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 — The application of anti-abuse measures in the area of direct taxation — within the EU and in relation to third countries COM(2007) 785 final
Date: 2008-09-17
Institutions: European Economic and Social Committee
Subjects: ESC opinion, EU law - national law, European Economic Area, European Union, European accounting system, administrative cooperation, fiscal policy, tax avoidance, tax system

31.3.2009

EN

Official Journal of the European Union

C 77/139

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 — The application of anti-abuse measures in the area of direct taxation — within the EU
and in relation to third countries’

COM(2007) 785 final

(2009/C 77/29)

On 10 December 2007 the Commission decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the

Communication from the Commission to the Council, the European Parliament and the European Economic and Social
Committee — The application of anti-abuse measures in the area of direct taxation — within the EU and in relation
to third countries.

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 14 July 2008. The rapporteur
was Mr Burani.

At its 447th plenary session, held on 17 and 18 September 2008 (meeting of 17 September), the European
Economic and Social Committee unanimously adopted the following opinion.

1. Conclusions and recommendations

The Commission document lays the foundations for a
1.1
discussion between Member States on direct
taxation in
cross-border transactions. In particular, it proposes ‘coordinated’
solutions for the implementation of anti-abuse measures, an
area in which cooperation between the different administrations
is poor, with wholly national approaches.

1.2
The EESC welcomes the initiative — which is envisaged
as long-term — particularly because it would result in the crea-
tion virtually of a Community body of laws (or at least that is
the intention), based on the numerous
the
European Court of Justice. ECJ case law is extensive enough to
be a good point of reference for national
tax authorities,
although the latter are not always willing to use it.

judgments of

1.3
The starting point is the agreement between Member
States on what is deemed ‘abuse’ — i.e. on the distinction
between ‘tax evasion’ and ‘tax avoidance’. The EESC stresses the
importance of the ECJ judgments, which have established that,
while there is no doubt that the former is an offence, a distinc-
tion needs to be made as regards the latter: avoidance is only an
offence if ‘wholly artificial arrangements’ are set up, i.e. if ficti-
tious situations are created. The setting-up of establishments
with the intention of taking advantage of state aid granted in
other countries does not count as an offence either: if the aid
were not
in line with the Treaty the distortion would be
addressed at source by other means without involving individual
parties.

1.4
A particularly important aspect is ‘thin capitalisation’, i.e.
providing foreign subsidiaries with funds instead of increasing
capital. The approach taken by administrations is somewhat
subjective, and it is particularly difficult to judge when it comes
to financial institutions.

Case law (see below) aside, the EESC draws attention to a
1.5
number of
fundamental principles on which Member States
should agree, maybe introducing them as of now. Firstly, a
balance needs to be struck between the interests of the state and
those of the taxpayer, with the proportionality principle always
applied when deciding on cases of ‘wholly artificial arrange-
ments’. This means that rules are needed for fair distribution of
the burden of proof and, in particular, establishing the proce-
dures to be followed by tax authorities when collecting proof,
with due regard for the law.

the

EESC feels

In conclusion,

1.6
that on such a
multi-faceted, varying matter Member States' goodwill and
willing cooperation is needed: they have to strike a balance
between protecting their finances and focusing on the public
and respect for their rights. At the same time, it feels that it is
its duty to highlight the role that tax administrations should
play in combating both abuse and, most importantly, artificial
(or even genuine) arrangements serving as a front for criminal
activities.

2. Introduction

As promised in 2006 (1), the Commission has started
2.1
work on coordinating Member States' direct tax systems.
The issue is quite clear: when implementing tax measures invol-
ving taxpayers' cross-border activities each national authority is
required to ensure that
its country receives the appropriate
revenue, but the diversity of systems could lead to differences
in interpretation or
authorities.
Taxpayers could take advantage of these differences and abuse
them to avoid some or all of their obligations. On the other
hand, double taxation also needs to be prevented.

application by other

(1) COM(2006) 823 of 19.12.2006.

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2.2
To this end, most Member States have adopted a number
of ‘anti-abuse rules’ — specific or general rules which differ
from country to country. This situation can — and does — give
rise to disputes in respect of taxpayers and sometimes between
Member States themselves. The European Court of Justice (ECJ),
called on to decide on various individual cases, has returned
judgments which, in the absence of Community legislation on
the matter, provide useful case law as a guide. The Commission
has referred to this in drawing up the Communication in
question.

