Communication from the Commission to the Council and the European Parliament - First annual report on the implementation of the code of conduct for business taxation and fiscal State aid - Progress report on the work concerning the taxation of income from savings and a common system of taxation for interest and royalty payments between associated companies (1998)
Date: 1998-11-25
Institutions: European Commission
Subjects: code of conduct, restriction on competition, savings, tax system, type of business

COMMISSION OF THE EUROPEAN COMMUNITIES 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.11.1998 
Brussels, 25.11.1998 
COM(1998) 595  final 
COM(1998) 595  final 

COMMUNICATION FROM THE COMMISSION 
COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

FIRST ANNUAL REPORT  ON THE IMPLEMENTATION  OF THE CODE  OF 
FIRST ANNUAL REPORT  ON THE IMPLEMENTATION  OF THE CODE  OF 

CONDUCT FOR BUSINESS TAXATION AND FISCAL STATE AID 
CONDUCT FOR BUSINESS TAXATION AND FISCAL STATE AID 

PROGRESS REPORT  ON THE WORK CONCERNING  THE TAXATION OF  INCOME 
PROGRESS REPORT  ON THE WORK CONCERNING  THE TAXATION OF  INCOME 

FROM SAVINGS AND A COMMON SYSTEM OF TAXATION FOR INTEREST AND 
FROM SAVINGS AND A COMMON SYSTEM OF TAXATION FOR INTEREST AND 

ROYALTY PAYMENTS BETWEEN ASSOCIATED  COMPANIES 
ROYALTY PAYMENTS BETWEEN ASSOCIATED  COMPANIES 

1998 
1998 

1. 

INTRODUCTION 

1.  A new global  approach to taxation issues was first presented by the Commission  in 

April  1996 at the informal  ECOFIN Council in Verona.  The objective  was to place 

taxation  issues  in  the broader  context  of  Community  policies  and,  in particular,  to 

propose  consideration  of  the  economic  and  social  disadvantages  arising  from  the 

absence of tax co-ordination in the Union. 

2.  Discussions  took  place  in  this  new  global  framework  in  1996  and  1997  in  a  high 

level  Taxation  Policy  Group  consisting  of  personal  representatives  of  Finance 

Ministers  of  Member  States.  The  Commission  Communication  "A  package  to 

tackle harmful  tax  competition  in the European  Union" drew on those  discussions, 

and, on the basis of that Communication, the Council, on 1  December  1997, adopted 

conclusions  concerning  tax policy,  and  in particular  concerning  a package  of  three 

tax measures'. 

3.  The  tax  package  aims  at  achieving  the  objectives  of  reducing  the  continuing 

distortions  in  the  Single  Market,  preventing  excessive  losses  of  tax  revenue  and 

encouraging  tax  structures  to  develop  in  a  more  employment  friendly  way. 

In 

reaching  these  conclusions,  the  Council  emphasised  the  respective  spheres  of 

competence of the Member States and the Community resulting from the Treaty.  In 

addition,  it  acknowledged  the  positive  effects  of  fair  competition  and  the  need  to 

consolidate the competitiveness of the European Union and the Member States at an 

international  level, whilst noting that tax competition may also lead to tax measures 

with harmful  effects. 

Conclusions  of  the  ECOFIN  council  meeting  on  1  December  1997  concerning  taxation  policy 
(98/C 2/01 ); OJ of 06.01.1998 n° C 2 page  1. 

1 

4.  The  Council  and  the  Representatives  of  the  Governments  of  Member  States, 

meeting  within  the  Council,  agreed  to  a  Resolution  on  a  code  of  conduct  for 

business taxation. The Council also agreed on a text on the taxation of income  from 

savings. The Commission  undertook 

• 

to  submit  rapidly  proposals  for  Directives  on  the  taxation  of  savings  and  on 

interest and royalty payments between companies, and 

• 

to publish  guidelines on the application  of state aid rules to measures relating  to 

direct business taxation. 

5. 

