CELEX: 51989PC0060(01)
Language: en
Date: 1989-02-08
Title: PROPOSAL FOR A COUNCIL DIRECTIVE ON A COMMON SYSTEM OF WITHHOLDING TAX ON INTEREST INCOME

COMMISSION OF THE EUROPEAN COMMUNITIES
                                                COM (89) 60  final
                                                Brussels, 8   February 1989
            TAX MEASURES TO BE ADDPTEn HV TFTR nHMMTINTW
   m QCKNBC?nCN y r m THK T.TTOAT.TZATT™ OF CAPITAL hnvEMwre
         fCumrnmlQation from tha Ccnmiswl cm tn th* HrtmvU-n
                  Proposal for a Council Directive
     on a common system of withholding tax on interest income
                PROPOSAL FOR A COUNCIL DIRECTIVE OF
    AMENDING DIRECTIVE 77/799/EEC CONCERNING MUTUAL ASSISTANCE
         BY THE COMPETENT AUTHORITIES OF THE MEMBER STATES
        IN THE FIELD OF DIRECT TAXATION AND VALUE ADDED TAX
                   (presented by the Commission)
 ---pagebreak---  ---pagebreak---                   TAX MBASOEES TO BE ADOPTED By THE OOMMONnY
          Df rrMMHfmnw V T T H T H B T.THKRAT.TaA'Hm O P CAPITAL MOVEMENTS
 IaLrûduotion
 1* Artiole 6(6) of Council Directive 68/361/KBC of 24 June I9601 on the
 liberalization of oapltal movements states that "the Commission shall
 suixnit to the Council, by 31 Deoember 1966, proposals aimed at eliminating
 or reducing risks of distortion, tax evasion and tax avoidance United to
the diversity of national systems for the taxation of savings and for
 controlling the application of these systems. "
             The Council shall take a position on these proposals by
30 June 1969. Any tax provision of a Ccumunity nature shall, In accordance
with the Treaty, he adopted imanLmcnisly.
2. As the Ctammission pointed out In its ooramunioation of 83 May 1966 on
the programme for the liberalization of oapltal movements in the
Community^ and in the oommunloation of 4 November 1967 on the creation of
a European finanoial area,3 the liberalization of oapltal movements
between Member States, which will be achieved In full with the application
of the Council Directive of 24 «Tune 1966, * is a prerequisite for the
genuine finanoial Integration of the Community. However, this in itself
Is not sufficient; another two requirements must be met.
1 Off No L 176 Of 6 July I960, p. 6.
d CXtt(ee) 292 final of 23 Kay 1966.                                         ,
3 O0M(87) 660 final of 4 November 1967.                                      J
 ---pagebreak---                                             -2-
3. First, a genuine oommon market In financial servioes must be created.
 Some important elements of this market are already in place, Including the
Directive of 20 December 1969 on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective
investment in transferable securities (UCITS),1 which will enter into
force on 1 October 1969. Others have been proposed by the Commission, the
most Important being a second direotive relating to credit Institutions2
and a direotive on Investment servioes in -Use securities field.3 All
 these measures are Intended to remove the obstacles which at present impede
aooess by suppliers of financial servioes to markets and clients In other
Member States, thereby preventing genuine cross-frontier competition. At
the same time, they are intended to create an environment in which
customers and investors are properly proteoted; the stability of the financial
system is strenghtened and equal conditions of competition are assured by the harmonisation of
the essential rules of supervision.
4. Second, appropriate measures must be taken to remove» or at least
reduce, the tax obstacles which create difficulties at different levels:
unsatisfactory allocation of resources, distortion of oompetltion between
suppliers of financial servioes and, risk of reduced tax revenue for
Member States as a result of Increased tax evasion.
6. Aa regards oompany taxation, a proposal for a direotive oonoerning the
harmonization of systems of company taxation and of withholding taxes on
dividends has existed since 1975. However, it will need to be reviewed and
supplemented at least by instruments aimed at harmonizing the corporation
tax base. It will also be necessary to look into how far tax rates should
be more closely aligned, in the interests of genuine neutrality of taxation
for investment in shares in the Community.
1 Off No L 378 of 21 Deoember 1966, p. 3.
2 Off NO C 64 of 21 March 1986, p. 1,                                                          Z
3 O0KC88) 778.
 ---pagebreak---                                      - 3-
6. The proposed measures for bringing tax rates more closely Into line
oonoero ttie taxation of Interest. Where the tax treatment of dividends is
concerned, the risks of distortion, evasion and avoidance are not
comparable. The withholding tax or tax credit systems generally applicable
in Member States ensure that the income oonoerned is declared and taxed.
GfiDflrfll ribflflrvfttlcpa
7. The two proposals attached to this communication are not intended to
faring about oomplete harmonization of the taxation of savings, something
which Is neither necessary nor désirable at the moment. They are designed
primarily to deal vita* ifre increased risks of avoidance or
evasion which will be a direct result of the final phase of the
liberalization of capital movements, agreed on SH June 1966. Community
residents will be free to transfer their savings into bank accounts in any
other Member State. There is thus a risk that, once Investors are free to
open bank accounts In other Member States, they will not declare their
Interest Income to their national tax authorities and will thus
evade payment of tax. The consei|uenoes might be a substantial loss of
budgetary revenue in many Member States and an unjustifiably favourable
treatment of Income from capital relative to income from employment.
While this risk cannot be quantified with any degree of aoouraoy, the
évidence available from Germany (following the introduction of a 10%
withholding tax), from the Netherlands (following the introduction of an
automatic obligation on banks to declare interest) and from France (in the
Lebègue Report) suggests that the loss of tax revenues oould be
substantial.
6. Action Is also necessary at Community level in order to ensure
equilibrium within the integrated financial ares, that will result from the
oomplete liberalization of capital movements. Without some minimum
movement towards alignment of the arrangements In Member States for taxing
Interest, present tax disparities may trigger undesirable shifts in capital
which, because of the national measures that would be taken to counter
them, would inevitably Jeopardize the removal of controls and lead to
renewed market fragmentation.
9.     Concerted action in the tax field in the Community will help to
strengthen both eoonomlo and financial cohesion between Member States and
the Community's identity vis-à-vis the rest of the world.
                                                                            k
 ---pagebreak---                                     - 4 -
In this conneotion, If a modern solution such as ttoe application of
withholding tax were adopted, this oould pave the way for its introduction
at International level as part of negotiations to be held with the
Community's main partners (QECD member countries).
10. In considering what measures to propose, the Commission has taken
account of a number of factors that have led it to rule out unduly drastlo
measures:
(a)    tase risk that savings will be shifted to banks and other financial
       institutions in third countries;
(b)    the possible loss of business for Community banks and financial
       institutions;
(o)    the risk of an appreciable increase in Interest rates and hence of a
       rise in the cost of money for Buropean firms and governments;
(d)    the risk of a significant Increase In administrative costs for both
       the publlo authorities and financial institutions resulting from the
       measures to be taken;
(e)    the need to maintain the Internal balance of the systems for the
       taxation of income in the different Member States, while at the same
       time encouraging closer alignment of national tax systems.
                                                                            s
 ---pagebreak---                                             - 6 -
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11. There Is clearly a primary responsibility on the national tax
authorities in Member States to take all reasonable steps within their
power to ensure that their residents declare and pay the tax on their
interest income from investments held at home.
12. m addition, as laid down in Directive 88/361/ESC of 34 «rune 1988 on
the liberalization of oapltal movements,1 any Member State will remain
free to obtain information from banks about transfers of oapltal abroad by
residents, either at the time of transfer or at a later date.
Cil) MmflUTfff Twrlfrt at flmrcmlty Iftvel
13. Given the disparities between the tax systems In force, however, the
national measures described In paragraphs 11 and 12 above will not be
sufficient to reduce the risks of distortion, avoidance and évasion.
14. In its communication of 4 November 1987 on the creation of a European
financial area,2 the Commission indicated that there were three possible
ways (not mutually exclusive) of reducing distortion and evasion in this
field:
1 See Article 4 of directive 88/361/EEC;
   OJ NO L 178 Of 8 July 1988, p. 8.
3 OCM(87)BB0 final of 4 November 1987.                                     (
 ---pagebreak---                                             -e -
- the introduction of a system of oontrol based on the requirement that
     banks disclose automatically to the tax authorities the identity of
     récipients of interest payments and the amounts reoaived;
- ilie introduction of a general withholding tax throughout the Community;
- the strengthening of mutual assistance between national tax authorities.
( a ) AirtrmwMq rfryfl fyn«/H rma YIJ h*rki*
18. the Commission has decided, not to propose that banks be required to
declare automatically to the tax authorities the interest payments they
make. While such a system would, in principle, enable the tax authorities
in each Member State to obtain Information about all the interest reoaived
by their residents, there would still be a risk of tax evasion and
additional administrative burdens would be placed on banks. Furthermore,
the introduction of such arrangements would be likely to encounter serious
obstacles in those Member States* where banking secrecy Is a long-standing
tradition and Is very often protected under the law or by the courts.
16. Nevertheless, it should be stressed that those Member States which so
wished would be free to enter into bilateral arrangements for the exchange
of information on interest paid to each other's residents.
(b)    W-WiliftlfHTifl +*~
17. Ihe Commission considers that the introduction of a minimum
Community-wide withholding tax on interest payments made to all Community
residents would be the most appropriate response to the risks of
distortion, evasion and avoidance described above. Ihe main features of
                                                                           *
 ---pagebreak---                                    - 7 -
this tax are set out In paragraph 16 below. A system of withholding tax
would have the following advantages In particular:
- as regards administration, it Is efficient in that it guarantees
   Immediate oolleotlon of the tax, before the saver receives the income;
   It thereby reduces the risks of evasion;
- it will fit into the tax system of most Member States, since nine of
   them already apply withholding tax to payments of interest to residents;
- it would be consistent with the Commission's proposals for a harmonized
   withholding tax on dividends;
- it would provide a basis for any future international discussions on
   limiting tax evasion and applying the withholding tax system generally;
- lastly, it would introduce a sew tax ooncept of "Community resident"
   that is entirely appropriate in the oontext of the creation of a
   European financial area.