The Communication is ‘intended to provide a framework
2.3
for further discussion with Member States and stakeholders with
a view to exploring the scope for coordinated solutions’. The
Commission believes that there is an urgent need ‘to strike a
proper balance between the public interest of combating
abuse and the need to avoid disproportionate restrictions on
cross-border activity within the EU’; moreover, it will be neces-
sary to coordinate application of anti-abuse measures in rela-
tions with third countries.

2.4
The Commission intends to launch a discussion between
the Member States on these issues involving stakeholders, so as
to reach conclusions on which all agree. This should lead to
voluntary coordination of rules and procedures. There is no
question of ‘harmonisation’ — which would be too difficult to
achieve in the short term — or of legislative measures, which
would be practically impossible to prescribe.

3. Gist of the Communication

The Commission document

3.1
takes particular care to
define the relevant terminology and background to the
issue, taking as basis ECJ judgments which have laid down a
number of basic principles. Firstly, an abuse is defined:
it
‘occurs only where, despite formal observance of the conditions
laid down in the relevant Community rules, their purpose is not
achieved and there is an intention to obtain an advantage by
artificially creating the conditions for obtaining it (2).’ A distinc-
tion must be made between an abuse and tax avoidance, which
is defined as ‘wholly artificial arrangements aimed at circum-
venting the application of the legislation of the Member State
concerned’.

3.2
Another basic principle is that ‘the need to prevent tax
avoidance or abuse can constitute an overriding reason in the
public interest capable of justifying a restriction on funda-
mental freedoms’. However, the legitimacy of restrictive rules
is dependent on their compliance with proportionality princi-
ples; the rules must, in addition, ‘serve the specific purpose of
preventing wholly artificial arrangements’.

a subsidiary is established in another Member State cannot, of
itself, be said to be covered by this definition, even where activ-
ities carried out by a secondary establishment
in another
Member State could just as well be pursued by the parent
company. The argument that decisions to set up secondary
establishments are based on tax considerations is not sufficient
alone: provided that there is no abuse, it is perfectly legitimate
to take advantage of a more favourable tax regime in another
Member State. Lastly, the fact that a secondary establishment is
set up in order to take advantage of state aid granted by
another Member State does not constitute such an arrangement
either: the distortion brought about by state aid which is not in
line with the Treaty should be resolved at source by other
means, but this does not warrant unilateral measures to counter
its harmful effects.

3.4
However, the ECJ did place limits on broader interpreta-
tion of these principles: they do not hold where a further
element of abuse is present such as the establishment of a
‘letterbox’ or ‘front’ subsidiary, or where terms and conditions of
financial
in
different Member States deviate from those that would have
been agreed upon between unrelated parties. A substance-over-
form rule is therefore applied.

transactions between related companies resident

The Commission points out that the above criteria apply
3.5
to specific cases but that it would be worth exploring the
practical application of those principles to different types
of business activities and structures.

As regards proportionality,

3.6
the ECJ allows Member
States to adopt ‘safe harbour’ criteria to target situations in
which the probability of abuse is high: the setting-out of
reasonable presumptive criteria is in the interest of both
legal certainty for taxpayers and workability for authorities.

The Commission points out

3.7
the need for criteria
ensuring fairness: the burden of proof should not lie solely
on the side of the taxpayer, who should be able to defend
himself without excessive administrative burdens and with the
guarantee that tax authorities' assessments are subject to inde-
pendent judicial review. Moreover,
the adjustments to the
taxable income as a result of the application of the anti-abuse
rules should be limited to the extent that is attributable to the
purely artificial arrangement. In addition, intra-group transac-
tions should be assessed using the arm's length principle. Ulti-
mately, however,
these criteria should not prevent Member
States from imposing penalties on taxpayers guilty of making
use of abusive schemes to avoid tax.

3.3
The ECJ has used specific criteria to define what does
not constitute a ‘wholly artificial arrangement’: the fact that

(2) Emsland-Stärke C-110/99, #52-53; Halifax C-255/02, #74-75

(Commission document footnote).

After establishing general principles,

the Commission
3.8
document moves on to the practical application of the rules;
this part of the document will be discussed on a case-by-case
basis in the Specific comments section (see below).

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4. General comments

The EESC views the Commission's initiative very favour-
4.1
ably:
it aims to coordinate rules and procedures
firstly,
without giving way to the temptation of imposing constraints
from above, adopting a realistic approach which takes into
account the provisions of the Treaty but also Member States'
concerns; secondly,
it aims to strike a balance between the
‘public interest’ (in each Member State) and the ‘need to avoid
disproportionate restrictions’ on the internal market.

