Taxation harmonization in the European Union

Business environment in the EU
1st Semester, Academic Year 2011/2012
Prepared by Dr. Endre Domonkos (PhD)
I. The need for a common tax policy I.
 The EEC Treaty was very cautious as regards tax harmonisation.
 What it wanted above all was the introduction and observance of the
rule of fiscal neutrality in Community trade.
 The Treaty did not call for any harmonisation or other Community
action with regard to direct taxes.
 Cumulative multi-stage taxes, which did not guarantee fiscal neutrality,
were replaced by a new turnover tax, the value added tax.
 The principle of fiscal neutrality was thus guaranteed.
I. The need for a common tax policy II.
 However, in the single market goods must be able to move completely
freely, and to achieve this, tax has to be imposed on them either in the
country of origin or in that of destination.
 This led, at the end of the 1980s, to the alignment of VAT and excise
 Inside the economic and monetary union, tax harmonisation should
progress at the same pace as economic integration.
 In the short term there was no question of making a single fiscal
territory of the European Community.
 In the field of taxation policy most of measures were centred on
achieveing fiscal neutrality and equal conditions of competition among
the Member States.
II. The fiscal neutrality in the common market I.
 If the Member States of a common market had absolute freedom in the
fiscal field, they could very quickly replace the customs barriers to trade
by tax barriers.
 It was therefore necessary that indirect taxes, in particular turnover tax,
have no influence on intra-Community trade flows.
 Fiscal neutrality between domestic production and imports from the
partner countries was needed.
 The rule of the tax of the country of origin:
 The system of the tax of the country of destination:
II. The fiscal neutrality in the common market II.
 Even if the system of the tax of the country of destination were imposed
uniformly, fiscal neutrality could still not be ensured if some countries
in the common market applied a system of cumulative multi-stage
turnover tax.
 Article 97 of the EEC Treaty:
 In addition, there existed important specific taxes on consumption,
known as excise duties.
 The differences between Member States in excise duty structures could
give rise to significant disturbances in conditions of competition.
 In the interest of proper functioning of the common market and the
attainment of the Community agricultural, energy and transport
objectives, the structures of these taxes needed to be harmonised.
III. Taxation and conditions of competition
 Just behind the harmonisation of the structures of all indirect taxes
came, of course, the harmonisation of their rates.
 In order to create a completely impartial conditions of competition in
the common market a common system of taxes on consumption is
 In effect, the different rates of taxes could have a different influence on
the consumption of various products in the common market and could
distort the conditions of competition between the undertakings of the
Member States.
 In fact, the requirements for tax harmonisation increase together with
progress in economic integration.
 The long-term goal is to reach a taxation framework conducive to
enterprise, job creation and environment protection in the Union.
IV. Harmonisation of indirect taxation
 Indirect taxes are those on turnover, production or consumption of
goods and services – regarded as components of cost prices and selling
prices – which are collected without regard to the realisation of profits,
or indeed income, but which are deductible when determining profits.
 Customs duties are a form of indirect taxation.
 Article 99 of the EEC Treaty:
 The problem of cumulative multi-stage taxes:
 The Commission was convinced at the beginning of the 1960s, that the
only radical solution to the problem arising from cumulative multi-
stage taxes was to replace them by the value added tax.
V. Value added tax I.
 The Council adopted on 11 April 1967 two Directives on the
harmonisation of the legislation of Member States concerning turnover
 Those two Directives (Directives 69/443 and 77/388) and laid the
groundwork for the common value added tax systems and a third one,
adopted in 1969, introduced it in the tax systems of the Member States.
 According to Article 2 of the first Directive of 1967, VAT is a general tax
on consumption, i.e. a tax on all expenditure on goods and services.
 The tax is levied at each stage of an economic activity on the value added
at that stage.
 The tax is proportional to the price of the products and services
irrespective of the number of transactions.
V. Value added tax II.
 The tax is paid to the State by the vendor in each transaction.
 Tax paid at previous stages, on deliveries made or services rendered to
the taxable person, and the tax paid on imports, is deductible from the
turnover tax of the taxable person.
 Given this deductibility of taxes already paid, VAT is neutral from the
point of view of domestic competition.
 The sixth directive (Directive 69/2006) on the harmonisation of turnover
taxes :
 Directive 77/388:
 These rules are known as „the uniform basis of assessment of VAT”.
V. Value added tax III.
 Regulation 1777/2005 lays down implementing measures for Directive
 Directive 2006/58:
 Directive 2003/96 and Directive 2004/74:
 Regulation 1777/2005:
 Main aim of Regulation 1777/2005: the uniform application of the current
VAT system + to improve the operation of the internal market
V. Value added tax IV.
 On 1 January 2007, the Sixth Directive was replaced by the VAT Directive
(Directive No 2006/112/EC).
