COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 22.10.1996 
COM(96) 546 final 
TAXA TION IN THE EUROPEAN UNION 
REPORT ON THE DEVELOPMENT OF TAX SYSTEMS 
(Presented by the Commission) 

TAXA TION IN THE EUROPEAN UNION 
REPORT ON THE DEVELOPMENT OF TAX SYSTEMS 
CONTENTS 
I INTRODUCTION 
II THE DEVELOPMENT OF TAX SYSTEMS WITHIN THE 
UNION 
III ENTERPRISE: COMPLETING THE SINGLE MARKET 
IV EMPLOYMENT 
V THE ENVIRONMENT 
VI THE WAY FORWARD 
U 
I. INTRODUCTION 
1.1 The Commission proposed a new and comprehensive view of taxation policy in its 
reflection document "Taxation in the European Union" of 20 March 1996. In 
particular, it 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. At the informal ECOFIN Council meeting in Verona on 13 April, Finance 
Ministers welcomed the Commission paper, and agreed on the need to take forward 
the consideration of these issues in a High Level Group, to be set up and co­
ordinated by the Commission. 
1.2 The ECOFIN Ministers appointed personal representatives to the High Level Group, 
which met four times, on 24 June, 19 July, 12 September and 7 October 1996. The 
Council's Secretariat General was also present at the meetings. 
1.3 The meetings provided a valuable opportunity for representatives to examine and 
exchange views on some central challenges for taxation policy. In the course of its 
meetings the Group took oral evidence from the European Trade Union 
Confederation (ETUC), the Union of Industrial and Employers' Confederations of 
Europe (UNICE), and Mr Onno Ruding.1 The European Parliament, through its 
Committee on Economic and Monetary Affairs and Industrial Policy, was kept 
informed of the broad topics submitted by the Commission for consideration by the 
Group. 
1.4 In June, on President Santer's initiative, the Commission proposed a European 
Confidence Pact for Employment. This highlighted in particular the need to reverse 
the tendency of taxation systems to be detrimental to employment, as part of a wide 
ranging strategy to create more jobs in the Union. 
1.5 The European Council in Florence emphasised "the essential contribution made by 
the Internal Market to promote growth and employment"; and requested the Council 
"to submit to it, before the European Council in Dublin, a report on the development 
of tax systems within the Union, taking account of the need to create a tax 
environment that stimulates enterprise and the creation of jobs and promote a more 
efficient environmental policy". 
1.6 In this report the Commission: 
• summarises (in sections III - V below) the views expressed by members of the High 
Level Group on the issues first raised by the Commission's Verona document; and 
• gives (in section VI) its own assessment both of these particular issues and of the 
way forward for the future. 
1.7 The Commission wishes to express its appreciation to the ECOFIN Ministers for 
the support that they have given to its initiative, both through their own 
Former Finance Minister of the Netherlands and chairman of the Committee of Independent Experts 
on Company Taxation in the European Community which reported in March 1992. The Commission's 
conclusions following that report are contained in its communication of 26 June 1992 (SEC(92)1118). 
1 b 
contributions to the discussions in Verona and through the participation of their 
personal representatives in the High Level Group. 
II. THE DEVELOPMENT OF TAX SYSTEMS WITHIN THE UNION 
2.1 The development of taxes and social charges in the 15 Member States of the 
European Union may be seen by considering both the evolution of the level of 
taxation (measured for example as a percentage of GDP) and trends in the structure 
of taxation (as they appear for example in the effective rates applied to different 
economic bases). 
2.2 Between 1980 and 1994, total taxes and social charges as a percentage of GDP for 
the EU average increased by about 2 points. There were however large variations 
between Member States. Looking at the traditional breakdown between direct and 
indirect taxes and social security contributions, most of the total increase in taxation 
in this period was accounted for by social security contributions (rise of 1.5 points 
for the EU average, with most of the rise in the 1990s). The evolution over this 
period is more relevant than the data for a given country in any one year. 
