EU Tax Policy vs. National
Sovereignty of Member
States
Michal Radvan
www.law.muni.cz
Aim of the Contribution
 Level of tax harmonization
 Taxes to be harmonized
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Tax harmonization
 One of the most discussed issues in EU
 Proponents point to the need for uniform rules in connection
with the growth of international trade (increasing number and
importance of multinational companies and their subsidiaries,
the movement of capital and people - residents of one country
working in another country). This leads to a conflict of individual
tax systems that have been around for decades or even centuries
built primarily with regard to national traditions, economic
status, political and social developments and also taking into
account the natural conditions, religion, etc.
 Advocates of national interest: fiscal policy should remain the
full responsibility of individual EU Member States - a loss of
competitive advantage especially in CEE countries
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Tax harmonization
 mechanism to remove tax provisions that either
create obstacles to the functioning of the internal
market or distort competition
 purpose of achieving tax harmonization is not uniform
tax system, but rather approach and harmonization
of the various tax systems
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Phases of harmonization process
 Select the tax to be harmonized,
 Harmonize the tax base, or other structural
components (tax subject)
 Harmonize the tax rate (not always, tax rate can be a
tool of competition for member states)
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Tax harmonization in EU
 tool leading to the ultimate objective of creating a single
market. Important obstacles to the single market are:
 the tax burden on the free movement of persons and especially
corporates and on the free cross-border movement of goods,
services, capital and revenues,
 different tax treatment of domestic and imported goods and
services,
 substantial differences between national tax legislation, which lead
to market distortions,
 difference in tax treatment between residents and non-residents,
and domestic and foreign investments and incomes (in particular
the double taxation of incomes from sources outside the country)
 Tax harmonization is not just a goal - a final state, but the
process itself.
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Tax harmonization as a process
 Positive harmonization - the process of approximation of
national tax systems through the implementation of the EU
directives, regulations and other legislative instruments; the
result (assuming the proper implementation of the directives
into national legislation) is where all states have the same rules
 Negative harmonization - the result of the activities of the
European Court of Justice, where national jurisdictions - tax
systems taking steps based on the tax case law of the Court;
does not create the same rules for all Member States, as the
case law is focused only on Member State which is a party in
proceedings; ECJ case law, however, may be a good interpretive
guide
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Negatives of harmonization
 Higher tax rates
 Slower economic growth
 Does not prevent the excessive expansion of the
public sector
 It interferes with national sovereignty of member
countries
 May jeopardize the revenue of public budgets
 The loss of fiscal autonomy of member states
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Income tax harmonization
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Stagnation of the harmonization process
Exchange of information
Avoidance of double taxation
The fight against tax havens
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Start
 Good conditions - in all countries, there were
personal income tax and corporate income tax
(excluding Italy)
 Emphasis on corporate taxes (remove barriers of the
common market functioning, mobility of capital,
labor immobility)
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Sad facts
 Limiting fiscal sovereignty - the unwillingness
 The unanimous adoption of directives
 Differences in accounting systems (tax vs. AngloSaxon)
 Differences in structural components - social aspects
(children, disability - from tax base or tax), rate
(bands, progressivity), application of losses,
investment incentives, depreciation
 Luxembourg - 17 zones
 The only rate - BLR, LAT, LTH, ROM, SVK
 Denmark - up to 59%
 Romania - 10%
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4 possibilities
 Taxation in the home country - optional taxation in
each country or just in home country
 Common Consolidated Tax Base - based on choice
(CCCTB)
 European corporate tax - for large multinational
companies, at EU level, uniform rate
 Mandatory harmonized tax base - mandatory, even
for companies operating in only one Member State
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Common Consolidated Tax Base
 The only rules within the EU for the determination of the tax
base, which would subsequently be divided into subsidiaries and
the national tax rate is to be applied
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Transparent effective rate and fair tax competition
Removing obstacles to cross-border mergers
Reduce costs
Elimination of problems with transfer pricing
Losses in one country and gain in another country - tax
neutrality
 Not for non-european small companies
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Taxation in the home country
 The tax base of all companies in the group would be
set as a consolidated tax base under the laws of the
State of management, then divided by the
subsidiaries and the national tax rate should be
applied
 For small companies
 Effective and cheap
 It is not harmonization, but rather the possibility for
competition
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The Merge Directive
 The main consequence is the possibility of deferral of
tax liability that arises from capital gains in case of
merger or division of a company, transfer of assets or
exchange of shares
 The aim is to prevent the taxation of profit, which
may arise during the merger because of the
difference between the value of the transferred
assets and liabilities and their accountings amounts
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The Parent-Subsidiary Directive
 The aim of the Directive is to eliminate the double
taxation of corporate profits paid by group companies
resident in a Member State to the parent company
located in another Member State. At least, parent
company can deduct the tax paid by the daughter in
another country from the tax base.