 Moreover, it does not set out the rates of VAT to be applied in Member
States, only a minimum rate of 15% fixed until 31 December 2010.
 Currently, Member States apply a standard rate of between 15% and 25%.
 They may also apply 1 or 2 reduced rates of at least 5%.
 There are a number of temporary derogations, e.g. zero rates in the
United Kingdom and Ireland.
 The VAT coverage also still differs from one Member State to another.
 On 5 May 2009, the Council adopted Directive 2009/47/EC.
VI. Removal of fiscal frontiers I.
 One of the main challenges to the completion of the single market was
in the tax field.
 Prior to 1992, goods and services moving within a Member State were
taxed differently from those that were exported.
 The tax was paid to the country in which the goods arrived at the final
consumption stage.
 The protection, which that system afforded against tax evasion,
depended on controls at borders.
 The notion of„fiscal frontiers”.
 The Commission actually proposed that as from 1 January 1993 all sales
of goods and services should be taxed at the rate of the country of origin.
VI. Removal of fiscal frontiers II.
 The Directive (Directive 2004/66) on the approximation of VAT rates
supplemented Directive 77/388 and completed the common VAT system.
 It stipulates that, during the operational period of transitional VAT
arrangements (where the VAT rate is that of the country of destination
and not of the country of origin), the Member States shall apply a
standard VAT rate of at least 15%.
 However, the standard VAT rate varies between 15 and 25% in the twentyfive Member States.
 All the higher VAT rates existing in several Member States have been
abolished, leading to a significant fall in consumer prices in some
sectors, such as automobiles.
VI. Removal of fiscal frontiers III.
 The Member States however enjoy the option of applying alongside the
normal rate, one (or two) reduced rates, equal to or higher than 5%,
applicable only to certain goods and services of a social or cultural
 The preservation of the zero and extra-low cost rates (below 5%) is
authorised on a transitional basis.
 The common system of VAT dispensed with customs procedures.
 Intra-Community trade in goods between taxable bodies is subject to
taxation in the country of destination.
 In the case of sales between companies subject to VAT, i.e. the vast
majority, the vendor exempts the deliveries made to clients in other
Member States.
VI. Removal of fiscal frontiers IV.
 Individuals travelling from one Member State to another pay VAT there
where they purchase the goods and are no longer subject to any VATrelated taxation or any border formality when they cross from one
Member State to another.
 In return, the system of travellers’ allowances (tax free sales in ports,
airports, etc.) was abolished in intra-Community travelling.
 The abolition of frontier controls and the resultant fraud risk require
cooperation between government authorities in the area of indirect
taxation to combat tax evasion.
 The core of the system is an on-line network linking the relevant
administrations of the Member States („SCENT – taxation”).
 The Fiscalis programme:
VII. Excise duties I.
 In a fiscally integrated Community a number of major special taxes on
consumption (excise duties), i.e. taxes on the consumption of certain
products are maintained.
 They are separate taxes.
 Excise duties can easily be adapted to the various economic, social and
structural requirements.
 Two conditions had to be met so as not to disturb the common market:
1. Their structures had to be harmonised.
2. Their rates had to be harmonised.
 (Directive 92/12 and Directive 2004/106):
VII. Excise duties II.
 The tax is payable when the product is put up for consumption and must
be acquitted in the country of actual consumption.
 Excise duties are paid by the consignee in the country of destination and
the appropriate provisions are taken to this effect.
 Individuals can purchase the products of their choice in other Member
States, inclusive of tax, for their personal use.
 Denmark, Finland and Sweden are, however, authorised by the Council
to continue restricting quantities of certain alcoholic drinks and tobacco
products which individuals purchase in other Member States and import
for their own consumption.
VII. Excise duties III.
 Seven specific directives to harmonise the structures and minimum
excise duty rates on manufactured tobaccos, mineral oils, spirits and
alcohol beverages.
 The Directive on taxes which affect the consumption of manufactured
tobacco was consolidated in 1995.
 Directive 92/79, on the approximation of excise duty rates on cigarettes.
 Directive 92/80, on the approximation of taxes on manufactured
tobaccos other than cigarettes.
 Directive 92/83 covers the harmonisation of excise-duty structures on
spirits and alcoholic beverages.
 Directive 92/84 sets the minimum excise duties on spirits and alcoholic
VIII. Other indirect taxation
 Various other indirect taxes whose harmonisation is important for
European integration also exist in addition to value added tax and
special taxes on consumption.
 Examples of these taxes on insurance policies and taxes on motor
vehicles intended for the carriage of passengers, which vary greatly
between Member States.
 The Commission proposes a number of policy measures and initiatives
in the area of passenger car taxation.
