Implementation of the community Lisbon programme -  Communication from the Commission to the Council and the European Parliament - The Contribution of Taxation and Customs Policies to the Lisbon Strategy
Date: 2005-10-25
Institutions: European Commission
Subjects: EU programme, economic and social cohesion, economic policy, fiscal policy, social policy, tariff policy

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.10.2005 
COM(2005) 532 final 

IMPLEMENTATION OF THE COMMUNITY LISBON PROGRAMME 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

The Contribution of Taxation and Customs Policies to the Lisbon Strategy 

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TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

2. 

A new start for the Lisbon Strategy ............................................................................. 3 

Taxation, efficiency and competitiveness .................................................................... 4 

Customs policy, one of the pillars of the Internal Market............................................ 4 

Making Europe a more attractive place to invest and work......................................... 4 

2.1. 

Extending and deepening the Internal Market ............................................................. 4 

2.1.1.  A Common Consolidated Corporate Tax Base for EU businesses .............................. 5 

2.1.2.  Simplifying the tax environment and creating a level playing field ............................ 6 

2.1.3.  Targeted measures to remove cross-border tax barriers faced by EU firms ................ 8 

2.1.4.  A new strategy for car taxation .................................................................................... 9 

2.1.5.  Reducing distortions created through tax fraud and tax evasion ................................. 9 

2.2. 

Ensuring open and competitive markets inside and outside Europe.......................... 10 

2.2.1.  A strategy against counterfeiting ............................................................................... 10 

2.2.2. 

Improving customs legislation and customs compliance, and promoting eCustoms. 11 

2.3. 

Improving European and national regulation............................................................. 12 

2.3.1.  Modernising VAT rules ............................................................................................. 12 

3. 

Knowledge and innovation for growth ...................................................................... 12 

3.1. 

Increasing and improving investment in Research and Development (R&D)........... 12 

3.1.1.  A Communication providing guidance on R&D tax incentives ................................ 13 

3.2. 

Facilitating the sustainable use of resources .............................................................. 14 

3.2.1.  Energy, transport and environment-related taxes....................................................... 14

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IMPLEMENTATION OF THE COMMUNITY LISBON PROGRAMME 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

The Contribution of Taxation and Customs Policies to the Lisbon Strategy 

1. 

A NEW START FOR THE LISBON STRATEGY 

The Commission has recently proposed a new start for the Lisbon strategy, with the focus on 
growth and jobs.1 In order to meet this challenge, it will be necessary to make Europe a more 
attractive  place  in  which  to  invest  and  work;  to  promote  knowledge  and  innovation;  and  to 
shape policies that allow European businesses to create more and better jobs. 

Taxation  and  customs  policies  have  a  significant  role  to  play  in  the  attainment  of  these 
objectives. They can contribute to raising the efficiency of our economies, including via the 
efficient  use  of  natural  resources,  and  the  competitiveness  of  our  companies.  They  can  also 
generate more competition in the markets, boost trade and support knowledge and innovation. 

This Communication presents the key Community taxation and customs policy measures 
that would contribute to the rapid structural adjustment needed in our economies in order to 
fulfil  the  above  objectives.  In  so  doing,  it  follows  the  lines  of  action  established  in  the 
Communication  to  the  Spring  European  Council:  "Working  together  for  growth  and  jobs,  a 
new start for the Lisbon strategy"2. 

The purpose of this Communication is to set out in a comprehensive manner both ongoing and 
planned customs and tax measures that represent a coherent set of initiatives supporting one 
of the main EU political commitments. 

Section  2  presents  key  actions  aimed  at  deepening  the  internal  market,  ensuring  open  and 
competitive markets and improving European and national legislation. Section 3 presents key 
initiatives to increase and improve investment in research and development and to facilitate 
innovation and the sustainable use of resources. (See the annexed table of policy measures). 
In  the  light  of  their  specific  features,  these  initiatives  will  take  different  form  and  will,  as 
appropriate, be accompanied by an evaluation of their impact. 

