The European Union’s lack of fiscal harmonisation is one of its Achilles’ heels and close to a tragedy for Europe’s economy and businesses. Europe continues to be the geographical area boasting the highest level of fiscal competition between its countries: competition characterised by a general decrease in corporation tax, which has fallen by almost 40% since the mid-1990s. Capital gains tax has also fallen, with consumption and labour taxes rising.
For me, fiscal harmonisation in Europe is on old acquaintance. During the early 80s, as Secretary of State for Finance, I was placed in charge of a working group on the topic. Now, looking back at the slim progress made over the last 30 years, I cannot help but feel a certain sense of frustration.
I felt frustration when it was decided to free-up the movement of capital without prior fiscal harmonisation, when the governments of Mitterand in France and González in Spain ceded to the demands of the other member countries spearheaded by the United Kingdom and Luxembourg. I felt it again in the European Convention drafted by the non-nata Constitution. We were not able to get rid of the unanimity rule on fiscal-related decisions, although it might be more appropriate to use the term taxation because of the confusion caused the word fiscal’s implication in English going far beyond purely tax-related issues.
This failure has since meant that mutual concessions between States in order to achieve unanimity have given rise to a proliferation of exceptions and derogations that are extremely difficult to eliminate in indirect taxation. It is also clear that States face difficulties when it comes to combatting cross-border tax fraud and evasion without the appropriate systems for exchanging information and administrative cooperation.
The second point of confusion relates to the limits of Europe-wide action on tax-related issues. Throughout the taxation system can be observed a wide variety of business models: the Swiss model, for example, with its high fiscal pressure, is distinctly different from that of conservative Britain and Spain.
Given that there is no theoretical “European model” to aim towards, it should be clear that fiscal decisions, or rather decisions on taxation, that are to adopted by a qualified majority are not likely to change the business models that each country decides upon through its own political decisions. How many times will the Commission have to repeat that this is not a case of fixing the tax rates applicable to businesses at a European level, and even less so to individuals?
The fiscal achilles heel
Despite certain non-negligible advances, albeit applied at a snail’s pace, it is clear that the European Union’s lack of fiscal harmonisation is one of its Achilles’ heels and close to a tragedy for Europe’s economy and businesses.
Europe continues to be the area that boasts the highest level of fiscal competition between its countries.
This competition is characterised by a general decrease in corporate tax, which has fallen by almost 40% since the mid-1990s: on average, it sat at a rate of around 36-37% and now sits at around 21-22%. Capital gains tax has also fallen, with consumption and labour taxes rising instead.
Public opinion, above all in these times of cuts and crises, is turning sour and the people are indignant at the revelation of the processes large multinationals employ to place their profits where they will be subject to the most favourable tax regimes and avoid, entirely legally of course, paying taxes in the countries where they operate. In addition, a proposed tax on financial transactions has never seen the light of day despite its introduction having been announced several times. On the contrary, its scope is being increasingly diminished, steadily making it devoid of content.
What is hindering progress towards real fiscal harmonisation in Europe?
Firstly, the Member States’ desire to keep their sovereignty intact and set fiscal conditions in their own territories despite the fact that, in reality, competition between States is what detracts from their ability to exercise such sovereignty, which really belongs to another era. Member States should understand that they would enjoy greater collective sovereignty if they made progress towards the harmonisation of their decision-making.
The second difficulty derives from the decision-making process in Europe, which continues to insist on unanimity on fiscal matters. Achieving unanimity amongst 28, soon to be 27, nations is very complicated.
What is more, businesses are reluctant to support harmonisation as they are wary that a stable, standardised and wide basis might be the first step towards States-wide increases in applicable tax rates.
However, the harmonisation proposal currently being debated would bring significant advantages to European businesses by allowing them to consolidate their gains across Europe, taxing only net profit throughout the zone. It would also reduce administrative costs for those businesses which currently have to abide by as many different tax regimes as countries they operate in.
The Commission’s current proposal is a project consisting of various parts. First of all, it aims to define one unique method to calculate taxable profits across all countries. Every subsidiary of a company or group would be treated as if they were one sole entity, the profit of which would be determined in a standardised manner.
Profit at a European level would be distributed between countries according to the factors which contributed to creating it, salaries, capital and sales.
The Commission proposes a profit distribution key taking into account one third of each of these three factors. This would reduce the risk of businesses artificially moving profits to countries with less demanding tax regimes.
The dead-set against fiscal harmonisation
Attitudes towards fiscal harmonisation vary greatly amongst Member States. Certain countries have been consistently dead-set against any form of tax harmonisation, especially that of direct taxation (corporate and capital gains tax), on the basis that the Treaty does not provide for it. This is true: the Treaties do not establish any need to standardise direct taxes, including those of businesses. Only the harmonisation of VAT and special taxes is provided for. The most reticent countries are always the same: the United Kingdom, Ireland and a number of the new Member States, frequently those which have most often and most effectively played at the competition game by reducing their tax rates. The new Member States are those which, on average, have the lowest rates of corporate tax.
On the other side of the coin, Germany and France are the countries that should push most obstinately for fiscal harmonisation. In 2011-2012, there was much talk about a possible convergence between French and German taxation. The perspective was that on the basis of a Franco-German agreement, the Commission would extend the system to the other countries of the Union.
If France and Germany do not reassume a dynamising role in proceedings, there will be no progress towards fiscal harmonisation. However, it would not be difficult to add Spain and Italy to the mix, two countries that have always reacted positively to the topic. Together, the four countries represent 52% of GDP in the EU. The Benelux countries would follow because they have never abandoned France and Germany in the march towards a more unified market; Austria and certain Nordic countries, such as Denmark and Finland, might also join the cause.
We would therefore have a minimum of ten Member States, representing 65% of GDP in the EU – a sufficiently large percentage to launch a bid for “strengthened cooperation” between the countries.
The other pressing question regards whether or not the European Union needs to be able to establish and raise its own taxes. It has been argued that Europe will only become politically relevant if its parliament obtains fiscal competencies. In the times of the American Revolution, it was often said that there could be no taxation without representation. Nowadays, in the corridors of the European Parliament, it is not uncommon to overhear the phrase “no representation without taxation”.
I am not against this idea, but neither am I convinced that the most pressing and relevant issue lies in bestowing the Union its own fiscal powers. I believe that combatting fiscal competition between States is much more urgent, and that this can only be done by standardising regulation and establishing wide-ranging administrative cooperation through the automatic exchange of information. I believe that it is of greater importance to establish a European Fiscal Agency capable of collecting state taxes with cross-border implications in a coordinated manner, thus drastically reducing VAT-related fraud, than to create European taxes. The latter could only come into being during an expansion of the EU’s competencies, which is not currently on the cards.
The most pressing issue at hand is to make progress with the harmonisation of national fiscal systems in order to create a taxable, consolidated and communal basis which could one day serve as the basis for a European tax. On top of this European tax every State could add a national tax, as in the American federal system.
The immediate objectives are clear to see. Even the recent expansion of the directive on the exchange of information regarding capital income is a welcome step, notwithstanding its late arrival. Brexit could accelerate the fiscal harmonisation process: it will soon become clear whether the British really were the project’s last insurmountable obstacle, or whether in reality many other forces were at work in the shadows behind its frank and open opposition.
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