In an increasingly interconnected world, where businesses expand their operations worldwide and capital flows across borders, not only does the issue of international taxation arise, but also cooperation between tax administrations, and this cooperation is an objective to be achieved in a European and international context.

Recognising the need for cooperation and harmonisation in such a complex panorama, the European Union (“EU”) took a significant step forward by introducing Council Directive 2010/24/EU (the “Directive”). This Directive serves as a keystone for promoting and upholding international tax cooperation among EU Member States. It enables the exchange of information and administrative assistance in the pursuit of fair and effective taxation, and it also ensures an efficient collection and enforcement of taxes. The Directive is aligned with EU’s main intent of establishing a level playing field and combating tax fraud and evasion, as well as aggressive tax planning practice, which weaken the integrity of the internal market.

The ratio legis of the Directive places significant emphasis on the collection of taxes and it establishes mechanisms for EU Member States to facilitate the effective recovery of tax claims. In detail, it enables tax authorities to request assistance from other Member States in tracing debtors and in gathering relevant information, in order to collect outstanding tax debts. This cooperation ensures that tax evasion and avoidance decrease, and that as many taxpayers as possible fulfil their obligations.

This instrument has been widely used to assist in the collection of debts when an assessment has already been issued and a tax enforcement action has already been started in the Member State in which the assessment was issued.

However, taking into consideration recent experiences regarding this matter in Portugal, tax authorities are resorting to the preventive mechanisms established in the Directive: the precautionary measures. Put another way, Member States started to extend the application of this Directive beyond debt collection (subsequently to the attempt of collection in the debt’s state of origin), and towards the implementation of precautionary measures aiming to avoid the dissipation of assets, therefore creating a surprise effect.

To our knowledge, Member States like Portugal, Spain, or Germany - although we expect it to be a growing trend across the EU - are now using this instrument to impose measures such as freezing bank accounts, seizing assets, etc., even before a tax enforcement action is started in the other Member State (in which, subsequently, the collection procedures were carried out). This highlights the adaptability and versatility of the Directive, as well as the countries’ willingness to have recourse to alternative measures to ensure the collection of debts and secure tax revenues to the best of their ability.

Article 16(1) of the Directive establishes that “[a]t the request of the applicant authority, the requested authority shall take precautionary measures, if allowed by its national law and in accordance with its administrative practices, to ensure recovery where a claim or the instrument permitting enforcement in the applicant Member State is contested at the time when the request is made, or where the claim is not yet the subject of an instrument permitting enforcement in the applicant Member State, in so far as precautionary measures are also possible, in a similar situation, under the national law and administrative practices of the applicant Member State”.

Until recently, tax authorities used to fully apply the compulsory enforcement measures that were available to them in its own countries. However, this is no longer the case in practice and now tax authorities resort immediately to the other jurisdictions. This may be significant in jurisdictions in which the managers or directors of indebted companies bear secondary/subsidiary liability, as happens in Portugal. Indeed, this is relevant given that the abovementioned surprise effect might occur at a point capable of halting the dispersal of the assets held by the liable parties (i.e., managers or directors).

These measures cannot be requested in every case, as they are subject to limitations based on factors such as the amount at stake and the issuance of the tax assessment in the Member State of origin. In addition to the abovementioned constraints, it is important to highlight that the feasibility of implementing specific measures must be evaluated on a case-by-case basis, bearing in mind that their application must be viable in the state of origin, according to domestic law.

The triggering of precautionary measures significantly contributes to the effectiveness of the tax authorities regarding debt collection, although it is important to note that Article 16 of the Directive also includes safeguards for taxpayers’ rights. The Directive requires Member States to provide appropriate remedies for the taxpayer to challenge or appeal the precautionary measures taken against them. These remedies must ensure that taxpayers can secure their interests.

Nevertheless, taxpayers cannot challenge the legality of the tax assessment that gave rise to the debt, nor can they challenge any aspect regarding the tax enforcement procedure. The scope of the taxpayer’s argumentation is restricted to the fulfilment of the criteria underlying the application of precautionary measures.

We acknowledge that the Directive seeks to achieve a balance between the interests of tax authorities and taxpayers’ rights in order to ensure the effective collection of taxes while upholding the principles of fairness and due process. It also seeks to avoid undermining the legal certainty of taxpayers through the abovementioned surprise effect. However, we tend to consider there may be an imbalance of power in the Member State where precautionary measures are applied, as the opportunity of challenging it is limited, in a field where taxpayers’ assets undergo a significant intrusion.

This serves as a cautionary note and gives rise to a myriad of questions. Indeed, the surprise effect can have its advantages, so it begs the question of whether it is justified in every situation, and this must be examined on a case-by-case basis.