Analytics, EU – Baltic States, Financial Services, Legislation, Modern EU

Commission’s directorate-general for taxation issues -DG TAXUD organised a conference to discuss taxation and fairness in a modern society. Fair Europe is not a catchword, said Commissioner for economic/financial affairs, taxation & customs, Pierre Moscovici at the conference’s opening and added that “fair Europe is what an overwhelming majority of citizens expects from the EU and this is why taxation matters so much”. 

Challenges and difficulties

However, delivering on this complicated issue is not without challenges and/or difficulties, as fairness may mean different things to different people. Besides, there is a broad range of opinions on the role taxation in a fair society and economy.

The complexity stems from the following factors:

·         The EU states have been navigating in the past years from one crisis to another: financial crisis followed by an economic crisis, itself followed by a migration crisis. We are also experiencing and we are conscious of that, a crisis of confidence in the institutions and their representatives, a rise of populism – even if there have been welcome defeats in the Netherlands or in France lately – and disenchantment with elites.

·         However the political landscape is only one issue to consider; the world is changing fast and policy makers have to adapt even faster. For example, digitalisation of the economy changes the working procedures and methods of productions, as well as consumption patterns. Hence, taxation systems are challenged by these developments.

Therefore, the EU member states need to reflect even more on such an urgent issue as which society they want to create and what role the EU is to play. Taxation is instrumental in shaping a fair society and a strong economy, as it always been presently is.

However, two fiscal options have been presented for too long as mutually exclusive: either promoting growth and investment or supporting social justice and a fair society. It is high time the leaders in the member states overcome these false contradictions and establish a positive taxation agenda. 

Towards a fair taxation system

Taxation is at the core of the functioning of any society: it not a technical matter, it is the highest and the most sensitive political matter. Two things have to be taken into consideration:

·         European citizens demand economic stability and social justice. These two objectives go hand in hand:  sustainable economic prosperity cannot be achieved without achieving social cohesion. Nor can social cohesion be achieved without having an economic environment that is supportive for creating jobs and growth.

·         Taxation matters much for both citizens and companies. Recent tax scandals which have led to a public outcry are an illustration of the concerns of public opinion. Honest taxpayers feel that they end up always paying higher taxes to make up for the tax cheats. Access to education, healthcare and infrastructure also rely on good tax policies and the compliance of all taxpayers with their own tax obligations.  

Tax systems also need to elicit trust from taxpayers: citizens would like to have trust in such issues as tax money are used properly and that everyone pays their fair share of taxation. Meanwhile tax systems must be supportive of investment and empower citizens to take up a job or set up and run an innovative business. In other words, tax systems need to be designed to meet these dual goals of fairness on the one hand and economic growth on the other hand. And there should be no contradiction between both goals.

Fairness in taxation should rest on two pillars at European level: first, ensuring a level playing-field, so that all taxpayers – citizens and businesses alike are on an equal footing and no one is unduly privileged; and second, while ensuring a level playing field, tax policy shall promote active fiscal policies at national and EU level in order to foster social justice.

At European level, a progress was made in the areas of corporate and income taxation, to ensure a level-playing field and to promote fairness across member states and beyond the EU borders. When multinational companies avoid paying their fair share of taxes, it becomes hard for other firms to compete on the same terms. This is neither fair nor supportive of a competitive economy. It also means that honest taxpayers have to pay more than their fair share to ensure the financing of public services. It’s against the EU’s integration idea…  

Commission’s efforts to support fairness in taxation

Commission has already accomplished some important steps in that direction:

·         The EU has built new defenses against profit shifting, also in the framework of the G20 guidance and the OECD BEPS initiative, through binding new anti-abuse rules for the entire EU.

·         The EU has broken new ground on tax transparency, by pushing EU states to commit to more openness, both on their own tax practices and those of multinationals. From 1 July, the EU states will for the first time begin to share information about tax rulings with each other, finally tearing down the wall of secrecy around the tax arrangements they grant to businesses and companies. DG TAXUD contributes to competition, but it will never oppose competition to transparency; secrecy has to be excluded from this sphere.

·         Commission presented a proposal in that sense in the start of June 207, to increase oversight over intermediaries that facilitate tax avoidance as a direct response to the Panama papers.

·         With the relaunch of the CCCTB, the EU will have a decisive tool against corporate tax avoidance. For the first time, companies will have a single rulebook for calculating their taxable profit throughout the EU-27. Large multinationals will no longer be able to exploit mismatches between national tax systems, benefit from preferential tax regimes and play with transfer pricing rules to reduce their own tax liability. A single set of rules for all companies will ensure that they are taxed effectively. Effective taxation in common corporate tax base (CCCTB) is not going to be through a minimum rate among the EU-27 (the rule of unanimity in taxation forbids it) but the states also need to restore a level playing field between companies, and all taxpayers as the general idea of CCCTB is also about.

·         Finally, Commission has extended the EU’s fair taxation agenda beyond the borders of the Union: it stepped up its work to export best practices of tax good governance worldwide. 

Thus, OECD and the G-20 states are applying some pressure on those countries that do not play fair when it comes to tax. The EU list of tax havens (which is expected to be adopted by the EU states by the end of 2017) would be sufficiently ambitious and will aim to ensure that European international partners commit to the highest standard of tax good governance. This list will give the EU states a certain leverage against those countries that consistently refuse to play fair in tax matters, including through the use of sanctions. In this regard European example will be the first in the world.