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The Savings Directive
 The aim is to prevent tax evasion to individuals who
derive interest income from other Member States
 Not applicable to payment of dividend
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The Interest and Royalties Directive
 It introduces a unified system of taxation of interest
income and royalties between related parties, if they
are paid over national borders
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Conclusion
 It is very likely that there will not be any deepen
fiscal harmonization in the field of direct taxation in
the near future
 Member States have no will to give up more of their
sovereign power
 There must be unanimous agreement of all Member
States in case of adoption of tax issues
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VAT harmonization
 Almost finished with the exemption of tax rates
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Start
 2 systems of indirect taxation
 France: VAT - a general consumption tax, imposed on
the added value
 Other countries: cumulative cascade system of turnover
tax - a tax imposed on the gross value of production;
the number of production stages affects the size of the
resulting tax; this system causes distortion of the
market environment, as the tax burden is increased in
proportion to the length of the production /
distribution chain; it is necessary for manufacturers to
integrate; does not cover services (lawnmower vs.
gardening services)
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VAT
 VAT is the only way
 The principle of the country of destination, as the
principle of the country of origin assumes a uniform
rate
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Directive no. 77/388/EEC (6th Directive)
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Basic rules
Rules for tax base
Territory
Subjects
Rates – basic 15%, reduces 5%
 Amended by directive no. 2006/112/EC (7th. Dir.)
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Conclusion
 Structural harmonization is completed, there is a single system
of indirect taxation
 Incomplete issue of tax rates harmonization (interference with
national interests, instrument of fiscal policy, the budget
revenue, unwillingness to enforce the implementation of the EC
Directives, national traditions)
 US various sales tax in each country, do not cause market
distortions
 The minimum amount of the reduced rate is not respected
 It maintains the principle of the country of destination, as the
country of origin principle would require tax rate unification,
but this has proven very effective
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Excise taxes harmonization
 fiscal plans, political aspects, regulation of
consumption, permanent consumption, luxury,
harmfulness
 Harmonized: tobacco and tobacco products, alcoholic
beverages (spirits, beer, wine), mineral oils, energy
 Non-harmonized: cars, fur products, guns, playing
cards, roulette, etc.
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Harmonization process
 Very advanced
 Efforts to unify rates (favoring domestic producers is
limited, resp. impossible) resulted in at least
minimum rates
 It relies on spontaneous harmonization process - a
country with high rates will have to reduce rates to
the level in other countries
 The principle of the country of destination (country
of origin is impossible with respect to different rates)
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Directive 72/43/EEC
 System od excise taxes (mineral oils, tobacco, spirit,
beer, wine)
 abolish other excise taxes, except taxes that do not
need border controls or additional costs of
international trade
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Directive 92/12/EEC
 Horizontal directive
 Single Customs Tariff to identify the product
 admits other indirect taxes such as for environmental
reasons - eg taxation of waste (Sweden, Denmark),
emissions (Italy, Lithuania), fertilizers (Sweden,
Denmark) and air transport (UK, France)
 Replaced by Directive 2008/118/EC
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Structural directives
 Tax bases
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Directive on the rates approximation
 Minimal rates
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Conclusion
 Structural harmonization is completed, there is a single system
of indirect taxation
 Incomplete issue of harmonization of tax rates (national
interests, instrument of fiscal policy, the budget revenue,
unwillingness to enforce the implementation of the EC
Directives, national traditions)
 The principle of the country of destination maintains, as the
country of origin principle would require tax rates unification
(hard to determine where purchased goods was made), but this
has proven very effective
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Taxes on motor vehicles
 Not in USA
 Europe, Japan
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Registration tax (to be abolished)
Regular tax – ones in EU, eco tax?