These initiatives would help to renew growth and therefore create more and better jobs. As far 
as more specific employment policies are concerned, it should be noted that, at Member State 
level, specific taxation measures can contribute to raising employment and promoting socially 
inclusive economies. Relatively heavy taxation on labour appears to have been a disincentive 
to the creation of additional jobs, especially low skilled jobs; but broadening the tax base by 
getting more people in work is still the most effective way for governments to raise revenues 
without raising tax rates. A shift from labour to consumption and/or pollution taxes could also 
help as part of a broader strategy to increase employment levels. 

1 
2 

Commission, COM(2005) 330 and COM(2005) 24. 
ibid. 

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1.1. 

Taxation, efficiency and competitiveness 

While some degree of tax competition is healthy and can have positive economic effects, the 
main objective of any tax system is to raise a certain amount of revenue in order to finance 
public services and transfers. This should be done as effectively as possible. Tax systems can 
entail costs either in the form of reduced economic efficiency — due to tax distortions — or 
through compliance and administrative burdens on tax payers and tax administrations. 

The existence of different national tax systems in the EU represents a sizeable source of extra 
cost  in  terms  of  administrative  tax  compliance.  This  situation  implies  barriers  to  a  more 
efficient allocation of resources and a lack of a "level playing field"3. In fact, double taxation, 
tax-related business restructuring costs and more general differences between Member States' 
tax rules mean that firms may prefer to operate domestically rather than in another Member 
State. These are significant obstacles to achieving the full benefits of a competitive internal 
market.  The  removal  of  these  barriers  would  help  create  new  opportunities  for  market 
entrants, and the resulting competition would spur investment and innovation. Moreover, the 
reduction  in  costs  associated  with  the  removal  of  these  tax  barriers  would  contribute  to 
enhancing the competitiveness of the EU productive sector. 

Taxation policy could also have a proactive role in boosting knowledge and innovation for 
growth. Research and development as well as the general business environment could benefit 
from  targeted  fiscal  measures.  Taxation  could  also  help  to  promote  environmental  change 
leading to more sustainable patterns of production and consumption. 

1.2. 

Customs policy, one of the pillars of the Internal Market 

Customs policy has an important role to play in boosting trade. The increase in trade volume 
in  recent  years,  along  with  the  complexity  of  the  modern  supply  chain,  security  and  safety 
concerns,  the  number  of  parties  involved  and  the  speed  with  which  goods  are  exchanged, 
greatly increases the requirements concerning trade-related information. 

Simplified  customs  legislation,  streamlined  customs  processes  and  procedures  and  the 
creation of a coherent and interoperable electronic customs system will mean that traders will 
save  money  and  time  in  their  business  transactions  with  customs.  At  the  same  time, 
computerisation  and  interoperability  will  ensure  traceability  of  goods  and  transparency  for 
both customs administrations and the business community. 

2. 

MAKING EUROPE A MORE ATTRACTIVE PLACE TO INVEST AND WORK 

2.1. 

Extending and deepening the Internal Market 

The Lisbon strategy stresses that key reforms are still needed to complete the internal market 
and that these should be given specific attention. The bulk of the action taken by the EU in the 
field  of  taxation  policy  addresses  issues  related  to  the  establishment  and  functioning  of  the 
internal  market.  In  this  context,  it  is  worth  stressing  the  important  contribution  that  the 
Community  Programmes  Customs  2013  and  Fiscalis  20134  will  continue  to  provide  to  the 

3 
4 

See "European Tax survey" (SEC(2004) 1128/2). 
Commission, COM(2005) 111. 

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smooth  functioning  of  the  Internal  Market,  not  least  through  their  funding  of  the  electronic 
interconnection of Member States' informatics systems in the field of customs and taxation. 

At present, several aspects of the functioning of national tax systems have negative effects 
on  market  integration  or  prevent  the  advantages  of  a  single  market  from  being  fully 
exploited.  Moreover,  because  the  current  business  environment  is  more  conducive  to  cross-
border activities than was the case two decades ago, taxation obstacles are now more evident 
as remaining barriers in the internal market. 

The  removal  of  such  obstacles  would  allow  businesses  to  make  sounder  economic  choices 
that are based on the productivity of factors and are less distorted by the influence of certain 
extra costs. This would lead to an increase in the output of the economies of Member States 
and, depending on the conditions of the relevant product markets and the actual behaviour of 
firms, downward pressures on costs and prices. This, in turn, would result in welfare gains.  

2.1.1.  A Common Consolidated Corporate Tax Base for EU businesses 

The  present  co-existence  of  25  different  and  sometimes  even  mutually  incompatible 
corporation  tax  systems  in  the  EU  de  facto  imposes  supplementary  compliance  costs  and 
offers  few  opportunities  for  cross-border  loss  compensation,  even  though  such  loss 
compensation  frequently  exists  for  purely  domestic  situations.  This  should  not  happen  in  a 
truly  single  market.  While  in  their  commercial  activities  (research,  production,  inventories, 
sales, etc.) companies increasingly tend to treat the EU as one single market, they are obliged, 
for tax purposes alone, to segment it into national markets. 

Corporate  tax  rules  treat  cross-border  activities  in  the  EU  differently  and  frequently  less 
favourably  than  similar  purely  domestic  activities.  This  encourages  firms  to  invest 
domestically  and  deters  participation  in  foreign  companies  and  the  establishment  of 
subsidiaries  abroad.  At  the  same  time,  inconsistencies  between  national  systems  open 
possibilities for tax avoidance. 

The Commission policy of working towards a Common Consolidated Corporate Tax Base 
("CCCTB")  dates  back  to  20015  and  was  confirmed  in  20036.  A  CCCTB  would  enable 
companies operating in the internal market to follow the same rules for calculating their tax 
bases  in  different  Member  States  of  the  EU.  The  Commission  does  not  intend  to  propose  a 
harmonised  corporate  income  tax  rate.  However,  a  Common  Consolidated  Corporate  Tax 
Base would permit cross-border offsetting of losses and would solve the current tax problems 
linked  to  cross-border  activities  and  restructuring  of  groups  of  companies.  A  method  for 
sharing the consolidated tax base between Member States so that  each State could apply its 
own  tax  rate  to  its  share  of  the  consolidated  base  would  have  to  be  agreed.  This  method 
should lead to a simpler and more transparent corporate tax system in the EU. 

This  is  a  challenging  exercise,  but  the  Commission  intends  to  carry  out  the  necessary 
preparatory  work  towards  a  Common  Consolidated  Tax  Base  during  the  next  three  years  in 
order to present a Community legislative measure by 2008. 

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Commission, COM(2001) 582 and SEC(2001) 1681. 
Commission, COM(2003) 726. 

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2.1.2. 

Simplifying the tax environment and creating a level playing field  

The measure presented above aims at tackling many of the Corporate tax obstacles faced by 
multinational  companies.  However,  cross-border  economic  activities  in  the  EU  are  also 
confronted  with  a  number  of  other  taxation  measures,  particularly  in  the  VAT  system,  that 
impose  cumbersome  obligations  and  act  as  barriers  to  trade  and  investment.  Cross-border 
activities  lead  to  statistically  significant  increases  in  compliance  costs  for  all  companies7. 
Small  and  medium-sized  enterprises  are  particularly  vulnerable  to  such  obstacles  since 
compliance  costs  are  proportionately  higher  for  SMEs  than  for  large  companies,  and  relief 
from these obstacles could considerably increase SMEs' participation in the internal market, 
that  is  at  present  much  lower  than  that  of  large  companies.  This  results  in  economic 
inefficiencies and a potentially negative impact on economic growth and job creation. 

a) 

VAT compliance obligations 

According  to  the  European  Tax  Survey8,  the  reason  that  14%  of  SMEs  and  10%  of  large 
companies have not carried out economic activities subject to VAT in Member States where 
they  do  not  have  permanent  establishments  is  solely  because  of  VAT  compliance 
requirements.  In  response  to  this,  in  October  2004  the  Commission  presented  a  major 
proposal to simplify current cross-border VAT compliance obligations so as to make life 
easier for traders who supply goods and services to other EU Member States. In particular, the 
proposal  provides  for  a  “one-stop  shop”  system  which  would  allow  traders  to  use  a  single 
VAT number for all supplies throughout the EU and to make a single global VAT declaration 
to  an  electronic  portal,  through  which  the  return  would  be  submitted  automatically  to  the 
different  Member  States  where  the  trader  has  taxable  activities.  The  proposal  contains  five 
other  simplification  measures  that  should  make  it  much  easier  for  businesses,  especially 
SMEs, to trade in other Member States. Discussions are ongoing in the Council. 

b) 

Experimental application of the Home State Taxation approach 

In the context of the Commission's company tax strategy, the concept of Home State Taxation 
was  identified  as  a  possible  solution  for  those tax  issues  which  hamper  SMEs  most  in  their 
cross-border  activities.  Essentially,  the  Home  State  concept  applies  the  internal  market 
approach  of  mutual  recognition  to  the  corporate  tax  treatment  of  SMEs.  Qualifying 
companies  would  apply  the  corporate  tax  rules  of  their  residence  state  to  subsidiaries  and 
permanent  establishments  in  other  participating  Member  States.  This  would  not  imply  any 
harmonisation of rates as these would continue to be set and applied by each Member State. 

The  Commission  is  of  the  opinion  that  this  idea,  which  has  been  developed  in  considerable 
technical  detail,  could  usefully  be  tested  by  allowing  SMEs  to  use  the  approach  on  an 
experimental,  pilot-scheme  basis  for  five  years.  The  Commission  intends  to  present  a 
Communication on this subject before the end of 2005. 

c) 

VAT rules concerning international services 

Tax legislation addresses economic realities and is only efficient if it is continuously adapted 
to new developments and challenges. The fact that more and more services can be supplied 
internationally is a particular challenge. While the EU has been able to react successfully to 

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See "European Tax Survey (SEC(2004) 1128/2). 
SEC(2004) 1128/2.  

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the implications for VAT of e-commerce and the liberalisation of telecommunication services, 
the VAT rules determining the place of supply for other services capable of delivery from a 
remote location need to be changed in a similar way so as to ensure that operators within and 
outside the EU are on an equal footing and so as to guarantee that revenue is allocated to the 
country of consumption.  

The Commission presented a proposal as regards the place of supply for services between 
taxable persons (B2B) in 2003.9 This proposal has recently been amended in order to include 
the review of  the  place  of  supply rules for services from business to consumer (B2C).10 
The amended proposal should, when adopted, ease the VAT burden for businesses supplying 
cross-border  services  to  other  businesses  by  eliminating  additional  VAT  registration 
requirements  and  eliminating  the  need  for  costly  refund  procedures.  It  will  also  help  to 
overcome  distortions  of  competition  caused  by  the  application  of  different  VAT  rates  by 
different Member States (and for which further rate harmonisation is unlikely) and to create a 
level playing field with third country operators. 

d) 

VAT rules concerning financial services 

The  VAT  rules  on  financial  services  date  from  1977  and  provide  a  general  exemption  for 
that sector. This means that VAT paid by financial institutions on their inputs is, in general, 
not  deductible  and  thus  becomes  a  final  cost  for  financial  institutions.  A  cascade  effect  is 
created with the result that the cost of services to business clients is increased. The situation 
may  become  even  more  complicated  when  the  financial  institutions  outsource  part  of  their 
activities and such supplies are made subject to additional VAT. There is good evidence that 
this exemption system is fundamentally inefficient and increases costs.  

There  is  a  need  to  review  these  rules  as  they  are  an  increasing  source  of  tension. 
Furthermore, the rules lend themselves to differences in interpretation at national level. These 
outdated  VAT  measures  are  increasingly  at  odds  with  other  Community  policy  objectives 
such  as  the  Financial  Services  Action  Plan.  Unintended  consequences  of  the  VAT  rules  are 
frequently an impediment to the increased efficiency in the sector which could otherwise be 
expected  as  a  result  of  the  creation  of  a  single  pan-European  marketplace  for  financial 
services.  

The Commission intends, after a broad consultation process with all stakeholders, to present a 
legislative  proposal  to  adapt  the  VAT  financial  services  rules  to  the  evolution  of  the  single 
financial market.  

e) 

Public authorities competing with private business 

The  rules  governing  the  exemptions  of  services  in  the  public  interest  and  the  exclusion  of 
public  bodies from the  scope  of the application of VAT  will also need  modernising. The 
current  rules  are  outdated  and  no  longer  correspond  to  the  economic  reality  of  the  21st 
century, where former monopolies have been subjected to liberalisation processes and broad 
areas of public services have been partially or totally privatised. This is causing distortions of 
competition  and  economic  inefficiencies  and  is  encouraging  tax  avoidance  schemes.  The 
Commission  intends  to  amend  the  current  VAT  rules  by  making  a  proposal  by  the  end  of 

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Commission, COM(2003) 822. 
Commission, COM(2005) 334. 

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2006 to re-establish a level playing field in certain activities in which both public and private 
entities are involved. 

2.1.3.  Targeted measures to remove cross-border tax barriers faced by EU firms 

In  the  area  of  corporate  taxation,  the  Commission  has,  pending  the  implementation  of  the 
CCCTB, identified several targeted solutions aimed at removing single tax barriers. 

a) 

Cross-border loss relief 

The  lack  of  cross-border  loss  relief  tends  to  impact  on  business  decisions  by  inciting 
companies  either  to  invest  domestically  or  to  make  cross-border  investments  in  larger 
Member States, due to the greater likelihood that they already have a tax base there against 
which losses may be set off.  

Whereas  cross-border  losses  within  one  company,  i.e.  losses  of  a  foreign  permanent 
establishment,  may  be  taken  into  account  at  the  level  of  the  head  office  in  most  Member 
States, only a few Member States provide for cross-border setting-off of losses within a group 
of companies, i.e. allowing relief for the losses of a foreign company belonging to the same 
group. It is obvious that such a difference in treatment creates distortions.  

Following  the  withdrawal  of  a  1990  proposal  for  a  directive  dealing  with  this  issue,  the 
Commission  has  commenced  technical  discussions  with  Member  States  with  a  view  to 
presenting  a  Communication  soon  after  the  European  Court  of  Justice  has  delivered  its 
judgement  in  case  C-446/03  (“Marks & Spencer”),  which  should  be  particularly  relevant  in 
this area.  

b) 

Transfer pricing 

The management of transfer pricing is a considerable source of additional compliance costs 
for EU firms.11 The Commission established the EU Joint Transfer Pricing Forum in 2002 in 
order  to  find  pragmatic,  non-legislative  solutions  to  transfer  pricing  problems  in  the  EU.  It 
consists of tax experts from Member States' tax administrations and from the business world. 
Following  the  Forum's  first  report  the  Commission  adopted  a  Communication,  including  a 
proposal for a Code of Conduct for the effective implementation of an Arbitration Convention 
in 2004,12 and the Council agreed to this Code of Conduct last December. 

Following  the  Forum's  second  report  of  May  2005,  the  Commission  intends  this  year  to 
propose  a  Code  of  Conduct  on  a  common  approach  to  transfer  pricing  documentation  for 
associated enterprises in the EU. In addition, the Commission services and Forum members 
are now focusing their attention on alternative procedures for the avoidance and elimination 
of tax disputes. 

c) 

Capital duty 

Certain  indirect  taxes  such  as  capital  duty  (a  levy  on  contributions  of  capital  to  capital 
companies)  are  clearly  detrimental  to  businesses  within  the  EU  and  should  be  abolished  as 
part of the process of making Europe a more attractive place in which to invest. The levying 

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See "European Tax Survey" (SEC(2004) 1128/2). 
Commission, COM(2004) 297. 

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of  capital  duty  is  particularly  damaging  in  connection  with  restructuring  operations  and  the 
development of EU companies. It is also disadvantageous for companies starting up and for 
companies increasing their capital. In recent years, the trend has been towards an elimination 
of capital duty.  This duty is  currently  levied by  just 10  of  the 25 Member States. And from 
next year only 8 Member States will continue to levy it. 

Therefore, the Commission services are now preparing a proposal for a recast of the Capital 
Duty Directive13 before the  end  of  2006. The recast will aim to simplify and modernise the 
legislation  and  to  provide  for  a  phasing  out  of  capital  duty  with  a  view  to  supporting  the 
development of EU companies. 

2.1.4.  A new strategy for car taxation 

The  European  car  market  is  a  good  example  of  a  sector  that  has  not  yet  benefited  fully 
from  the  internal  market,  and  taxation  is  one  of  the  reasons  for  this.  Following  a 
Communication in 200214 and an extensive consultation process, the Commission adopted on 
5 July 2005 a new proposal on passenger car taxation15. This proposal calls for the gradual 
abolition  of  car  registration  taxes  in  Member  States  and  their  replacement  by  annual 
circulation  taxes  or  other  existing  or  innovative  new  taxes.  The  gradual  abolition  of 
registration  taxes  would  reduce  bureaucracy  and  the  high  transactional  costs  faced  by 
consumers. It would also bring about more transparency and legal certainty for all operators 
and reduce existing car price differentials by about one fifth. 

The  proposal  also  aims  to  reduce  the  existing  fragmentation  of  the  EU  car  market,  which 
affects  the  cross-border  car  trade.  At  present,  industry  is  often  obliged  for  tax  reasons  to 
produce  specific  models  with  different  specifications  for  different  Member  States.  The 
proposal would give an impetus to the car industry to benefit from greater economies of scale 
by producing cars for the entire internal market using the same technical specifications. 

2.1.5.  Reducing distortions created through tax fraud and tax evasion  

Tax fraud creates a significant distortion in the functioning of the internal market, prevents 
fair  competition  and  also  erodes  revenues  that  should  be  used  for  the  implementation  of 
public services at national level. Increased levels of fraud result in increased tax burdens on 
legitimate companies as governments are forced to make up their revenue shortfalls.  

The  operation  of  tax  systems  is  and  should  remain  the  competence  of  Member  States. 
Nevertheless, the Commission believes that more common and coordinated approaches could 
help and encourage Member States in the fight against tax fraud. The Commission is therefore 
currently evaluating the need for a new anti-fraud tax policy at European level. A wide range 
of  instruments  could  be  considered,  such  as  improving  cooperation  between  internal 
administrations; reducing obstacles to the effective exchange of information by, for example, 
improving  access  to  bank  information;  promoting  negotiations  with  third  countries  to 
introduce  provisions  for  exchanging  information;  further  developing  the  use  of  intra-
Community administrative cooperation tools; and improving basic tax legislation. 

13 
14 
15 

Council Directive 69/335/EEC of 17 July 1969 as amended. 
Commission, COM(2002) 431. 
Commission, COM(2005) 261. 

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The  Commission  would  ensure  the  necessary  coordination,  in  particular  with  a  view  to 
enhancing  the  administrative  cooperation  tools  available  to  Member  States.  It  intends  to 
present a Communication on this subject in 2006. 

2.2. 

Ensuring open and competitive markets inside and outside Europe 

European companies are facing an increasing number of international challenges. Ensuring a 
level playing field for them within and outside the EU would enhance investment in the EU's 
internal market. Action to improve the international competitiveness of EU firms is therefore 
essential in order to meet the Lisbon agenda. 

2.2.1.  A strategy against counterfeiting 

The industrial and intellectual property rights of EU businesses are being massively violated 
by pirated and counterfeit products. According  to  studies carried out  by the  International 
Chamber of Commerce in 1997 and the OECD in 1998: 

•  Counterfeits accounted for 5 to 7% of world trade 

•  Counterfeits were responsible for the loss of 200 000 jobs in Europe 

Since  that  time  there  has  been  considerable  growth  in  this  traffic.  In  2003  in  Davos, 
Switzerland,  global  business  leaders  and  Government  representatives  called  for  "a  massive 
global effort to combat counterfeiting, now estimated to equal more than 450 billion dollars 
annually". Improving border controls was considered to be of key importance. 