2.3 One method for analysing the long term trends in the structure of taxation is to 
calculate implicit tax rates (tax revenues divided by the tax base) according to 
economic functions (factors of production and consumption). Between 1980 and 
1994, the European average of the implicit tax rate on employed labour increased 
steadily from 34.7 % to 40.5%. The same rate for other factors of production 
(capital, self-employed labour, energy, natural resources) decreased from 44.1% to 
35.2% (see graph below). The rate for consumption was broadly stable, rising 
slightly from 13.1% to 13.8%). Again there were large variations between individual 
Member States. Those Member States which had the largest rises in the implicit tax 
rate on employed labour over this period were mainly those where the level of total 
taxation also increased most. 
2.4 There are many possible explanations for these changes in the structure of taxation, 
including the evolution of tax rates and bases, the ageing of the population, and the 
fact that employment income is a relatively stable and easy base to tax. Another 
factor might be the progressive erosion of certain fiscal bases that could be caused 
by excessive or harmful tax competition. The OECD Ministerial and the G7 Lyon 
summits have this year underlined fears that especially favourable tax regimes, 
particularly for internationally mobile activities, can cause economic misallocations 
and undermine other countries' revenues. Although there is no measure of the 
overall impact of fiscal erosion, there is some evidence that effective taxation of 
investment income has been endangered by movement of investments between 
Member States or outside the Union purely for tax purposes. 
Implicit Tax Rates 1980 -1994 
50 -r 
Labour Employed 
Other Factors 
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 
HI. ENTERPRISE: COMPLETING THE SINGLE MARKET 
Background 
3.1 Enterprise is an essential force for the creation of growth, prosperity and 
employment within the Union. Creating an environment which enables enterprise to 
flourish is vitally important to maintain and enhance the Union's competitiveness 
world-wide. The Single Market is central to this. As regulatory restrictions are 
disappearing, those tax hindrances or distortions that do remain are becoming 
increasingly visible, and taxation is widely seen as one of the most important areas 
in which the Single Market has not been fully achieved. This is the case even in 
areas such as VAT where, in spite of a considerable amount of Community 
legislation, the system is still far from being adapted to the needs of a Single Market 
and where its complexity and the diversity of its application cause real problems. 
3.2 Tax systems must allow cross-border economic activity to develop within the 
Union. However, at the same time, there is a need to ensure that the increased 
opportunities for cross-border trade and investment do not lead to an unacceptable 
loss of tax revenues through tax arbitrage, avoidance or fraud. Just as it is necessary 
to prevent the double taxation of cross-border income flows, transactions within the 
Union should not be able to escape tax altogether. 
Promoting growth and enterprise 
3.3 There was broad agreement within the High Level Group that the best conditions for 
enterprise lay in taxation systems that were as simple, fair and effective as possible. 
Over recent years the trend has been towards broadly-based systems at generally 
low rates of tax. These were generally thought best suited to promoting continuing 
economic growth, and preferable to a series of particular tax exemptions or 
deductions targeted at individual business sectors or niches. 
3.4 Nevertheless, some Member States have taken particular initiatives to stimulate 
business start-ups and small and medium sized enterprises. Both of these areas are 
primary creators of new wealth and jobs, and both can suffer from 
disproportionately high compliance costs. 
The Single Market 
3.5 There was general recognition both that taxation rules were an important element 
in fully realising the Single Market; and that the development of the Single Market 
had posed certain challenges for tax systems themselves, notably in the protection 
of tax bases and the prevention of cross-border fraud and evasion. There was, 
however, a variety of views on the need and the urgency for specific actions at the 
Community level. While all representatives pointed to the political sensitivity of 
taxation decisions and the need to respect the subsidiarity principle, some went on to 
stress that these should not be excuses for inaction or stagnation in taxation. 
3.6 A number of representatives expected taxation distortions to be even more visible 
under Stage III of EMU, when there would be fewer variables and transaction costs 
and currency risks would be less of a barrier to trade. Others, however, thought that 
the major impact of EMU would be to underline the importance of retaining national 
flexibility in taxation policy. 
3.7 The Group in general thought it important to have a clear medium to long term view 
of the role of taxation within the Single Market, but within that framework to take a 
pragmatic and practical approach to individual issues. It also noted that, even in the 
absence of new legislation in taxation, an increasing number of cases are coming 
before the Courts, either nationally or before the European Court of Justice. In this 
sense, the understanding of the law is constantly developing. A number of 
representatives expressed serious concern that, unless Court judgements were 
supplemented by other instruments, the development of Community tax systems 
risked being piecemeal. 
3.8 Many personal representatives gave as their immediate priority for Community 
action the removal of tax disincentives to cross-border income flows. Indeed, a 
significant number singled out interest and royalty payments between companies 
and asked the Commission to make a new draft directive on which discussions could 
be relaunched. Many pointed as well to a need for a simpler and more effective 
VAT system in order to remove the complexities, market segmentation, and 
opportunities for fraud in the current transitional arrangements. Some called for 
work to commence urgently to implement the Commission's programme for a new 
common system of VAT. 
3.9 A number of representatives thought that the 1992 report of the Ruding Committee 
had provided a useful analysis of steps that should be taken in the company taxation 
field. Among the priorities that were mentioned for Community action were 
measures relating to financial services, particularly life insurance and pensions; the 
income taxation and social security treatment of cross-border workers; excise duti<^; 
and the possible development of common tax definitions. 
3.10 There was considerable discussion of the role of double taxation treaties between 
Member States (and with third countries) in contributing most effectively to 
meeting Single Market needs. Even though bilateral treaties based on the OECD 
Model Treaty have gone a long way towards facilitating international trade world­
wide, many representatives called for action to improve their functioning. It was 
suggested that certain areas of potential double taxation should be identified, and 
their treatment agreed upon at the Community level. This would provide a 
common pattern to streamline the system. 
3.11 The need to develop and reinforce co-operation between tax authorities against fraud 
and evasion within the Single Market was stressed by a number of representatives as 
being among their highest priorities. Tax systems should be non-discriminatory, but 
they also needed to be robust against the loss of revenue from tax evasion. 
Co-operation would extend not only to sharing experience of the best ways to tackle 
evasion, but also to improving control and mutual assistance measures taken 
between the tax authorities of the Member States. The possibility of developing joint 
tax audits in respect of cross-border economic activity was also mentioned. 
Tax competition 
3.12 Discussions in the Group showed that the extent to which the perceived threat of 
unfair or harmful competition for the revenues from internationally-mobile business 
affects tax policy making varies from country to country. Moreover, there was no 
standard and objective understanding of what constitutes an unfair measure. Some 
representatives stressed their concerns that the effects of fiscal erosion could 
ultimately endanger the achievement of vital Community objectives, and, as a result, 
called for a common approach within the Union. 
3.13 A number of representatives laid great emphasis on the need to apply the EC 
competition rules, notably on State Aids, consistently and transparently. Others, 
while supporting the call for transparency, also pointed out that tax measures were 
only one way in which governments could help businesses, and that the treatment of 
tax incentives should be consistent with wider competition policy, including the 
recognition of regional policy objectives. The general wish of the group was for 
closer co-ordination between the Commission and the Member States in this area. 
3.14 The High Level Group generally gave little support to minimum corporation tax 
rates or bases at this stage, even within the framework of the overall objective of 
ensuring some minimum degree of effective taxation within the Union. 
3.15 Many representatives, however, favoured continuing with initiatives specifically 
targeted at restraining or eliminating unfair competition in this area, in conjunction 
with the work currently being undertaken at the OECD. Representatives also 
suggested a number of further initiatives, including ones aimed at clarifying the 
interpretation of existing law, at defining acceptable and unacceptable conduct in a 
Community context, and at sharing information more closely on other Member 
States' taxation policies and measures. 
Taxation of capital income 
3.16 Many personal representatives drew particular attention to the problem of capital 
income taxation, both within the Union and world-wide. Capital income, 
particularly interest income from savings, forms the most mobile base of all, and 
differences in taxation can cause serious distortions to capital allocation and flows. 