18. The main features of the withholding tax system set out in the
Commission's proposal are as follows:
  (1) there should be a minimum rate of withholding tax on interest pfl,tfl
       by debtors residing in the Community; Member States would be free
       to apply a higher rate of withholding tax either to their own
       domestic taxpayers only or to all recipients of interest;
                                                                            s
 ---pagebreak---                                     - 8 -
  ( U ) however, Member States which already had a system of automatic
        declaration to the tax authorities of interest payments made by
        banks would be permitted to apply the withholding tax only to
        residents of the other Member States;
 (111) Member States would be free not to apply the withholding tax to
        tax-exempt savings inoome (savings books and other oommon forms of
        saving);
  (IT) they would have the option of not applying the withholding tax to
        interest payments constituting Industrial or ooramerolal Income;
   (v) they would also have the option of not applying -Use withholding tax
        to interest payments made to residents of third countries or to
        International loans (Eurobonds) - see paragraph 19 below;
  (vi) the withholding tax would be levied by the debtor or his paying
        agent in the case of interest-bearing financial Instruments,
        including bank accounts;
(vil) Member States would have the option either of regarding the
        withholding tax as fully extinguishing their resident taxpayers'
        liability to tax or of considering It as a payment on account of
        personal income tax, In which case the tax paid would be credited
        against the total amount of tax payable by the taxpayer, with the
        excess being refunded where appropriate.
19. The Eurobond market enables large oompanies, governments and other
public sector bodies to raise large amounts of capital rapidly and on
competitive terms. At present, Interest on Eurobonds is not subjeot to
                                                                            1
 ---pagebreak---                                     -9 -
 withholding tax In most Member States. If it were,the effeot would be
 either that major European companies would be placed at a disadvantage
 oompared with their US and Japanese competitors or that Community issuers
would set up subsidiaries in third countries to float their bonds and
 thereby escape tax. Community investors would be likely to follow them,
 m both oases, harm would be done to Europe as a major financial oentre.
 For these reasons, there would seem to be no alternative at the moment to
 permitting Member States to exempt interest payable on Eurobonds.
20. 'Order the olroumstanoes, the Commission considers that the minimum
 rate of withholding tax should 2» 18%, a figure whioh Is close to the
average of the withholding taxes applied in the Ccnraunity (0% to 38%).
 Co) "fe^^^wilng nnfrpr^tl^wt trttmm    twr iiiilftnirllrtiii
 21. 3he exchange of information is currently inhibited by the fact that,
under Council Directive 77/799/BBC of 19 December 1977,1 a oompetent
authority is not required to look for, or to transmit to the oompetent
authority of another Member State,information whioh it would be prevented
by its laws or administrative practices from oolleoting or using for its
own purposes.
22. This provision is a particularly serious obstacle to the exchange of
Information in the case of Income from capital, given the existence of very
strict rules on banking secrecy in many Member States and of an even more
restrictive administrative practioe in some others.
1 OJ No L 336 of 37 Deoember 1977, p. IB.                                   J( ù
 ---pagebreak---                                     -lo-
ss.     The oomplete removal of obstacles to coopération would, require
harmonization of national laws on banking secrecy. The Commission does not
believe that this is feasible at this stage. Where, however, the
restrictions stem solely from administrative praotioe whioh is more
restrictive than legislation, they can and should be abolished.
24. The Commission has accordingly decided to propose that
Directive 77/799/EEC be amended to remove purely administrative
restrictions and to facilitate the exchange of information In oases where
the tax authorities of the Member State of the investor in question can
show that there are d e a r grounds for a presumption of fraud.
28.     In order to reduce the risk of an outflow of capital to third
oountries as a means of escaping taxation, the Community should open
negotiations with the major third oountries involved, either bilaterally or
within a multilateral framework such as the 03GD.
These negotiations should have a twofold objective: approximation of the
provisions governing non-residents on the basis of a system of withholding
tax, and cooperation between tax authorities.
TïlflrTPlmlnAtnrry t/a mfwairas
36. As the Commission indicated in its communication of 4 November 1987,
the optimum allocation of Investment and fair competition in the provision
of financial servioee can be seriously distorted by national tax
concessions whioh give the investor an incentive to invest in financial
instruments issued by residents of his own country. Such measures are
                                                                            .u
 ---pagebreak---                                    - 11 -
incompatible with the creation of a genuinely Integrated financial market.
Accordingly, the Commission will open discussions with the Member States
oonoerned with a view to ensuring the progressive removal of such sources
of discrimination.
fhmliwlnm
27. In the light of the above, the Commission is presenting ttoe Council
with two proposals for directives.
28. The first is oonoerned with the general introduction of a withholding
tax on interest payments.
29. The second provides for limited amendment of the 1977 Directive on
mutual assistance In order to bring about more etfeotive coopération
between national tax authorities in the fight against tax evasion in the
case of Investment income.
30. The Commission calls on the Council to examine these two proposals
and to reach a décision before 30 dune 1969, as required by Article 6 of
Directive 88/361/EBC of 24 June 1988.
31. Finally, the Commission will draw up a report on the common
withholding tax system and on the use made of the exemptions provided for,
once that system has been in operation for two years.
                                                                           Al
 ---pagebreak---          PROPOSAL FOR A COUNCIL DIRECTIVE
ON A SYSTEM OF WITHHOLDING TAX ON INTEREST INCOME
                                                  Al
 ---pagebreak---                                       - 2 -
                             Explanatory memorandum
I. GENERAL CONSIDERATIONS
                                                                        C1)
1. Article 6(5) of Council Directive 88/361/EEC of 24 June 1986              on
    the liberalisation of capital movements states that "the Commission
    shall submit to the Council,     by 31 December 1988, proposals aimed at
    eliminating or    reducing risks of distorsion,      tax evasion  and tax
    avoidance linked to the diversity of national systems for the taxation
    of savings and for controlling the application of these systems".
2. As explained in the Communication to the Council, to which the present
    proposal is attached,    the Commission believes that the most effective
    measure  for avoiding    distorsions   and fraud  is a common system of
    withholding tax at source on payments of interest income.      The present
    Directive   accordingly    provides   for  the  introduction  of   such   a
    withholding   tax.   Precisely,    one characteristic   of Member States1
    national tax systems is that in most cases they make no provision for
    the taxation of interest to non-residents.
3. This measure will ensure that a minimum level of taxation is applied
    to all investment income arising within the Community.       It will thus
    discourage Community investors from transferring funds to other Member
    States solely in order to evade paying tax.
4. Having regard to the range of withholding tax rates at present applied
    in Member States     (0%-35%) and the risk that a too high rate of tax
    could  lead  to a diversion     of savings outside   the Community,     the
    Commission considers that the minimum rate of withholding tax should
   be 15%.
(1)   O.J. L 178, 8.7.1988, p. 5
                                                                                Alf
 ---pagebreak---                                           - 3 -
5. The Commission considers that this withholding tax at source should be
   designed to fit as easily as possible into the existing domestic tax
   systems of Member States.           It is accordingly proposed that the tax
   should have the following characteristics :
   i)    it should be a minimum rate of withholding tax.                Member States
        would remain free to apply a higher rate of tax either to their
        own domestic taxpayers or to all Community residents;
   ii)  Member     States    having    a   system    of  automatic    declaration   of
        interest payments by their banks to their tax authorities would
        be permitted to apply the withholding tax to Community               residents
        from other Member States only;
   iii) Member States would have the option to disapply               the withholding
        in the case of all interest payments constituting industrial or
        commercial revenues.
6. In addition it is proposed that Member States would be free to exempt
   from the withholding:
   i)   interest     not    subject    to   the    income   tax    (exempted   private
        savings);
   ii)  residents of third countries;
   iii) certain    international     loans    (e.g.   "Eurobonds") meeting defined
       criteria.       This exemption already applies in a number of Member
       States.        The   Community     must   promote   its   development    as  an
       international financial center.
7. Finally,   the Commission considers          that once the common      system of a
   withholding    tax   at  source    will   be   adopted,    the   Community   should
   consider   the    possibility    of    negotiations    with    its  major   trading
   partners,    either     bilaterally     or   multilaterally     to  extend   at  an
   international standard the scope of the withholding at source.
                                                                                       K
 ---pagebreak---                                    - 4 -
II-  COMMENTS
                                Article 1
The criterion for levying a withholding tax is that the debtor of the
interests should be resident in a Member State.
The withholding   will not  be  levied  on the   interests distributed   by
non-resident debtors.
The residence shall be determined on the basis of national legislation.
Any disputes will be settled by mean of "ad hoc" measures provided in
accordance with the bilateral conventions in force between Member States.
                                Article 2
Paragraph 1
For the purpose of the tax arrangements established by the Directive, the
term "interest" covers all income from claims of any kind,    even if those
claims carry a profits participation clause.     The expression "claims of
any kind" of course includes cash deposits and cash guarantees,      public
debt securities and bond loans.     Moreover,   claims,  and in particular
bonds which entitle the holder to participate in the debtor's profits,
are still regarded as loans if at least the contract is, overall, clearly
one for an interest-bearing loan.
The second sentence of the first paragraph excludes penalties for late
payment from the definition of interest.    Such penalties,   which are the
result of a contract,   a practice or a judgement,     consist of payments
calculated on a pro rata temporis basis or of a fixed sum.
                                                                            AL
 ---pagebreak---                                      - 5 -
Paragraph 2
In the case of non-interest-bearing securities (e.g. zero bonds)         or of a
relatively  low rate of interest     (e.g.   deep discount bonds) and whose
income  are   made  up   exclusively  or  mostly   of   a  capital   gain,   the
difference between the issue price and the redemption value is regarded
as interest subject to withholding tax.
                                   Article 3
Paragraph 1
The debtor of the interest or its paying agent (financial institution) is
required to apply withholding tax at the rate fixed by the Member State
in which it is resident.       The withholding tax is applied to securities
issued inside or outside the Community,       before or after the Directive
comes into force,    irrespective of whether the interest is paid inside or
outside the Community and of the currency in which the loan was issued.
Paragraph 2
Where the interest is paid not in the Member State in which the debtor is
resident but by an establishment located in another Member State which
deducts the interest from its taxable profits,        the withholding tax must
be applied   by the    permanent  establishment   and paid    over  to the tax
authorities in the Member State in which this permanent establishment is
situated.
                                   Article 4
Paragraph 1
The obligation   of levying a minimum     withholding tax of 15 % does not
preclude application by a Member State of differential rates according to
the nature  of the    financial   instrument   (e.g.    bank  deposit,    bonds.
Treasury bond).
                                                                                 A"i
 ---pagebreak---                                     - 6 -
Paragraph 2
Member States are free to apply higher withholding tax rates to their own
residents than to non-residents.      This will generally be the case when
the withholding tax levied on residents has the effect of discharging of
debt.
Paragraph 3
The Directive    does not  preclude   application  of  agreements  concluded
between Member States where a taxpayer wishes to benefit from a lower
rate of withholding tax provided for under such an agreement,       since he
may benefit from such agreements only by declaring the income in question
to his national tax authorities.       It goes without saying that in such
cases the recipient may set against his personal tax (see Article 7) only
that amount of withholding tax still borne by him.
                                 Article 5
(a)  This sub-paragraph permits Member States not to levy withholding tax
     where the identity of the recipients is known to them and there is
     therefore no risk of evasion.
(b)  Member   States  are  free not   to  levy  withholding  tax  where  the
      recipient is one of their residents and does not fall within the
      scope of the income or profits tax (e.g. undertakings for collective
      investment in transferable securities, charitable institutions).
(c)  Member   States  are  free not   to  levy  withholding  tax  where  the
     interest paid to their own residents is not subject to income or
     profits tax.    This provision concerns in particular the exemption
     schemes to promote certain issues.
                                                                             AI
 ---pagebreak---                                        - 7-
(d)   In order to ensure      that a private individual is not required to
      comply   with   the     formalities    laid   down    by   this   Directive,
      particularly as     regards the application of a withholding tax and
      payment of such sums to the tax authorities.         Member States are free
      not to apply withholding tax in such cases (e.g.           in the case of a
      burrowing between private individuals).
(e)   This provision aims at permitting Member States not to apply the
      withholding   tax   where   the   interest  is  paid    on  private   savings
      accounts subject to a preferential scheme.         The application of such
      schemes is subordinate to particular conditions concerning interest
      rates or the amount invested.
(f)   This faculty of exonerating is justified because the recipients are
      subject to complete fiscal control which removes the risk of fraud.
(g)   Member States are free not to levy withholding tax on the interest
      of   international      loans    (eurobonds),      as    defined    in   this
      sub-paragraph.
(h)   In view of the arrangements in force in the Member States and the
      arrangements applied by non-Member countries to Community residents,
      the Member States must be allowed a degree of flexibility              in the
      provision to be applied to residents from non-Member countries.
                                     Article 6
In the case of undertakings for collective investment              in transferable
securities (UCITS) there are two possibilities :
-   or the withholding tax is not applied or is refunded,            in which case
   the redistribution of interest is subject to withholding tax;
-   either the withholding tax is transferred as an allowable credit to
   the unitholder,      in which case the redistribution of interest by the
   UCITS is exempt from withholding tax;
                                                                                    A<\
 ---pagebreak---                                       - 8 -
In both    cases,    unitholders  are entitled    to set   the withholding tax
against their personal tax and to a refund of any amount in excess.
                                    Article 7
Except in the case where the withholding tax has a discharging character
for a resident,       it makes up simply a payment on account        towards the
definitive tax payable by the recipient of the interest.        It is therefore
normal clear that the withholding could be allowable as a credit or be
refunded if the recipient is not taxable, or if it exceeds the final tax.
                                    Article 8
Paragraph 1
In order to ensure that the budgetary cost of crediting or refunding the
withholding tax under the items of Article 7 is borne by the Member State
in   which  the   income   arose,   this   paragraph   provides   for  financial
compensation between the two Member States concerned.
Paragraph 2
The two Member States concerned may arrange,        on the basis of a bilateral
agreement,    to divide the amount of withholding tax between each other,
provided that the rights of the recipients of the interest as regards the
crediting and possible refund of the tax in their own Member State are
not affected.
                                   Article 9
With   the  aim   of   reducing  the   risks  of   capital  flows   outside  the
Community,    the Community shall enter into negotiations with its main
commercial partners in order to enlarge the geographical scope of the
withholding at source.
                                                                                 2P
 ---pagebreak---                                   - 9 -
                                Article 10
The report provided for in this article shall permit an evaluation of the
functioning of the system and particularly of the rate of the withholding
tax at source and the use of the exemptions provided for in article 5.
                                                                          1\
 ---pagebreak---                                          - 10 -
                         Proposal for a Council Directive
          on a common system of withholding tax on interest income
THE COUNCIL OF THE EUROPEAN COMMUNITIES
having regard to the provisions of the treaty establishing the European
Economic Community and particularly Article 100,
having regard to the proposal from the Commission
having regard to the opinion of the Economic and Social Committee,
having regard to the opinion of the European Parliament,
                                                (1 )
whereas the Council directive 88/361/EEC             of 24 June 1988 provides that
Member States shall abolish       not   later than 1 July 1990 restrictions on
movements   of   capital   taking  place    between   persons   resident  in Member
States;
whereas the complete liberalization of capital movements in the Community
entails risks of distortion,       tax evasion and tax avoidance linked at the
diversity   of   national    systems   for   the   taxation   of  savings   and for
controlling    the   application    of   these    systems;     in  consequence  the
approximation of these regimes is necessary to ensure that competition in
the Common market is not distorted.
whereas the application of a common system of withholding tax meets this
objective while at the same time ensuring a minimum taxation of interest
paid by a debtor which is resident in a Member State;           the institutions of
the Communities are not residents of a Member State;
whereas it is necessary to allow Member States not to levy a withholding
tax in cases where the risk of fraud is remote;
  (1)  0J L 178 of 8 July 1988, p. 5.
                                                                                    \l
 ---pagebreak---                                       - 11 -
 whereas provision must be made to ensure that from the interest collected
 by an undertaking for collective investment in transferable securities a
 withholding tax could be levied.
whereas the withholding tax should be simply a payment on account of the
 final tax liability of the recipient of interest except if it is for the
 residents discharging    of debt;   whereas  in  order  to avoid  complicated
 formalities,   any possible excess of tax ought to be repaid by the State in
which the recipient is resident; whereas Member States must nevertheless be
allowed to conclude bilateral agreements on the sharing of budgetary costs
 resulting from these provisions;
whereas a withholding tax should be introduced not later than 1 July 1990,
at which moment the complete liberalization of capital movements will be
achieved,
HAS ADOPTED THE PRESENT DIRECTIVE :
                                   Article 1
Member   States shall apply,    in accordance   with  the provisions of this
Directive, a common system of withholding tax to interest whose debtor is a
Member State or a political subdivision, local authority or a resident of a
Member State.
                                   Article 2
For the purposes of this Directive,    "interest" means income from claims of
any kind,    including premiums and prizes linked to public debt securities
and bond    loans.   Penalties for  late payment   shall  not be  regarded as
interest for the purposes of this Directive.
In the case of securities producing income made up exclusively or partly of
a gain,    "interest" means the difference between the issue price and the
redemption price.
                                                                               n
 ---pagebreak---                                      - 12 -
                                  Article 3
1.   The debtor of the interest or its paying agent shall deduct from the
    amount of interest due a withholding tax,     the rate of which shall be
    fixed by the Member State in which it is resident.     It shall pay over
    the sums withheld    to the tax authorities of    that Member   State in
    accordance with the conditions laid down by that State.
2.  Where payment of the interest is effected by a permanent establishment
    of the debtor located in a Member State other than that of the debtor,
    the withholding tax shall be deducted by the permanent establishment,
     in as much as this interest is a deductible charge for it, and shall be
    paid over to the tax authorities of the Member State in which these
    permanent establishment is situated.
                                  Article 4
1.  The rate of the withholding tax may not be less than 15%.
2.  Member States shall be free to apply a higher withholding tax rate if
    the interest is paid to their own residents.
3.  The provisions of paragraph 1 shall not preclude application of the
    provisions of agreements which has been concluded between Member States
    or between Member States and non-member countries providing lower rates
    of withholding tax when the income is declared.
                                  Article 5
Member States shall be free not to levy withholding tax on interest where:
(a)   the  recipient is one of their own    residents and his name and his
      address and the amount of interest paid are automatically notified to
      the tax authorities;
                                                                             2<f
 ---pagebreak---                                         - 13 -
(b)  the recipient is one of their own residents and does not fall within
     the scope of the income or profits tax;
(c)  the recipient is one of their own residents and the interest         is not
     subject to income or profits tax;
(d)  the    interest    is  not subject  to   income  or  profits  tax following
      incentives in favour of private savings;
(e)  the debtor of the interest is a private individual;
(f)  the interest      is made up of commercial and industrial income of the
     recipient;
(g)  the interest is payable on an international loan ("Eurobond"),        which
      is   defined   for   the purposes  of  this   Directive  as a transferable
      security in the form of a bond, which :
         is to be underwritten and distributed by a syndicate at least two
         of the members of which have their registered offices in different
         States,
     -    is offered on a significant scale in one or more States other than
         that of the issuer's registered office and
     -   may be subscribed for or initially acquired only through a credit
                                                                             (1)
         institution, as defined in Article 2 of Directive 77/780/EEC           ,
         or other financial institution.
  (1)   OJ L 322 of 17.12.1977, p. 30.
                                                                                  IS
 ---pagebreak---                                       - 14
 (h)   the recipient is a resident of a non-Member country.
                                   Article 6
Where interest redistributed by an undertaking for collective investment in
                                                                           (1 )
transferable securities in the sense of Council directive 86/566/EEC
has not been charged withholding tax in the hands of that undertaking or
where withholding tax has been refunded to it,         that interest shall be
subject to withholding tax if such tax would have been chargeable if the
interest had been paid directly by the debtor.
In the contrary case, such interest shall be exempt from withholding tax.
However, withholding tax charged on interest in the hands of an undertaking
for collective    investment  in transferable securities   shall be allowable
against the amount of income or profits tax payable by the unitholder.      It
shall be refunded to him in the cases referred to in the second paragraph
of Article 7.
                                   Article 7
Withholding tax on interest shall be allowed as a credit against the amount
of income or profits     tax payable by the    recipient  in respect  of such
interest.
It shall be refunded to the recipient by the Member State which levies the
tax referred   to in the preceding paragraph if it exceeds the amount of that
tax or if the recipient is not taxable.
