“Tax reforms and European and international co-ordination of taxation: the main issues”
by Frits Bolkestein
in charge of internal market, taxation and customs union
With the important challenges currently facing the European Community, it is clear that tax policy can no longer be decided in isolation and that, at Community level, tax proposals must be compatible with other general EU policy objectives.
Community tax policy must underpin the goal set by the Lisbon European Council that the EU should become the most competitive and dynamic knowledge-based economy in the world by 2010. In addition, it must support the continued success and development of the Internal Market, both before and after enlargement. It must take account of the increasing globalisation of economies and the heightened competition for investment.
The tax reforms in several EU Member States in recent years represent a move in the right direction. They were often aimed at reducing the tax burden on labour income, particularly at the low to middle end of the pay scale, and achieving a general reduction in corporate income tax rates to improve the functioning of capital markets. Increases in indirect taxation in several countries were driven by green tax reforms, often as a counterpart to the reduction in the taxation of labour.
While tax harmonisation is clearly not necessary in all fields of taxation, increased co-ordination would help Member States adjust their tax systems further to meet these challenges while protecting their revenues against tax fraud, distortions of competition and situations of double non-taxation.
It is in this general context that the European Commission has drawn up its plans for the next few years in the tax field (1). The work on the elimination of harmful tax competition should continue. But to achieve a balance in EU tax policy, attention must also be paid to the concerns of taxpayers, both individuals and companies. This means eliminating tax obstacles hindering the exercise of the fundamental freedoms guaranteed by the EC Treaty.
To achieve its objectives the Commission intends not only making proposals for legislation, but to pursue a pro-active strategy in initiating legal action against Member States where it believes that Community law is not respected.
Close regard has to be given to the international dimension in considering the development of EU tax policy. To work effectively, a global economy needs some acceptable basic rules to guide governments and business. At the same time tax systems must be conducive to cross-border business activity. The Community has played a leading role in taking forward the work on harmful tax competition at the OECD and on mutual assistance in tax matters and it has also participated actively in establishing international rules for the application of consumption taxes to electronic commerce.
Some of the Commission’s current tax policy priorities are:
The Council of EU Economic and Finance Ministers on Tuesday 21st January reached political agreement on the tax package to eliminate harmful tax competition (consisting of a directive on savings taxation, a code of conduct to eliminate harmful business taxation and a directive on interest and royalty payments). The Council committed itself to adopting the package formally before the European Council in March 2003. The Commission is giving high priority to finalising its negotiations with the five third countries (Andorra, Liechtenstein, Monaco, San Marino and Switzerland) on the adoption of savings tax measures equivalent to those agreed within the EU, as requested by the Council.
The Commission, in line with its Communication on company taxation of 23 October 2001(2) is working on proposals to address specific tax obstacles hindering cross-border economic activity in the EU such as in the field of mergers and dividend payments between parent and subsidiary companies where proposals are expected in June 2003. In addition, it has established a Joint Transfer Pricing Forum comprised of experts from the private and public sector to consider ways of reducing the high compliance costs and eliminating the double taxation that often occurs in cross-border inter-group transactions. It is also developing further the idea of a consolidated corporate tax base for companies for their EU-wide activities, ultimately the best way in the Commission’s view for companies to avoid the current costly inefficiencies of 15 different sets of tax rules.
Value Added Tax (VAT)
The Commission’s strategy (3) in the area of the harmonised VAT system is currently focussed on simplification, modernisation and a more uniform application of present rules in order to encourage legitimate commercial transactions while preventing fraud.
Important initiatives of the Commission in the first six months of 2003 in this general direction will include an evaluation of the results of the pilot project commenced in 2000 reducing VAT rates for labour-intensive services; a review and rationalisation of the rules and derogations applying to the definition of reduced VAT rates; a proposal modernising and ensuring the neutrality of the VAT rules applicable to postal services; a proposal simplifying and modernising the rules concerning the place of taxation of supplies of services; a Communication analysing the state of play and redefining priorities for future work in the field of VAT.
The EU's Council of Ministers has been debating for some years the Commission's 1997 proposal for a Community framework, including minimum tax levels, for the taxation of all competing sources of energy (4). All technical difficulties are now resolved. Some political issues remain, but it is hoped that it will be possible to reach an overall political agreement within the next few weeks.
The Commission on 9 September 2002 presented a comprehensive strategy on the taxation of passenger cars in the European Union (5). It analysed current passenger car taxation systems and explored ways of improving their co-ordination so as to remove the considerable obstacles to free movement of passenger cars in the Internal Market. It also examined ways of restructuring vehicle taxes in order to make such taxes more CO2 efficient. The Commission may present proposals for Community legislation on the basis of these principles and of the results of consultations with interested parties.
Other excise duties initiatives
Following the Council adoption of its common position on the Commission proposal to computerise the movement and surveillance of excisable products, it is expected that the Parliament will adopt the proposal at its second reading. The Commission intends by June 2003 to propose solutions to address imperfections in the internal market relating to intra-EU purchases by individuals i.e. the problems related to distance-selling.
The Commission is continuing efforts to strengthen administrative co-operation between Member States through mutual assistance and exchange of information in order to tackle fraud and evasion. It will present a proposal to strengthen the rules governing mutual assistance between Member States in the direct tax area in June this year. It will present a final report on achievements under the Fiscalis 2002 programme of co-operation between tax administrations in June. It will also in that month present its bi-annual report evaluating the operation of administrative co-operation in the field of VAT.
(1) “Tax policy in the European Union – Priorities for the years ahead” COM (2001) 260 of 23/5/2001
(2) COM (2001) 582
(3) See the Commission Communication “A Strategy to improve the operation of the VAT System within the context of the Internal Market” of 7/6/2000 (COM (2000) 348)
(4) COM (1997) 30
(5) COM (2002) 431 plus annex SEC (2002) 858