In  order to  ensure  the  even  and  effective  implementation  of  the  Code  of  Conduct, 

the  Council  invited the Commission  to report to  it annually  on the  implementation 

of the Code and on the application of fiscal  State aid. The Council further  asked the 

Commission to submit each year, together with the report on the implementation of 

the Code, a progress report  on the work  concerning taxation of savings and  interest 

and  royalty  payments  between  companies.  This  Communication  contains  the  first 

annual report of the Commission. 

2. 

THE  IMPLEMENTATION OF THE  CODE OF CONDUCT FOR BUSINESS TAXATION  AND 

FISCAL STATE AID 

2.1  THE CODE OF CON DUCT 

6.  The  Code  of  Conduct  covers  measures  which  provide  for  a  significantly  lower 

(including  zero)  effective  level  of  taxation  than  normally  applies  in  the  Member 

State concerned and which affect,  or may affect,  in a significant  way the location of 

business  activity  within  the  Community.  Such  a  level  of  taxation  may  operate  by 

virtue  of the  nominal  tax  rate, the tax  base  or  any  other  relevant  factor.  The  Code 

provides  for  a number  of  criteria  to be taken  into account  when  assessing  whether 

such  measures  which  fall  within  the  scope of  the  Code  are  harmful,  in the  light  of 

the effects  they may have within the Community. 

7. 

In agreeing to the Code of Conduct on business taxation  Member States committed 

themselves to: 

•  refrain  from introducing any new harmful  tax measures (standstill) 

•  re-examine their existing  laws and established  practices and amend  such laws or 

practices as necessary  with a view to eliminating  any harmful  measures  as soon 

as  possible  taking  into  account  the  Council's  discussions  following  the  review 

process (rollback); 

• 

inform  each  other  of existing and  proposed  tax  measures  which  may  fall  within 

the scope of the Code; 

•  establish a group to assess the tax measures that fall  within the scope of the Code 

and to oversee the provision of information  on those measures, and 

•  promote the adoption  of principles  aimed at abolishing  harmful  tax measures  in 

third countries and in territories to which the Treaty does not apply. In particular, 

Member  States  with  dependent  and  associated  territories  or  which  have  special 

responsibilities  or taxation  prerogatives  in respect  of other territories  committed 

themselves,  within  the  framework  of  their  constitutional  arrangements,  to 

ensuring that these principles are applied in those territories. 

The Code  of  Conduct  Group  (Business  Taxation) was  established  by  the  ECOFIN 
Council  on 9 March  19982 to assess the tax measures that may fall  within the scope 

of  the  Code  of  Conduct  and  to  oversee  the  provision  of  information  on  those 

measures.  By  common  accord  Mrs  Primarolo  (UK  Financial  Secretary  to  the 

Treasury)  was  appointed  as  Chair  for  the  Group  for  a  two  year  period.  Two  sub 

groups,  chaired  by  Mrs  Primarolo  and  Mr Nolz  (Director  General  of  the  Austrian 
Ministry of Finance), were established3 to undertake a preliminary examination of a 

range of potentially  harmful  measures that the  Code of Conduct  Group had  agreed 

to  assess  first  and  report  back  to  the  main  group.  These  measures  fall  within  the 

categories of intra group services and financial  services and offshore  companies. 

All  Member  States  have  contributed  to  the  exchange  of  information  process  by 

providing  details of the tax measures which might fall  under the scope of the Code 

of Conduct.  These have been categorised  as intra group services, financial services 

and  offshore  centres, other  sector  specific  measures, regional  incentives, and  other 

measures.  The  Commission  has  co-ordinated  and  facilitated  the  provision  of  this 

information.  Where  appropriate,  Member  States  have  subsequently  provided 

detailed  information,  in  terms  of  relevant  legislation,  administrative  practices  and 

detailed  explanations  regarding  measures  falling  within  the  work  of  the  two  sub 

groups. The Commission compiled summaries of all the measures to be reviewed by 

the two sub-groups to provide basic information on the benefits they provide and the 

conditions attached. 