A number of personal representatives suggested that the elimination of currency 
risks and the reduction of interest rate differentials in Stage III of EMU would 
increase this sensitivity to tax differences. 
3.17 In response to this problem, many representatives called for a minimum level of 
taxation on interest income from savings to be ensured throughout the Union in 
order to prevent economic disruptions and revenue losses. Some favoured a 
minimum withholding tax; while others favoured the exchange of information 
between administrations on the interest income of non-residents, and were reluctant 
to see a withholding tax in the Union if there were no lifting of bank secrecy 
legislation. Still others believed that the co-existence of these two approaches might 
be the basis for a possible way to resolve the impasse. 
IV. EMPLOYMENT 
Background 
4.1 Fighting unemployment is the biggest challenge facing the Community today. As 
shown above, the long term trends in taxation in the Community have been 
unfavourable to labour. Greater substitution of capital for labour has been 
encouraged through the structural bias in taxation systems against labour. 
4.2 A significant reduction in taxes on labour to promote employment (1-2% of GDP) 
as recommended by the Commission in its White Paper on Growth, 
Competitiveness, Employment has not yet taken place. The main reason is the 
difficulty experienced by Member States of finding suitable and sufficient budgetary 
compensation to offset the revenue losses. 
The role of taxation 
4.3 There was broad consensus in the High Level Group that taxes on labour need to 
be reduced. Some personal representatives favoured a targeted approach, where 
taxes on labour would be cut for particular categories of workers (e.g. the long 
term unemployed, youth unemployed) in order to maximise the impact on 
employment. Other personal representatives emphasised the need to create the 
right tax environment for job creation, by reducing the tax burden overall, 
including for businesses. Shifting taxes away from labour and on to alternative tax 
bases was favoured by some representatives. For others, employment creation 
could be enhanced more by reducing the overall tax burden and by controlling or 
reducing public expenditure. 
Long term and short term measures 
4.4 Many personal representatives recognised that reversing the long term trend of 
increasing taxes on labour was necessary, although difficult in practice mainly 
because of the limited room for manoeuvre in financing significant reductions in 
taxes on labour. Reversing this trend was more likely than short term measures to 
have an impact on hiring decisions in the medium and long term. Most personal 
representatives identified a key issue as being whether employers receive a clear 
signal that the long term trend of taxation structures would now be reversed, and 
incorporate this signal into their expectations. 
4.5 Some personal representatives highlighted the importance of shorter term measures 
which have been implemented in some Member States. These tend to be temporary 
reductions in non-wage labour costs and to be targeted, and are more likely to have 
an impact on hiring decisions in the short term, during the life of the measures. A 
key issue is the responsiveness of the demand for labour to these short term 
reductions in its cost. Some personal representatives underlined the risks of these 
short term measures, for example high deadweight cost. 
Financing reductions in taxes on labour 
4.6 The options for financing reductions in taxes on labour (both in the short term and in 
the long term) are public expenditure reductions and increased taxation elsewhere. 
The alternative tax bases could be consumption, or factors of production other than 
labour. Financing such reductions is easier in a context of higher economic growth. 
4.7 For some personal representatives, reductions in public expenditure should be 
pursued as a matter of priority. These could give scope either for funding reductions 
in taxes on labour, or for reducing the overall tax burden more generally. Some 
personal representatives highlighted the existing trend in their Member States to 
shift taxes from those falling on income, including income from employment, to 
those falling on expenditure or consumption. On the particular option of using 
additional receipts from adjusting the standard rate of VAT in the new common 
system, personal representatives generally recognised that this was more of a 
medium or long term option. Some of them underlined the neutrality of VAT 
increases with regard to EU competitiveness. The option of introducing or 
increasing environmental taxes, including energy taxes, to finance reductions in 
taxes on labour, and hence help to correct the current under-use of labour resources 
and over-use of scarce environmental resources, was highlighted by some personal 
representatives (see section V below). Finally, regarding taxation of factors of 
production other than labour, particularly mobile capital, some personal 
representatives highlighted the importance of reaching agreement on "safety nets" 
either to provide stable alternative tax bases to labour, or to prevent further fiscal 
erosion in these tax bases leading to increased taxation of labour. 
4.8 Faced with increasing pressures on their social security systems, some Member 
States have introduced alternative ways of financing social expenditure, for example 
by broadening the financing base so that the full burden no longer falls only on 
employed labour, or by encouraging greater private provision. Some personal 
representatives stressed the link between social contributions and social benefits. 
Others emphasised that, with the ageing of the population and relative narrowing of 
the base of employed labour, alternative ways of funding social expenditure had to 
be pursued. Some personal representatives outlined recent reforms in this area. 
V. THE ENVIRONMENT 
Background 
5.1 One of the tasks of the Community is to promote sustainable economic growth 
which respects the environment. To ensure that high environmental standards do not 
interfere unnecessarily with other goals, such as a high level of employment which 
requires inter alia high economic performance and a competitive European industry, 
it is essential to find cost-effective solutions to environmental problems. Taxation, 
by affecting the price of goods, is one economic instrument which can be deployed 
to encourage a more balanced use of scarce natural resources and to internalise the 
external costs of their use. 
5.2 Environmentally related taxes, charged for example on the use of limited natural 
resources and on energy, can be broadly defined as all taxes whose base has a 
specific negative impact on the environment. Apart from the function of raising 
revenues, they also serve as an incentive for behavioural changes. They are thus 
often envisaged as an efficient economic instrument for environmental protection. 
Experience in areas such as the use of unleaded petrol has shown that the 
environmental objectives can often best be achieved when taxation instruments are 
combined with other measures which are used consistently to change behaviour. 
5.3 The use of environmentally related taxes, including taxes on energy, has not on 
average increased significantly between 1980 and 1994. For the EU as a whole, 
taxes on the environment and energy amounted to 2.6% of GDP in 1980 and to 
2.9% in 1994. The results for 1995 and 1996 may show some increase as several 
Member States have introduced new environmental taxes, which are not reflected in 
the above mentioned figures. Some of the personal representatives outlined these 
recent "green" tax reforms in their countries. 
Environmental taxes and reductions in taxes on labour 
5.4 As indicated above, revenue from increased use of environmental and energy taxes 
could be used to finance reductions in taxes on labour. In this perspective, some 
personal representatives were in favour of increasing energy related taxes and 
recalled that several Member States had already used this option. Energy taxes were 
seen as an area where significant amounts of revenue could be raised, although some 
Member States already had relatively high levels of taxes on energy. Other 
environmentally related taxes with smaller tax bases were unlikely to yield 
significant amounts, in particular if they were successful in influencing behaviour. 
Other personal representatives saw less prospect for using energy and environmental 
taxes to reduce taxes on labour, particularly if other countries did not adopt the same 
policy. It was also stressed that the potentially adverse effects on competitiveness of 
increasing taxes on industrial use of energy could be mitigated if a common 
framework for environmental taxes could be introduced in the EU. 
VI. THE WAY FORWARD 
A process for a greater co-ordination 
6.1 In this final part of this Report, the Commission sets out its conclusions drawn 
from the four meetings of the High Level Group. These conclusions build on the 
paper prepared for the Verona informal ECOFIN meeting and the deliberations of 
the High Level Group, including the calls for action by ETUC, UNICE and Mr 
Onno Ruding. 
6.2 The Commission emphasises that any proposal for Community action in taxation 
must take full account of the principles of subsidiarity and proportionality. It does 
not seek harmonisation of taxation systems for harmonisation's sake. Rather, it 
favours a pragmatic and realistic approach which aims to provide a more effective 
defence than hitherto against the loss of national fiscal sovereignty in favour of the 
markets experienced by Member States. 
6.3 How can better co-operation at Community level be achieved? Personal 
representatives have expressed the view that there is a clear need for a group where 
Member States and the Commission can share information on, and review, taxation 
policies. 
6.4 Such a group, which should be chaired by the Commission, could be used to 
provide a strategic overview of taxation policies and of the work of the existing 
specialised committees between the Commission and the Member States (covering 
indirect taxation; direct taxation; and the reduction of non-wage labour costs). It 
would have as its task to help identify those key initiatives, whether legislative or 
not, which, when looked at in a global way, could contribute to the realisation of 
essential Community objectives, such as those spelled out in Florence, while at 
the same time safeguarding the Member States' tax collecting capacities. 
6.5 Sharing information more closely on policies and measures in other Member States 
should enable the group to address the question of tax competition. To that effect, 
the Commission will take forward a number of initiatives, including a number of 
those suggested by personal representatives. These initiatives will be directed at: 
• securing broad agreement on what types of measure are harmful in a Community 
context; 
• defining common standards across a range of areas (a "code of good conduct"); 
• introducing greater co-ordination of measures that are taken by the taxation 
authorities of Member States and designed to prevent tax competition from 
harming the common interest; and 
« reinforcing co-operation between tax authorities in the mutual fight against tax 
fraud and evasion. 
6.6 Beyond these areas, the group could also provide a much needed opportunity to 
examine the major policy implications of certain specific issues. Examples of 
these, many of which were cited by personal representatives, include: 
• the role, functioning, and possible co-ordination of double taxation treaties; 
• the simplification of the tax environment for SMEs and other businesses; 
• the interaction of taxes and social security contributions, in particular for cross-
border workers; and 
• the taxation of international services and the impact of new technologies. 
6.7 Finally, there is a need for further work on the interaction between taxation and 
shared Community goals as identified at Florence, namely: enterprise, 
employment, and the environment along the lines suggested below. 
Enterprise and the Single Market 
6.8 To harvest the full benefits of the Single Market and to stimulate enterprise, tax 
obstacles and disadvantages to doing business within the Union must be tackled 
head on. Eliminating obstacles to cross-border income and capital flows will reduce 
the complexity and therefore the costs of doing business. In the longer term, a tax-
neutral environment conducive to business and wealth-creation is one of the most 
helpful ways to the competitiveness that is essential in an international context. 
6.9 The Commission, while mindful of the sensitivities and difficulties, believes that 
action is necessary to remove such barriers. It is also convinced that a joint and 
co-operative effort is vital to build up non-distortionary and Single Market oriented 
tax systems. Until now, some of the obstacles to the free circulation and non­
discrimination principles enshrined in the Treaties have been the subject of 
decisions by the European Court of Justice, when national courts have thought that 
taxation provisions could stand in the way of the proper functioning of the Single 
Market. If such a trend continues and is not supplemented by other action, it could 
well result in a piecemeal approach, which can never be a viable alternative to co­
operation. 
10 
6.10 Against this background the Commission highlights four areas of action which are 
essential to develop the taxation conditions for an optimal Single Market. The 
Commission will: 
• take forward its work programme for the introduction of a new common VAT 
system; 
• bring forward new proposals to remove tax disadvantages to cross-border economic 
activity, beginning with the payment of interest and royalties between associated 
companies; 
• clarify the scope and improve the consistent application of the Community 
competition rules, including the State Aid rules; and 
• commit itself to enhancing possibilities for greater co-operation and mutual 
assistance between tax authorities, notably through specific proposals integrating 
tools for co-operation and reinforcing mutual assistance in the recovery of taxes. 
6.11 As for the taxation of savings, the Commission believes that the current situation is 
so disruptive that effective action must be taken. Introducing a minimum 
withholding tax along the lines of its 1989 proposal is, in the Commission's view, a 
valuable first step. This would not have the effect of enshrining the principle of bank 
secrecy, and it would ensure that there would at least be an effective minimum level 
of taxation applied to all interest income within the Union. It therefore urges the 
Council to restart its examination of the existing proposal on taxation of interest 
from savings. 