Fuel tax,
Vignettes,
Toll systems
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„Eurovignette“ Directive
 For all vehicles above 3,5 tons
 modifies somewhat broader than only toll (performance fee) and
the user (time) fee
 generally controls the regular tax on motor vehicles
 requirement to collect tax only in the Member State in which
the vehicle is registered
 minimum tax rate
 tolls and time-based charges may be levied only for the use of
multi-lane highways or roads for motor vehicles for the use of
bridges, tunnels and mountain passes
 maximum rates for tolls and time-based charges
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Interoperability Directive
 the obligation to use in the implementation of toll
systems only satellite technology, GSM, or microwave
 Preferred mobile technology GSM and GPS satellite
due to their intended use within the system Galileo
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Other taxes
 Tax on Air tickets?
 Property tax (tax on immovables) – is there any need
to unify?
 Transfer taxes (on sales, gift tax, inheritance tax)
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Local vs. State Taxes
 municipalities (not only in the Czech Republic) have enough
legal competences and sufficient privileges to influence their
local taxes revenue?
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Challenges for our region
 From central planning to markets => new public
finance system
 From State hegemony to local self government
 Local self governments need stable and predictable
financing
 To provide mandated services and duties
 Continued urbanization puts more strain on urban
infrastructure
 European integration encourages local gov’ts
 Growing role of subnational governments and their
financing
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State Taxes
 More stable
 Definite income
 VAT, PIT and CIT, Excises
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Economic Autonomy of Municipalities
 Article 8 Czech Constitution: There is a selfgovernment of the self-government units
 Article 101(3) Czech Constitution: Self-government
units are public corporations with the right to own
property and the right to manage with their budget.
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Economic Autonomy and ECLSG
Rules from European Charter of Local Self-Government:
 Local communities have right fot their own incomes.
 Part of these incomes are local taxes. Local self-government can set
up these taxes.
 State must discuss the amount of money send to the municipalities.
The last two are not valid for the Czech Republic!!!
We have no legal act on local taxes!!!
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Own Tax Incomes of the Municipalities
 Real estate tax: cca 5 %
 Local fees and administrative fees:
cca 4 %
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Other Tax Incomes of the Municipalities
VAT: 35 %
Personal Income Tax from dependent activity: 19 %
Personal Income Tax from business: 8 %
Corporate Income Tax without tax paid by
municipalities: 15 %
 Corporate Income Tax paid by municipalities: 12 %
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Local Taxes in General
 one of the most important revenues of local budgets
 suitable instrument for local self-government units to
influence the revenue according to the needs of
municipalities, regions, etc.
 self-government units have usually rights to impose
or abolish local taxes, they can set the tax base and
the tax rate, create exemptions and other correction
components
 to adopt, change, or abolish local law is usually much
easier and quicker than to do the same with legal
acts at the national level
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Local Taxes ???
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Personal income taxes (shared or surcharge)
Corporate income taxes (shared)
User charges
Business registration taxes
Visitor taxes
Property taxes
Gross receipt and turnover taxes
Transfer taxes
Registration fees
Local excise and sales taxes
Local wage taxes
Building permits, planning permissions etc.
Dog taxes
Other
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Local Tax by Radvan
 a financial levy, determined to municipal budget
that can be influenced (talking about tax base, tax
rates or one of the correction elements) by the
municipality; it is not crucial whether the taxpayer
obtains from the municipality any consideration or
if it is a regular or a single levy – local taxes include
the tax in the strict sense, so the charges (fees)
 the catalogue of local taxes in the Czech Republic
includes tax on immovable property and local charges
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Property tax
 Most widespread form of local revenue is property tax
 Significance of property tax (% GDP) varies widely:
 LV - 1.4%, PL - 1.2%, LT - 0.5%, EST - 0.23%, SVK - 0.4%,
RO - 0,6%, H - 0.3%, CZ - 0.15%, BG - 0.34%, SLO - 0.2%,
SRB - 0.3%
 Significance of property tax (% local revenues) varies
widely:
 PL - 14.5%, RO - 11%, CZ, H - 2.1%, EST - 2.7%, BG 2.8%
 Wide variation in tax bases, rates, relief, billing,
collection, enforcement
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Tax on immovable property
 municipalities in the Czech Republic can influence
tax in two ways:
 exemptions
 exemption of real estate attached by natural disaster
 exemption of agricultural lands
 possibilities to apply or change coefficients that can
influence the tax rate
 location rent
 municipal coefficient
 local coefficient
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Exemption of Real Estate Attached by Natural Disaster
 by generally binding ordinance of the municipality
 fully or partly (as a percentage)
 real estates located within the area of the municipality and affected by a
natural disaster
 for a period of up to five years
 exemption may be effective not only for the year of the disaster and for the
following years, but even for one previous taxable period – retroactivity!!!
