Opinion of the European Economic and Social Committee on the Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Coordinating Member States' direct tax systems in the Internal Market on the Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Tax Treatment of Losses in Cross-Border Situations and on the Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee — Exit taxation and the need for coordination of Member States' tax policies COM(2006) 823 final — COM(2006) 824 final — {SEC(2006) 1690} — COM(2006) 825 final
Date: 2007-09-26
Institutions: European Economic and Social Committee
Subjects: European tax cooperation, corporation tax, personal income tax, single market, tax harmonisation

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Opinion of the European Economic and Social Committee on the

— ‘Communication from the Commission to the Council, the European Parliament and the
European Economic and Social Committee — Coordinating Member States' direct tax systems in
the Internal Market’ on the

— ‘Communication from the Commission to the Council, the European Parliament and the
European Economic and Social Committee — Tax Treatment of Losses in Cross-Border Situa-
tions’ and on the

— ‘Communication from the Commission to the Council, the European Parliament and the
European Economic and Social Committee — Exit taxation and the need for coordination of
Member States' tax policies’

COM(2006) 823 final

COM(2006) 824 final — {SEC(2006) 1690}

COM(2006) 825 final

(2008/C 10/25)

On 19 December 2006 the Commission decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the abovementioned proposals.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 4 September 2007. The rappor-
teur was Mr Nyberg.

At its 438th plenary session, held on 26 and 27 September 2007 (meeting of 26 September), the European
Economic and Social Committee adopted the following opinion by 168 votes to 2 with 4 abstentions.

1. Conclusions and recommendations

1.1 With regard to the aims and approach of efforts in the
field of taxation and the internal market, the EESC endorses the
Commission's view that tax objectives can be achieved and the
tax base protected through coordination and cooperation
between the Member States. It could also reduce compliance
costs and remove obstacles such as discrimination and double
taxation.

1.2
The Commission chooses its words carefully in these
communications, with expressions such as ‘proposes to present’,
or ‘proposes to examine … in the near future …’, etc. The EESC
believes that the Commission's proposed initiatives are a logical
part of a taxation work programme. These are problem areas
when cross-border activity is involved.

1.3
However, the Commission's cautious approach puts the
reader to the test. The descriptions of the various situations are
very brief and the legal interpretations tentative. Consequently,
any reactions to the ideas expressed in the Commission's
communications must concern themselves more with the funda-
mentals rather than adopting any specific position. Discussions
with Commission representatives have also revealed that the
communications can be seen more in terms of a report on the
Commission's wider work.

The Commission takes the view that while it is not ideal
1.4
to apply domestic loss relief systems to cross-border situations,
it does constitute an improvement. It is, however, extremely
dubious both legally and socio-economically, as what it involves

in practice is using a foreign firm to apply the national rules of
that firm's country in another country's territory. The different
legal and economic problems involved in loss relief for firms
with cross-border activity could, in the long term, be solved via
a common consolidated corporate tax base (CCCTB). Given that
the Commission is currently dealing with this issue in a special
working group with the Member States,
it should focus the
group's efforts on finding a rapid solution and use these
communications more as a means of addressing the general
problems.

1.5
The Commission is attempting to solve a problem
without providing — at least in this communication — any
assessment of its scale, or of the actual implications of intro-
ducing the right to transfer losses across borders. Moreover, the
Commission's argument does not take sufficient account of the
fact that losses can be carried forward. In most cases there is
not always a need to transfer losses across borders.

1.6
The treatment of transfers of corporate unrealised gains
between Member States can hardly be exclusively based on a
case involving transfers for private individuals. The rule that exit
tax may not be levied on unrealised gains makes considerable
demands in terms of information. Cooperation between the tax
authorities should be sufficient to ensure that both countries get
their rightful share of the tax revenue when it is eventually paid.
Some transferred assets, such as intangibles, are never disposed
of, or simply expire. The Commission's description of such
cases is unclear.

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1.7
Generally speaking, it is important to extend cooperation
and coordination on corporation tax. At the same time, the
subsidiarity principle requires that the Member States' preroga-
tive to take independent decisions based on national conditions
must be respected.

2. Introduction

2.1
On 19 December 2006 the Commission presented three
communications on the coordination of Member State tax
policies. These include a more general communication and
two communications addressing specific problems:
losses in
cross-border situations and exit taxation. The aim is to improve
coordination between the different national tax systems rather
than to propose any harmonisation.

2.2
Although the communications refer to direct taxation
systems, they deal almost exclusively with company taxation.
The communications have been presented in part in an attempt
to find quick solutions to the problems involved when compa-
nies are active across borders, which can — in the long-term —
be solved through a CCCTB; and in part to solve any problems
that might remain after the consolidated tax base is introduced.

2.3
The EESC has commented positively on the introduction
of a CCCTB, and stated a number of principles that should
apply if one is introduced (1).

