EU – Baltic States, Financial Services, Legislation, Taxation

Algirdas Šemeta.

Commissioner Algirdas Šemeta spelled out the three pillars of the EU tax agenda; he believed that there was a new momentum in EU tax matters, fuelled by the wider recognition that the optimal approach could be reached only by common efforts.

The Union business and governments need timely and relevant policy agenda at the time of unprecedented fiscal consolidation effort: business is struggling to restore the balance sheets while tax authorities and practitioners are under severe pressure.

During 2008-09, Europe has witnessed a severe economic downturn; though the recent Commission's forecasts reflect the EU growth at about 1,7% in 2010, the crisis has left deep strains on the member states. The EU average debt to GDP ratio has jumped from about 60% to about 80% in the last two years, said the Commissioner.

European taxation policy has an important role to play in putting Europe back on the road to prosperity, with considerable fiscal consolidation and budgetary adjustments at national and European level.

The Commissioner presented the EU's forthcoming initiatives in the field of taxation, and highlighted the three pillars of Union’s tax agenda: a) the quality of taxation in the context of reinforced economic coordination; b) the contribution of tax policy to sustainable growth, and c) the good governance in the tax area.

Quality of taxation

Mr. Šemeta started with the explanation of importance in the "quality of taxation". In the ambitious fiscal consolidation programmes, the quality of tax revenue is equally important.

Today the EU-27 are facing fundamental questions in the reform of their tax systems: how to shape taxation to encourage employment and investment, how to support a greener, more knowledge-based economy?

“Each Member State has the right to decide on its own approach”, underlined the Commissioner. However, he was convinced that 27 unilateral and uncoordinated approaches is not the most efficient way forward; the EU coordination is crucial and the Commission has a significant role to play.

The assessment of the current tax systems should tackle the distortions that could have potentially contributed to the creation of a crisis-prone economic environment. This might eventually result in changing certain provisions such as tax treatment of debt compared to equity, taxation deductibility of interest, or inefficient reductions, exceptions or exemptions – the so-called tax expenditure - which are not economically justified and may no longer meet their original objective.

The member states also consider more radical reform aimed at shifting tax structures in a desirable way. A good tax system should create the right incentives for investment in research, development and innovation as well as education and training. It has to encourage domestic entrepreneurship and attract foreign productive capital. In other words, it should lay the groundwork for sustainable growth, argued the Commissioner.

While there is only weak evidence that the level of taxation affects economic performance, the links between the structure of tax systems and growth rest on stronger foundations. In this respect, the economic literature has shown that consumption taxes, property taxes and environmental taxes are the most growth-friendly, although they have potential equity implications.

In the context of the exit strategy, the Commission aims to detect, in various tax areas, the best practices and general guidelines for tax systems that promote growth. Thus, in October, DG TAXUD will propose a Communication on taxation of the financial sector. Two options are being discussed: the Financial Transaction Tax, which targets transactions, and the Financial Activities Tax, which targets the sum of profits and remunerations in the financial sector. Both options have pros and cons which should be carefully assessed before coming to definitive conclusions, warned the Commissioner.

Taxation for sustainable growth

Tax policy is a strong contributor to the EU-2020 Strategy and the sustainable growth. It is well known that strong, stable EU economy relies on a strong, fully functioning Internal Market.

Too many tax obstacles still exist in the single market; while the aim is to improve taxation to make it cheaper and easier for businesses to operate across borders and to invest throughout the EU.

One of the EU priorities is to reduce compliance costs and administrative burdens: the EU has to eliminate tax costs and make available cash flow for business. Hence, the EU needs to ensure that tax systems facilitate investment in productive activity and especially in SMEs.

