Combatting tax avoidance in the EU

Scale of the problem

Tax fraud and evasion undermine the functioning of democratic societies, distort economic decision-making and erode the trust between citizens and governments.

Each year, billions of euros are lost when companies, wealthy individuals, and other taxpayers fail to contribute their fair share. These losses not only reduce the resources available for public services—such as healthcare, education, and infrastructure—but also undermine economic fairness and stability across the EU.

Tackling this issue is critical to safeguarding public trust, ensuring the functioning of the single market and promoting economic stability.

How EU tax policy works

When tax fraud and tax avoidance occur

Tax fraud and tax avoidance occur when a taxpayer or an entity deliberately files an incomplete or incorrect tax return to or hides relevant information from the national tax authorities, in order to avoid paying taxes. These activities can take many forms, each with distinct characteristics and implications.

Below, we explore the various types of tax fraud and evasion, explaining their definitions and how they operate.

Tax evasion or tax fraud

Tax evasion or tax fraud are illegal activities aimed at avoiding paying taxes altogether. Tax evasion can involve not declaring all profits, under-reporting income, or taking part in complex schemes to avoid paying value-added tax (VAT), for example. Tax fraud can also include falsifying records or using other deceitful methods to evade tax obligations.

Tax avoidance

Tax avoidance involves using legal instruments and strategies to minimise tax liabilities. Common practices include shifting profits to countries with lower tax rates or deducting interest payments on loans with artificially inflated interest rates. While formally legal, these tactics exploit loopholes and inconsistencies in the tax laws in order to reduce the amount of tax paid.

Aggressive tax planning

Another form of tax avoidance is aggressive tax planning. This occurs when large businesses and wealthy individuals exploit the limits of the law to minimise the amount of taxes paid. While these actions may be technically legal, they are ethically questionable and contribute to an overall loss of tax revenue.

Tax havens

Tax havens are countries or jurisdictions that offer favourable tax conditions, such as very low or zero tax rates, often to foreign companies and individuals in particular. In addition, tax havens often provide secrecy by not divulging the identities of individuals or the real owners of companies registered there. This allows money to be stored in these jurisdictions (‘offshore’), often unreported and untaxed, leading to significant losses in tax revenue for other countries.

Consequences of tax fraud

Tax fraud limits the capacity of EU countries to raise the funds they need, implement economic and social policies, and sustain public services. The repercussions include potential cuts in public services and a slower economy.

Tax fraud has several main consequences:

Economic consequences

Reduces government revenues needed to finance essential public services.

Inequity and unfairness

Puts an unfair and disadvantageous burden on honest taxpayers.

Trust erosion for the law and public institutions

Undermines public confidence in the public legal order and in public institutions.

Criminal activity

Finances criminal or illegal activities, endangering citizens, businesses and even entire countries.

Global implications

Distorts competition, grants unfair advantages, and contributes to growth of cross-border crime and tax evasion.

Role of the EU

Combatting tax fraud and evasion is primarily the member states’ responsibility. However, countries have agreed rules at EU level to enhance transparency on tax matters, promote information sharing, adopt legislation to close loopholes and enforce tax compliance across borders.

These are some of the main activities undertaken at EU level:

Directive on administrative cooperation

Under the directive on administrative cooperation (DAC), member states engage in the automatic, spontaneous and on-request exchange of tax-relevant information, which helps to prevent tax evasion. This makes it harder for individuals and businesses to conceal assets or income from tax authorities. In place since 2011, and significantly enlarged in scope a few times since 2014, these rules play a crucial role in fostering cooperation and promoting tax transparency between EU member states.

In 2023 the Council extended its scope and added rules on the reporting and automatic exchange of information on revenues from transactions in crypto-assets, and on advance tax rulings for the wealthiest (high-net-worth) individuals.

Council adopts directive to boost cooperation between national taxation authorities (DAC8) (press release, 17 October 2023)

Cooperation on value added tax

The regulation on administrative cooperation in value added tax (VAT) provides for the exchange of specific information between tax administrations of member states to combat VAT fraud and evasion. The exchanges of information, joint audits and simultaneous controls allow officials from national tax authorities to form international audit teams to check tax compliance in this area, including the tax compliance of multinational companies and platforms.

Value added tax (VAT) in the EU

EU list of non-cooperative jurisdictions for tax purposes

The EU is committed to promoting good tax governance principles and mechanisms worldwide and to fighting unfair tax competition.

The EU list of non-cooperative jurisdictions for tax purposes is part of the EU’s efforts to strengthen fair taxation and enhance global tax transparency, with the aim of tackling tax fraud, evasion, and avoidance. It includes countries and jurisdictions which do not cooperate with the EU or have not fully met their commitments on tax matters.

EU list of non-cooperative jurisdictions for tax purposes

Code of Conduct Group

The code of conduct group is a body within the Council which is composed of high-level representatives of member states and the European Commission. Its role is to identify and assess harmful tax practices by countries and jurisdictions, both within the EU and beyond. The aim of the group is to promote fair competition and prevent tax base erosion.

Code of Conduct Group (business taxation)

Anti-tax avoidance measures

The EU anti-tax avoidance measures directive (ATAD) bans a number of specific forms of corporate tax avoidance across the EU, while ensuring a fairer and more stable environment for businesses.

The rules include five anti-abuse measures, which all member states are legally bound to apply against common forms of aggressive tax planning.

The Council adopted the anti-tax avoidance directive on 12 July 2016. On 29 May 2017, an amendment to the implementation was introduced to tackle hybrid mismatches with the tax systems of countries outside the EU.