 ordinance must take effect no later than 31 March of the taxable period
following the year when there was the disaster
 retroactivity could cause many problems in administration and for the taxpayers
 there are not many municipalities using this opportunity
 it is quite difficult to prove that the real estate was somehow affected by
the disaster
 municipality usually needs more revenue to improve its property affected
by the disaster
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Exemption of Agricultural Lands
 arable lands, hop–gardens, vineyards, orchards and permanent grass
growths
 by municipality’s generally binding ordinance
 cannot be applied to lands in a developed area and a built–up area of
the municipality
 lands must be determined in the ordinance by the parcel number and
the cadaster area
 must become valid no later than 1 October of the preceding taxable
period and take effect no later than 1 January of the following taxable
period
 used very rarely
 negative fiscal effects (high number of agricultural lands in villages)
 administratively-technical aspects (low number of these lands in
cities)
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Location Rent
 coefficient according to the number of inhabitants
 for development lands, residential buildings, other structures
that provide facilities for residential buildings, flats and non–
residential premises not used for the running of businesses and
as garages
 multiplies the standard tax rate
 basic value of the coefficient is set in the act (between 1.0 and
4.5)
 municipalities have the right to increase (up to one level) or
reduce (down to three levels) a basic coefficient by a generally
binding ordinance
 must become valid no later than 1 October of the preceding
taxable period and take effect no later than 1 January of the
following taxable period
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Municipal Coefficient
 for houses and family houses used for individual recreation,
other structures that provide facilities for houses and family
houses used for individual recreation, garages, structures for
business activities, non–residential premises used for business
activities and as garages
 municipalities have the right to set this coefficient by their
generally binding ordinance for particular types of structures
 value of the coefficient is at 1.5 and it multiplies standard tax
rate
 must become valid no later than 1 October of the preceding
taxable period and take effect no later than 1 January of the
following taxable period
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Local Coefficient
 multiplies the tax duty of the taxpayer for particular kinds of
lands, buildings, non–residential premises and flats
 at 2, 3, 4 or 5
 by a generally binding ordinance
 for all real estates in their area, excluding agricultural lands
 must become valid no later than 1 October of the preceding
taxable period and take effect no later than 1 January of the
following taxable period
 only 7 % of municipalities in the Czech Republic are using this
option
 political reasons
 some municipalities argue that they do not want to increase the tax
for all real estate, especially residential one
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Local Charges I
 every municipality has a possibility to levy local
charges (local fees) by the generally binding
ordinance
 catalogue set by Local Charges Act includes following
local charges:
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dog charge
charge for spa and recreation stay
charge for using public places
charge on entrance (admission)
charge for housing capacity
charge on communal waste
charge for permission to enter selected places by motor vehicle
charge on the evaluation of building land
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Local Charges II
 list is comprehensive and the municipality cannot levy any other
charge
 municipality can define conditions for levying, the charge rate,
charge maturity, eventual exemptions, etc.
 the ordinance may not exceed the conditions defined by the
Local Charges Act (for example absolute charge rate or the
definition of taxpayer)
 no conditions when the ordinance must become valid and take
effect, but especially for those charges with the taxable period
of one calendar year (dogs and communal waste) I strongly
recommend effectiveness to 1 January of the taxable period
 ordinances must not be retroactive
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Conslusion
 local taxes in the Czech Republic have minor role in the selfgovernment units financing
 real estate tax approx. 5 %
 local charges approx. 5 %
 very depends on number of inhabitants
 several possibilities for municipalities to influence their budget incomes
through local taxes, but none options like that for regions
 local self-government units are dependent on the transfers of shared
taxes (PIT, CIT, VAT) from central budget in drawing up their budgets
 I have to reject the hypothesis that municipalities in the Czech
Republic have enough legal competences and sufficient privileges to
influence their local taxes revenue
 shared taxes are the base for local budgeting
 PIT and richmen?
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Thank you for your attention