In order to better fight tax evasion and fraud, the European Commission adopted on February 2, 2009 two proposals for new directives intended to improve mutual assistance between the tax authorities of the Member States in the assessment and recovery of taxes. One of the key elements of the proposals is that the Member States will no longer be able to rely on bank secrecy in order to refuse cross-border cooperation.
Bank secrecy is a legal principle pursuant to which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. Bank secrecy is more effective in certain countries, such as Switzerland, or in tax havens, where offshore banks adhere to voluntary or statutory levels of privacy. Created by the Swiss Banking Act of 1934, which also resulted in the creation of the famous Swiss banks, the principle of bank secrecy is sometimes considered one of the keystones of private banking. However, it has also been suggested that bank secrecy encourages the growth of underground economies and organised crime.
The current EU arrangements for mutual assistance in the recovery and assessment of taxes date from 1976 and 1977, respectively. At that time, the mobility of persons and capital was incomparable to what it is today. Today, fraudsters take advantage of territorial limitations on the national tax authorities in order to hide income in foreign countries and claim insolvency in countries where they owe taxes.
As a result, the European Commission has decided to open a new front in the battle against tax fraud with proposals that target bank secrecy laws in Austria, Belgium and Luxembourg.
Current situation and the bank secrecy exception
Under Directive 2003/48/EC of June 3, 2003 on taxation of savings income in the form of interest payments, each EU Member State is expected to provide information to the other Member States on interest paid from that Member State to individuals residing in the other Member States. However, the directive provides for a transitional period for Belgium, Luxembourg and Austria, during which time these Member States can levy a withholding tax, rather than provide information, on interest income paid from these Member States to individuals residing in other EU Member States. The rate of withholding tax was 15% for the first three years (July 1, 2005 - June 30, 2008); it is now 20% (July 1, 2008 - June 30, 2011) and will be raised to 35% effective July 1, 2011. These three Member States must transfer 75% of the revenue raised by this withholding tax to the tax authorities of the recipient's Member State of residence, retaining 25% to cover the administrative expenses arising from application of the tax.
According to the EU's tax commissioner, it is unacceptable for bank secrecy in one Member State to constitute an obstacle to the correct assessment by the tax authorities of another Member State of the taxes due by its resident taxpayers. He described the proposal as only a "first step" towards abolishing bank secrecy since the new directive will only apply when an EU Member State requests tax information about a resident of another EU country. Under the proposal, resident taxpayers of Austria, Belgium and Luxembourg will continue to benefit from bank secrecy as regards dealings with their local tax authorities. The new rules will also give European countries a stronger hand when dealing with non-EU tax havens. Such countries have on occasion rejected requests or demands for information, pointing to uncooperative EU states, as the EU commissioner rightly points out.
This proposal is intended to complete the proposals made by the Commission in November 2008 to improve the legislation on the taxation of savings income.
Administrative cooperation in the assessment of taxes
One of the novelties of the proposed directive on improved administrative cooperation in the assessment of taxes is its wider scope. Indeed, the proposal extends to all taxes except those covered by specific EU legislation, i.e., VAT and excise duties.
The proposed directive is intended is to help the Member States efficiently cooperate at the international level in order to overcome the increasing difficulties they face in properly assessing taxes. In this regard, the proposal provides clearer and more precise rules in the area of cooperation. In particular, it provides for common rules of procedure, forms, formats and channels to exchange information. It also allows the tax officials in one Member State to be present on the territory of another Member State and to participate actively - with the same inspection powers - in administrative enquiries carried out there.
One of the main purposes of the proposed directive is to tackle the problem of reliance on bank secrecy to refuse cross-border cooperation. Based on the OECD Model Convention, the proposal provides that a Member State cannot refuse to supply information about a taxpayer residing in the requesting Member State solely because this information is held by a bank or other financial institution located in the requested Member State. As such, the proposal abolishes bank secrecy in relations between the tax authorities when a requesting Member State is assessing the tax situation of one of its resident taxpayers.
Another crucial element of the proposed directive is that the Member States are obliged to provide the same level of cooperation to their EU partners as they extend to any third country, thus stressing the specific EU dimension.
Mutual assistance in the recovery of taxes
The proposed directive to improve mutual assistance in the recovery of taxes is intended to reinforce and improve recovery assistance between the Member States. The end goal is to improve the recovery ratio, which currently stands at around 5% of the total for which assistance is requested.
The Commission proposes in particular that all taxes and duties levied by the Member States and their administrative subdivisions, as well as compulsory social security contributions, be covered. The proposal introduces the compulsory exchange of information about tax refunds made by national tax authorities to non-residents and allows the officials of one country to actively participate in administrative enquiries on the territory of another country. As with the proposed directive on administrative cooperation in the field of taxation, the purpose of this directive is also to simplify and rationalise the procedures to be used when requesting or providing mutual assistance.