The EESC for its part recommends that the focus be
4.1.1
on the individual/taxpayer.
If and when coordination is
attempted, it must first and foremost be based on fairness in
respect of the taxpayer: while this principle seems to underpin
the ECJ's judgments it does not always seem to be observed in
practice.

4.2 Moreover, the EESC's concern seems to be shared by the
ECJ and the Commission: when the proportionality principle
(see point 3.2 above), to be adopted to prevent excessively
‘wholly artificial
restrictive rules applying in cases of
arrangements’ (see point 3.3), is mentioned, this is clearly not
a reference to hypothetical situations. There are numerous
breaches of the rules and some may well never come to light,
but there are just as many subsidiaries established abroad whose
legitimacy is called into question or disputed. If tax authorities
were to take on board the principles set forth in ECJ judgments
then businesses would be able to operate in an environment of
legal certainty, without unnecessary red tape and without
running the risk of double taxation.

4.3
(see
The EESC endorses the Commission's comment
point 3.5) that the catalogue of lawful and unlawful cases is too
varied to form the basis of general principles and that it is
therefore necessary to explore the practical application of those
principles to different types of business activities and structures.
However,
looking at individual cases in the light of ECJ judgments
would as a first step enable businesses themselves to make an
initial assessment of the likelihood of their decisions to set up
subsidiaries abroad not being opposed — provided, of course,
that the authorities decide to act in line with ECJ case law,
albeit adapting it to each individual case. Taking a case-by-case
approach would allow individual situations to be assessed fairly,
avoiding standardised solutions based on form over substance.

If both businesses and authorities act in this way, it will
4.4
be easier to isolate ‘letterbox’ or ‘front’ subsidiaries (see
point 3.4), which constitute explicit fraud. Looking at case law
in this area could help Member States when they establish ‘safe
harbour’ criteria (see point 3.6) restricting fundamental
rights.

4.5
The point raised by the Commission relating to criteria
ensuring fairness (see point 3.7) warrants particular attention.
One principle of common law relating to criminal justice is the
presumption of innocence, which places the burden of proof on
the prosecution. Although tax law is not always based on these

rules, there is no doubt that any oppressive measures taken by
authorities would be a burden for both businesses and private
individuals.

4.5.1
The EESC endorses the recommendation to establish
rules for fair distribution of the burden of proof: respect for
fundamental freedoms and the presumption of innocence must
underpin tax administrations' relations with taxpayers. Rules are
needed which establish the procedures to be followed by tax
authorities when collecting proof and which determine
where their autonomy ends when it comes to offences subject
to criminal sanction, as in the case of tax avoidance achieved
by unlawful means, which is tantamount to tax evasion.

5. Specific comments: application of rules within the

EU/EEA

5.1
The Commission refers to the principle that ‘[a]nti-abuse
measures must […] be accurately targeted at wholly artificial
legislation (or
arrangements designed to circumvent national
legislation)’.
Community rules as
Although it would be difficult to disagree with this principle, it
is still very much open to interpretation. The same can be said
of the recommendation that rules should not be dispropor-
tionate to the aim of curbing abuses.

transposed into national

5.2
The EESC believes that the only way of coordinating
measures adopted — assuming there is a sincere desire so to do —
is for the Member States to work with the Commission and
examine these measures together. The purpose of the rules in
each administration, though the underlying philosophies derive
from different
is to safeguard the
common good. One may hope for these differences to be miti-
gated, but it will be some time before the practical results are
visible.

traditions and situations,

5.2.1
The EESC entirely agrees with the Commission docu-
that anti-abuse measures designed to curb cross-
ment
border tax avoidance must not be applied to purely
domestic situations where there is no possible risk of abuse.
The ECJ also finds such measures unnecessary, as well as coun-
terproductive in terms of competitiveness.

5.3
One important point is the interpretation of the terms
debt and equity financing. One Member State may view a
transaction as an equity injection and another merely as a loan
on which interest is tax deductible. The same holds for hybrid
entities, regarded as corporate bodies by one Member State and
as transparent entities by another. This may lead to double
exemptions or double taxation. These are familiar instances
that benefit, or suffer, not only from differences in the rules
applied in different Member States, but also from the different
approach of administrations, prone to either favour or discou-
rage cross-border investments.

5.3.1
and one which should be the basis of future discussion.

