EU Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3)- Final Report

The EU’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) has received the EU Parliament’s approval for implementation of its recommendations regarding anti-money laundering and aggressive tax planning. The European Parliament established the Tax3 Committee to address significant issues identified following the recent tax scandals such as the Panama Papers, Luxleaks and Paradise Papers among others.

Co-authored by Luděk Niedermayer and Jeppe Kofod, the report’s main aim was to align EU-wide tax systems with the technological challenges of the 21st century and achieve tax collection efficiency and fairness. The final meeting of the TAX3 Committee took place on 27 February 2019 in order to vote on the draft Report which sets out the proposals of the Committee with the final report of the Committee being adopted by the European Parliament on 26th March 2019.

Tackling artificial taxable presence:

The adoption of a comprehensive definition of aggressive tax planning is included within the measures to be adopted, as is the definition of permanent establishment and the setting of economic activity requirements and expenditure tests to avoid companies having an artificial taxable presence in a Member State. The importance of having corporate taxes being paid in the jurisdiction where profits are actually generated is a key feature stressed in the report.

Adopting the rules of ATAD and BEPS action plan:

The report acknowledges the exit taxation rules adopted by the EU in the ATAD I and the implementation of the BEPS action plan.  It was noted that the implementation of both ATAD I and ATAD II has provided a minimum level of protection against tax avoidance in the EU and the proposed provisions on hybrid mismatches to prevent double taxation were welcomed, as were the provisions relating to controlled foreign companies (CFC) and the general anti abuse rules in calculating corporate tax.

Digital Tax package:

The report identified that digitalisation allows some companies to enjoy an unfair lower tax burden when compared to those companies with a physical presence. As a result, the EU has adopted a digital tax package to ensure that profits are registered and taxed where businesses have significant interaction with end users through digital channels and that interim tax will be imposed covering the main digital activities that currently escape tax altogether in the EU.

State aid:

The Committee’s report also gave guidance on what constitutes tax-related state aid and transfer pricing and urged Member States to avoid granting state aid as a tax advantage.

Defining the so called ‘’ letter-box ‘’ companies:

The EU parliament approved the report’s recommendation that “Letter-box companies” be defined as “entities which have no actual economic activity and hold no documentary proof to the contrary,  registered in a jurisdiction where companies are not required to submit financial statements, and/or have no place of business in their country of residence”. The adoption of the report’s recommendations imposes an obligation upon Member States not only to implement the aforesaid definition within their national laws but also to adopt measures in order to ban commercial relationship with letterbox companies.

 VAT fraud:

The Committee emphasised the need for both reliable statistics of VAT revenues and a common approach to data sharing and collection by all Member States as large amounts of the expected VAT revenue, which constitutes one of the most important revenue sources for national budgets, are lost because of fraud.

Setting up a financial police force:

Finally, the Committee expressed its concern as to the general lack of political will to tackle tax evasion and financial crime and proposed setting up a financial police force and an EU anti-money laundering watchdog for this purpose. Drawing attention to the US protection and reward system for whistle -blowers and investigative journalists, it recommended that this strategy be replicated by the EU.