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3.4.9. Fiscal policy and taxationLEGAL BASIS Action in the general taxation field can be justified by the general aim of the EC Treaty, expressed in Article 3, of eliminating between Member States "customs duties...and all other measures having equivalent effects"; and of "ensuring that competition in the common market is not distorted". Article 93 (99) deals specifically with indirect taxation (VAT and excise duties). Measures in other tax fields are generally taken on the basis of Article 94 (100) [completed by Articles 96 (101) and 97 (102)], covering measures to prevent distortions of the market. Article 293 (220) also recommends the conclusion of inter-State fiscal conventions in order to avoid double taxation. Article 104 (104c) of the Treaty, as amended at Maastricht, requires that Member States participating in the Single Currency shall "avoid excessive government deficits", with penalties for any failure to do so. Non-participants must also “endeavour to avoid” excessive deficits. OBJECTIVES Both the creation of the Single Market and the completion of Economic and Monetary Union have led to new Community initiatives in the field of general taxation. The removal of restrictions on the mobility of capital has created fears that tax competition will erode national tax bases, with adverse consequences for employment and social protection. In the area of general taxation policy, the Community is therefore pursuing a number of objectives. 1. A first, long-standing aim has been to prevent differences in indirect tax rates and systems from distorting competition within the Single Market. This has been the purpose of legislation under Article 93 (99) on VAT and excise duties. 2. In the field of direct taxation, where the existing legal framework mostly takes the form of bilateral agreements between Member States, the primary objective of Community action has been to close the loopholes which permit tax evasion; and to prevent double taxation. 3. 3. The objective of more recent moves towards a general taxation policy has been to prevent the harmful effects of tax competition, notably the migration of national tax bases as firms move between Member States in search of the most favourable tax régime. Though such competition can have the beneficial effect of limiting governments' ability to "tax and spend", it can also distort tax structures. In recent years the proportion of total taxation accounted for by taxes on relatively mobile factors like capital (interest, dividends, corporate tax) has fallen, while that on less mobile factors, notably labour – for example social charges - has risen. 4. 4. The Maastricht Treaty provisions on Economic and Monetary Union introduced a new dimension to general taxation policy by severely limiting governments' ability to finance public expenditure out of borrowing. Under the Stability and Growth Pact, Member States participating in the € area must not at any time run budget deficits at a level above 3% of GDP. The general aim of the Pact is for Member States' budgets to be roughly in balance over the economic cycle. Higher public spending can therefore be financed only out of higher tax receipts. Despite broad acceptance of these objectives, however, national governments have been reluctant to see any major steps towards the harmonisation of taxation within the Community, and to end the Treaty provision that tax measures must be adopted by unanimity in Council. As the Commission pointed out in its 1980 paper on "The Scope for Convergence of Tax Systems in the Community" (COM(80)139), not only is "tax sovereignty...one of the fundamental components of national sovereignty..", but tax systems differ widely as a result of differences in economic and social structures and "different conceptions of the role of taxation in general or of one tax in particular". Overall taxation and social security contributions as a percentage of GDP, for example, varies between under 34% in Greece to nearly 55% in Sweden (the EU average is 42.6%). Direct taxes – mostly personal income tax and company taxation – vary between 9% of GDP in Greece to over 32% in Denmark (EU average 13.7%). Indirect taxes – that is, mainly VAT and excise duties – vary between about 11% of GDP in Spain to over 19% in Denmark (EU average 13.8%). And social security contributions vary from only 1.7% of GDP in Denmark to over 19% in France (EU average 15.1%). ACHIEVEMENTS 1. Taxation In 1996 the Commission proposed a new and comprehensive view of taxation policy (see " Taxation in the European Union" of 20 March (SEC(96)487)). This highlighted the major challenges facing the Union: the need to create growth and employment, to stabilise fiscal systems, and to fully realise the Single Market. In June 1996 the Commission proposed a European Confidence Pact for Employment. This emphasised the need to reverse the tendency of taxation systems to penalise employment, as part of a wide-ranging strategy to create more jobs in the Union. In April 1996 the Council of Finance Ministers (ECOFIN) set up a High Level Group on taxation, (the "Monti Group") chaired by the then tax Commissioner, Mario Monti. The Commission's initial conclusions following the meetings of this group (which included representation from the European Parliament) appeared in October 1996: "Taxation in the European Union: Report on the Development of Tax Systems" (COM(96)546). The report observed that "any proposal for Community action in taxation must take full account of the principles of subsidiarity and proportionality". Rather than "harmonisation for harmonisation's sake", measures were needed "to provide a more effective defence against the loss of national fiscal sovereignty in favour of the markets experienced by Member States". The new European fiscal strategy (the so-called "Monti package") was published by the Commission in October 1997 ("Towards Tax Co-ordination in the European Union: a package to tackle harmful tax competition"). In addition to proposals on the taxation of interest and royalties, and on the taxation of savings it outlined a Code of Conduct for Business Taxation, which was approved by Parliament and Council, and is now in operation. Adherence to the code is monitored by a body appointed by the national finance ministers: the so-called "Primarolo Group" (see paper on "Personal and Company Taxation"). At the same time, there have been parallel moves within the OECD to eliminate “harmful tax competition” at an international level, and in particular to close down “tax havens”. Many of those identified by the OECD’s Committee on Fiscal Affairs are directly associated or dependent territories of EU Member States: for example, Gibraltar, the Isle of Man and the Channel Islands (UK); Aruba and the Netherlands Antilles (NL). Others are linked with the EU in other ways (e.g. through the EEA): for example, the Principalities of Liechtenstein and Monaco and Andorra. 2. Fiscal Policy The restraints on national budgets introduced by the Maastricht Treaty and the Stability and Growth Pact have so far proved generally successful. Neither Member States within the Euro area, nor the four countries currently outside, have run deficits above 3% of the GDP, and several have run surpluses. Table:
General Government deficit (-)/surplus (+) in 1999 as a percentage of GDP
Countries outside the Euro area in italics. Despite this, both the Commission and the European Central Bank have warned against any relaxation of budgetary discipline. They have noted that, at the current “upswing” stage of the economic cycle, all Euro-area participants should be aiming for a budgetary surplus. ROLE OF THE EUROPEAN PARLIAMENT Parliament has approved the general lines of the Commission’s programmes in the field of taxation, including the Monti package (see, for example, its resolution of 18 June 1998), and also of the Code of Conduct and the work of the Primarolo Group.
20/10/2000 |