2.4
The Commission states quite clearly that the discussion
and proposals are not limited to merely removing discrimina-
tory obstacles for firms and the risk of double taxation, but also
aim to enable the Member States to protect their tax bases.

3. Coordinating Member States' direct tax systems in the

Internal Market COM(2006) 823 final

3.1
tax
According to the Commission, coordination of
systems is needed to remove discrimination and double taxa-
tion, preventing non-taxation and abuse, and reducing compli-
ance costs for businesses and persons who have to work with
several tax systems. Bilateral agreements tend to be the instru-
ment of choice where there is a mismatch between two tax
systems. Court proceedings have been developed as an alterna-
tive in order to assess whether the provisions comply with
Community legislation. According to the communication, tax
rules that can conflict with Community legislation include rules
on exit taxes, withholding tax on dividends, group loss relief,
and taxation of branches.

3.2
European Court of Justice (ECJ) case law in the area is
constantly evolving, but it generally concerns specific cases and
can rarely be interpreted broadly. The Commission believes
there is a need for guidance so that case law can be interpreted
more
the
Commission is attempting to help the Member States to find
coordinated solutions.

comprehensively. With these

communications

(1) OJ C 88, 11.4.2006, p. 48: Opinion of the EESC on the Creation of a

common consolidated corporate tax base in the EU.

In order

the Commission is

An important objective for

3.3
the
removal of double taxation, which can be an obstacle to
cross-border activity.
to prevent non-taxation and
abuse, the Commission proposes to examine existing rules with
a working group from the Member States. Apart from the fact
that the rules are essentially different, they must also be applied
in 27 different
systems. The Commission
proposes to examine how administrative cooperation between
the Member States can be improved.

administrative

future
The Commission also announces subjects for
3.4
communications, such as measures to combat abuse, definitions
of debt and equity, and to extend recourse to arbitration proce-
dures for tax disputes between Member States.

Comments

3.5
In commenting on the three communications, the EESC
would reiterate its support for efforts to secure a common
consolidated corporate tax base, or CCCTB. One of
the
principles posited in the EESC's opinion on the subject was that
the CCCTB should be mandatory if it is to be fully effective.
Political
reservations have been expressed about a CCCTB.
The Committee takes the view, however, that efforts to secure
such a tax base cannot be called into question. It is needed in
the long-term if the internal market is to function properly. It
would also facilitate implementation of the proposals addressed
in the Commission communications. On the other hand, there
can, of course, be different views as to how this tax base should
be constructed, but
this debate must be resumed when a
concrete proposal has been presented.

3.5.1
The EESC's opinion on CCCTB pointed out that there
could be a case for gradually presenting proposals that could be
implemented before
finalised. The
Committee sees the communications as a step in this direction.

the main proposal

is

The wording used by the Commission in the communi-
3.6
‘The Commission proposes to
cation is extremely cautious:
present a number of initiatives’;
‘the Commission proposes to
examine this area together with Member States in a working
group in the near future’; ‘It is desirable to explore more gener-
ally the ways in which cross-border compliance costs can be
reduced’. The Commission's cautious approach to tax issues is
understandable given the prevailing negative attitude, not least
on the part of finance ministers. If politicians are not prepared
to work constructively on cooperation, coordination and, where
appropriate, harmonisation (particularly on CCCTB), the ECJ
will continue to be the institution that decides how national tax
systems must work together.

3.7
The EESC believes that the Commission's proposed initia-
tives are a logical part of a taxation work programme. These are
is
problem areas when cross-border activity is involved.
important that the Commission's forthcoming proposals should
be accompanied by a statement of their expected impact on the
achievement of the Lisbon Agenda objectives.

It

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3.8
The problems addressed in this communication and in
the other two communications relate mainly to the cross-border
activity of firms. Individuals are only dealt with in the commu-
nication on exit taxation. The EESC believes it is right to focus
first on businesses when discussing the internal market and
taxation.

ECJ decided that a loss may only be offset by the parent
company once every possibility to take account of the loss in
the country where the subsidiary is located has been exhausted.
to the parent
Loss
company. Moreover, it can only be temporary.

relief may only take place vertically,

3.9 When a firm is contemplating starting up in another
country, it needs detailed information about that country's tax
system. Greater openness is required and information needs to
be more readily available. The Commission could be an impor-
tant link to Member State tax offices and the information they
hold. Its role as an information provider for competition policy
could serve as a model here.

3.10
There is a great need for cooperation and coordination
in the field of corporate taxation. Although the Commission
speaks of cooperation and coordination, some of the arguments
used in the communications could lead in practice to national
sovereignty being waived in the field of taxation. This must be
avoided in any forthcoming specific proposals.

