Select Committee on European Communities Twenty-Eighth Report




A.  While recognising the positive effects of fair competition, and the need to maintain world-wide competitiveness, the Council notes that unrestrained tax competition for mobile forms of business increasingly threatens to cause economic distortions and to erode tax bases within the Community. It underlines its concern, especially in relation to measures that provide operating support to international finance and services activities. The Council condemns the use of tax measures that harm the Community interest, including the effective operation of the Single Market, and it accordingly encourages Member States neither to introduce nor to retain such measures.

B.  To this end, the Council requests the Member States to adopt and implement the following Code of Conduct. This Code, which is wholly without prejudice to the application of Community law, identifies tax measures that are potentially harmful and provides a framework within which Member States can commit themselves to follow the principles of fair competition. The Code fully respects the principle of subsidiarity, and does not affect the respective competences of the Member States and the Commission.


Taxes covered

C.  This Code covers those business tax measures which affect, or which may affect, in a significant way the location of business activity in the Community. Business activity in this respect includes all activities carried out within a group of companies. The Code also covers those special tax regimes for employees which have, or which may have, a significant effect on the location of business activity. The tax measures covered by the Code include legislative provisions, regulations and administrative practices.

Identifying potentially harmful tax measures

D.  Within the field of application specified in §C, the Council recognises as being potentially harmful those tax measures which provide for a significantly lower effective level of taxation, including zero taxation, than that which generally applies in the Member State in question. Such regimes, which may operate by virtue of the nominal tax rate, by virtue of the tax base, or otherwise, will in addition be evaluated in the light of one or more of the following characteristics:

    (i)    whether particular benefits are given only to non-residents of the Member State in question, or are given only in respect of transactions carried out with non-residents;

    (ii)  whether benefits are otherwise ring-fenced from the domestic market of a Member State so they do not affect the national tax base;

    (iii)  whether benefits are available without there being any real economic activity;

    (iv)  whether the basis of profit determination in respect of activities within a multinational group of companies departs from internationally-accepted principles, notably those agreed upon within the OECD;

    (v)  whether the measure lacks transparency, including where statutory rules are relaxed at administrative level in a non-transparent way.



E.  Member States commit themselves not to introduce new tax measures which are harmful to the Community interest, including the effective operation of the Single Market. Member States will therefore respect the principles underlying the Code when determining future policy, and will have particular regard to the Review Process outlined in §G-K below in assessing whether any new tax measures or practices are harmful.


F.  Member States commit themselves to re-examine their existing laws and established practices, having regard to the principles underlying the Code and to the Review Process outlined in §G-K below. Member States will amend such laws and practices as necessary, with a view to eliminating any harmful measures. Any such measures should, as a general rule, be eliminated within two years, although a longer period may be justified in particular circumstances, taking into account the reasonable expectations of business.


Provision of information

G.  In accordance with the principles of transparency and openness, Member States will inform each other of existing and proposed tax measures which fall within the scope of the Code as described at §C-D above. In addition, Member States may seek information from other Member States on any tax measure which appears to fall within the scope of the Code. Where proposed measures need parliamentary approval, such information may be given after their announcement to Parliament.

Assessment of harmful measures

H.  Any Member State may request the opportunity to discuss and comment on a tax measure of another Member State that falls within the scope of the Code. This will permit an assessment to be made of whether such measures are harmful, in the light of the effects that they may have within the Community. That review will take into account all the factors identified in §D above, and, in assessing the impact of tax measures on business location, the effective levels of taxation on the same economic activity that are applied throughout the Community.

I.    In reviewing tax measures, the Council emphasises the need to assess carefully the effects which they have on other Member States, and, insofar as they are used to support the economic development of particular areas, to evaluate the extent to which the measures are effective in achieving their aims.


J.    A Group will be established by the Council to oversee the provision of information on, and assessment of, tax measures that fall within the scope of this Code. The Council invites each Member State and the Commission to appoint a high level representative and a deputy to this Group. The Group, which will meet as necessary, will select and review the tax measures for assessment under §G-I. A report by the Group of the review of each measure will be transmitted to the Council for its consideration and, if the Council so decides, for publication.

K.  The Council invites the Commission to provide assistance to the Group in carrying out the necessary preparatory work for its meetings, and to facilitate the provision of information and assessment process. To this end, the Council requests Member States to provide to the Commission the information referred to in §G so that the Commission may co-ordinate its exchange between the Member States.


L.  The Council notes that some, although not all, of the tax measures covered by this Code fall within the scope of the provisions on state aid in Articles 92-94 of the EC Treaty. Without prejudice to Community law, the Council notes that the Commission undertakes to provide guidance on the application of the state aid rules to fiscal aids, and commits itself to the rigorous application of the state aid rules, taking into account, inter alia, negative effects of aid that are brought to light in the application of this Code.


M.  The Council stresses its commitment to full co-operation in the fight against tax evasion and avoidance, notably in the provision of information to other Member States in accordance with national legislation.

N.  The Council notes that anti-abuse provisions or countermeasures contained in tax laws and in double taxation conventions play a fundamental role in counteracting tax avoidance and evasion. Member States should apply such measures in accordance with Community law.


O.  The provisions of this Code will apply within the Community. Furthermore, the Council considers that it would be beneficial that the principles supporting fair competition be adopted as widely as possible. To this end Member States will promote their adoption at an international level, and in particular will give active support to their adoption in their dependent or associated territories.


P.  In order to ensure the even and effective implementation of the Code, the Council invites the Commission to report to it annually. The Council shall also review the provisions of the Code when it has been in operation for two years.

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