WRITTEN QUESTION P-2463/98

by Ernesto Caccavale (UPE) to the Commission

(23 July 1998)

Subject: Tax relief in southern Italy

The Italian Government asked the Commission for an initial opinion on the possibility of granting tax relief to companies intending to operate in southern Italy. According to numerous reports in the Italian media, Mr Mario Monti and Mr Karel Van Miert, the Members of the Commission instructed to consider the matter, have rejected the idea on the grounds that tax incentives not linked to new investment or job creation might serve merely to boost business, thereby infringing the Community principle of free competition.

In addition, the Members of the Commission apparently maintained that the tax burden could not be eased in southern Italy alone, since the end effect would be to create a kind of tax haven, show gross favouritism to some firms at the expense of others, and, possibly, pave the way for the abolition of taxes in Italy as a whole, where labour is currently taxed much more heavily than in the other Member States.

1. Does the Commission not believe that a tax relief policy confined solely to national level might fuel dangerous pressures to withdraw from the Union and break up the national territory, posing serious geopolitical as well as social risks and undermining the stability of Italy and the entire European continent?

2. Why and under what arrangements has tax relief been granted in regions such as Wales, part of the United Kingdom, which have thus been able to reduce their labour costs accordingly?

3. Why is it admissible to adopt provisions such as area contracts and territorial pacts, which are based on similar principles and create pockets of tax concessions, but are not considered to violate the principle of free competition?

4. Finally, can the Commission say exactly how far the tax system may be used to encourage and secure more appropriate levels of investment in less favoured areas plainly suffering the disadvantages now besetting southern Italy, where the unemployment rate is so high?

Answer given by Mr Van Miert on behalf of the Commission

(11 September 1998)

1. With regard to the question of possible pressures to withdraw from the Union, which might arise from the fact that it is not possible to carry out a tax policy diversified by region, the Commission would point out that, quite apart from evaluations which might be made in the light of Community rules on state aid, all measures concerning business taxation, i.e. not only those concerning certain regions but also those covering the entire national territory, must, in accordance with the code of conduct for business taxation adopted in December 1997, be submitted to the working group set up by the Council to assess whether or not they are "detrimental" to the proper functioning of the internal market. Consequently, it is not possible to say that certain tax measures can be considered compatible with the commitments made by the Member States under the code of conduct simply because they are introduced at national level.

2. The Commission would recall that the limits applicable to regional and tax policies are aimed at the proper functioning of the single market and therefore, ultimately, at achieving the objectives of the Treaty, namely the harmonious and balanced development of economic activities and economic and social cohesion. Consequently, from the point of view of convergence of economic performances, regional problems must be resolved using the instruments - and there are many - available for precisely this purpose, such as the Structural Funds and the national measures which the Commission authorises within the framework of its competition policy to support the development of certain areas.

With regard to existing aid in Wales, the Commission would inform the Honourable Member that this is investment aid in the form of subsidies and equity holdings. There are also several aid schemes (training and business consultancy) for small and medium-sized enterprises (SMEs). The intensity of this aid, which is mostly concentrated in Liverpool and Cardiff, ranges from 20 % to 30 % net.

3. According to information in the Commission's possession, the tax aid for area contracts and territorial pacts is investment aid granted under a scheme approved by the Commission in June 1997. It concerns in particular tax credits granted solely to companies which undertake investment and in proportion to the investment to be undertaken. This aid is compatible with the rules on state aid because it is linked to investment. As regards conformity with the rules laid down by the code of conduct, it has not been examined by the working group as it came into force before the code itself.

4. With regard to tax instruments which may be used to encourage the development of disadvantaged regions, the Commission could consider reductions in direct tax linked to new investment or job creation as being compatible with its policy on state aid.

It should be remembered that these measures should be communicated to the working group set up under the code of conduct since they could be in breach of the code. VAT reductions, on the other hand, are not possible, unless authorised by the Council.