On 8 November 2022, European Union (EU) Finance Ministers approved an important updating of the code of conduct for business taxation (“New Code”) during the Economic and Financial Affairs (“ECOFIN”) Council meeting.
The New Code replaces, from 1 January 2023, the code of conduct for business taxation set out in the Resolution of the Council and the representatives of the governments of the Member States meeting within the Council of 1 December 1997 (“Original Code”). However, with regard to some tax features of general application the New Code will apply from 1 January 2024, and will only be used for measures enacted or modified on or after 1 January 2023.
The Original Code was adopted a) in order to reduce distortions in the single market, prevent significant losses of tax revenue and help tax structures develop in a more employment-friendly way and b) acknowledging the positive effects of fair competition and the need to consolidate the competitiveness of the EU and the member states at international level, whilst noting that some tax measures might lead to harmful effects.
Code of Conduct Group
In order to assess tax measures that may fall within the scope of the Original Code in 1998 was established the Code of Conduct Group (“CoCG”), composed of high-level representatives of the member states and the European Commission. CoCG is chaired by a representative of a member state, serving a mandate of two years, and assisted by the General Secretariat of the Council (“GSC”). The CoCG has also an international dimension which aims to promote effective changes in respect of worldwide tax good governance through cooperation. The member states are also committed to promoting the adoption of good tax governance principles in third countries and in territories where the EU treaties do not apply.
To encourage positive change in tax legislation and practices outside the EU, the Council established in 2017 the EU list of non-cooperative jurisdiction for tax purposes (“EU List”). The EU List is regularly revised by the EU ministers of finance following an in-depth review of the implementation of commitments taken by all third country jurisdictions that are part of the process. The CoCG, assisted by the GSC, conducts technical work, screenings and assessments of third country jurisdictions on the basis of the screening criteria and the agreed geographical scope to prepare revisions of the EU List. The Commission services assist the group by carrying out the necessary technical preparatory work.
New Code’s Scenario
On 8 November 2022, Hungary and Estonia changed their previous positions on the matter and the EU Finance Ministers agreed unanimously to adopt a New Code to meet new challenges as efficiently as possible in an increasingly globalised and digitalised economic environment.
The revision will bring greater clarity as to the scope of the New Code by expanding it to cover tax features of general application which create opportunities for double non-taxation or that can lead to the double or multiple use of tax benefits for the same amount of income. Previously, the Original Code only addressed preferential measures such as special regimes or exemptions from the general taxation system. This gave rise to disagreements over whether a feature was a measure (and hence covered by the Original Code) or merely an inherent part of the tax regime (and hence outside the Original Code).
Tax measures potentially harmful
According to the New Code the preferential tax measures which provide for a significantly lower effective level of taxation than those levels which generally apply in the Member State in question are considered potentially harmful. Such a level of taxation may operate by virtue of the nominal tax rate, the tax base or any other relevant factor. When assessing whether such measures are harmful, account should be taken of, inter alia:
- whether advantages are ring-fenced de facto or de jure from the domestic market, e.g., they are accorded only to non-residents or in respect of transactions carried out with non-residents, or they do not affect the national tax base, or
- whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages, or
- whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD, or;
- whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.
Furthermore, according to the New Code also tax features of general application of a Member State, which create opportunities for double non-taxation or that can lead to the double or multiple use of tax benefits, in connection with the same expenses, amount of income or chain of transactions, are considered potentially harmful. Such effects may occur by virtue of any relevant feature of a national tax system that leads to lower tax liability, including no tax liability, other than the nominal tax rate or deferred taxation as a feature of a distribution tax system. To assess if a tax feature of general application is harmful, the following cumulative criteria and the existence of a direct causal link between them shall be verified: the tax feature of general application:
- is not accompanied by appropriate anti-abuse provisions or other adequate safeguards and as a result, leads to double non-taxation or allows the double or multiple use of tax benefits in connection with the same expenses, amount of income or chain of transactions; and
- affects in a significant way the location of business activity in the EU. When evaluating this criterion, the CoCG should take into account the fact that the location of business activity can also be influenced by circumstances other than tax features.
Standstill and Rollback
Member states commit themselves:
- not to introduce new tax measures which are harmful within the meaning of the New Code; and
- to re-examining their existing laws and established practices, having regard to the principles underlying the New Code.
The New Code provides for a review process according to which the member states i) will inform each other by the end of each calendar year of existing and proposed tax measures which may fall within the scope of the New Code and ii) may also inform each other of existing or proposed tax measures in relation to which they want to obtain certainty about their compliance with the New Code. In the absence of these notifications, member states are called upon to provide at the request of another member state or the Commission information on any tax measure which appears to fall within the scope of the New Code. Where envisaged tax measures need parliamentary approval, such information need not be given until after their announcement to Parliament.
Action to combat tax avoidance and evasion
The member states are called to fully cooperate in the fight against tax avoidance and evasion, notably in the timely exchange of information, in accordance with their respective national laws, EU law and international standards. In the light of above the New Code also provides for new activities for the CoCG which can be invited, by the Council, to hold, where this is deemed appropriate, exchanges on issues of common interest discussed in international fora that fall within the scope of the New Code. The CoCG could also submit to the Council for approval proposals for general guidance within the scope of its mandate, to the extent that the proposed general guidance is not already covered by EU legislation. Once approved by the Council, the final guidance will be published.