Tax in Europe

Description of Tax

The Concise Encyclopedia of the European Union describes tax in the following terms: [1] In the general perception, the Community’s right to intervene in tax matters is restricted under the Treaty of Rome to harmonisation of indirect taxes such as VAT and excise duties (from which source the EU also collects most of its own budgetary funding). Proposals concerning direct taxes require unanimity and are therefore subject to the national veto. In practice, however, since around 1996 two theories have been developed by the Community to justify intrusion into the field of direct tax – first, that the single market presupposesharmonisation of corporate tax; and second, that the revenue base of higher tax countries needs protection from ‘harmful competition’, that is to say artificial loopholes or (in the extreme formulation) the mere existence of more attractive tax regimes in other member states.

Even before these developments, the Commission had drawn up a Merger Directive sanctioning the refusal of tax relief in a cross-border amalgamation if one of the companies involved fails to meet its obligations regarding worker participation. Then in 1998, in two telling cases (Safir and ICI), the Court of Justice (ECJ) delivered itself of the judgment that ‘although, as Community lawstands at present, direct taxation does not … fall within the purview of the Community, the powers retained by the member states must nevertheless be exercised consistently with Community law’.

The ICI case concerned cross-border consortium tax relief: in the Court’sopinion UK law contravened the Community’s doctrine of freedom of establishment. The Safir case concerned Swedish insurance company tax law: the Court ruled that its own guiding principle was the need ‘to enable the objectives of the single market to be met’. In effect, the ECJ was now close to establishing itself as the supreme national tax court in any case for which it could claim jurisdiction.

The theory of ‘fiscal dumping’ gains its impetus in part from the supranational ambitions of the Commission and in part from the wish of high-tax countries, notably Germany and France, to avoid losing economic activity through migration to low-tax locations. In 1997 an EU Code of Conduct on business tax was agreed, leading to a three-year search for practical proposals. Certain special tax incentives in Dublin, Madeira, Trieste, Belgium, The Netherlandsand Luxembourg were an obvious potential point of attack, as were the various tax havens, such as the Channel Islands, Bermuda, Gibraltar and The Netherlands Antilles, which are linked to member states. More ominously, an attempt – vigorously opposed by Britain – to impose a Community-wide savings tax on the international bond market threatened to drive that market from the City of London to Wall Street (from where, ironically, it had been expelled some 40 years earlier by a similar US tax). ‘Tax harmonisation’ became one of the central themes of successive EU presidencies.

Proponents of free markets argued that harmonisation would lead to a job-destroying upward drift in taxes, whereas tax competition would lead to reduced taxes and more resilient economies. Such voices, however, were in the minority. A more significant bar to harmonisation was the multiplicity of national regimes and the fact that taxes as a percentage of GDP varied from around 35% in the UK, Ireland and Spain to over 50% in Sweden and Greece, while top corporate rates ranged from 57% in Germany to 31% in the UK. Methods of tax collection also differed from country to country, as did the social priorities underlying the various tax structures. All in all, it was not a background against which agreement would come easily. (See also ‘Fiscal dumping’ and VAT.)


Notas y References

  1. Based on the book “A Concise Encyclopedia of the European Union from Aachen to Zollverein”, by Rodney Leach (Profile Books; London)

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