4. Tax treatment of

losses

in cross-border

situations

COM(2006) 824 final

4.1
The treatment of tax relief on cross-border losses for
firms and groups is mainly based on the ECJ decision in the
Marks and Spencer case. In the absence of cross-border relief for
losses, a firm operating in several countries will be taxed more
heavily than one that operates in one country only. With
CCCTB this problem could be solved for firms with operations
in several countries. In the meantime, the Commission suggests
various methods for providing cross-border relief for a parent
company when losses are incurred by a subsidiary, and for
companies with permanent establishments and branches in
other countries.

It is not possible to describe the EU situation in its

4.2
entirety because the rules differ between Member States.

4.3
Firms with several entities in one country can always
offset losses between entities. A table in the communication
shows that cross-border loss relief is generally available, but not
in all Member States. The ECJ has ruled that the same conditions
must apply to a firm with several activities in one country as to
a firm that is active in several Member States. Consequently, the
Commission believes that loss relief is pursuant to freedom of
establishment.

For groups (parent company-subsidiary), domestic loss
4.4
relief is available in most Member States. Where there are subsi-
diaries in other countries,
it is only available in exceptional
cases. This was the situation in the Marks and Spencer case. The

4.4.1
Firms within a group are legally separate entities and
are taxed individually. However, 19 Member States have
domestic systems of group taxation. Most have opted for the
pooling of tax results, whereas a few others only allow loss
relief. Clearly, special rules are needed for cross-border loss
relief, as the result must be taxed according to different systems.
These rules differ across the Member States. With CCCTB, all
these problems could be solved for firms with operations in
several countries. What the Commission wishes to achieve are
temporary common solutions for cross-border loss relief for
groups.

Comments

4.5
The communication deals with loss relief but the taxa-
tion of profits is, naturally, the point of departure. The best
approach would have been to formally address both profits tax
and loss relief in the same document. Loss relief cannot be dealt
with independently of profits tax. In focusing on the option to
transfer losses, the Commission avoids the other way to make
up for the deficit: intra-group contributions. If an intra-group
contribution can be made before tax is paid on profits, it has
the same tax effect as loss transfers.

the same country only addresses half

4.6
The argument that a firm that is active in several coun-
tries must be treated in the same way as a firm that operates in
several areas of
the
problem. The Commission wants firms with cross-border opera-
tions to be treated the same. Given that loss relief rules vary
between the Member States, new discrepancies emerge between
firms. If a firm comes from a country where cross-border loss
relief is permitted and it can apply those rules in a country
relief between the parent company and the
where loss
subsidiary is not permitted, then a discrepancy arises between
national and foreign firms. As long as the rules differ there can
be no equivalence between all three types of firm; the equiva-
lence is merely transferred. The legal equivalence that used to
exist between all
firms operating in a given country thus
becomes equivalence between all firms from the same country,
regardless of where their operations are carried out. Put differ-
ently, the rules on transfers of losses are transferred from one
country to another via a subsidiary or a branch in that country.
This
the Commission's
analysis does not include the potential impact on firms with no
cross-border operations.

In other words,

is unacceptable.

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4.6.1
The Commission takes the view that while it is not
ideal to apply domestic loss relief systems to cross-border situa-
tions, it does constitute an improvement. It is, however, extre-
mely dubious, both from a legal and socio-economic point of
view, as what it would involve in practice is using a foreign firm
to apply that firm's national rules in another country's territory.
The Committee believes that the most serious of the negative
consequences that the Commission says result from the lack of
cross-border loss relief are problems in establishment, as there
are usually losses when an activity is launched. In the start-up
phase, however, it is not possible to offset losses against profits
in the firm's home country. This is a disincentive to establish-
it is SMEs that find it
ment in other countries. Furthermore,
most difficult to bear these initial costs. Domestic firms also
face these problems, so they are not just specific to establish-
ment abroad.

The EESC also believes future proposals must be framed in a
way that minimises the risk of tax avoidance in connection with
loss relief.

4.11
The Commission has already submitted various propo-
sals that allows for loss relief in years following the year in
which the loss transfer was made. The loss is returned from the
parent company as soon as there is a profit against which it can
be offset. This would appear to be the best method here, as the
tax base is only transferred temporarily between the countries
concerned.

4.7
Furthermore, the Commission's argument does not take
sufficient account of the fact that losses can be carried forward.
In most cases there is not always a need to transfer losses across
borders. The difference between carry forward loss relief within
a country and loss relief between countries is the time aspect.
With cross-border loss relief, losses can be offset against profits
immediately. The question that needs to be asked is whether the
difficulties encountered in creating the special solutions needed
to ensure cross-border loss relief can take place within the EU
are warranted by the gains to be had from being able to apply
loss relief immediately during loss-making years. A temporary
intra-group contribution can be used to fund losses temporarily.
The problem the Commission is attempting to solve is perhaps
not as great as it might seem. The Commission's analysis should
consider cross-border loss relief and loss relief over time as alter-
instead of
firms with cross-border operations
natives
focusing exclusively on just one of them.

for

4.8
Furthermore, there is no assessment — at least in this
communication — of the scale of the problem, or of the actual
implications of introducing the right to transfer losses across
borders. Such an analysis is essential before any decision can be
taken on whether to allow losses to be transferred across
borders.