The Commissioner concentrated on the following areas:

• First, common consolidated corporate tax base. By creating common EU rules for cross-border businesses, the EU could eliminate costly mismatches between national systems and significantly reduce compliance costs for enterprises operating in more than one Member State. To be effective, the CCCTB should be available to all of companies: it would relieve multinational enterprises of the effects of certain tax obstacles and SMEs would incur less compliance costs if they decided to expand commercially into another Member State. A formal Commission’s proposal will be put forwards in 2011. 
• Second, is to examine how best the VAT system could be reviewed with the objective of creating a more favourable environment for business and a more robust system for the Member States. The current VAT system suffers from numerous shortcomings, including a high level of administrative burdens for businesses and susceptibility to tax fraud. A Green Paper will be published later this year to launch a wide-scale debate on the evaluation of the current system and the preferable ways forward for the future. It will be followed by an intense consultation phase. In 2011, a Commission Communication should set out priorities for the evolution of the VAT system, promised the Commissioner.
• Third, the issue of double taxation in the Single market. After the recent public consultation on double taxation, it is now clear that citizens and businesses face double taxation problems in several areas: conflicts regarding tax residence; categorisation of income; treatment of venture capital funds investing across borders; divergent taxation of pensions; complicated procedures for claiming tax relief and difficulties in dealing with foreign tax authorities. It is now time to act, added the Commissioner and proposed for the end of 2010 a communication identifying ways to tackle tax problems that EU citizens face when they cross borders to work or live or when they purchase properties or invest abroad. It will be followed by the specific proposals to address cross-border problems in specific fields like inheritance taxes, withholding taxes or more generally double taxation of income and capital.
• Finally, sustainable growth as part of the EU-2020 Strategy. It is high time to pursue a "green" taxation agenda and the revision of the Energy Taxation Directive is a central part of this, argued the Commissioner. The way energy is taxed now is no longer appropriate, he added; the current Energy Taxation Directive actually creates incentives for more polluting products. Moreover, the Emission Trading Scheme (ETS) covers only 50% of the CO2 emissions. Thus, the current directive must be reviewed. This review will not introduce a new tax but it will restructure energy taxation to meet high priority goals of climate change, energy efficiency and fair competition. It will also provide the member states with a welcome opportunity to make their overall tax system not only "greener" but also to make it foster growth and employment.

Good governance in the tax area

The third pillar in tax agenda was good governance in the tax area. In times of economic difficulty, it is more important than ever to maintain the member states' ability to collect their revenues. Tax fraud and tax evasion deprive treasuries of billions of Euros each year to the detriment of taxpayers.

To this end, the EU must step up its fight against tax fraud and evasion, and continue to lead the campaign for good governance by promoting the principles of transparency, tax information exchange, and fair tax competition both within the EU and beyond, argued the Commissioner.

Within the EU, the Commission has already put forward ambitious proposals to improve the existing instruments for administrative cooperation between tax administrations. A proposal to improve assistance in the recovery of tax claims was adopted earlier this year and a proposal to improve exchange of information is pending in the Council. Once adopted, this proposal will mean that bank secrecy can no longer be invoked to refuse administrative assistance.

The Commission has also made a proposal to amend the existing EU Savings Directive with a view to extending the scope of the directive to financial instruments not covered by the current Directive and providing for measures to avoid circumvention of the Directive by using untaxed entities. The good governance package is currently under discussion in the Council.

The EU is also continuing our efforts to promote good governance beyond the borders of the EU. Negotiations for the inclusion of good governance principles in tax matters in relevant EU agreements with third countries are underway. DG TAXUD launched actions to encourage and support developing countries in the adoption and implementation of international standards in the tax area with a Communication on "Tax and Development" in April 2010.  

See: http://ec.europa.eu/taxation_customs/index_en.htm

The Commission is active on the issue of harmful tax competition both with the EU Member States and in relations with non-EU countries.

The EU has successfully developed and implemented internal standards in the form of the Code of Conduct for business taxation over the past decade. The EU’s commitment towards good governance in the tax area beyond the borders of the Union is illustrated by the recent initiative to promote the principles of the Code in third countries. The Commission has started discussions with Switzerland and Liechtenstein with a view to encouraging them to adopt and apply those principles.

Conclusion

The Commissioner expressed his conviction that the DG has to maintain the pressure in the fight against harmful tax competition. Promoting investment in order to raise tax revenues is a sensible policy as part of fiscal consolidation programmes. However, coordination at EU level should prevent raising domestic revenue from undermining other member states.

Extending the Code of Conduct to third countries is therefore not enough: the EU should also re-examine the scope of the Code of Conduct itself and consider whether it is still fit to achieve its original aims and goals given recent economic developments.

These issues will be discussed in the Tax Policy Group, which the Commissioner promised to re-launch as a forum for political discussion with personal representatives of European Finance Ministers.