EU: European Court of Auditors issue report on ATAD, DAC6, TDRD

13 December, 2024

The European Court of Auditors released a report, “Combating Harmful Tax Regimes and Corporate Tax Avoidance” on 28 November 2024.

The report evaluates the effectiveness of measures and strategies implemented by the European Commission (EC) and selected EU member states to address tax avoidance and harmful tax practices.

The report examines the design and implementation of key EU tax measures between 2019 and 2023, including the Anti-Tax Avoidance Directive (ATAD), mandatory disclosure rules (DAC6), and the Directive on Tax Dispute Resolution Mechanisms (TDRD).

Executive Summary

1. Harmful tax regimes and corporate tax avoidance are economic phenomena that are not only evident at EU level but also constitute a global challenge. A tax regime is considered harmful when a country implements one that has adverse effects, such as the erosion of foreign tax bases or the unfair distribution of tax burdens. Such regimes can lead to significant tax losses for EU member states and distortions in the internal market.

2. The EU has put a legal framework in place and uses other supporting instruments as a first line of defence against harmful tax regimes and corporate tax avoidance. The national governments of EU member states remain largely free to design their own tax laws and systems, and EU-level intervention can only take place where the functioning of the internal market is affected. Within this framework, the European Commission is responsible for enforcing EU law, and monitoring, coordinating and harmonising member states’ actions.

3. This audit assessed whether the EU framework is adequate within the limited scope of EU competences in the field of direct taxation. The European Court of Auditor therefore assessed the appropriateness of measures and mechanisms employed in the EU by both the Commission and the member states. In particular, they focused on the design and implementation of three directives (the Anti-Tax Avoidance Directive, the 5th amendment to the Directive on administrative cooperation in the field of taxation (DAC 6) and the Directive on Tax Dispute Resolution Mechanisms) between 2019 and 2023. The European Court of Auditor also examined whether the member states and Commission fulfilled their obligations in respect of the non-legally binding EU Code of Conduct for business taxation, and assessed whether they monitor, in an effective manner, the performance of their policies in the area that they audited.

4. The European Court of Auditor carried out this audit because the EU measures taken to fight harmful tax regimes and corporate tax avoidance have not been comprehensively covered by ECA audits, while their economic relevance and importance on the EU agenda have increased. Our previous work in the area focused on the procedures introduced by the Directive on administrative cooperation in the field of taxation (DACs 1 to 5, special report 03/2021). In this audit they extended the scope of our analysis to cover a wider range of measures with a view to improving their effectiveness, the ultimate purpose of which is to ensure that the right amount of tax is paid in the correct member state.

5. Our overall conclusion is that the established EU framework serves as a necessary first line of defence to support the fight against harmful tax regimes and corporate tax avoidance within the limited scope of the EU’s competences. However, there are shortcomings in the way EU measures were drawn up and implemented, and there is no appropriate monitoring system for assessing their effectiveness.

6. The European Court of Auditor notes that in recent years the Commission has advanced the legislative framework for tackling harmful tax regimes and corporate tax avoidance at EU level. However, they found unclear definitions and gaps that have resulted in different interpretations across the member states. The Commission oversees the incorporation of EU legislation into national law effectively, but some evaluations, although ongoing, are overdue. At the level of the member states, our main findings concern the implementation of the DAC 6. The European Court of Auditor found that the five member states that visited did exchange tax information on potentially harmful cross-border arrangements, but carried out few data quality checks and made little use of the information received.

7. Although the Commission provides satisfactory assistance to the Code of Conduct Group in assessing potentially harmful tax regimes, its role was very limited at the time of the audit. Member states withdraw their harmful tax regimes when this is recommended by the Group. However, in several cases the period to comply was much longer than the two years recommended by the Council. This gives rise to the risk that companies continue to benefit longer from unfair tax advantages.

8. The European Court of Auditor also found that the Commission and four of the five member states visited had taken no suitable approach to measuring the performance of the tools used to combat harmful tax regimes and corporate tax avoidance in the EU. The lack of appropriate performance frameworks prevented them from measuring and assessing their efforts and deploying resources where they are most needed.

9. The European Court of Auditor recommend that the Commission should:

clarify the EU legislative framework;
improve the quality of DAC 6 reports;
ensure that the impact of penalties is adequate;
enhance its support to the Code of Conduct Group;
monitor the results and impact of the fight against harmful tax regimes and corporate tax avoidance.