4.9
The Commission's interpretation of the legal situation,
i.e. that loss relief must be allowed in order to comply with
freedom of establishment when activities are performed by
permanent establishments or branches in other Member States,
neglects to say whether the relief is to be temporary or other-
wise. It would appear that only temporary loss relief is currently
available. Consequently, it should be stated clearly that this is
what is being advocated.

first

then

CCCTB,

4.12
If an attempt were made to solve cross-border loss relief
a
problems without
introducing
broad-based problem — which the Commission does not seem
to have addressed adequately — would remain: how are we to
know the extent of the loss to be carried over from one country
to another when profits and losses are based on different tax
base calculations in the two countries? This means they cannot
agree on the actual size of the loss. In short, it would seem that
CCCTB is the only way to solve the various legal and economic
problems involved in cross-border loss relief in the long-term. If
this matter is resolved relatively quickly, it might be appropriate
for the Commission to focus more on the other problems raised
in these communications.

5. Exit taxation and the need for coordination of Member

States' tax policies COM(2006) 825 final

The Commission believes that when unrealised gains are
5.1
transferred between firms, the same tax deferral rules must
apply whether the transfer is made within a single country or
between countries. However, problems arise because the rules
on taxation of unrealised gains differ. In addition, lack of infor-
mation between tax authorities and the firms or individuals in
question can also lead to uncollected taxes or double taxation.
The Commission gives examples of how Member State rules
could be coordinated better. More remains to be done if the
problems are to be fully resolved.

5.2
The Commission bases its argument on a case in which a
private individual (2) was taxed on unrealised gains when leaving
the country, whereas those who stay are taxed when the gain is
realised. The ECJ felt that this discrepancy was a breach of the
Treaty rules on free movement. But
then comes the other
problem: the country where the gain was made misses out on
the tax revenue.
In the absence of any specific rules, when
realised it accrues to the country the taxpayer has moved to.
The ECJ ruled that a tax declaration could be required on
leaving the country, to be used as a basis for apportioning tax
revenue when the gain is realised.

4.10
The Commission wishes to use the restrictions imposed
in the Marks and Spencer case as a guide for future measures.

(2) Case C-9/02 Hughes de Lasteyrie du Saillant v. Ministère de l'Economie,

des Finances et de l'Industrie, OJ C 94, 17.4.2004, p. 5.

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5.3 Most Member States now follow the ECJ's ruling and
have abolished exit tax. Uncertainty arises as to how or indeed
whether tax on part of the gain is to accrue to the country from
which residence is transferred. The Commission advocates a
system whereby the new country of residence grants credit for
that part of the gain that occurred before residence was trans-
ferred. This would require the tax authorities in the two coun-
tries concerned to coordinate their efforts. The Commission also
interprets that ECJ case that applied to an individual as also
applying to firms that transfer unrealised gains.

5.4
The EEA/EFTA countries constitute a special case, as they
are bound by EU provisions on free movement but not on tax
legislation. Here the Commission feels that, in order to ensure
that revenue can accrue to the country being left, tax may be
demanded on exit, unless bilateral agreements provide for other
solutions.

Comments

individuals cannot be applied wholesale to firms. The Commis-
sion therefore needs to flesh out its analysis by addressing the
specific problems that can arise for firms.

is

text

needed

A more

exhaustive

5.6
clarify
what the Commission believes should apply in different situa-
tions, e.g.
involving a parent company and subsidiary, or
branches and permanent establishments. The Commission's
the reader wondering whether
communication also leaves
unrealised assets should really be treated differently according to
the type of relationship that exists between the firms concerned.

to

The rule that exit tax may not be levied on unrealised
5.7
gains leads to considerable demands for information. It seems
unfair to require an annual declaration that the assets have not
been disposed of, when cooperation between the tax authorities
should be sufficient to ensure that both countries get their
rightful share of the tax revenue when it is eventually paid.

5.5 When the Commission argues the different cases invol-
ving transfers between firms of assets comprising unrealised
gains, the legal situation appears less certain than for private
individuals. The Commission bases its interpretation for firms
on the ECJ ruling for private individuals, but a ruling for private

5.8
Some transferred assets, such as intangibles, are never
disposed of, or simply expire. The Commission's description of
such cases is not exhaustive. How is the Member State where
the asset originates ever to be able to tax a previously unrealised
gain if it is not allowed to do so when it is transferred?

Brussels, 26 September 2007.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS