(1)

In an international context, the existence of differing tax legislation is generally accepted as a consequence of fiscal sovereignty. In this context, some, typically small, third countries with limited financial needs have opted for a low level of income tax which applies generally, both to individuals and to companies, or even no income tax at all. Such tax policies are not necessarily undesirable as such, as long as the State participates in international cooperation in order to allow other States to enforce their tax policy.

(2)

However, policies which entail a low level of income tax or none at all often go along with a lack of transparency or exchange of information with other States. The States concerned attract investment by offering non-residents a shelter for some types of mobile income or capital and allowing them to conceal the existence of such income or capital from the tax administration of their State of residence.

(3)

Various initiatives have been taken in international forums, such as the Organisation for Economic Cooperation and Development or G20, to address these concerns. Moreover, the Global Forum on Transparency and Exchange of Information for Tax Purposes (hereinafter ‘the Global Forum’) has developed standards of transparency and exchange of information for tax purposes. In 2009, the Global Forum agreed to review the implementation of those standards. It has engaged in a comprehensive peer review process and many traditional low tax jurisdictions have agreed to conclude bilateral agreements on exchange of information on tax matters.

(4)

Within the Union, issues of transparency and exchange of information are addressed by Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC (1). Moreover, there is a consensus in the Union, expressed in the Code of conduct for business taxation referred to in Annex 1 to Conclusions of the Ecofin Council meeting on 1 December 1997 concerning taxation policy (2), that harmful tax measures are not acceptable, which makes it difficult for Member States to maintain or introduce such measures. In addition, a number of measures potentially falling under the Code of conduct are subject to scrutiny under the rules on State aid set out in the Treaty on the Functioning of the European Union (TFEU).

(5)

In its relations with third countries the Union has sought to convince them to subscribe to the Union principles concerning transparency and exchange of information (similar to the broadly accepted international standards for transparency and exchange of information) and the abolition of harmful tax measures as described in Commission Communication on promoting good governance in tax matters (3) and Commission Communication on tax and development cooperation with developing countries on promoting good governance in tax matters (4).

(6)

Member States whose tax base has been negatively affected by a lack of transparency or by harmful tax measures on the part of third countries have taken steps to remedy that situation. However, taxpayers respond to such measures by routing business or transactions through another jurisdiction with a lower level of protection. This risk is particularly relevant within the Union given the freedom of economic operators to do business anywhere in the Union. Consequently, the level of protection available within the Union against such erosion of the tax base tends to correspond to the lowest level of protection offered by any Member State.

(7)

The distortions that this situation brings about within the Union can lead to artificial capital flows and movements of taxpayers within the internal market and thus harm its proper functioning, as well as erode Member States’ tax bases. Such distortions should be remedied through an approach shared by all Member States.

(8)

Therefore, it is necessary to clearly spell out minimum standards of good governance in tax matters, both in regard to transparency and exchange of information and in regard to harmful tax measures, and a number of measures to be taken vis-à-vis third countries, with a view to encouraging those countries to comply with those standards.

(9)

In regard to transparency and exchange of information, an internationally recognised standard has been set out in the Terms of Reference agreed by the Global Forum in 2009. Those terms should therefore form the basis of this Recommendation. As far as harmful tax measures are concerned, the Code of conduct for business taxation has proven to be a pertinent reference within the Union. Member States have committed themselves to promoting principles of that Code in third countries. It is therefore appropriate to refer to the criteria of that Code for the purposes of this Recommendation. In this regard, it is also appropriate to refer to the work of the Code of Conduct Group (business taxation), set up within the framework of the Council to asses the tax measures that may fall within scope of the Code of conduct for business taxation (5). The cases assessed by this group can be of assistance when it comes to examine whether a given measure is to be considered as harmful.

(10)

This Recommendation should indicate a set of measures to be applied in relation to third countries that do not meet the minimum standards of good governance in tax matters. By applying these measures together, Member States would significantly increase the overall effectiveness of the measures taken by each of them. Losses of tax revenues could therefore be reduced, along with administrative costs for tax administrations and the compliance burden on taxpayers.

(11)

In order to promote the application of the minimum standards of good governance in tax matters, it is also necessary to indicate positive measures to encourage third countries that meet these standards or that are committed to meeting them but need assistance to achieve this.

(12)

The measures indicated in this Recommendation and applied by Member States must be compatible with Union law, in particular with the fundamental freedoms enshrined in the TFEU,