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EU Commission will draft directive for automatic exchange of tax rulings, says president

Out-Law News | 28 Nov 2014 | 4:23 pm | 3 min. read

The European Commission will propose a new directive on the automatic exchange of information about tax rulings between EU countries, Commission president Jean-Claude Juncker has said.

"On behalf of the Commission, we support tax on financial transactions," he told European newspapers including Le Monde this week. "And over the next semester commissioner Moscovici [the Commission responsible for economic policy] is going to prepare a directive on the automatic exchange of information on tax rulings."

Tax rulings are 'comfort letters' from tax authorities giving a specific company clarity on how its corporate tax will be calculated or on the use of special tax provisions. Tax rulings are used in particular to confirm transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies, particularly prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Tax rulings may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: "The suggestion of sharing ruling information goes beyond the current OECD proposals on automatic exchange of information. While current efforts are focused on ensuring that tax authorities have details of taxpayers’ transactions for risk assessment purposes, an exchange of rulings will permit tax authorities to monitor each other’s behaviour."

Self said that there are wide variations in practice relating to the issuing of tax rulings around the EU and elsewhere. She said that the US already publishes its 'Private Letter Rulings' in anonymised form and many countries have a practice of making more rulings than the UK does. 

Juncker has been under political pressure early in his term as Commission president because Luxembourg, the country he led for 18 years as prime minister, was found to have granted tax rulings to multinational companies that moved profits to the country and paid an effective tax rate of 1%.

Critics accused the country of facilitating tax shifting and Juncker survived a motion of censure in the European Parliament this week. The European Commission is currently investigating whether tax rulings granted by Luxembourg in favour of Amazon and Fiat Finance and Trade, a subsidiary of the car company, were illegal state aid.

Juncker, who was prime minister of Luxembourg from 1995 to 2013, told the newspapers that he had discussed the plan for an EU-wide law on tax information sharing with the leaders of the 20 countries with the most developed economies at the G20 summit in Brisbane earlier this month, but that the plan did not attract widespread support.

"I was surprised at the last G20 summit [that] heads of state weren’t so enthusiastic about this idea. Only the Germans, the French, the Spanish and the Italians supported this proposition, as well as the South Korean president," he said. "At the G20 the subject wasn’t originally envisaged to feature in the final declaration of the summit – we protested, and it was put on the agenda. Then we ended up with a phrase requesting more transparency but this is not the wording that I requested to begin with.”

As companies increasingly sell goods and services online there are ongoing debates between countries and between governments and companies about whether income should be taxed where customers are or where the company is based. Juncker indicated that the location of taxation might be based on another criterion – "where profit arises".

"My sincere conviction is that the country where the profit arises should be the country of taxation, it’s a general common sense principle. This principle is not currently in practice, but we are going to make proposals in that direction," he said.

Self said: “We already have concerns that the EU state aid investigations may be going too far.   This proposal appears to be encouraging tax authorities to check up on each other, which may be greeted with some surprise by fiscal authorities and taxpayers alike.”

The automatic exchange of financial information is seen by governments and regulators as being more important than ever as financial transactions and accounting are increasingly internationalised.

The Organisation for Economic Co-operation and Development (OECD) announced plans earlier this year for a standardised method of exchanging information automatically.

"Globalisation of the world's financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence," said OECD secretary-general Angel Gurría. "This new standard on automatic exchange of information will ramp up international tax co-operation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion."