

L a b o ur  Em  ployed 

O t h er  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. 

Within  the framework of  European  models  of  a  social  market  economy,  views  may 
9. 
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. 

In  this  changing  environment,  harmful  tax  competition  will  become  an  increasing 
11. 
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 

The  informal  meeting  in  Mondorf-les-Bains  considered  how  best  to  respond  to  the 
12. 
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. 

Following the informal  discussions in Mondorf-les-Bains,  which noted the  substantial 
15. 
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. 

There is a clear call  from  all sides for  renewed  action on the taxation of income  from 
19. 
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; 

the  measure  lacks  transparency,  including  where  benefits  are  given  by  relaxing 

(v) 
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 

EN 

09  08  01 

Catalogue number  : CB-CO-97-513-EN-C 

ISBN 92-78-25638-2 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg