Taxation and the Competitiveness Agenda

1 March 2006

László Kovács, the European Commissioner for Taxation and Customs Union, addressed a European Policy Centre Breakfast Policy Briefing on “Taxation and the Competitiveness Agenda”. The meeting was chaired by the EPC’s Head of Communications Jacki Davis.

László Kovács began by explaining that the Spring 2005 European Council had endorsed an updated Lisbon Agenda with a targeted focus on jobs, growth and competitiveness. Although the Union was at “half-time” in the decade-long Lisbon process, “it was not half way”. Tax reform could play an important role in achieving the Lisbon goals, as breaking down financial barriers would make countries more efficient and companies more competitive

The Commissioner said the double taxation that companies face when they invest abroad is one of the major obstacles to greater EU competitiveness, and reforms are needed to enable companies to make choices that are not distorted by economic costs. Improving their profitability will in turn stimulate research and development, adding value for the EU.

The Commissioner highlighted the problems involved in getting agreement on proposals to harmonise taxes at EU level because of the requirement for unanimous decisions and the sensitivity of this issue in some Member States - notably, the UK and Ireland - on national sovereignty grounds. However, he insisted that Europe must adopt measures to enhance its competitiveness if it is to succeed in a globalised world.

The UK’s tough stance meant it had not been possible to make progress on a consolidated tax base during the UK Presidency, so the Commission had decided to wait until Austria took over the Presidency in January this year to begin discussions on the proposed reforms in earnest.

Commissioner Kovács also outlined the three current priorities for tax reform: corporate taxation; modernising and simplifying the VAT environment; and combating tax fraud.

Corporate taxation

Companies operating across borders currently have to deal with 25 national tax systems, which creates high compliance costs and administrative burdens.

In December 2005, the Commission published a Communication outlining plans for a ‘home-state taxation system’, specially geared to small and medium-sized enterprises (SMEs) to run for a five-year pilot term. Taxing all the companies’ profits in the country where they are based and not in each country where they operate - i.e. allowing them to apply their ‘home-state tax rules’ - reduces their costs and fosters cross-border activity.

The Commission has also launched a more ambitious proposal to create a Common Consolidated Corporate Tax Base. This would allow those countries which supported the measure to agree a single set of tax rules to apply to companies operating within the EU.

VAT reform

Value Added Tax is the second major area in need of reform, said the Commissioner. Since each country uses a different system for calculating and implementing VAT measures, companies working across borders are faced with questions about which country’s VAT regime applies.

To overcome this, a proposal was introduced in 2004 to allow companies to pay VAT in the Member State where they are established. This has, however, run into opposition in several EU countries.

Tax fraud

Commissioner Kovács said tax fraud was an increasing preoccupation for Member States as it distorts the EU’s internal market. To stamp out fraud, the Commission is preparing proposals to boost cooperation between countries, including measures such as promoting greater information-exchange.

Customs reform

Finally, the Commissioner turned to the issue of customs policy, the second part of his portfolio. “The role of customs is not just to facilitate legitimate trade, but to protect the internal market, which requires more control,” he said.

Reforms in this area could also help to boost the EU’s competitiveness, including plans for a simplified customs code and the use of e-customs (electronic customs). This will become operational in 2009, and should lead to substantial savings at the Community level.

Customs policy is also playing a greater role in combating the import of fake goods - from luxury items to medicines, foods, children’s toys, and spare parts for cars. The Commissioner pointed out that the same organised crime gangs which had masterminded drug trafficking had now moved into the field of counterfeit goods. One sign of the times is that this illicit trade is now being used to finance terrorist groups.

Commissioner Kovács concluded by emphasising that the future of Europe depended on introducing reforms to enable Europe to compete successfully with the US, Japan, China, Russia and India. “If Europe wants to influence the global agenda, meet the challenge of climate change, help the third world and fight terrorism, then it needs to compete successfully,” he said.