The Importance of Information Exchange in Tax Matters

Algirdas Šemeta

EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud

"The Importance of Information Exchange in Tax Matters"

Symposium on International Fiscal Data Exchange

Leuven, 16 November 2010

Ladies and Gentlemen,

I am delighted to be here today to address such a distinguished audience.

I would like to express my thanks to the Belgian Presidency and the Catholic University of Louvain for giving me the opportunity to speak to you today, and in particular to Mr Devlies for having invited me to this important event. I would also like to thank Professor De Broe for his introduction.

Today's presentations and debates will be particularly interesting and will not only be fed by expertise and experience, but will also focus on very important political challenges as regards International Tax Data Exchange.

Promoting good governance in the tax area is one of the three main pillars of my tax agenda, along with improving the quality of tax revenues and the contribution of tax policy to sustainable growth.

It is incredibly important that Member States are able to collect tax revenues they are due, especially in this time of economic difficulty. To this end, the EU must step up its fight against tax fraud and tax evasion, and continue to lead the campaign for good governance which implies a reinforced cooperation on exchange of information.

I will concentrate my intervention around the following three questions:

• Why does exchange of information matter?

• What kind of exchange of information do we need?

• Why is the issue relevant beyond the borders of the EU?

Let me first emphasise how important the exchange of information is for the efficiency of EU tax policy.

We live in an age of globalisation. Taxpayers and capital have become increasingly mobile and are able to move freely across borders and where the number of cross-border transactions has grown substantially. All this makes it difficult for Member States to properly assess and collect their taxes in isolation. At the same time, direct taxation systems are not harmonised and Member States are keen to safeguard their sovereignty in this area.

In this context, it is essential that the European Union ensures the proper functioning of the internal market: On the one hand, by allowing EU citizens and businesses to move or invest abroad without suffering discrimination or double taxation, on the other hand by limiting the scope for tax fraud and tax evasion.

Developing a robust and effective system of administrative cooperation and exchange of information is a prerequisite for achieving such goals.

Undoubtedly, the OECD standards of transparency and exchange of information have paved the way for international consensus on the importance of effective exchange of information for collecting taxes.

But as you may know, the OECD standards, which prevent States from invoking bank secrecy to refuse access to information, concerns exchange of information on request. This approach only works if the State that needs the information already has indications that a tax resident may have financial interests in another State.

However, and this is my second point, Europe needs more than exchange of information on request.

In the single market, national economies are increasingly integrated and capital markets fully liberalised. The fact that taxpayers and their investments can move freely between Member States, poses additional challenges to tax administrations which seek to ensure the proper collection of taxes.

It is therefore only logical that the EU should be more ambitious when it comes to improving tax transparency. In this context, enhanced transparency by means of automatic exchange of information constitutes the way forward. This has already been agreed by Member States, as demonstrated by the Savings Directive adopted in 2003.

Automatic exchange of information permits tax authorities to obtain information on their own tax residents in cases where they might not otherwise be aware of such cross-border investments.

It is much more interesting for a tax authority to receive comprehensive information about the assets owned by its residents abroad than to receive only a withholding tax on the income produced by such assets. Such a withholding tax may generate some revenue, but it does not allow Member States to assess the overall tax base of their residents. As a consequence, the progressivity of some tax scheme cannot properly be applied. This leads to less revenue and the unequal treatment of taxpayers.

Of course, one may contest the usefulness of the information received and argue that there is a risk of 'information overload'. It is true that automatic exchange of information is only useful when the information is properly structured and tailored to the needs of tax administrations.

However, this is also a question of proper organisation at the level of national tax administrations. Member States can use risk management techniques to trigger the appropriate controls and thus make use of the information received and stored during audits or investigations.

In this context, I have to stress that, although it is important to build an efficient system for the tax administrations, it is equally important to ensure that the automatic exchange of information respects agreed standards of taxpayer privacy.

In this respect, within the EU, information is protected by strict provisions on secrecy. Any information received has to be kept secret in the same manner as under national legislation. It cannot be used for purposes other than the assessment or collection of taxes. In addition, the European Union data protection rules apply.

Let me finish with the external dimension of the good governance principles and exchange of information.

We are continuing our efforts to promote good governance beyond the borders of the EU. Negotiations on the inclusion of good governance principles in tax matters in a number of relevant EU agreements with third countries are well underway.

In this context, a distinction must be made between our closest neighbours and other international partners. Our European neighbours are closely associated to all our policies, through the EFTA and EEA agreements and, particularly in the case of Switzerland, also through a series of bilateral EU agreements. As a result, our respective markets are closely integrated and cross-border trade and investment are intense.

It is therefore only logical that we have higher expectations for these countries, and that we expect them to cooperate more closely with the EU on the exchange of information.

In this context, it is not sufficient that individual EU Member States conclude bilateral agreements with third countries which provide for the OECD standards of transparency and exchange of information.

There is a need for a more coherent approach, which does not call into question existing bilateral agreements, but which is able to provide a uniform solution and to ensure legal certainty for the taxpayer, for the Member States and for third countries.

At global level, we also aim to improve transparency and exchange of information worldwide. A Commission communication adopted last April strengthens the link between tax and development policies. It suggests how the EU could better assist developing countries in building efficient and sustainable tax systems and administrations, in order to enhance domestic resource mobilisation. This is in line with other international efforts such as those in the OECD, the G20, and the UN.

Conclusion

Ladies and Gentlemen,

Within the EU, the Commission has already put forward ambitious proposals to improve the existing instruments for administrative cooperation between tax administrations. A proposal to improve assistance in the recovery of tax claims was adopted by the Council earlier this year. A proposal to improve exchange of information is still pending in the Council. Once adopted, it will in particular ensure that bank secrecy can no longer be invoked to refuse administrative assistance.

I hope that very soon the Finance Ministers will reach a political agreement on the proposal on administrative cooperation that I have mentioned. It is vital that we make rapid progress on this issue.

The current economic context, where national budgets are under severe pressure, makes it more important than ever that the European Union shows its determination to combat tax fraud and tax evasion and to improve information exchange in tax matters, in full respect of taxpayer's rights.

I am convinced that the EU Member States remain committed to implement an efficient and ambitious agenda for good governance that will pave the way for future successful negotiations at international level.

I wish you a successful symposium and I am looking forward to the conclusions of Professor De Broe's study on the international exchange of information which will provide an invaluable insight in today's practices and challenges for the future.