                                   Article 8
1.   Where the withholding tax levied by a Member State is allowed       as a
     credit or refunded in another Member State,      the Member State which
     levied the withholding tax shall refund it to that other Member State.
   (1)   OJ L 332 of 26.11.1986, p. 22.
                                                                                DC
 ---pagebreak---                                        - 15 -
2.  By way of derogation from the provisions of paragraph 1,         Member States
    may divide the amount of the withholding tax between each other on the
    basis of a bilateral agreement,      provided that that agreement in no way
    affects the rights of the recipients of the interest as established by
    this Directive.
                                    Article 9
The   Community  shall   enter  into  negotiations     with  its  main   commercial
partners either on a bilateral or on a multilateral basis,             in order to
enlarge the scope of the withholding at source to an international level.
                                    Article 10
The Commission will present to the Council before the 1st of July 1992 a
report on    the functioning   of the common      system of withholding      tax at
source.
                                    Article 11
1.  Member States shall bring into force, not later than 1 July 1990, the
     laws,   regulations   and administrative provisions necessary to comply
    with   this  Directive.    They   shall   forthwith    inform  the   Commission
    thereof.
2.  Member States shall communicate to the Commission the main provisions
    of   national  law   which  they   adopt   in  the   field  governed   by   this
    Directive.
                                    Article 12
This Directive is addressed to the Member States.
                                                                                     n
 ---pagebreak---           - 16 -
Done at ,        For the Council
                 The President
                                 QS
 ---pagebreak--- XV-B-1
                   PROPOSAL FOR A COUNCIL DIRECTIVE OF
       AMENDING DIRECTIVE 77/799/EEC CONCERNING MUTUAL ASSISTANCE
            BY THE COMPETENT AUTHORITIES OF THE MEMBER STATES
           IN THE FIELD OF DIRECT TAXATION AND VALUE ADDED TAX
                                                                  iq
 ---pagebreak---                             EXPLANATORY MEMORANDUM
I-  General Considerations
1.  As explained in detail in the communication to the Council to which
    this proposal    for a directive    is annexed,     the   liberalization of
    capital movements should be accompanied by measures to eliminate or
    reduce the risk of tax avoidance and evasion, linked to the diversity
    of national systems for the taxation of savings and for controling
    the application of these systems.
2.  One way of doing this is to step up the cooperation between national
    tax    administrations     introduced     by   Directive     77/799/EEC    of
                      (1)
    19 December 1977        and   based    primarily   on    the    exchange   of
    information.    Of course, this exchange is limited and, in particular,
    a Member    State   is not  obliged   to have enquiries      carried  out or
    provide   information   if  its  own    laws or  administrative     practices
    prevent it from carrying out the enquiries or collecting or using the
    information for its own purposes.
3.  As regards legislation,     the rules on banking secrecy,      which are the
    main   ones   involved  in   the  case   of  income   from   capital,    vary
    considerably from one Member State to another and their harmonization
    is a long procès which raises complex problems and is politically
    highly sensitive.
    This is not true of administrative practices,        which can be modified
    without any change in legislation and without obliging a Member State
    to obtain and pass on to another Member State information which its
     laws do   not permit    it to obtain     for the purpose of      calculating
    correctly the tax payable by its own residents.            Accordingly,   the
    Commission considers that a Member State should not be permitted to
    invoke its administrative practices but should exhaust every legal
    possibility when the Member State making the request cites specific
(1)   O.J. No L336, 27.12.1977, P. 15
                                                                                  1O
 ---pagebreak---     grounds for supposing one of its taxpayers has transferred abroad
    significant funds and has not declared all,      or has declared only
    part, of the income derived from them.
II- Particular comments
                                  Article 1
    Where a tax administration suspects one of      its taxpayers of tax
    evasion on the grounds that funds have been transferred to another
    Member State without the corresponding income having been declared,
    and the taxpayer's explanations do not appear satisfactory,     it may
    request  information  from the tax authorities of the other Member
    State.    These authorities may,   however,   be unable to collect or
    supply   the  information  requested   because  of  an  administrative
    practice which restricts their powers of investigation of financial
    institutions, even for their own tax purposes.
    The amendments made by this Article to Article 8(1) of Directive
    77/799/EEC are designed to overcome this obstacle.
                                                                           l{
 ---pagebreak---                                     - k -
                      PROPOSAL FOR A COUNCIL DIRECTIVE OF
         AMENDING DIRECTIVE 77/799/EEC CONCERNING MUTUAL ASSISTANCE
              BY THE COMPETENT AUTHORITIES OF THE MEMBER STATES
             IN THE FIELD OF DIRECT TAXATION AND VALUE ADDED TAX
    THE COUNCIL OF THE EUROPEAN COMMUNITIES,
    Having  regard   to  the  Treaty   establishing   the   European  Economic
    Community, and in particular Article 100 thereof.
    Having regard to the proposal from the Commission,
    Having regard to the opinion of the European Parliament,
    Having regard to the opinion of the Economic and Social Committee,
                                           (1)
    Whereas Council Directive 88/361/EEC       stipulates that restrictions
    on capital movements between persons resident in the Member States
    must be abolished no later than 1 July 1990;
    Whereas that   Directive requires the Commission       to submit   to the
    Council   proposals   aimed   at  eliminating    or   reducing   risks  of
    distortion, tax evasion and tax avoidance linked to the diversity of
    national systems for the taxation of savings and for controlling the
    application of these systems;
                                                  (2)
    Whereas under Council Directive 77/799/EEC         the Member States are
    required to provide mutual assistance to combat tax evasion and tax
    avoidance in respect of taxes on income and on capital;            whereas
    under Article 8 of that Directive,      however,   a Member State is not
(1)    O.J. No L 178, 08.07.1988, p. 5
(2)    O.J. No L 336, 27.12.1988, p.15
                                                                               11
 ---pagebreak---                                - 5 -
obliged   to  provide information   following a request    from another
Member State if its laws or administrative practices prevent it from
collecting this information for its own purposes;
Whereas the restriction on the exchange of information arising from
administrative practices should be abolished        in cases  where the
Member State making the request has specific grounds for supposing
that one of its taxpayers has transferred         significant   funds to
another Member State without declaring the corresponding income,
HAS ADOPTED THIS DIRECTIVE:
                                Article 1
The following    is added at the end of Article 8(1) of Directive
77/799/EEC:
"However, where the appropriate authority of the Member State making
the request shows specific grounds for supposing that one of its
 residents   has  transferred,   either   directly   or through   another
 country,   significant funds to the Member State to which the request
 is made without declaring the corresponding income, the appropriate
 authority of the Member State to which the request is addressed may
 not rely on the fact that its administrative practices do not permit
 it  to   carry  out  these  enquiries   or   to  collect  or   use  this
 information for the purpose of correctly establishing the taxes due
 by its own residents."
                                Article 2
 Member States shall bring into force the necessary laws, regulations
 and administrative provisions in order to comply with this Directive
 not later than 1 July 1990 and shall communicate them forthwith to
 the Commission.
                                                                          M
 ---pagebreak---                              - 6 -
                              Article 3
This Directive is addressed to the Member States
Done at Brussels,                                For the Council
                                                  The President
                                                                 m
 ---pagebreak---                FICHE D'IMPACT SUR LA COMPETITIVITE ET L'EMPLOI
I.   Quelle est la justification de la mesure ?
     La directive du Conseil du 24 juin 1988 relative à la libéralisation
     des mouvements de capitaux stipule que la Commission soumettra au
     Conseil, au plus tard le 31 décembre 1988, les propositions visant à
     atténuer ou à supprimer les risques de distorsions, d'évasion et de
     fraude fiscales liés à la diversité des régimes nationaux concernant
     la fiscalité de l'épargne.
II.  Caractéristiques des entreprises concernées.    En particulier :
     (a) y a-t-il un grand nombre de PME ?    NON
     (b) Note-t-on des concentrations dans des régions :
         i.  éligibles aux aides régionales des Etats membres ?    NON
         ii. éligibles au Feder ? NON
III. Quelles sont les obligations imposées directement aux entreprises ?
     Les entreprises, débitrices d'intérêts doivent déduire, du montant des
     intérêts dus, une retenue à la source dont le taux est fixé par l'Etat
     membre dont elles sont résidentes.     Elles versent les sommes retenues
     a l'administration fiscale de cet Etat.
IV.  Quelles    sont    les   obligations    susceptibles   d'être    imposées
     indirectement aux entreprises via les autorités locales ?
     Aucune
V.   Y a-t-il des mesures spéciales pour les PME ?    NON
VI.  Quel est l'effet prévisible ?
     a)  L'introduction d'une retenue à la source sur les intérêts
         d'obligation peut se traduire par une augmentation des coûts des
         emprunts dans les Etats membres qui n'appliquent actuellement
         aucune retenue ou une retenue plus faible que celle proposée ou
         par une réduction de ce coût dans les Etats membres qui appliquent
         une retenue plus élevée.      Il n'est pas possible de chiffrer cet
         effet.
     b)  Sur l'emploi ?
         Néant
VII. Les partenaires sociaux ont-ils été consultés ? NON
     Quels sont leurs avis ?
