3.4.8.     Personal and company taxation

LEGAL BASIS

There is no explicit provision in the EC Treaty for the harmonisation of direct taxes. Action in this field has therefore had to be based on more general objectives.

1. Legislation on the taxation of companies has usually been based on Article 94 (100), which authorises "directives for the approximation of such laws, regulations or administrative provisions of Member States as directly affect the establishment or functioning of the common market". As in the case of Article 93 (99) - and in contrast to Article 95 (100a) under which most Single Market legislation was adopted unanimity and the consultation procedure apply.

2. Article 58 (73d), introduced by the Maastricht Treaty, qualifies the free movement of capital by allowing Member States to "distinguish between tax-payers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested". However, on 14 February 1995 the Court ruled (Case C-279/93) that Article 39 (48) is directly applicable in the field of tax and social security. This Article provides that freedom of movement for workers "shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment". Article 293 (220) requires Member States to "enter into negotiations" for the abolition of double taxation within the Community and Article 294 (221) forbids discrimination between the nationals of Member States "as regards participation in the capital of companies"

3. Most of the arrangements in the field of direct taxation, however, still lie outside the framework of Community law. An extensive network of bilateral tax treaties - involving both Member States and third countries - covers the taxation of cross-border income flows.

OBJECTIVES

In the field of direct taxation, two specific objectives are the prevention of tax evasion (e.g. the proposed withholding tax on interest) and the elimination of double taxation (e.g. agreements on dividend payments to non-residents).

More generally, some harmonisation of business taxation (both corporation tax and the personal taxation of dividends) may be required to prevent distortions of competition, particularly of investment decisions. Where tax systems are non-neutral - i.e. where relative post-tax rates of return do not correspond to relative pre-tax rates of return - resources will be misallocated. Harmonisation might also be justified to prevent the undermining of revenues through "tax competition", and to reduce the scope for manipulative accounting (e.g. via transfer pricing).

The Ruding Report ("Report of the Committee of Independent Experts on Company Taxation", March 1992), found that all Member States' tax systems discriminated in one way or another between domestic and non-domestic investment. It also noted that the potentially distorting effects were increased by the removal of barriers to the mobility of capital. The principal issues were whether such distortions seriously threatened the Single Market; and, if so, whether they could be eliminated "simply through the interplay of market forces and competition between national tax regimes", or whether action at Community level was required.

ACHIEVEMENTS

1.     Company Taxation

Proposals for the harmonisation of corporation tax have been debated within the European Community for over 30 years. The Neumark Report of 1962 and the van den Tempel Report of 1970 both advocated harmonisation, though on different systems. In 1975 the Commission published a draft Directive proposing the introduction in all Member States of yet another system, with an alignment of rates between 45% and 55%. This proved unacceptable; and by 1980 the Commission was arguing that, though a common system might be desirable on competition grounds, "any attempt to resolve the problem by way of harmonisation would probably be doomed to failure" ("Report on the Scope for Convergence of Tax Systems" COM(80)139).

Instead, the Commission decided to concentrate on more limited measures essential for completing the Single Market. The "Guidelines for Company Taxation" of 1990 (SEC(90)601) gave priority to three already-published proposals, which were adopted later that year:
-     the "mergers" Directive (90/434/EEC), which covers the treatment of capital gains arising when companies merge;
-     the "parent companies and subsidiaries Directive" (90/435/EEC), eliminating double taxation of dividends paid by a subsidiary in one Member State to a parent company in another; and
-     the "arbitration procedure" Convention (90/436/EEC), which introduced procedures for settling disputes concerning the profits of associated companies in different Member States.

At the beginning of the following year, the Commission also published a proposal covering a common system of taxation applicable to interest and royalty payments made between parent companies and subsidiaries in different Member States (COM(90)571). Despite being revised two years later (COM(93)196) and receiving a favourable opinion from the European Parliament, it was withdrawn as a result of failure to agree in Council. A new version was presented in 1998 (COM(1998)67) as part of the "Monti package", which also included the Code of Conduct and the proposal on the taxation of savings income (see below).

Meanwhile, the Ruding Committee of independent experts was established in 1991, and reported in March of the following year (see above). It recommended a programme of action to eliminate double taxation; harmonise corporation tax rates within a 30%-40% band; and ensure the full transparency of the various "tax breaks" given by Member States to promote investment.

The Commission published its reactions in June 1992 (SEC(92)1118). While not agreeing with all of Ruding - notably on rates of corporation tax - it accepted the need for priority action on double taxation. In the following year it proposed amendments to enlarge the scope of the "mergers" and "parent/subsidiaries" Directives ((COM(93)0293); and drew attention to two already-tabled draft Directives: that on the carry-over of losses (COM(84)404) and on losses of subsidiaries situated in other Member States (COM(90)595). All these are still before the Council.