The EESC finds this one of the more sensitive issues

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5.4
Also germane to this are the rules on Controlled
Foreign Corporations (CFC). Customarily, the profits of a CFC
are attributed to the parent company and taxed — albeit under
a special regime — in the country where the latter is established.
In the Commission's view, this difference in treatment consti-
tutes discrimination unless there is ‘an objective, relevant differ-
ence of situation such as to justify it’. These rules also constitute
‘an obstacle to the ability of the latter to establish itself in other
MSs by way of subsidiaries’.

5.4.1
The EESC calls for the rules on CFCs to be scrutinised
and, if necessary, revised. Important for all companies, they are
particularly so for those in the financial sector. As the
‘[I]t is crucial that taxpayers are given the
Commission says:
opportunity to demonstrate […] that their transactions served
bona fide business purposes’. While this can sometimes be a
difficult requirement for commercial businesses to meet, for the
financial sector it could become a crucial problem. The
rules that apply in this sector on both judicial review and
prudential control actually serve as a guarantee for companies
that are properly controlled. At
their
complexity and the differences from country to country could
improper dealings.
provide easy loopholes for a range of
Prime among these is the establishment of — sometimes ficti-
tious or even seemingly ‘normal’ — companies for speculative
or downright criminal ends which use sophisticated techniques
to avoid tax and prudential controls. Targeted fiscal rules can
be more useful than prudential controls in bringing these activ-
ities to light.

the same time,

The rules on thin capitalisation (capitalisation through
5.5
debt
form of equity financing)
financing, a surreptitious
mentioned in point 4.3 are another central concern. They often
diverge radically between different Member States as a result of
different views and legal traditions. The advantage or otherwise
of financing subsidiaries by means of equity rather than debt
lies in the different treatment of dividends and interest, and
businesses make this decision based on the tax regime operating
in the country of the controlled company. It is not unusual for
the same parent company to choose between the two systems
when financing controlled companies in different Member
States.

The Commission would like to see thin cap rules
5.5.1
abolished or at
least changed to exclude agreements with
lenders in other Member States. This would eliminate the differ-
ence in treatment between resident subsidiaries according to the
seat of their parent company. The Commission also adds that
‘MSs should […] be able to protect their tax bases from artifi-
cial erosion through structured debt financing, also within
the EU/EEA’. The EESC warns against making generalisations:
there could be cases where it really is necessary, or at least
preferable,
from tax
considerations.

financing, quite apart

to use debt

Brussels, 17 September 2008.

5.5.2
The EESC's reservations would appear to be echoed in
the European Court of Justice's Thin Cap ruling, which recog-
nises that ‘measures to prevent thin capitalisation are not per
se impermissible. Their application must however be confined
to purely artificial arrangements’. This form of capitalisation
should not, therefore, be excluded: all that is needed is to make
controls to forestall abuse more effective and to set tighter rules
to ensure the transparency of transactions.

In the light of all

the preceding remarks,

the EESC
5.6
concludes that
forward employ
the various arguments put
concepts that are vague or interpreted in different ways —
either strictly or loosely — in the various Member States. Before
the discussions that the Commission would like to see can
begin, there must therefore be agreement on the terminology
to be used and on the scope of every term.

The same can be said of tax avoidance. In the view of
5.6.1
the ECJ — though not of some taxation authorities — this is
not per se an offence and only becomes one if ‘a wholly arti-
ficial arrangement’ is involved, in which case it constitutes a
fraud subject to administrative and/or criminal sanction. On
this principle, too, a preliminary agreement is needed on not
only the scope but also the interpretation of the term ‘wholly
artificial arrangement’.

6. Specific comments: application of anti-abuse rules in

relation to third countries

6.1
Generally speaking, rules on CFCs also apply to subsidi-
aries of third-country companies established in the EU and to
subsidiaries in third countries of companies established in the
EU, except in the many cases where there are bilateral agree-
ments. Moreover, discriminatory treatment is compatible with
Community law where the establishment of Member States' citi-
zens or companies
is
concerned. This should also be the case for provisions to ban or
regulate the injection of thin capital, for corporation tax and
especially for specific anti-avoidance rules.

in third countries, and vice versa,

6.2
The Committee has no particular comments to make on
this aspect, but would like to stress the need to pay great atten-
tion to the application of anti-avoidance rules to new or
recently established companies from certain third countries
and subsidiaries of EU companies in those countries. There
is a disturbing proliferation of crime — not only financial —
throughout the world. Committed and effective collaboration on
this front would be even better and quicker than coordination
between administrations. The problem is far less about taxation
than about security: the tax authorities can make a huge contri-
bution here.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS