On July 29, 2022 the Opinion of the European Economic and Social Committee (EESC) on the Proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (COM(2021) 565 final — 2021/0434 (CNS)) was published in the Official Journal of the European Union.
The EESC amongst other states that it fully supports the Commission proposal and its overall objectives. Ensuring effective and fair taxation across the single market is crucial in order to favour a real recovery after the COVID-19 pandemic. Sufficient tax revenues to Member States are indeed a key factor in facilitating public investments aimed at achieving a greener and more digitalised single market. The EESC is slightly concerned that the substance requirements do not recognise the digital side and only emphasise the importance of tangible assets. This could create problems in the future.
The EESC furthermore is of the opinion that the Commission proposal is therefore fully in line with the Communication on Business Taxation for the 21st century, resulting in concrete and consistent action aimed at combatting tax evasion and tax avoidance, thereby ensuring a fair taxation environment across Europe.
The EESC also deems the proposal to be in line with the proportionality principle, since it does not go beyond ensuring the minimum necessary level of protection for the single market, with an apparently reasonable impact on companies. Indeed, the Directive aims at achieving a minimum protection for Member States’ tax systems, ensuring the essential degree of coordination within the EU for the purpose of achieving its objectives.
On the other hand, the impact on companies also seems to be proportionate, striking an appropriate balance among the various objectives and values, including:
i) effectiveness in reducing the misuse of shell entities;
ii) tax gains for public finances;
iii) compliance costs for businesses and tax administrations;
iv) indirect effects on the single market and on competition among firms.
Specific comments made by the EESC
The EESC considers the ‘gateway criterion’ implemented by the Commission proposal in the form of cumulative indicators as reasonable and appropriate. In this respect, the EESC observes that entities holding assets for private use, such as real estate, yachts, jets, artwork or equity alone may have no income for long periods of time, but still give rise to significant tax benefits for their controlling entities.
The Committee therefore believes that checks should be not solely on income, but also on assets, as taxes can be levied even if they do not generate any income, such as wealth taxes wherever applicable. The EESC believes that, in order to correctly manage these checks and to share the information, the Commission should have the adequate capacity and enough resources to do so.
The EESC suggests that the Commission issue appropriate guidelines regarding the substance test set forth by the Directive, with particular regard to the meaning of specific terms such as ‘residence’, ‘resident director’ and ‘premises’. Following this approach, national discrepancies and divergent interpretations potentially harmful for the internal market could be reduced or better addressed. In particular, the EESC requires the Commission to duly consider the new digital models of business in this respect.
The EESC considers that companies’ engagement in cross-border activities should be carefully evaluated with regard to the actual nature of the transactions carried out by such companies on the one hand, and with reference to their properties and assets on the other hand. Companies presenting an adequate level of transparency and not posing a real risk of lacking economic substance for the purpose of tax evasion or tax avoidance should not be covered by the Directive.
The UNSHELL Directive draws on the existing EU and international standard. The EESC recommends that the Commission ensure compatibility with the relevant international and common EU standard already in place, in particular the concept of ‘substantial economic activity’ developed in the context of preferential tax regimes and extensively discussed within the forum on harmful tax practices. Another important issue to address concerns the establishment of common and clear rules concerning the specific contents of the declarations required of undertakings. Overreporting going beyond the Directive objectives and the resulting compliance costs should be avoided.
The EESC urges that specific attention should be paid to the role of so-called ‘professional enablers’, an issue not mentioned in the proposal for a Directive. The EESC recommends that the rules regulating the activity of ‘professional enablers’ be laid down in a different legislation, in line with the criteria set out on the subject by the OECD, who often also play a relevant role in the specific area of shell companies.
The OECD, which describes the professional categories, some of whose practitioners manage or collaborate with chains of shell companies, considers it essential to focus on ‘professional enablers’ in order to combat the criminal activity of companies established for unlawful purposes, including tax evasion. Law abiding professionals should indeed be duly distinguished from a small set of practitioners using their skills in the field of tax law and corporate accounting to actively favour practices relating to tax evasion, tax avoidance and money laundering.
The EESC therefore highlights the need to target professional enablers who actively supply opportunities to exploit unlawful practices favouring fiscal and financial crimes. By doing so, it would be possible to disrupt a crucial factor relating to tax abuses. Reducing the opportunities to develop unfair fiscal practices is indeed a fundamental step towards achieving the very same objectives pursued by the Commission proposal.
The EESC believes that the cooperation of professional regulatory or supervisory bodies in combatting malpractice and possible criminal activities of ‘professional enablers’ would be of great value. This would be an interesting line of development of the European social and political pact against fiscal and economic crimes, money laundering and corruption, which the Committee has advocated in various opinions.
The EESC also suggests coordinating the Commission Directive proposal with the existing rules regarding transfer pricing, since the use of shell companies aimed at tax evasion might interplay with such a practice across the EU and should therefore be specifically considered in this respect. Here again, the EESC considers that the possibility of establishing a transfer pricing directive should also be considered.
The Committee believes that the list of companies not subject to reporting (Article 6(2)) must be properly justified and assessed in order to ensure that they do not benefit from an inappropriate tax advantage and that they are not used to circumvent the law.
The EESC also considers that more action should be put in place when a company or entity outside the EU does business with an EU-listed company or entity. One has to understand what action could be made available to EU-listed companies or entities in order to see that the funds or assets being managed are not coming from outside the EU ‘shell’ entity.
In order to be able to take effective action against companies that do business with companies based in non-cooperative jurisdictions for tax purposes, the Committee reiterates the need for the EU list of non-cooperative tax jurisdictions to be as effective and comprehensive as possible.
The full text of the opinion of the EESC on the proposal for the unshell directive as published in the Official Journal of the European Union can be found here.
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