In 1996, the Commission launched a new approach to taxation (* 3.4.9). In the field of Company Tax the main result was the Code of Conduct for Business Taxation, adopted as a Council resolution in January 1998. Council also established a Code of Conduct Group (known as the "Primarolo Group" after its President) to examine notified cases of unfair business taxation. Its report was presented in November 1999, identifying 66 tax practices to be abolished within five years. The Group’s mandate has now been extended to supervise this "rollback".

2.     The Taxation of SMEs

In May 1994 the Commission published a "Communication on the Improvement of the Fiscal Environment of Small and Medium Sized Enterprises" (COM(94)206). By comparison with larger firms, it observed, SMEs faced three main problems: attracting sufficient financial resources; coping with administrative complexity; and continuity when the business changed ownership. Although there was no intention to "harmonise to any extent the purely national tax treatment of small and medium sized enterprises", action might be needed on cross-border aspects.

Annexed to the Communication was a "first initiative in the form of a recommendation on self-financing", "Concerning the taxation of small and medium-sized enterprises" (94/390/EC). It invited Member States to act on two matters concerning sole proprietorships and partnerships:
-     "to correct the deterrent effects of the progressive income tax payable...in respect of reinvested profits" - for example, by allowing an option for corporation;
tax; and
-     "to eliminate the tax obstacles to changes in the legal form of enterprises, in particular..incorporation".

3.     Personal Direct Taxation

The taxation of those who work in or draw a pension from one Member State, but live and/or have dependent relatives in another, has been a continuing source of problems. Bilateral agreements avoid double-taxation in general, but fail to cover such questions as applying various tax-reliefs available in the country of residence to income in the country of employment. In order to ensure equal treatment between resident and non-resident workers the Commission in 1980 proposed under Article 94 (100) a Directive on the harmonisation of income tax provisions with respect to freedom of movement. This would have applied the general principle of taxation in the country of residence; but was not adopted by Council and was withdrawn in 1993. Instead the Commission issued a Recommendation under Article 211 (155) covering the principles that should apply to the tax treatment of non-residents' income.

Meanwhile, the Commission has also brought infringement proceedings against some Member States for discrimination against non-national workers. The Court ruled in 1993 (Case C-112/91) that a country could tax its own nationals more heavily if they resided in another Member State. The Court has also found, however, that a country cannot treat a non-resident national of another Member State less favourably that its own nationals (see above: Case C-279/93).

The other main issue in the field of personal direct tax is the taxation of bank and other interest paid to non-residents. In principle, a taxpayer is required to declare such income when making normal tax returns. In practice, as the Ruding Report observed, "the free movement of capital..together with the existence of bank secrecy...will increase the potential for tax evasion by individuals." Some Member States impose a withholding tax on interest income; but when in 1989 Germany introduced such a tax at the modest rate of 10%, there was massive movement of funds into Luxembourg, and the German tax had temporarily to be abolished.

That same year the Commission published a draft Directive for a common system of withholding tax on interest income (COM(89)60), levied at the rate of 15%. This was opposed by some Member States on the grounds that, based on the German experience in 1989, it would lead to a flight of capital from the Community. The proposal was eventually withdrawn, and a new one, to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community (COM(1998)295), was presented. The rate proposed was 20%; but there was to be an alternative system of providing information on payments to the tax authorities of the saver's home state.

After lengthy negotiations, a compromise was agreed at the Santa Maria da Feira European Council on 20 June 2000. On 26/27 November 2000, ECOFIN reached agreement on a draft Directive.
-     Austria, Belgium and Luxembourg would introduce a withholding tax at a rate not below 15% for three years following the entry into force of the Directive. This would rise to not less than 20% for another four years.
-     All other Member States would adopt the exchange of information system following the entry into force of the Directive, and Austria, Belgium and Luxembourg after seven years.
-     25% of withholding tax revenues would be retained by the collecting country, the rest cleared to the countries where the tax-payer was resident.
-     Bonds issued before 1 March 2001 would not be subject to the Directive.
-     The Commission would hope to have information on the positions of the US, Switzerland and other countries by July 2001.
-     Luxembourg and Austria have made it a condition of adopting the Directive that "equivalent" measures will be introduced by these countries.

ROLE OF THE EUROPEAN PARLIAMENT

On tax proposals, Parliament's role is confined to the one-reading consultation procedure. Its resolutions and amendments have broadly supported all Commission proposals in the fields of both company and personal direct taxation - including all elements of the "Monti Package" -, while advocating a widening of their scope. It gave its opinion on the Ruding Report, and the Commission's reaction to it, in a report, adopted in April 1994. In giving general approval to the Commission's approach on SMEs on 24 October 1994, Parliament called for a "plan of action" in a form that could form part of an integrated programme for SMEs.

Parliament's Economic and Monetary Affairs Committee has recently instituted an annual review, in the form of a report and resolution, on progress in tax co-ordination in the EU.

19/10/2000