                                                                       •3j-
 ---pagebreak--- Commission of the European Communities
COM(89) 60 final
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in connection with the
liberalization of capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest income
— amending Directive 77/799/EEC concerning mutual assistance by the
    competent authorities of the Member States in the field of direct
    taxation and value-added tax
(presented by the Commission)
8.2.1989
Office for Official Publications of the European Communities
L - 2985 Luxembourg
Series: DOCUMENTS
 1989 - 35 pp. - Format: 21.0 * 29.7 cm
EN
ISSN 0254-1475
ISBN 92-77-45880-1
Catalogue number: CB-CO-89-032-EN-C
 ---pagebreak---                                                          ISSN 0254-1475
COM(89) 60 final
DOCUMENTS
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in
connection with the liberalization of capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest
     income
— amending Directive 77/799/EEC concerning mutual
     assistance by the competent authorities of the Member
     States in the field of direct taxation and value-added tax
(presented by the Commission)
m
09                                                       8.2.1989
Catalogue number: CB-CO-89-032-EN-C
ISBN 92-77-45880-1
COMMISSION OF THE EUROPEAN COMMUNITIES
 ---documentbreak--- COMMISSION OF THE EUROPEAN COMMUNITIES
REVISED VERSION                            C0MC89) 60 final/3
                                           Brussels, 12 May 1989
               TAX MEASURES TO BE ADOPTED BY THE COMMUNITY IN
          CONNECTION WITH THE LIBERALIZATION OF CAPITAL MOVEMENTS
             (Communication from the Commission to the Council)
                                Proposal for a
                               COUNCIL DIRECTIVE
         on a common system of withholding tax on interest income
                                Proposal for a
                              COUNCIL DIRECTIVE
        amending Directive 77/799/EEC concerning mutual assistance
         by the competent authorities of the Member States in the
                field of direct taxation and value added tax
                        (presented by the Commission)
 ---pagebreak---                  TAY M?AKPRaS TO Eg ADOPTED BY TEK ŒHM7NTTÏ
         TV morararra vrm mm T/mreAT.TgATTnw OP nAPTTAT. MrrasraNTg
1. Article 6(0) of Council Directive 88/361/KaC of 24 JUDO I9601 on the
liberalization of capital aovements states that "-tie OammissiQn shall
submit to the Council, by 31 December I960, proposals aimed at eliminating
or reducing risks of distortion, tax evasion and tax avoidance UTiVerl to
the diversity of national systems for the taxation of savings and for
controlling the application of these systems.
            The Council shall take a position on these proposals by
30 Jane I960. Any tax provision of & Gcsnnunlty nature shall, in accordance
with the Treaty, he adopted unanimously."
2, As the Commission pointed out in its oannunioation of 23 Kay i960 an
the programme for the n > w » n » w « w of capital movements in the
Community2 and in the oonram1.on.tion of 4 November 1967 on the creation of
& European financial area,3 the liberalization of capital movements
between Kember States, which will be achieved in full with the application
of the Council Directive of 24 June 198a,1 is a prerequisite for the
genuine financial integration of the Community. However, this in itself
±B not sufficient; another two requirements must be net.
1 OJ No L 178 of 8 July 1988. p. 5.
2 <XH(66) 292 final of 23 Hay 1986.
3 CO£(87) 580 final of 4 November 1987.
                                                                            .2
 ---pagebreak---                                             - 2 -
3.    First, a genuine common market in financial services must be created.
Some important elements of this market are already in place, including the
Directive of 20 December 1085 on the coordination of laws, regulations and
administrative provisions relating to undertakings for oolleotiv*
investment in transferable securities (COTS), 1 which will enter into
force on 1 October 1089. Others have been proposed by the Commissi«i. the.
most important being a second directive on the coordination of Laws on banking
and a direotive on investment servioes in the securities field.3 All
these measures are intended to remove the obstacles which at present impede
aooess by suppliers of financial servioes to markets and clients In other
Mml-XT States, thereby preventing genuine cross-frontier ocmpetlticn. At
the same time, they are intended to create an environment in which
customers and investors are properly proteoted; the stability of the financial
system is strengthened and equal conditions.of conpetition are assured by the harmonization of
the essential rubes of supervision.
4.     Second, appropriate measures must be taken to remove, or at least
reduce, the tax obstacles which create difficulties at different levels:
unsatisfactory allocation of resources, distortion of ocmpetlticn between
suppliers of financial servioes and, risk of reduced tax revenue for
Member States as a result of increased tax evasion.
8. As regards ocmrpany taxation, a proposal for a direotive ccnoerning the
harmonization of systems of ocmpany taxation and of withholding taxes on
dividends has eadjsrted since 1075. However, it will need to be reviewed and
supplemented at least by instruments aimed at harmonising the corporation
tax base. It will aLso be necessary to lock into how far tax rates should
be more closely aligned, in the Interests of genuine neutrality of taxation
for investment in shares in the Community.
1 Ctf Ko L 375 of 21 December 1085. p. 3.
2 OT No C 84 of 21 March 1988. p. 1.
3 0CMC88) 778.
                                                                                               S
 ---pagebreak---                                      - 3-
 6.    The propoeod measures for bringing tax rates more closely into line
 coioam t&e t^ntl^n of Interest. Hhero the tax treatment of dividends is
 oonoerned, toe risks Of distortion, evasion and avoidance are not
 ocimjarahle. The withholding tax or tax credit systems generally applicable
 in Member States ensure that the Income oonoerned is declared and taxed.
 (forerai cfaflTYfttlnnfl
 7.    The two proposals attached to thijB communication are not intended to
 bring about couplets harmoni7At1on of the taxation of savings, something
 which is neither necessary nor desirable at the moment. They are rt/»«ign/^
 primarily to <v*i with tfce Increased risks of avoidance or
 evasion which vlll be a direct result of the final phase Of the
 liberalization of capital movements, agreed on 21 «June 1968. Community
 residents will be free to transfer their savings into bank accounts In any
 other Member State. There is thus a risk that, once investors are free to
 open bank accounts in other Member States, they will not declare their
 interest income to their national tax authorities and will thus
 evade payment of tax. The conséquences might be a substantial loss of
 budgetary revenue in many Member States and an unjustifiably favourable
 treatment of Income from capital relative to Income from employment.
 While this risk cannot be quantified with any degree of accuracy, the
 evidence available from Germany (following the Introduction of a 10%
withholding tax), from the Netherlands (following the Introduction of an
 automatic obligation on banks to declare Interest) and from France (in the
Lebegue Peport) suggests that the loss of tax revenues could be
 substantial.
8.    Action is also necessary at Community level in order to ensure
equilibrium within the integrated financial area that will result from the
complete liberalization of capital movements. Without .seme minimum
movement towards alignment of the arrangements in Member States for taxing
interest, present tax disparities may trigger nnriesl rahl e shifts in capital
which, because of the national measures that would be taken to oounter
them, would inevitably Jeopardize the removal of controls and lead to
renewed market fragmentation.
9.    Concerted action in the tax field in the Community will help to
strengthen both eoonamio and financial cohesion between Member States and
the Community 'e identity vis-a-vis the rest of the world.
                                                                               <f
 ---pagebreak---                                            - 4 -
I n •*>•*« connection, the adoption of a modern solution such as the
application of withholding tax could pave the way for its introduction
at international level as part of negotiations to be held with the
Community's main partners (ODCD member countries).
10. In <vwq^^T^ what measures to propose, the Commission has taken
account of a number of factors tfcat have led i t to rule out unduly drastlo
measures:
(a)       the risk that savings will be shifted to banks and otter financial
          institutions in tkird countries;
Cb)       « M possible loss of business for Community banks and financial
          Institutions;
(o)       the risk of an appreciable i™rr*flfl3 In interest rates and hence of a
         rise In the cost of money for European firms and governments;
(d)       the risk of a significant I T Y T ^ V » ? in administrative oosts for both,
          the public authorities and financial Institutions resulting from the
         measures to be taken;
(e)       the need to »»•«**•»••< ™ the internal *»I«TV*> of "the systems for the
          taxation of <**™*» In tie different Member States, while" at the same
          time encouraging tflow alignment of national tax systems.
                                                                                      'S"
 ---pagebreak---                                                     - B -
 (I)   M - M S t T ^ fr» Tift + * * « " " ^ TV^tiftrw3 \«V*1
 11. There is clearly a primary responsibility on the national tax
 authorities In Member States to take all reasonable steps within their
 power to ensure that their residents declare and pay the tax on their
 Interest income from investments held, at borne.
 12. m edditjbon. as laid down In Directive 88/361/KEC of 34 June 1088 on
 the liberalization of oapital movements,1 any Member State will remain
 free to obtain Information from banks about transfers of oapital abroad by
 residents, either at the time of transfer or at a later date.
 (II)    tomir^i       T~**A     «.+. nrrrmiTnl+y 1«w»1
 13. Given the disparities between the tax systems in force, however, ifce
nat,1 onal measures described in paragraphs 11 and 12 above will not be
 sufficient to reduce the risks of distortion, avoidance and evasion.
 14. in its communication of 4 November 1887 on the creation of a European
 financial area,2 the Commission 1n11oated that there were three possible
ways (not mutually exclusive) of reducing distortion and evasion in this
field:
1 See Article 4 of Directive 88/361/ESC;
    CJ Ko L 178 Of 8 July 1088, p. 6.
2 <XM(67)fi50 final of 4 Hovember 1987.                                     /"
 ---pagebreak---                                          -e -
 -  the introduction of a system of 'controltaa/yrlon the requirement that
    banks disclose automatically to the tax authorities the Identity of
    recipients of interest payments and the amounts received;
-   -the introduction of a general withholding tax throughout the Community;
 -  the strengthening of mutual assistance between national tax authorities.
 (aO Autnm*trtn rlanl *rnfc1 nra by hftiAg
 18. The Commission hasrtnoltVrlmot to propose that banks be required to
declare automatically to the tax authorities the interest payments they
make. While such, a system would, in principle, enable the tax authorities
in each. Member State to obtain Information about al}. the interest received
by their residents, there would still be a risk of tax evasion and
additional administrative burdens would be plaoflrt on banks, furthermore,
the introduction of such arrangements would be likely to encounter serious
ohstaol es in those Wemher States* where banking secrecy is a long-standing
tradition and is very often protected under the law or by the courts.
16. Nevertheless, it Shrmlrl be stressed that those Member States which so
wished vculd be free to enter into bilateral arrangements for the exchange
of information on Interest paid to each other's résidants.
17. The 'Commission oonsidars that the Introduction of a minimum
Community-vide withholding tax on Interest payments made to all Community
residents would be the most appropriate response to the risks of
distortion, evasion and avoidance described above. The main features of
                                                                             ?
 ---pagebreak---                                     - 7 -
tkls tax are set out in paragraph 18 below. A system of withholding tax
would have the following advantages in particular:
-   as regards adminlstraticn. it is efficient In that it guarantees
    immediate colleotion of the tax. before tke saver reoelves the income;
    it thereby redunes tke risks of evasion;
-   it will fit into tke tax system of most Member States, since nine of
    them already apply withholding tax to payments of interest to residents;
-   it would be consistent with, the Commission's proposais for a harmonized
    withholding tax on dividends;
-   it would provide a T»**« for any future International <11flonmlonson
    umiM-ng tax evasion and applying the withholding tax system generally;
 -   lastly, it would introduce a new tax concept of "Community résinent**
    tfcat is entirely appropriate in the context of the creation of a
    European financial area.
 18.    The T^n features of the withholding tax system set out in the
 Commission's proposal are as follows:
   (i) ifcere s V ^ ™ be a minimum rate of withholding tax on interest paid
         by debtors residing in the Community; Member States would be free
         to apply a ™gh*r rate of withholding tax either to their own
         domestio taxpayers only or to all recipients of interest;
                                                                             S
 ---pagebreak---                                       - 8 -
  (il) however, Member States which already had a system of automatio
          declaration to the tax authorities of Interest payments made by
          VwnVa vould be permitted to apply the withholding tax only to
          residents of the other Member States;
 (111) member States would be free not to apply the withholding tax to
          tax-exempt savings income (savings books and other forms of small
          savings);
  (!•) Member States would have the option of not applying the uitH-holding tax to
          interest payments constituting Industrial or <XBimwm1/i1 Income;
    (v) they would also have the option of not applying the withholding tax
          to interest payments made to residents of third countries or to
          International loans (Eurobonds) - see paragraph 19 below;
  (vi) the withholding tax would be levied by the debtor or his paying
          agent in the case of interest-bearing financial Instruments,
          including bank aooounta;
 (vli) Member States would have the option either of regarding the
          withholding tax as fully extinguishing their resident taxpayers'
          liability to tax or of considering it as a payment on account of
          personal Inoonw tax. In which oase the tax paid would be credited
          against the total amount of tax payable by the taxpayer, with the
          excess being refunded where appropriate.
19. The «nrfyrrrt market ftcrtilm large oompanies, governments and other
p u b H o sector bodies to raise large amounts of capital rapidly and on
competitive terms* At present. Interest on Eurobonds Is not subject to
                                                                                ?
 ---pagebreak---                                         - 9 -
withholding tax in most Kemher States. If it were,the effect would be
 either that major European companies would be plaonrl at a disadvantage
oompared with their US and Japanese competitors or that Community issuers
would set up subsidiaries in third ocuntries to float their bonds and
 thereby escape tax. Community Investors would be likely to follow them.
 In both oases, barm would be done to Europe as a major financial oentre.
 For these reasons, there would seem to be no alternative at the moment to
 permitting ******* States to exempt Interest payable on Eurobonds.
 BO. Tinder the circumstances, the Commission considers that the nrtnlmma
 rate of withholding tax should be 18%, a figure which is d o s e to the
 average of the withholding taxes applied in the Community (0* to 38%).
 (o)   Rty»B^>» B r.^r^/v^p«T^tHrg> btttwwn *pat ftn+lwrt t l * e
 21. The exchange of information is currently inhibited by the fact that,
under Council Directive 77/799/HBC of 19 December 1977, * a ocmpetent
 authority is not required to look for, or to transmit to the ocmpetent
 authority of another Member State,informatlon which it would be prevented
by its laws or administrative practices from collecting or using for its
 own purposes.
22.     This provision is a particularly serious obstacle to the exchange of
Information in the oase of income from oapltal, given the exijstenoe of very
strict rules on banking secrecy In many Member States and of an even more
restrictive administrative practice in some others.
1   OJ Ho L 336 of 27 December 1977, p. 13.
                                                                             U
 ---pagebreak---                                       - 10 -
 23. The oomplete removal of obstacles to oooperation would require
 harmonisation of national laws on banking secrecy. The Commission does not
 believe that » > H « is feasible at this stage. Where, however( tfce
 restrictions stem solely from administrative practice which la more
 restrictive than legislation, they oan and should be abolished.
 24.    Tbe Commission has accordingly derrlrtarl to propose that
 Directive 77/799/EBC be amended to remove purely administrative
 restrictions and to facilitate the exchange of information In oases where
 the tax authorities of the Member State of the investor in question can
 show that there are d e a r grounds for a presumption of fraud.
 Ttw intffffratdftnftl^nrmtinrt
 28.    In order to reduce the risk of en outflow of capital to third
 countries as a means of escaping taxation, the Community should open
negotiations with the major third oountrles Involved, either bilaterally or
witfcin a multilateral framework such as the CBCD.
These negotiations annuld have a twofold objective: approximation of the
provisions governing non-residents on the basis of a system of withholding
tax, and oooperation between tax authorities.
26.    Aa the Commission 1n11ofttei In its communication of 4 November 1987,
the optimum allocation of investment and fair competition in the provision
of financial servioes oan be seriously distorted by national tax
concessions which give the investor an incentive to invest In financial
Instruments Issued by résinants of his own country. Such measures are
                                                                             .u
 ---pagebreak---                                    - 11 -
fyinigyHKi* with the creation of a genuinely integrated financial market.
Accordingly, the Commission will open discussions with the Member States
concerned with a view to ensuring the progressive removal of such sources
of discrimination.
nmnlTtfrtrca
27.   m the light of the above, tha Commission is presenting the Council
with two proposals for directives.
28. 3ne fliwt is concerned with the general introduction of a withholding
tax an interest payments.
29.   The second provides for limited amendment of the 1977 Directive on
mutual assistance in order to bring about more effective coopération
between national tax authorities in the fight against tax evasion in the
case of investment Income.
30.   Ihe Commission calls on the Council to examine these two proposais
and to reach" a decision before 30 June 1989, as required by Article 6 of
Directive 88/361/Z3C of 2* June 1988.
31.   Finally, the Commission will draw up a report on the common
withholding tax system and on the use made of the exemptions provided for,
once that system has been In operation for two years.
                                                                           41
 ---pagebreak---          PROPOSAL FOR A COUNCIL DIRECTIVE
ON A SYSTEM OF WITHHOLDING TAX ON INTEREST INCOME
                                                  /s
 ---pagebreak---                                        - 2 -
                              ExpIanatory memorandum
I. GENERAL CONSIDERATIONS
                                                                            1
1. Article 6(5) of Council Directive 88/361/EEC of 24 June 1988               on
     the liberalization    of capital movements states that "the Commission
     shall submit to the Council, . by 31 December 1988,        proposals aimed at
     eliminating or    reducing risks   of distortion,      tax  evasion   and tax
     avoidance linked to the diversity of national systems for the taxation
     of savings and for controlling the application of these systems'*.
2. As explained in the Communication to the Council, to which the present
     proposal is attached,    the Commission believes that the most effective
     measure  for   avoiding  distortions and     fraud  is a common     system of
     withholding tax at source on payments of interest income.         The present
     Directive   accordingly   provides    for   the   introduction   of    such   a
     withholding   tax.   Precisely,    one  characteristic    of Member States'
     national tax systems is that in most cases they make no provision for
     the taxation of interest to non-residents.
3. This measure will ensure that a minimum level of taxation is applied
     to all investment income arising within the Community.          It will thus
     discourage Community investors from transferring funds to other
     Member States solely in order to evade paying tax.
4. Having regard to the range of withholding tax rates at present applied
     in Member States     (OX-35%) and the risk that a too high rate of tax
     could  lead  to a diversion    of   savings   outside   the Community,      the
     Commission considers that the minimum rate of withholding          tax should
     be 15Z.
 1
   0J L 178, 8.7.1988, p. 5.
                                                                                     (¥
 ---pagebreak---                                        - 3 -
5. The Commission considers that this withholding tax at source should be
    designed to fit as easily as possible into the existing domestic tax
    systems of Member States.        It is accordingly proposed that the tax
    should have the following characteristics :
   (i)   it should be a minimum rate of withholding tax.           Member States
         would remain free to apply a higher rate of tax either to their
         own domestic taxpayers or to all Community residents;
  (ii)   Member   States   having    a  system   of  automatic   declaration  of
         interest payments by their banks to their tax authorities would
         be permitted to apply the withholding tax to Community residents
         from other Member States only;
  (iii) Member States would have the option to disapply          the withholding
         in the case of all interest payments constituting industrial or
         commercial revenues.
6. In addition it is proposed that Member States would be free to exempt
    from the withholding:
  (i)    interest   not   subject    to  the   income   tax   (exempted small
         savings);
  (ii)   residents of third countries;
  (iii) certain international      loans (e.g.    "Eurobonds") meeting defined
        criteria.     This exemption already applies in a number of
         Member States.      The Community must promote its development as an
        international financial centre.
7. Finally,   the Commission considers that once the common system of a
   withholding   tax   at  source   will be   adopted,    the  Community  should
   enter into negotiations with its major trading partners, either
   bilaterally or rnuItilaterally to extend at an international standard
   the scope of the withholding at source.
                                                                                 i*
 ---pagebreak---                                    - 4 -
II.  COMMENTS
                                Article 1
The criterion for levying a withholding tax is that the debtor of the
interests should be resident in a Member State.
The withholding  will not   be  levied   on the  interests distributed   by
non-resident debtors.
The residence shall be determined on the basis of national legislation.
Any disputes will be settled by mean of "ad hoc" measures provided in
accordance with the bilateral conventions in force between Member States.
                                 Article 2
Paragraph 1
For the purpose of the tax arrangements established by the Directive, the
term "interest* covers all income from claims of any kind,    even if those
claims carry a profits participation clause.     The expression "claims of
any kind" of course includes cash deposits and cash guarantees,      public
debt securities and bond loans.     Moreover,   claims,  and in particular
bonds which entitle the holder to participate in the debtor's profits,
are still regarded as loans if at least the contract is, overall, clearly
one for an interest-bearing loan.
The second sentence of the first paragraph excludes penalties for late
payment from the definition of interest.    Such penalties,   which are the
result of a contract,   a practice or a judgement,     consist of payments
calculated on a pro rata temporis basis or of a fixed sum.
 ---pagebreak---                                      - 5 -
Paragraph 2
In the case of non-interest-bearing securities (e.g. zero bonds)       or of a
relatively  low rate of interest     (e.g.   deep discount bonds) and whose
income  are  made  up   exclusively   or  mostly   of   a  capital gain,   the
difference between the issue price and the redemption value is regarded
as interest subject to withholding tax.
                                   Article 3
Paragraph 1
The debtor of the  interest (or its paying agent - financial institution) is
required to apply withholding tax at the rate fixed by the Member State
in which it is resident.      The withholding tax is applied to securities
issued  inside or outside the Community,       before or after the Directive
comes into force,   irrespective of.whether the interest is paid inside or
outside the Community and of the currency in which the loan was issued.
Paragraph 2
Where the interest is paid not in the Member State in which the debtor is
resident but by an establishment located       in another Member State which
deducts the interest from its taxable profits,        the withholding tax must
be  applied  by the   permanent  establishment    and paid    over to the tax
authorities in the Member State in which this permanent establishment is
situated.
                                   Article 4
Paragraph 1
The obligation of levying a minimum       withholding tax of 15%      does not
preclude application by a Member State of differential rates according to
the nature   of the   financial   instrument   (e.g. bank deposits,     bonds.
Treasury bonds).
                                                                               J •+
 ---pagebreak---                                     - 6 -
Paragraph 2
Member States are free to apply higher withholding tax rates to their own
residents than to non-residents.      This will generally be the case when
the withholding tax levied on residents has the effect of discharging of
debt.
Paragraph 3
The  Directive   does' not  preclude -application  of bilateral agreements
 concluded by Member States where a taxpayer wishes to benefit from a lower
rate of withholding tax provided for under such an agreement,      since he
may benefit from such agreements only by declaring the income in question
to his national tax authorities.       It goes without saying that in such
cases the recipient may set against his personal tax (see Article 7) only
that amount of withholding tax still borne by him.
                                  Article 5
(a)   This sub-paragraph permits Member States not to levy withholding tax
     where the identity of the recipients is known to them and there is
      therefore no risk of evasion.
(b)   Member  States   are  free not  to  levy  withholding  tax where  the
      recipient is one of their residents and does not fall within the
      scope of the income or profits tax (e.g. undertakings for collective
      investment in transferable securities, charitable institutions).
(c)  Member   States   are  free not  to  levy  withholding  tax where  the
      interest paid to their own residents is not subject to income or
     profits tax.     This provision concerns  in particular the exemption
      schemes to promote certain issues.
                                                                            »f
 ---pagebreak---                                    - 7 -
(d)   This provision aims at permitting Member States not to apply the
      withholding tax where the interest is paid on small savings accounts
      subject to a preferential scheme.     The application of such schemes
      is subordinate to particular conditions concerning interest rates
      or the amoun* invested.
(e)   In order to ensure that a private individual is not required to
      comply with the formalities laid down by this Directive, particularly
      as regards the application of a withholding tax and payment of
      such sums to the tax authorities, Member States are free not to
      apply withholding tax in such cases (e.g. in the case of a borrowing
      between private individuals).
(f)   This faculty of exonerating is justified because the recipients are
      subject to complete fiscal control which removes the risk of fraud.
(g)   Member States are free not to levy withholding tax on the interest
      of   international   loans  (Eurobonds),      as   defined    in   this
      sub-paragraph.
(h)   In view of the arrangements in force in the Member States and the
      arrangements applied by non-member countries to Community residents,
      the Member  States must be allowed   a degree of flexibility     in the
      provisions to be applied to residents from    non-member count ries.
                                 Article 6
In the case of undertakings for     collective investment    in transferable
securities (UCITS) there are two possibilities :
-   or the withholding tax is not applied or is refunded,      in which case
    the redistribution of interest is subject to withholding tax;
-   either the withholding tax is transferred as an allowable credit to
    the unitholder,   in which case the redistribution of interest by the
    UCITS is exempt from withholding tax;
                                                                              ft
 ---pagebreak---                                         - 8 -
In   both  cases,    unitholders   are   entitled   to  set  the withholding   tax
against their personal tax and to a refund of any amount in excess.
                                     Article 7
Except in the case where the withholding tax has a discharging character
 for a resident,      it makes up simply      a payment on account     towards the
definitive tax payable by the recipient of the interest.          It is therefore
normal clear that the withholding could be allowable as a credit or be
 refunded if the recipient is not taxable, or if it exceeds the final tax.
                                     Article 8
Paragraph 1
In order to ensure that the budgetary cost of crediting or refunding the
withholding tax under the items of Article 7 is borne by the Member State
in   which   the  income    arose,    this   paragraph   provides   for  financial
compensation between the two Member States concerned.
Paragraph 2
The two Member States concerned may arrange,          on the basis of a bilateral
agreement,    to divide the amount of withholding tax between each other,
provided that the rights of the recipients of the interest as regards the
crediting and possible refund of the tax in their own Member State are
not affected.
                                     Article 9
With   the   aim  of    reducing  the    risks  of   capital  flows   outside  the
Community,    the  Community    shall  enter into negotiations with       its main
commercial partners      in order to enlarge the geographical        scope of the
withholding at source.
                                                                                   Ji-^
 ---pagebreak---                                    - 9 -
                                Article 10
The report provided for in this article shall permit an evaluation of the
functioning of the system and particularly of the rate of the withholding
tax at source and the use of the exemptions provided for in Article 5.
                                                                          u
 ---pagebreak---                                             - 10 -
                           Proposal for a Council Directive
             on a common system of withholding tax on interest income
 THE COUNCIL OF THE EUROPEAN COMMUNITIES,
  Having regard to the Treaty establishing the European Economic Community,
  and in particular Article 100 thereof,
  Having regard to the proposal from the Commission,
  Having regard to the opinion of the European Parliament,
  Having regard to the opinion of the Economic and Social Committee,
  Whereas Council       Directive     88/361/EEC       provides    that
 Member States     shall abolish     not   later  than 1 July 1990 restrictions on
 movements    of   capital    taking  place    between  persons   resident   in
Member States;
Whereas the complete liberalization of capital movements in the Community
 entails risks of distortion,         tax evasion and tax avoidance linked at the
diversity     of   national     systems   for   the  taxation   of  savings    and   for
 controlling     the   application     of   these   systems;  whereas in consequence the
approximation of these regimes is necessary to ensure that competition in
the   common market is not distorted;
 Whereas the application of a common system of withholding tax meets this
objective while at the same time ensuring a minimum taxation of interest
paid by a debtor which is resident in a Member State;             the institutions of
the Communities      and the European Investment Bank are not residents of a
Member State;
 whereas it is necessary to allow Member States not to levy a withholding
tax in cases where the risk of fraud is remote;
1
  0J  No L 178, 8.7.1988, p. 5.
                                                                                         3-2-
 ---pagebreak---                                              - 11 -
  Whereas provision must be made to ensure that from the interest collected
 by an undertaking for collective investment             in transferable  securities a
 withholding tax could be levied;
  Whereas the withholding tax should be simply a payment on account of the
  final tax liability of the recipient of interest except if it discharges
  residents from further tax liability;     whereas  in   order  to avoid   complicated
  formalities,     any possible excess of tax ought to be repaid by the State in
 which the recipient is resident; whereas Member States must nevertheless be
 allowed to conclude bilateral agreements on the sharing of budgetary costs
 resulting from these provisions;
Whereas     a withholding tax should be introduced not later than 1 July 1990,
 at which moment the complete           liberalization of capital movements will be
 achieved,
 HAS ADOPTED T HIS DIRECTIVE:
                                          Article 1
 Member    States shall apply,         in accordance    with  the provisions   of  this
 Directive, a common system of withholding tax to interest            paid by a
 Member State or a political subdivision, local authority or a resident of a
 Member State.
                                          Article 2
 For the purposes of this Directive,           interest    means income from claims of
 any kind,      including premiums and prizes linked to public debt securities
 and bond     loans.     Penalties    for  late payment    shall  not  be  regarded  as
 interest for the purposes of this Directive.
 In the case of securities producing income made up exclusively or partly of
a gain,        interest    means the difference between the issue price and the
 redemption price.
                                                                                        >-3
 ---pagebreak---                                                - 12 -
                                            Article 3
1.  The       payer of interest (or paying agent) shall          deduct        from   the
    amount of interest due a withholding tax,               the rate of which shall be
    fixed by the Member State in which he              is resident. He        shall pay over
    the       sums withheld      to the    tax  authorities of   that Member        State in
    accordance with the conditions laid down by that State.
2.  Where payment of the interest is effected by a permanent establishment
    of the          payer located in a Member State other than that of the             payer,
    the withholding          tax shall be deducted by the permanent establishment,
    in as much as this interest is a deductible charge for it, and shall be
    paid over to the tax authorities of the Member State in which this
    permanent establishment is situated.
                                            Article 4
1.  The r a t e of the withholding tax may not be less than 15%.
2.  Member States s h a l l be f r e e to apply a higher withholding tax rate               for
     i n t e r e s t paid to t h e i r own residents than for i n t e r e s t paid to
    non-residents.
3#  Paragraph 1 shall not preclude application of agreements concluded between Member States
    or between Member States and non-member countries providing lower rates
    of withholding tax when the income i s declared.
                                            Article 5
Member States shall be free not to levy withholding tax on interest where:
(a)   the       recipient   is one of      their own  residents and his name and his
      address and the amount of interest paid are automatically notified to
      the tax authorities;
                                                                                                ~Y
 ---pagebreak---                                        - 13 -
(b)  the recipient is one of their dwn residents and does not fall within
     the scope of the income or profits tax;
(c)  the recipient is one of their own       residents and the interest    is not
     subject to income or profits tax;
(d)  the   interest   is   not subject   to  income   or  profits  tax  following
     incentives in favour of     small savings;
(e)  the   payer    of    interest is a private individual;
(f)  the interest    is made up of commercial     and industrial income of the
     recipient;
(g)  the interest is payable on an international loan ("Eurobond"),         which
     is   defined  for   the purposes   of  this   Directive   as a  transferable
     security in the form of a bond, which :
     -   is to be underwritten and distributed by a syndicate at least two
        of the members of which have their registered offices in different
        States,
     -   is offered on a significant scale in one or more States other than
        that of the issuer's registered office and
     -  may be subscribed for or initially acquired only through a credit
                                                                                    1
        institution,     as defined in Article 2 of     Council Directive 77/780/EEC ,
        or other financial institution.
 OJ No L 322, 17.12.1977, p. 30.
 ---pagebreak---                                       - 14 -
 (h)  the recipient is a resident of a non-member country.
                                  Article 6
Where interest redistributed by an undertaking for collective investment in
transferable securities within the meaning of Council Directive 86/566/EEC
has not been charged withholding tax in the hands of that undertaking or
where withholding tax has been refunded to it,        that interest shall be
subject to withholding tax if such tax would have been chargeable if the
 interest had been paid directly by the payer.
 In the contrary case, such interest shall be exempt from withholding tax.
However, withholding tax charged on interest in the hands of an undertaking
 for collective  investment  in transferable securities   shall be  allowable
against the amount of income or profits tax payable by the unitholder.     It
shall be refunded to him in the cases referred to in the second paragraph
of Article 7.
                                   Article 7
Withholding tax on interest shall be allowed as a credit against the amount
of income or profits    tax payable by    the recipient  in respect  of such
interest.
It shall be refunded to the recipient by the Member State which levies the
tax referred to in the preceding paragraph if it exceeds the amount of that
tax or if the recipient is not taxable.
                                   Article 8
1.   Where the withholding tax levied by a Member State is allowed       as a
     credit or refunded   in another Member State,   the Member State which
     levied the withholding tax shall refund it to that other Member State.
1
  0j No L 332, 26.11.1986, p. 22.
 ---pagebreak---                                        - 15 -
2.   Notwithstanding      paragraph     1, Member     States
    may divide the amount of the withholding tax between each other on the
    basis of a bilateral agreement,     provided that that agreement in no way
    affects the rights of the recipients of the interest as established by
    this Directive.
                                    Article 9
The  Community   shall  enter  into   negotiations   with   its  main   commercial
partners either on a bilateral or on a multilateral basis,            in order to
enlarge the scope of the withholding at source to an international level.
                                   Article 10
The Commission shall present to the Council before 1 July*1992 a
report  on   the functioning  of   the common    system of   withholding   tax at
source.
                                   Article 11
1.  Member States shall bring into force,      not later than 1 July 1990,     the
    laws,    regulations and administrative provisions necessary to comply
    with   this  Directive.   They   shall   forthwith   inform   the   Commission
    thereof.
    The provisions adopted pursuant to the first subparagraph shall make
    express reference to this Directive.
2.  Member States shall communicate to the Commission the main provisions of
    national law which they adopt in the field governed by this Directive.
                                                                                   i?
 ---pagebreak---                                   - 16 -
                                Article 12
This Directive is addressed to the Member States
 Done at                                      For the Council
                                              The President
 ---pagebreak---             PROPOSAL FOR A COUNCIL DIRECTIVE OF
AMENDING DIRECTIVE 77/799/EEC CONCERNING MUTUAL ASSISTANCE
     BY THE COMPETENT AUTHORITIES OF THE MEMBER STATES
    IN THE FIELD OF DIRECT TAXATION AND VALUE ADDED TAX
 ---pagebreak---                              EXPLANATORY MEMORANDUM
I.  6eneral Considerations
1.   As explained in detail in the communication to the Council to which
     this proposal    for a directive     is annexed,      the   liberalization   of
     capital movements should be accompanied by measures to eliminate or
     reduce the risk of distortion, tax avoidance and evasion, linked to
     the diversity of national systems for the taxation of savings and for
     controlling the application of these systems.
2.   One way of doing this is to step up the cooperation between national
     tax   administrations       introduced     by    Directive     77/799/EEC    of
                        1
     19 December 1977        and    based    primarily    on    the    exchange   of
     information.    Of course, this exchange is limited and, in particular,
     a  Member   State   is not obliged     to have enquiries       carried  out  or
     provide   information   if   its  own    laws or   administrative     practices
     prevent it from carrying out the enquiries or collecting or using the
     information for its own purposes.
3.   As regards legislation,      the rules on banking secrecy,        which are the
     main  ones   involved   in    the  case   of   income   from   capital,    vary
     considerably from one Member State to another and their harmonization
     is a long procès which raises complex problems and is politically
     highly sensitive.
     This is not true of administrative practices,          which can be modified
     without any change in legislation and without obliging a Member State
     to obtain and pass on to another Member State information which its
     laws do   not permit     it  to obtain     for  the purpose     of  calculating
     correctly the tax payable by its own residents.              Accordingly,   the
     Commission considers that a Member State should not be permitted to
     invoke its administrative practices but should exhaust every legal
     possibility when the Member State making the request cites specific
 1OJ No L 336, 27.12.1977, p. 15.
                                                                                     yo
 ---pagebreak---     grounds  for  supposing one of    its taxpayers has transferred     abroad
    significant  funds and has not declared all,        or has declared only
    part, of the income derived from them.
II. Particular comments
                                    Article 1
    Where  a tax   administration  suspects one of     its  taxpayers  of  tax
    evasion on the grounds that funds have been transferred to another
    Member State without the corresponding      income having been declared,
    and the taxpayer's explanations do not appear satisfactory,         it may
    request  information   from the tax    authorities   of the other Member
    State.    These authorities tnay,    however,    be unable to collect or
    supply   the   information  requested    because   of  an   administrative
    practice which restricts their powers of investigation of financial
    institutions, even for their own tax purposes.
    The amendments made by this Article to Article 8(1) of           Directive
    77/799/EEC are designed to overcome this obstacle.
                                                                               ?/
 ---pagebreak---                                        - 4 -
                    PROPOSAL FOR A COUNCIL DIRECTIVE OF
      AMENDING DIRECTIVE 77/799/EEC CONCERNING MUTUAL ASSISTANCE
            BY THE COMPETENT AUTHORITIES OF THE MEMBER STATES
           IN THE FIELD OF DIRECT TAXATION AND VALUE ADDED TAX
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having    regard   to   the   Treaty    establishing    the   European    Economic
Community, and in particular Article 100 thereof.
Having regard to the proposal from the Commission,
Having regard to the opinion of the European Parliament,
Having regard to the opinion of the Economic and Social Committee,
Whereas Council Directive 88/361/EEC             stipulates that restrictions
on capital movements between persons resident in the Member States
must be abolished no later than 1 July 1990;
Whereas that     Directive requires the Commission            to submit     to the
Council     proposals    aimed    at   eliminating     or    reducing    risks    of
distortion, tax evasion and tax avoidance linked to the diversity of
national systems for the taxation of savings and for controlling the
application of these systems;
Whereas under Council Directive 77/799/EEC 2 , as last amended by Directive 79/1070/EEC ,
Member States are required to provide mutual assistance to combat tax evasion and tax
avoidance in respect of taxes on income and on capital;                     whereas
under Article 8 of that Directive,           however,     a Member State is not
pOJ No L 178, 8.7.1988, p. 5.
^0J No L 336, 27.12.1988, p. 15.
3
  0J No L 331, 29.12.1979, p. 8.
 ---pagebreak---                                  - 5 -
obliged   to   provide   information  following   a request    from   another
Member State if its laws or administrative practices prevent it*/rom
collecting this information for its own purposes;
Whereas the restriction on the exchange of information arising from
administrative practices should be         abolished   in cases   where   the
Member State making the request has specific grounds for supposing
that   one of    its   residents has   transferred   significant    funds to
another Member State without declaring the corresponding income,
HAS ADOPTED THIS OIRECTIVE:
                                  Article 1
The following subparagraph is added to Article 8(1) of Directive
77/799/EEC:
"However, where the appropriate authority of the Member State making
the request shows specific grounds for supposing that one of its
residents    has   transferred,    either   directly   or  through    another
country,   significant funds to the Member State to which the request
is made without declaring the corresponding income,          the appropriate
authority of the Member State to which the request is addressed may
not rely on the fact that its administrative practices do not permit
it   to  carry    out   these  enquiries    or  to   collect   or  use   this
information for the purpose of correctly establishing the taxes due
by its own residents."
                                  Article 2
Member States shall bring into force the necessary laws, regulations
and administrative provisions in order to comply with this Directive
not later than 1 July 1990.        They shall communicate them forthwith
to the Commission.
The provisions adopted pursuant to the first paragraph shall make
express reference to this Directive.
 ---pagebreak---                              - 6 -
                              Article 3
This Directive is addressed to the Member States.
Done at Brussels,                               For the Council
                                                  The President
 ---pagebreak---  ---pagebreak--- Commission of the European Communities
COM(89) 60/3/Revision final
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in connection with the
liberalization of capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest income
— amending Directive 77/799/EEC concerning mutual assistance by the
    competent authorities of the Member States in the field of direct
    taxation and value-added tax
(presented by the Commission)
REVISION
12.5.1989
Office for Official Publications of the European Communities
L - 2985 Luxembourg
Series: DOCUMENTS
1989 — 34 pp. — Format: 21.0 * 29.7 cm
EN
ISSN 0254-1475
ISBN 92-77-49613-4
Catalogue number: CB-CO-89-188-EN-C
 ---pagebreak---                                                                                  ISSN 0254-1475
COM(89) 60/3/Revision final
DOCUMENTS
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in connection with the liberalization of
capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest income
— amending Directive 77/799/EEC concerning mutual assistance by the competent
   authorities of the Member States in the field of direct taxation and value-added tax
(presented by the Commission)
REVISION
09                                                                             12.5.1989
Catalogue number: CB-CO-89-188-EN-C
ISBN 92-77-49613-4
€
COMMISSION OF THE EUROPEAN COMMUNITIES
 ---pagebreak--- Commission of the European Communities
COM(89) 60/3/Revision final
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in connection with the
liberalization of capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest income
— amending Directive 77/799/EEC concerning mutual assistance by the
    competent authorities of the Member States in the field of direct
    taxation and value-added tax
(presented by the Commission)
REVISION
12.5.1989
Office for Official Publications of the European Communities
L - 2985 Luxembourg
Series: DOCUMENTS
1989 — 34 pp. — Format: 21.0 * 29.7 cm
EN
ISSN 0254-1475
ISBN 92-77-49613-4
Catalogue number: CB-CO-89-188-EN-C
 ---pagebreak---                                                                                  ISSN 0254-1475
COM(89) 60/3/Revision final
DOCUMENTS
Communication from the
COMMISSION TO THE COUNCIL
Tax measures to be adopted by the Community in connection with the liberalization of
capital movements
Proposals for
COUNCIL DIRECTIVES
— on a common system of withholding tax on interest income
— amending Directive 77/799/EEC concerning mutual assistance by the competent
   authorities of the Member States in the field of direct taxation and value-added tax
(presented by the Commission)
REVISION
09                                                                             12.5.1989
Catalogue number: CB-CO-89-188-EN-C
ISBN 92-77-49613-4
€
COMMISSION OF THE EUROPEAN COMMUNITIES