2  Council  Conclusions  of  9  March  1998 concerning  the  establishment  of the  Code  of  Conduct  group 

(business taxation) (98/C 99/01); OJ of 01.04.1998 n° C 99 page 1. 

3  Council  Conclusions  of  6  July  1998  concerning  the  establishment  of  sub-groups  to  the  Code  of 

Conduct Group. 

10.  Member  States  have,  to  the  knowledge  of  the  Commission,  refrained  from 

introducing  any  new  tax  measures  which  are  harmful  within  the  meaning  of  the 

Code.  Some  proposed  new  measures  have  been  referred  to  the  Code  Group  for 

future  consideration.  The Commission  notes  that  some  measures  which  might  fall 

within  the scope of the Code have already  been withdrawn  or are being phased  out 

in some Member States. 

11.  The  Code  of  Conduct  group  will  be  making  an  interim  report  to  the  Council  on 

I  December 1998  setting  out  in  more  detail  progress  reached  so  far  in  the 

assessment of the measures which might fall within the scope of the Code. 

12.  In the context  of  promoting  the adoption  of principles  aimed  at abolishing  harmful 

tax measures on as broad a geographical  basis as possible, it should be noted that the 

OECD Council  in April  1998 adopted a report on Harmful  Tax Competition and the 

G7  has  also  demonstrated  its  commitment  to  the  further  work  on  harmful  tax 

competition.  The  OECD  report  provides  for  a  set  of  guidelines  for  dealing  with 

harmful  preferential  regimes in OECD Member countries, for the development of an 

OECD tax haven list and for the establishment of a Forum on Harmful Tax Practices 

to oversee the implementation of the recommendations in the report. 

2.2  FISCAL STATE AID 

13.  Some of the tax measures covered by the Code of Conduct on business taxation may 

fall  within the scope of the provisions on state aid in Articles 92 to 94 of the Treaty. 

In  the  framework  of  the  Code  of  Conduct  the  Commission  committed  itself  to 

publish  guidelines  on  the  application  of  the  state  aid  rules  to  fiscal  aids.  The 

guidelines  were  discussed  with  experts  from  the  Member  States  and  a  notice 

them  was 

including 
II  November 19984. 

subsequently 

adopted  by 

the  Commission 

on 

4  Commission  notice  on  the  application  of  the  state  aid  rules  to  measures  relating  to  direct  business 

taxation,  SEC (1998)  1800 final. 

14.  The guidelines aim at clarifying  the application of the state aid rules to cases relating 

to  direct  business  taxation.  They  form  part  of  a  wider  objective  of  clarifying  and 

reinforcing  the  application  of  the  state  aid  rules  in  order  to  reduce  distortions  of 

competition  in the Single Market. 

15.  The Commission  will, on the  basis of the guidelines  set out  in the notice,  examine 

the  tax  aid  plans notified  to  it  and  any  tax  aid  implemented  in  the  Member  States 

and will review existing systems. The Commission will take account of all  specific 

circumstances in each individual case. 

3. 

PROGRESS ON WORK CONCERNING THE TAXATION OF SAVINGS AND INTEREST AND 

ROYALTY  PAYMENTS BETWEEN COMPANIES 

3.1  TAXATION OF SAVINGS 

16.  The Commission  adopted  in May  1998s a proposal  for  a directive  on  savings. The 

proposal  is  based  on  the  key  elements  agreed  by  the  ECOFIN  Council  on 

1 December  1997  and  takes  into  account  the  discussions  in  the  Taxation  Policy 

Group  in  February  1998.  The  Commission  proposed  the  co-existence  of  a 

withholding tax of 20% and a system for providing information  to tax authorities of 

other Member States. 

17.  The  proposal  was  presented  to  the  Council  in  June.  The  Austrian  Presidency  has 

taken  negotiations  forward  in  the  Council  and  several  meetings  of  the  Council 

financial  questions  group  have  been  arranged  to  discuss  different  aspects  of  the 

proposal. 

Proposal  for  a  Directive  to  ensure  a minimum  of effective  taxation  of savings  income  in the  form  of 
interest  payments  within  the  Community,  COM(1998)  295  final  -  O.J.  of  08.07.1998  n°  C212 
page  13. 

18.  The European Parliament and the Economic and Social Committee have begun their 

examination  of the proposal  for  a Directive. It  is foreseen  that  the opinions of both 

institutions will be adopted in early  1999. 

19.  In order to preserve the competitiveness of the financial  markets of the  Community 

in the global context, equivalent measures to ensure a minimum of effective  taxation 

should  be  adopted  as widely  as possible. At the  informal  meeting  of the  ECOFIN 

Council  in September the importance of the third country problem was emphasised. 

It was agreed  that  this question  should  be tackled  rapidly  and the Commission  was 

invited  to  present  outlines  for  solutions.  The  Commission  services  are  presently 

finalising  this  document  on  the  basis  of  a  wide-ranging  discussion  held  at  the 

Taxation Policy Group on 12 November 1998. 

3.2.  TAXATION  OF INTEREST AND ROYALTY PAYMENTS BETWEEN COMPANIES 

20.  The Commission  presented  in  March  1998 a proposal  for  a directive on a common 

system  of  taxation  applicable  to  interest  and  royalty  payments  made  between 
associated companies of different  Member States6. The proposal aims at eliminating 

obstacles  to  cross-border  co-operation  between  companies  from  different  Member 

States, such as a possible double taxation of such payments. 

21.  The negotiations  at technical  level  in the Council  started  under the UK  Presidency 

and  continued  under  the  Austrian  Presidency,  which  pursued  the  negotiations  in 

order to make as much progress as possible towards an early adoption. 

22.  The  Economic  and  Social  Committee  gave  a  favourable  opinion  on  1  July  19987. 

The European Parliament gave a favourable opinion on  16 September  1998. 

6 

Proposal  for  a  Directive  on  a common  system  of taxation  applicable  to  interest  and  royalty  payments 
made between  associated  companies  of different  Member  States; COM(1998) 67 final  of 04.03.1998  -
O.J. of 22.04.1998 n° C  123 page 9. 

7  O.J. of  14.09.1998 n°C 284. 

4. 

CONCLUSIONS 

23.  At  its meeting  in Cardiff  on  15 and  16 June  1998, the  European  Council  reaffirmed 

its  commitment 

to  fostering 

tax  efficiency  and  discouraging  harmful 

tax 

competition.  In this context, the  European  Council  welcomed  the  establishment  of 

the Code of Conduct  Group and  its intention  to present a preliminary  report  to  the 

Council by the end of 1998. 

24.  Ministers expressed  their firm commitment  to a rigorous implementation  of the tax 

package  at  the  informal  meeting  of  the  ECOFIN  Council  in  Vienna  in  September 

1998.  They  gave  high  priority  to  the  implementation  of  the  Code  of  Conduct  and 

agreed to aim at concrete results with regard to the taxation of savings by the end of 

the German  Presidency. 

25.  The Council is asked to 

• 

take note of this first annual report on the implementation of the Code of Conduct 

and fiscal state aids; 

• 

take note of this progress report on the work concerning taxation  of savings and 

interest and royalty payments between companies; 

•  confirm  the  objective  of  reaching  concrete  results  in  the  negotiations  on  the 

proposal  for  a Directive  on the  taxation  of  income  from  savings by  the  end  of 

June  1999; 

•  set the objective  of reaching  concrete results in the negotiations on the  proposal 

for  a  directive  on  interest  and  royalty  payments  between  associated  companies 

for the end of June  1999; and 

•  reaffirm  its commitment to a rapid  implementation  of the Code of Conduct and, 

within the context of the package to tackle harmful  tax competition, ask the Code 

of  Conduct  Group  to  endeavour  to  complete  the  assessment  of  the  measures 

which might fall within the scope of the Code by the end of June 1999. 

ISSN 0254-1475 

COM(98) 595  final 

DOCUMENTS 

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09  06  01  16 

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