Promoting employment 
6.12 To promote employment, there is widespread agreement on the need to reverse the 
trend in taxation structures towards an increasing burden on labour compared to 
other tax bases. The Commission underlines that, in accordance with the principle of 
subsidiarity, Member States should have flexibility in choosing the method of 
reducing taxes on labour and the means of financing those reductions. There are 
constraints on all of the financing options: each needs to be considered, including a 
mix of options. The Commission sees great value in intensifying the exchange of 
information and experience which is currently taking place regarding these issues, 
following the publication of its report on the future of social protection in the 
Community. 
6.13 In the short term, measures taken in many Member States to reduce non-wage 
labour costs, and targeted at specific categories of workers, such as the low-skilled, 
or new entrants to the labour markets, have not, in current economic conditions, yet 
led to sizeable reductions in unemployment. Experience, however, shows that their 
impact can be considerably enhanced if they are very carefully designed. These 
measures might be more effective if they are linked to job creation, and linked in a 
flexible way to experiments involving changes in work organisation or working 
time. Moreover, keeping the measures as simple as possible would help maximise 
take up and minimise compliance costs, especially for the smallest enterprises. 
Indeed, given that SMEs are the dominant source of new jobs in the Union, taxation 
policies should also facilitate and sustain their employment creating capacity. 
11 
Similarly, taking better account for business taxation purposes of expenditure on 
intangible investment would contribute to the development of qualifications, to the 
enhancement of capacities, and also to better innovation strategies. 
6.14 For the longer term, the Commission believes that there are great benefits to be 
gained in co-ordinating tax measures and presenting them as part of a Community 
wide effort to reduce unemployment. It is crucial to persuade economic agents that 
taxation structures will, from now on, be geared towards promoting employment. 
Such co-ordination would be particularly valuable in the context of reversing the 
long term trend in taxation structures, and in helping to instil the necessary 
confidence as part of the European Confidence Pact. 
The environment 
6.15 For the environment the Commission acknowledges the need to explore an increased 
use of energy and environmentally related taxes. However, current practice shows 
that environmental objectives are often best achieved when taxation instruments are 
combined with other measures, used consistently to change behaviour. In deciding 
the choice of instruments, the effects on competitiveness, on employment and on the 
environment should be carefully assessed. 
6.16 Although the appropriate mix of policy instruments for achieving environmental 
objectives may not be the same for all Member States, it is essential that differences 
are compatible with the smooth functioning of the Single Market. In this respect, the 
Commission will present shortly a communication giving guidelines for Member 
States on the use of environmental taxes on the basis of current Community law. 
6.17 Although Member States will need to judge the degree to which fiscal instruments 
will be necessary to meet their environmental goals at a national level, there is one 
clear area where action has been identified as necessary at Community level. This 
concerns the taxation of energy products which, inter alia, has an important role to 
play in helping to achieve the objective of stabilising CO2 emissions by the year 
2000 at the 1990 level. In this context, the Commission will bring forward new 
proposals on the taxation of energy products before the end of the year. These 
proposals will provide a common framework, giving Member States flexibility to 
modulate their tax systems in the light of their own national circumstances while 
respecting the proper functioning of the Single Market. 
Conclusions 
6.18 Bearing in mind the analysis and the lines of action outlined above, the Commission 
considers that there is a pressing need to make progress, both with regard to 
individual issues and to the broad direction of tax policies. A taxation policy group 
could prove valuable in developing and assessing progress across all these areas. In 
the longer term, it might prepare the way for a general agreement to ensure that 
taxation policies are better geared towards achieving important Union objectives 
while at the same time protecting fiscal bases against harmful tax competition. 
12 
6.19 The Commission invites the Council: 
i) to take note of this report and to draw it to the attention of the European 
Council; 
ii) to devote one of its next sessions to the examination in their globality both of 
existing Commission proposals and of possible future actions; and 
iii) to endorse the taking up of work in the group and to agree on the broad lines of 
its agenda as proposed in this report. 
13 

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