Tuesday, December 14, 2010

The Council of the European Union and Exchange of Information

By David Spencer, senior adviser to TJN

The Council of the European Union reached 'political agreement' on December 7, 2010 on a draft directive aimed at strengthened mutual assistance between Member States to “better combat tax evasion and tax fraud.” The agreement was reached at a meeting of the Economic and Financial Affairs Council, and the Council of the European Union will issue the directive when the text has been finalized.

The EU press release summarizing the agreement focused on two issues:
(1) implementation within the EU of the OECD standard for the exchange of information upon request;
and (2) adoption by the EU over time of automatic exchange of information for five, and possibly eight, categories of income, subject to conditions.

Implementation within the EU of the OECD Standard for the Exchange of Information upon request

The EU press release states that:
The directive will ensure that the OECD standard for the exchange of information on request is implemented in the EU as regards the exchange of information on request. It will thus prevent a Member State from refusing to supply information concerning a taxpayer of another member state on the sole grounds that the information is held by a bank or other financial institution.

The EU press release summarizes the additional purposes of the directive:

In addition, the directive will:
  • extend cooperation between Member States to cover taxes of any kind;
  • establish time limits for the provision of information on request and other administrative enquiries; introduce provisions on the automatic exchange of information (see below);
  • allow officials of one Member State to participate in administrative enquiries on the territory of another Member State;
  • provide for feedback on the exchange information;
  • and provide that information exchange be made using standardized forms, formats and channels of communication.
The EU press release emphasizes that the OECD standard of exchange of information upon request is a limited procedure:
In order to allay the risk of Members States making imprecise requests aimed at detecting irregularities (“fishing expeditions”), the Council agreed to identify in the directive certain details that must be specified in requests for information, namely the identity of the person under investigation and the tax purpose for which the information is sought;

It is not clear whether the requirements of exchange of information upon request to be adopted in the Council directive are to be the same as the OECD requirements for exchange of information upon request, or whether the requirements in the Council directive will be less stringent.

Adoption of Automatic Exchange of Information over time for Certain Types of Income

The EU press release indicates that the EU has adopted a step-by-step-approach. In 2015 EU Member States will exchange information automatically about five categories of income. Those five categories are reported to be the following: income from employment, director fees, certain life insurance products, pensions, and ownership of and income from real (immovable) property.

However, the EU press release states that “from 2015, Member State will communicate automatically information for a maximum of five categories, provided that that information is readily available.” The EU press release does not refer explicitly to the obligation of EU Member States to make sure that such information is “readily available.” If such information is not “readily available” in an EU Member State, that Member State would presumably not be required to provide automatic exchange of information.

The EU press release indicates that “by 1 July 2017, the Commission will provide a report and, if need be, a proposal [“2017 Commission Proposal”]. When examining that proposal, the Council will examine the possibilities for removing the condition of availability and extending the number of categories from five to eight.” Therefore, the directive will apparently not require mandatory automatic exchange of information on those five categories of income unless the Council issues a new directive after reviewing the European Commission’s 2017 Proposal.

The three additional categories of income that could be subject to automatic exchange of information beginning in 2018 are dividends, capital gains and royalties.

The EU press release does not refer to the EU Directive on the Taxation of Savings, which presumably will not be affected by the new Council directive.

(This article was initially prepared by David Spencer for publication in the Journal of International Taxation).


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