TAXATION IN THE EUROPEAN UNION - REPORT ON THE DEVELOPMENT OF TAX SYSTEMS
Date: 1996-10-22
Institutions: European Commission
Subjects: competition law, environmental tax, single market, tax system, type of business

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 
from 
primary  creators  of  new  wealth  and 
disproportionately high compliance costs. 

jobs,  and  both  can  suffer 

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. 

recommended  by 

4.2  A significant  reduction  in taxes on labour  to promote  employment  (1-2% of  GDP) 
as 
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  Commission 

in 

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 
labour,  particularly  mobile  capital,  some  personal 
production  other 

than 

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 
identified  at  Florence,  namely:  enterprise, 

shared  Community  goals  as 
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. 

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ISSN 0254-1475 

COM(96) 546 final 

DOCUMENTS 

EN 

09 

Catalogue number  :  CB-C0-96-547-EN-C 

ISBN 92-78-10719-0 

Office  for Official  Publications of the European Communities 

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