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Opinion of the European Economic and Social Committee on the ‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee: Promoting Good Governance in Tax Matters’

On 28 April 2009, the European Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee: Promoting Good Governance in Tax Matters

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 13 November 2009. The rapporteur was Mr Burani.

At its 458th plenary session, held on 16 and 17 December 2009 (meeting of 17 December 2009), the European Economic and Social Committee adopted the following opinion unanimously.

1.1 The Communication constitutes the Commission's contribution to the fight against tax evasion and tax havens, which was announced by the G-20 and confirmed by the ECOFIN Council and the European Council. Good governance in tax matters is an objective that has been pursued for some time. Rules on cooperation among EU countries and with third countries, on mutual assistance, taxation of savings income and recovery of tax claims have been issued in this field; a code of conduct for avoiding harmful tax competition has been published. All of this shows that Europe considers that good governance in tax matters is of fundamental importance, and demonstrates this practically.

1.2 The Communication under discussion sets out the main actions that the Commission proposes to take, particularly in the part relating to follow-up to OECD initiatives; as a whole, it represents an integrated plan of regulations, negotiations, and innovations in the criteria that guide certain policies. The EESC is in full agreement with the series of measures proposed and with the Commission's comments. On one point in particular, namely the consistency between financial support given to many countries in various forms and those countries’ level of cooperation in tax matters, it hopes that the EU will adopt a firm and responsible attitude: more explicitly, an end should be put to the policy of unconditional aid with nothing in return.

1.3 There is little point in listing the points where we agree: this would make the text longer without adding any value to it. However, the EESC considers that it should mention a few fundamental problems, which it believes should be given careful consideration.

In the Commission's introduction, it describes governance in tax matters to be a means of providing a ‘coordinated response’ to money laundering, corruption and terrorism; the principle of a comprehensive approach to these problems is thus reaffirmed. In reality, however, this statement gives rise to some doubts: tax governance alone cannot meet the challenges of combating other phenomena that may or may not have a bearing on taxation, but have a different background: money-laundering as a product of organised crime, terrorism or corruption.

1.4.1 The third money-laundering directive (1) (MLD) considers tax fraud as a ‘serious crime’, which should, as such, be subject to the provisions of that directive. In practice, this is not the case: tax evasion (or fraud) is the subject of a series of specific directives that take this issue out of the hands of anti-money laundering authorities and place it within the remit of tax authorities alone. An issue therefore arises of overlapping rules, or rather the need for clear delimitation of powers and competences: the MLD should be refocused on its stated aim, excluding tax-related or financial offences where these are not of criminal or terrorist origin; conversely, the tax directives should exclude from the competence of tax authorities any offences that have a clear criminal or terrorist background. Of course, there will always be a grey area where the two problems meet, but at least clear guiding principles will have been established.

1.4.2 The money-laundering directives and tax directives currently seem to run on two separate tracks. Blame for this, however, lies not with the Commission but rather with a fragmentation of powers and competences: money laundering and the fight against organised crime are the responsibility of the FATF (2) at global level and the Justice and Home Affairs Council at European level; tax evasion is dealt with by the G-20 and, in Europe, by the ECOFIN Council. There is no mention in any document of the need for cooperation, information exchange and division of tasks among the various authorities. The EESC calls for this situation to be put right, as it makes the ultimate aim of a ‘comprehensive approach’ abstract and unachievable.

1.5 While we are on the subject of a comprehensive approach, the issue of tax havens arises. These are the focus of attention only when talking about tax evasion; the issue of money related to organised crime or money intended for terrorist financing remains out of sight. This problem arises not only in the most well-known centres, with which the tax authorities are currently negotiating, but also and more importantly in emerging financial markets located in areas where geopolitical considerations may affect the willingness to negotiate.

1.6 A difficult issue that is not mentioned is that of flags of convenience (3), a source of considerable financial flows that are perfectly legal even if they are spared from taxation. These usually end up in tax havens, which they then leave in order to be reinvested. However doubtful they may be for various reasons, flags of convenience exist with the tacit consent of all countries: when combating tax havens, it will be important to avoid unintended effects on legitimate activities and the diversion of capital to less cooperative centres.

1.7 Conclusion: the EESC notes that Europe has done and is doing much in the area of combating tax evasion, as well as on the financial aspects of combating organised crime and terrorism. However, the Committee would like to draw legislators’ attention to a number of serious deficiencies: there is no effective coordination between the fight against tax evasion and that against crime, nor a clear distinction between the tasks and remits of the authorities responsible for tackling these various phenomena. These often have aspects that relate both to tax evasion and crime or terrorism, and are thus difficult to assign: another reason for requiring structured cooperation between the various authorities. There is no mention of such cooperation in the Commission or Council programmes.

2.1 The Commission Communication contains a number of ideas for tax governance. These ideas echo the results of a series of meetings: of the G-20 countries in November 2008, of the ECOFIN Council in December 2008, of the finance ministers and central bank governors of the G-20 on 14 March 2009, of the European Council of 19 and 20 March 2009, and finally the G-20 summit on 2 April 2009. The conclusions of these meetings show a common willingness to take action against non-cooperative jurisdictions, including tax havens, providing for sanctions to protect public finances and financial systems. In particular, the G-20 summit commented that ‘the era of banking secrecy is over’.

2.2 The Communication aims to identify the possible EU contribution to good governance in the area of direct taxation. In three distinct chapters, it examines how to improve it; the instruments for promoting it in practice; and the role of the Member States in supporting the initiatives taken by the OECD and the UN through coordinated actions both within the EU and internationally.

2.3 Good governance in tax matters is an objective the Commission has been pursuing for some time through cooperation within the EU and, more widely, through cooperation with the OECD in combating money laundering through tax havens.

On the whole, the EU's legislative and regulatory framework in the area of tax cooperation can be considered satisfactory: directives on mutual assistance, taxation of savings income and recovery of tax claims have been issued or are under discussion. It remains to be seen how, and how conscientiously, the Member Sates put the Community rules into practice.

2.4.1 In the area of harmful tax competition, a Code of Conduct for business taxation has been published (4). This has already achieved promising results, though there is room for further improvement. The Code has been adopted by the Member States and their dependent territories; its extension to third countries is part of the 2009-2010 work programme. The recurring theme across the board is transparency; the Commission's position in relation to the application of the state aid rules to measures relating to direct business taxation is also clear.

The Commission intends to propose coordinated action by Member States to ensure an appropriate follow-up to the OECD initiatives at international level. For the time being, it is ‘looking forward to [the] implementation’ of ‘the important commitments that have been made recently’. Those commitments are twofold: firstly, the OECD proposes to dismantle the preferential tax regimes of its 30 member countries, and secondly, it has applied – and intends to continue – pressure on non-member countries with the aim of obtaining political commitments from them to cooperate with OECD countries.

2.5.1 The OECD has contacted numerous countries – pretty much the whole world – and has already achieved its first successes: 35 non-member countries, including several tax havens, have given a political commitment to cooperate on transparency and exchange of information in the area of taxation. A number of other countries (5) have recently committed to complying with OECD standards in the area of exchange of information on request, without regard to domestic requirements or bank secrecy.

With regard to international policy, the Commission is working to agree good tax governance practices with various countries (6); more formally, the May 2008 ECOFIN asked that a standard for good governance in the area of taxation be included in agreements between the EU and third countries. In December of the same year, the introduction of the standard took on an even more stringent nature, with the request to be more determined about combating tax havens and non-cooperative jurisdictions.

2.6.1 In the area of savings taxation, the Commission has managed to get some third countries (7), along with Member States’ dependent or associated territories (some of which were previously classed as tax havens) to apply measures that are the same as or equivalent to those laid down in the EU directives. Exploratory talks are also under way with other countries (8), but formal negotiations have not yet begun.

2.6.2 A series of negotiations are ongoing with the countries of the European Economic Area (EEA) (9) and Switzerland. The EEA countries directly apply the principles of the single market, whilst ‘similar rules’ apply to state aid. Relations with Switzerland are governed by the Free Trade Agreement of 1972, but some aspects have recently been called into question. Negotiations are under way with Liechtenstein regarding a new anti-fraud agreement. The whole area is in a development phase.

2.6.3 The principles of transparency, cooperation and exchange of information have been included in the action plans and the agreements concluded with several countries in connection with the European neighbourhood policy and enlargement policy. The Commission is working to extend those principles to a number of third countries: the first discussions with some countries seem promising, but it would be appropriate to establish what position should be adopted vis-à-vis those countries that have so far rejected the idea.

2.6.4 Particular attention is given to negotiations with developing countries: as well as openness in some quarters, there is resistance in others, which needs to be overcome, perhaps by making funding under the ENPI (European Neighbourhood and Partnership Instrument) and the 10th EDF (European Development Fund) conditional on accepting the rules on tax governance.

2.7 One chapter of the Communication is set aside to list ongoing initiatives: internal ones, in the form of the directives mentioned in point 2.4, and external ones, to provide practical follow-up to the initiatives mentioned in point 2.5. It is worth noting that the Commission rightly asks the Council to give it sufficient flexibility in its negotiations, an essential prerequisite for it to be able to adapt general policy to the specific case of each country. Particular attention is given to development cooperation incentives, which, it is suggested, might be used vis-à-vis recalcitrant countries as an incentive to greater openness (see 2.6.4 above).

2.8 The Commission concludes by drawing the Council’s attention to the importance of the measures proposed and to the need to ensure rapid transposition at national level of the directives already issued, to speed up the process for those under discussion, to adopt more coherent and better coordinated policies at EU level, and finally to ensure greater consistency between the positions of individual Member States and the governance principles agreed.

3.1 The European Economic and Social Committee (EESC) gives a very warm welcome to the Commission Communication: it was high time that a course of action and behaviour was mapped out in the complex area of combating tax evasion, as part of an environment of good tax governance. The Committee can only give its support and full agreement to every aspect the Commission mentions and the measures it proposes. However, it does consider that it has a duty to draw attention to a few fundamental problems and some other, more detailed ones, which it believes deserve careful consideration.

The Commission raises the issue of consistency between EU financial support for certain countries and their level of cooperation with the principles of tax governance (see point 2.7 above). It raises the possibility of taking ‘appropriate measures’ as part of the forthcoming mid-term review of the European Development Fund (EDF) and introducing specific measures into the Cotonou agreement (10). Such measures could include reducing the allocation of funds to countries that do not cooperate and, conversely, providing incentives in the form of technical assistance and additional funds to those who show willingness to meet their commitments.

3.2.1 Thus, it is proposed that a concept be introduced into EU policy on support for other countries whereby aid must be earned with tangible evidence of willingness to cooperate in areas including – but not limited to – taxation. The EESC considers that the documents setting out the arrangements for aid should contain an explicit clause to that effect. There needs to be a clear and explicit change in the policy on giving financial aid, which should become a means of fostering a tangible and verifiable process of ethical, social and economic progress. Corrupt governments are unmoved by requests for cooperation: the only way of convincing them is to put their interests on the line. It remains to be seen to what extent the Commission's proposal will be able to be put into practice: political and social hesitations could play a significant role in relation to its implementation.

A few other comments arise from the statement made by the Commission in its introduction, which considers good governance in tax matters to be a way of providing a ‘coordinated response’ to the problems of money laundering, corruption and terrorism. This reaffirms the oft-repeated idea, to which the EESC subscribes, that only a comprehensive approach can put in place a strategy for protecting society from every kind of financial crime, be that of criminal, terrorist or fiscal nature.

3.3.1 All the measures mentioned by the Commission in its Communication are useful in the area of tax governance; however, the EESC notes that there is no clear reference to a global strategy. The actions under way or planned in the area of taxation should run parallel, and be consistent, with those in the area of money laundering, combating corruption, organised crime and terrorism. A first step would be to remove a few grey areas and the inconsistencies between the directives on taxation and those on money-laundering.

The directives on combating tax fraud do not refer to the provisions of the third money-laundering directive (MLD) (11), despite the fact that the latter includes tax fraud (or some aspects of it) among a list of ‘serious crimes’ (12). One could therefore wonder whether the MLD provisions apply to the area of taxation, in particular as regards reporting requirements, the functions of FIUs (13), and the involvement of third parties, including the professions (14). However, the answer to that question is no: in the tax directives, the fight against fraud is assigned to the tax authorities alone, and there is no mention of a role for FIUs or links with them, nor of the provisions of the MLD.

3.4.1 Thus, there is a discrepancy between legislative and operational fields in EU directives. In practice, the boundaries between tax fraud and the laundering of the proceeds of crime, even if they can be determined in theory, may be vague or non-existent: for example, VAT evasion can be seen as smuggling (laundering) or as tax fraud, and can reveal links between apparently normal businesses and drug trafficking, arms smuggling, etc.; corruption always involves tax evasion, but often hides other types of much more serious crime; transfers of money of questionable tax status may hide terrorist activities. There is much scope for doubts over interpretation and possible conflicts of competences.

3.5 The whole subject therefore needs rethinking and reviewing from top to bottom: the MLD should be refocused on its declared aim, i.e. the fight against organised crime and terrorism, explicitly excluding tax-related and financial offences where these are not of criminal or terrorist origin. Conversely, the tax directives should exclude from the competence of tax authorities any offences that have a clear criminal or terrorist nature. Without wishing to create a hierarchy of values, the fight against crime and terrorism is of even greater political and social importance than the fight against tax evasion. However, the two fields are closely linked, not only because of the blurred line between them as mentioned above, but also in terms of putting into practice the concept of a ‘comprehensive approach’, which implies an obligation incumbent on the various authorities to cooperate and share information. Incidentally, the need for cooperation between the various authorities is mentioned in a 2004 Communication (15), but does not appear in any directive.

3.6 The sub-division or overlap of competences reflects the distribution of powers at Council level: problems of tax evasion and tax havens are dealt with by the ECOFIN Council, whereas combating crime and terrorism is dealt with by the Justice and Home Affairs Council. The same sub-divisions can be found at global level: the G-20 and the FATF (16) seem to belong to different worlds. There is a link at the OECD, but only at the centre: the contacts at national level vary in accordance with ministerial competences.

Official declarations lead one to believe that there is the political will to move forward with an effective comprehensive fight; but there is no immediate prospect of a practical solution unless there is a clear awareness of the problem at the highest political and financial echelons. At all events, a preliminary examination of some fundamental issues is urgent and must not be delayed. This must include an assessment of the phenomenon of tax havens (17) as a whole. Thanks to the OECD’s action and that of the Commission, many tax havens have recently agreed to cooperate in the fight against tax evasion (18), by abolishing or limiting banking secrecy, such that no country is any longer on the blacklist (19). The near future will show whether and to what extent these promises have been kept.

3.7.1 However, the various lists are not exhaustive, or at least leave room for uncertainty. There seems to be something of a lack of transparency in emerging financial markets, some of which have, or may have in future, characteristics that make them ‘havens’, if not ‘heavens’ for tax or other purposes: some south-east Asian countries, the Gulf States, but also to some extent India, Singapore and China (Hong Kong is just the leading edge of Chinese finance). Although the issue of terrorist financing is included in the standard clauses, negotiations often skate over it, as it runs through channels that are certainly not going to make themselves public, still less negotiate. This and other problems are so delicate that the silence that surrounds them is understandable. However, this does not mean that they can be ignored.

3.7.2 There are other issues, too, that are not mentioned: trafficking of weapons, which are often sold legally and with the appropriate official authorisation, but subsequently pass through secret channels to fuel wars and terrorism in many countries. This is often funded with proceeds from drugs: all of this feeds into enormous flows of money that seems to disappear into an unfathomable black hole. This phenomenon is well known, but certainly cannot be dealt with through directives, agreements or enquiries: it is of an entirely different nature and involves world politics.

3.7.3 The phenomenon of tax havens as a whole is thus a problem that needs addressing, whilst keeping in mind the geopolitical aspects that will affect any solution. In terms of what is possible in practice, the fight against tax evasion and money laundering (but above all against terrorism) must, as far as possible, be global, keeping in mind that global victory is a goal that remains a long way off. More than anything, it is important to continue to take care to prevent activities being diverted from known centres to others that are less well known, which may be hostile or less willing to negotiate. The current crisis is speeding up the gradual shift in the balance of power among world financial centres: Asia and the Islamic world are the new emerging powers, whose thinking and behaviour is not necessarily the same as has traditionally prevailed in the Western world.

Another problem, which is in a way connected with tax havens, is that of flags of convenience (FOC), under which 63 % of the world’s merchant fleet is registered, along with a significant number of large pleasure crafts: most of these are based in tax havens and provide them with a significant flow of funds of perfectly legal origin, albeit exempt or almost exempt from tax. Some of the countries that host such registers are EU Member States. Fleets sailing under flags of convenience have a competitive advantage over those that fly national flags, and the freight revenue they raise represents avoidance, though certainly not evasion, of ‘official’ taxation. In addition, they are not subject to the requirements set out in collective agreements relating to seafarers.

3.8.1 No tax measures are envisaged in relation to flags of convenience, not just because there is no legal basis for any such action, but also because any action based purely on tax considerations would risk, among other things, harming an economic activity that it is vital to the whole world and drying up a significant flow of investment into the global economy. Aside from serious moral considerations, flags of convenience distort competition and avoid complying with collective agreements – and do so with the tacit consent, or the tacit resignation, of governments throughout the world. At EU level, the only rules that apply to them are those relating to safety at sea and to traffic.

3.8.2 These aspects are mentioned in order to highlight the fact that not all the funds that flow into tax havens, and then flow out of them and are invested in world financial centres (20), constitute tax evasion, money laundering or terrorist financing. With this in mind, the actions in the area of taxation proposed by the G-20 and presented by the Commission deserve support: they must also cover the aspects of money laundering and terrorism, whilst taking care to avoid unintended effects on activities and financial flows that are legitimate or at least not illegal.

3.8.3 Getting tax havens to cooperate and be transparent would be an historic achievement; the grey areas that remain, and probably will remain, show that, as well as broad principles, it is important to aim for reasonable goals, even if they are not perfect. In the final analysis, it becomes clear that initiatives in financial and tax matters need to be driven and monitored by political authorities as part of their international relations strategy. The EU needs a common policy in this latter area: an aim that governments should consider a priority, but that, as things stand, seems a long way off.

Brussels, 17 December 2009.

The President of the European Economic and Social Committee

Mario SEPI

(1) Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005.

(3) A ship flies a ‘flag of convenience’ (FOC) when it is registered in a country which has few rules with the aim of reducing operating costs or avoiding burdensome regulations. The International Transport Workers’ Federation has drawn up a list of 32 registers that it considers to be FOC.

(5) Including Switzerland, Austria, Belgium, Luxembourg, Hong Kong, Macau, Singapore, Chile, Andorra, Liechtenstein and Monaco.

(10) Partnership agreement between the African, Caribbean and Pacific group of countries on the one hand, and the EU and its Member States on the other, signed in Cotonou on 23.6.2000.

(11) Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005, p. 15, known as the 3rd Money Laundering Directive (MLD).

(12) See Article 3(5)(d) of the MLD: ‘“serious crimes” means … fraud… as defined in Article 1(1)Article 2 of the Convention on the Protection of the European Communities’ Financial Interests’: tax evasion, at least in the area of VAT, is therefore explicitly included in the crimes covered by the MLD.

(15) Communication from the Commission to the Council and the European Parliament on Preventing and Combating Corporate and Financial Malpractice, COM(2004) 611 final.

(17) It is interesting to note that the English term ‘tax haven’ has been translated into most other languages as ‘tax heaven’. It does not appear that the difference between ‘haven’ and ‘heaven’ can be attributed to a simple translation error: it reflects a different mentality.

(18) In reality, the standard clause on organised crime and terrorism is included in the agreements with tax havens, but the emphasis is always on the tax aspect.

(19) There are two other lists, ‘light grey’ and ‘dark grey’ according to the level of cooperation that has been promised.

(20) It has been calculated that 35 % of worldwide financial flows transit through tax havens. However, it is not known on what basis this calculation is made.