The EU first became involved in members' tax policy in 1967, when it was decided that all member states should adopt a system of Value Added Tax (VAT) as part of the programme to create a single market. The 1985 Cockfield Report encouraged further steps to cover all indirect taxation. In 1991 a unified excise duty was adopted and in 1992 a standard base of VAT rates of above 15% was set across the EU.
While this created some integration in the sale of goods, to have a real single market all countries would have to have a similar rate of business tax - effectively creating a European tax system with similar rates in all countries. This has not occurred. The 1997 Code of Conduct on business tax tried to encourage integration by calling on countries not to compete with each other to have lower tax rates, but it is not binding. Some member countries resent efforts by growing European economies such as Ireland, Spain and the Baltic states to attract businesses to their countries by cutting taxes. Yet these members argue that they need lower taxes in order to bring their economies up to the European average.
What is the EU's role in taxation?
The EU does not have the power to collect taxes; this power rests with member states. It only has powers over indirect tax and members still have a veto on tax issues. Instead, it seeks to guide members into developing similar taxation systems, while the European Court of Justice (ECJ) uses its power to forbid taxes that go against the principle of the single market. On VAT, the EU has a strong interest in co-ordinating policy not only to promote a single market but because some of the money that goes into the EU budget is based on member states' VAT systems.
Attempts to control direct taxation policy, such as the 1997 Code of Conduct, have been limited to encouraging tax co-ordination and trying to stamp out harmful tax practices. This has taken place largely through judgements by the ECJ rather than agreements between European politicians. Ministers in the Council of the European Union have remained reluctant to move forward with tax harmonisation. There are fears that the Lisbon Treaty would enable tax harmonisation across the EU if it is implemented in 2009; for example misgivings about tax harmonisation were a significant factor in Ireland's rejection of the Lisbon Treaty by referendum in 2008.
Facts and Figures
- EU member states currently have very different rates of business tax: Germany charges 38%, Ireland 12% and Estonia has no business tax.
- Member states' also have very different VAT rates, even though they are within EU-wide limits. In Germany VAT is 16%, while in Hungary it is 25%.
Arguments
For
- A co-ordinated tax system stops member states competing to have lower tax rates and thus makes the operation of a fair single market easier.
- Money and people should be allowed to move between member states without being taxed twice.
- Without an integrated tax system, companies operating in several member states often get taxed twice: this discourages the growth of businesses.
Against
- Different member states have different economic priorities: some may want low taxes to encourage enterprise while others want higher taxes to pay for welfare or healthcare.
- Countries must retain control over their own tax systems because the power to levy taxes is central to national sovereignty and decision-making.
Quotes
‘'The times of individual national efforts regarding… tax polices are definitely over.' - Gerhard Schröder, German Chancellor, 1998-2005
'If you create a tax haven for a few people, you condemn the rest to a tax hell.' - Mario Monti, EU Competition Commissioner, 1999-2004
Technical Terms
Tax Harmonisation:
The term used in the EU to describe a possible unified tax system.
VAT:
value-added tax is an indirect tax on most sales of goods and services.
Indirect Taxation:
a tax that is added automatically to the values of goods or services.
Direct Taxation:
a tax made on the wealth or income of private individuals or businesses.
