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Yes to tax coordination, no to the harmonisation of rates. Almost two years after the European Commission publication titled The contribution of taxation and customs policies to the Lisbon Strategy', the European Parliament adopted, on 24 October, an own-initiative report on this topic greeted as being perfectly in line with its positions on tax matters by the EPP-ED Group. To recall, the initial text prepared by the rapporteur Sahra Wagenknecht (GUE-NGL, Germany) had practically been rewritten by the Committee on Economic and Monetary Affairs as their positions were so different. Below is the outline of this report.

Tax competition. The Parliament considers that "the existence of 27 different tax systems in the European Union constitutes an impediment to the smooth functioning of the internal market," because it "creates significant opportunities for the erosion of tax bases, for example, through tax avoidance". However, MEPs believe that "tax competition in the EU has led - and continues to lead - to EU-wide economic gains by way of a dynamic corporate environment". That said, MEPs are aware that "appropriate EU-level tax coordination, which does not attempt to harmonise tax rates, can contribute to the benefits of tax competition being even more widely shared between undertakings, their employees and consumers".

Downward trend... While reiterating that tax rates in the EU were declining but that the taxation level remains higher in Europe than in the rest of the OECD countries, the Parliament stresses the need for a coordinated fiscal framework, including for corporate taxes, "should be favourable to companies, in particular SMEs, and geared to renewing growth and generating employment".

...but rates too high. MEPs regret that the tax systems in the member states went "too far in applying relatively high rates to low tax brackets, which discourages risk-taking and start-ups". On the matter, the Parliament offers the following advice: it is possible to increase their tax revenue through tax cuts accompanied by a widening of tax bases, while controlling expenditure.

Worrying tax fraud. Reiterating that the current fragmentation of tax systems constitutes "loopholes enabling tax evasion" (the tax revenue lost by fraud and tax evasion is estimated at between 200 billion and 250 billion as regards VAT alone) the Parliament instantly invites the Commission and member states to take new measures to combat tax fraud. A sign of the major influence that the German delegation holds in the Parliament, one paragraph specifies that the introduction of a reverse charge mechanism could contribute to the fight against VAT fraud (while most member states are hostile or a least very reticent).

Yes to the lower rate. MEPs reiterate their support for experimenting with lower VAT rates for labour-intensive services "as a structural element of the VAT system," on the condition that member states can retain relative flexibility on a local level and that these reduced rates do not distort cross-border competition.

Taxing polluters. Considering that energy taxation is "a useful instrument" in that it both applies the polluter pays' principle and achieves a reduction of pollution at source and "there is an urgent need to address the ever-growing environmental impact of traffic," MEPs are in favour of "an increase in fuel taxes" on the condition that "economical and attractive means of mass transport were available."

No to minimum rates of excise duty. As demonstrated in the report adopted (not without some trouble) in July this year on the rate of duty applicable to alcohol, Parliament rejects any "policy line that is oriented to the determination of the minimum tax rate at the Community level". On the other hand, the EU must adopt a code of conduct, with the objective of encouraging member states to approximate more closely their highly divergent rates of excise duty.

Simplifying customs procedures. Parliament considers that for the completion of the internal market, it is necessary "to simplify customs legislation and to rationalise customs procedures with the purpose of reducing the administrative cost for enterprises engaged in cross-border transactions," for example by simplifying business' cross-border compliance obligations.

Reinforced cooperation. Parliament renews its support for the proposed creation of a Common Consolidated Corporate Tax Base (CCCTB) "in the framework of enhanced cooperation," even though this would not necessarily be the best solution.

Tax losses. Regarding the tax treatment of losses in cross-border situations, MEPs believe that it is necessary to work on establishing a system of cross-border loss relief for businesses and groups who have establishments abroad. Furthermore, the Parliament welcomes the Commission communication on this matter.

Tax on profits in step decline

The average rate of taxation on company profits has strongly declined in recent years. In the EU15, the tax rate had fallen by almost 10 percentage points since 1995, passing from 38% to 29.5%. Even Eastern European countries, where the corporate tax rates were low in 1995, have systematically continued to decrease their rates. This process is still far from being finished. Germany is currently preparing the next corporate tax reform, trying to bring its tax rate below 30%. Denmark is planning to bring its rate down from 28% to 22%. For the rapporteur, Sahra Wagenknecht, these measures certainly emphasise the pressure on other countries.
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Publication:European Report
Date:Oct 26, 2007

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