 Also important from the point of view of competition are capital duty
and stamp duty levied on shares in registered capital (share and
 Directive 1969/335:
IX. Harmonisation of direct taxation
 Taxes on the revenue of undertakings (firms, companies, businesses)
and private individuals, which are not incorporated in cost prices or
selling prices and the rate of which is often progressive, may be regarded
as direct taxes.
 The two important categories of direct taxes are income tax and capital
gains tax.
 Article 92 of the EC Treaty:
 The EC Treaty does not deal with direct taxes and does not call for them
to be harmonised.
 It gradually became clear, however, that the free movement of capital
and the rational distribution of production factors in the Community
required a minimum degree of harmonisation of direct taxes.
X. Company taxation I.
 In the field of company taxation the European Commission had tabled
proposals to this end in 1969, after the realisation of the customs union.
 But the Council needed 21 years of debate, before it could approve these
proposals, vital for transnational cooperation and company mergers in
the single market.
 The first Directive (Directive 90/434) on business taxation.
 The second Council Directive of July 1990 (Directive 90/435) relates to the
common fiscal system applicable to parent companies and subsidiaries
situated in different Member States.
X. Company taxation II.
 A code of conduct on business taxation.
 A group within the framework of the Council has the task to assess the
tax measures that may fall within the scope of the code and to oversee
the provision by the Member States of information on those measures.
 A common system of taxation is applicable to interest and royalty
payments made between associated companies in different Member
 For budgetary reasons, Greece, Spain and Portugal may apply
transitional measures in introducing the new system.
 The Commission has proposed a strategy for providing companies with a
consolidated corporate tax base (CCCTB) for their EU-wide activities.
XI. Effort to combat tax avoidance I.
 Problem in the area of direct taxation: international tax avoidance.
 Therefore, a 1977 Directive (Directive 77/799) instituted a mutual
assistance by the competent authorities of the Member States in the
field of direct taxation (income tax, company tax and capital gains tax)
and certain excise duties and taxation of insurance premiums.
 A regulation (Regulation 2073/2004) lays down a set of conditions and
procedures to assist administrative authorities in preventing fraud and
distortions of competition in movements of excisable products.
 The liberalisation of capital movements as from 1 July 1990 has increased
the risk of tax evasion.
XI. Effort to combat tax avoidance II.
 In order to lessen the risk of tax distortion, evasion and avoidance, it
was necessary to intensify the exchange of information between tax
 These objectives are aimed at by the Directive (Directive 2003/48)
ensuring a minimum of effective taxation of savings income in the form
of interest payments within the Community.
 In order to preserve the competitiveness of European financial markets,
the European institutions entered into discussions with key third
countries, such as the USA, Switzerland, Liechtenstein, Monaco,
Andorra and San Marino, to promote the adoption of equivalent
measures in those countries, notably effective exchange of information.
 Agreements have been reached with the European countries, notably
Switzerland, Liechtenstein, Andorra and San Marino.
XII. Tax legislation in the Treaty of Lisbon
 The Treaty on the Functioning of the EU (TFEU), under Article 113,
specifically provides for the Council, acting unanimously in accordance
with a special legislative procedure and after consulting the European
Parliament and the Economic and Social Committee, to adopt
provisions for the harmonisation of Member States' rules in the area
of indirect taxation(principally Value Added Tax and Excise Duties).
 Member States have also adopted EU-wide legislation in the field
of mutual assistance and co-operation in tax matters, under Articles 113,
114 or 115 of the TFEU.
 Member States’ tax systems and tax treaties must in any event respect
the Fundamental Treaty principles on the free movement of workers,
services and capital and the freedom of establishment (Articles 45, 49, 56
and 63 TFEU) and the principle of non-discrimination.
XIII. Conclusion I.
 It was, however urgent for the common market to harmonise turnover
tax structures and consequently to achieve fiscal neutrality.
 That was to a large extent achieved with the adoption of the VAT system
by all original Member States at the beginning of the 1970s and by the
new Member States after their accession.
 Such a close harmonisation of turnover taxes as that resulting from the
adoption by all Member States of the value added tax with a uniform
basis of assessment was not called for by the Treaty of Rome.
 The completion of the single market required the abolition of fiscal
 The harmonisation of indirect taxation is very important, not just for
the smooth operation of the internal market but also for the
convergence of economic conditions in the Member States.
XIII. Conclusion II.
 Some very important areas of direct taxation, such as personal income
tax, are not directly targeted by the harmonisation process.
 As EMU advances, however, a procedure for the coordination of national
fiscal policies will have to be introduced to enable these policies to
converge progressively in parallel with the convergence of economic
 Such coordination should not necessarily aim at uniform tax rates.
 The definitive VAT system should be as simple as possible for
enterprises, particularly SMEs.
 In the field of direct taxation, the harmonisation process will be longer
because of the differences in corporate taxations between the Member