Fairness in reforming Value Added Taxation

The VAT system, which was originally meant to be a kind of “transitional” in the EU, has been in place for over 20 years, which is a bit long for a transitional arrangement. It has become since a complex, burdensome and out-dated system for EU businesses that want to expand their activities across EU borders.

Due to these complexities, VAT is more and more vulnerable to fraud. Several media reported on cases of fraud being allegedly committed by criminal and terrorist networks with ramifications across the whole EU. This cross-border VAT fraud represents no less than € 50 billion revenue loss for EU-28 states per year, which is completely unacceptable at a time when the states are asked to tighten their budgetary belt.

DG-TAXUD will present an overhaul of existing VAT system at the end of 2017, with three objectives: a) simplifying VAT obligations for companies; b) providing greater flexibility to the states in defining what products should be taxed at reduced rates (the states should take their own decisions without the EU delivering a list of reduced rates using the subsidiarity principle); c) combating growing risk of tax fraud. This reform is going to be crucial in the EU agenda for fair taxation. VAT is going to be most important EU reform in the years to come.

Effective taxation cannot be static as soon as the economy is not static: the states have to continually review tax rules to ensure they are in line with practices on the ground thus reacting quickly and decisively to new challenges as they arise.

Technology is a key issue in combating fraud: it helps share and match information, and get more granularity on the taxable presence and taxable activity of mobile taxpayers; and there are still more uncovered potential.

However, digitalisation, in conjunction with globalisation, also brings challenges. Changes in society and business are emerging and will further test the tax systems’ sustainability and progress shall be beneficial to the society as a whole.

Taxation in digital age

The member states have to look at taxation in the digital economy with new eyes. And here a reflection at a broader EU level will always be fairer and more effective than a patchwork of national rules as they are currently being set up.

Leveraging taxation to ensure a level-playing field is important to promote fairness; but fairness in taxation goes beyond fighting tax abuse.

Presently, income and wealth inequality have reached an all-time high in the world, and wealth inequality increasingly exceeds inequality of income. Taxation has a major role to play in changing the pattern, in particularly in the European Union states: they have to reflect more on how the overall design and structure of the tax systems can promote fairness.

The states have to ensure that enough revenues are collected to fund public policies, while ensuring fair burden sharing between citizens. This means reflecting on the progressivity of national tax systems but also on the overall balance between all types of taxes.

Taxation has also a role to play in supporting labour market participation, social mobility and intergenerational fairness, and it can finally help to mitigate income and wealth inequality. This means that states need to widen the way they think about taxation, and consider how tax system can support, fund, incentivize, and correct social imbalances.

Debates on social justice at EU and states’ level often lead to lively reactions; some may feel that the EU has no role to play here. However, social justice is an EU imperative: not only are excessive inequalities detrimental to economic growth and to macro-economic stability, but they also weigh on the trust that citizens have in their institutions and on social cohesion. Inequality issue feeds the legitimacy crisis in the member states and the EU; it is as well feeding growing populism. Hence, focus on social justice must be the EU states’ main mission.

Economic and social cohesion behind taxation

European Union is founded on values of justice, solidarity and equality. The Treaty says that the Union shall combat social exclusion; promote social justice, equality between women and men, and solidarity between generations. Last but not least, the EU “shall promote economic and social cohesion”, in the word in the Treaty (art. 3 TEU). Thus, the focus should therefore be on defining what action is appropriate at which level, through which instrument.

·         Firstly, the EU, through its own budget already ensures some redistribution, for example across regions. The Commission insisted on both cohesion, as a priority for the future, and also on convergence: both are closely linked to debate on taxation and on the EU financing aspects.

·         Secondly, a group of EU states have engaged in an enhanced cooperation to ensure that the financial sector makes a fair and substantial contribution to public finances, through the Financial Transaction Tax, FTT. These are 10 EU states including four largest economies of the Eurozone (Germany, France, Italy and Spain). The Commission believes that it is fair that the financial sector pays back part of what the European tax payers have pre-financed in the context of the bank rescue operations. Commission really believes that an agreement must be reached on FTT, which would not be about “sanctioning a sector”. It is just for fairness, about financing development, about financing the fight against climate change, it is about showing that reinforced cooperation can work in the member states when unanimity blocks important reforms.

·         Thirdly, the EU is also acting to promote fair and efficient tax reforms at national level, through the European Semester. This mechanism supports greater convergence among the states: they just need to properly take into account social priorities when they engage in structural reforms. Structural reforms are not about punishing, they are about reforming, about progressing. Tax and benefit systems combined (through the progressivity of tax systems, good tax collection and the provision of adequate social benefits) can help to promote employment and reduce income inequalities and poverty. In this context, a number of recommendations to the states were proposed in spring 2017 to improve the adequacy and coverage of safety nets. Though, ultimately it is for the EU states to implement reforms; the EU is not acting as a super government, it is acting through recommendations, which is better for the member states.

In the conclusion, Pierre Moscovici stressed two aspects of “taxation’s future”: competitive and fairer Europe. To make this future real, the member states have to make right choices; here, all depends on the level of ambition that the states will be ready to put for a common agreement.

Source: http://europa.eu/rapid/press-release_SPEECH-17-1828_en.htm?locale=en

Brussels, 28 June 2017.