EU customs seizures (more than 100 million articles a year, with a value of over €1 billion) 
have increased by almost 1000% in the last five years. All EU business sectors face increasing 
competition from this illegal and unfair trade. This trade also reduces tax yields and puts at 
risk the safety of citizens. 

Effective  action  to  protect  intellectual  property  rights  is  necessary  if  investment  in 
research and development is to be encouraged and a level playing field inside and outside the 
EU is to be ensured. 

A  coherent  strategy  based  on  practical  measures  to  give  business  low-cost  and  concrete 
support  to  combat  this  threat  calls  for  solid  intervention  at  Community  level.  International 
cooperation will also need to be promoted so as to stop the production and export of fakes in 
source  countries.  Without  this  underpinning  safety  net,  businesses  will  face  an  increasingly 
unfair  struggle  against  new  producing  regions  manufacturing  fakes  on  an  unprecedented 
scale. 

After  having  presented  in  July  a  comprehensive  package  of  criminal  measures  aimed  at 
ensuring  the  enforcement  of  intellectual  property  rights16,  the  Commission  adopted  a 
Communication  in  October  200517  setting  out  concrete  measures  designed  to  increase  the 
protection  that  customs  authorities  can  offer  against  piracy  and  counterfeiting,  namely 
through  an  enhanced  partnership  with  economic  operators  and  an  increased  international 
cooperation with the EU's trading partners.  

16 
17 

Commission, COM(2005)276 
Commission, COM(2005)479 

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2.2.2. 

Improving customs legislation and customs compliance, and promoting eCustoms 

In  the  current  international  business  environment,  simple,  predictable  and  cost-effective 
formalities  for  the  cross-border  movement  of  goods  have  become  central  to  increasing 
trade. 
economic  growth 
Furthermore,  customs  authorities  are  very  well  placed  to  ensure  that  imports  respect 
environmental,  health  and  technical  requirements,  and  that  commercial  policy  measures  are 
efficiently enforced. This part of customs work is crucial to ensuring that 

through  national  or  regional  participation 

international 

in 

* a level playing field is created, maintained or re-established with trade partners, 

* trade-sensitive consumer goods produced in the EC can obtain the full benefits that should 
be associated with their production standards and location, and 

*  defensive  measures,  where  required  to  cushion  necessary  adjustment  in  the  EC,  are 
effective. 

In 2003, the Commission adopted a Communication on a simple and paperless environment 
for  customs  and  trade  and  the  role  of  customs  in  the  integrated  management  of  external 
borders.18  The  latter  sets  out  an  action  plan  for  a  thorough  revision  of  customs  procedures 
including  their  simplification  and  streamlining  in  order  to  make  full  use  of  the  possibilities 
offered by information and communication technologies (ICT). Presentation at the customs is 
a  mandatory  step  in  the  movement  of  goods  across  the  Community's  external  borders.  The 
procedures to be applied significantly influence the role of domestic industry in international 
trade and its contribution to the domestic economy. Effective and efficient clearance of goods 
increases  the  participation  of  domestic  industry  in  the  global  marketplace,  contributes  to  its 
competitiveness,  and  encourages  the  participation  of  small  and  medium-sized  enterprises  in 
international trade while meeting security challenges. Moreover, by streamlining and adapting 
customs legislation, procedures and processes, including common standards for IT systems, a 
modernised  Customs  Code,  combined  with  operational  actions  in  the  Member  States,  will 
contribute to achieving a simple and paperless environment for customs and trade. 

This modernised Customs Code, which will be the subject of a Commission proposal later this 
year, will be the legislative pillar of eCustoms. It will create the legal basis for electronic data 
exchange not only between traders and customs authorities of the Member States' , but also 
with  other  administrations  or  agencies  involved  in  the  international  movement  of  goods,  as 
provided  for  in  Commission  Communication  on  the  role  of  eGovernment  for  Europe's 
future.19  According  to  this  initiative,  traders  will  have  to  deliver  information  only  once  to 
customs  authorities,  ('single  window')  and  the  goods  will  be  controlled  by  these  different 
authorities at the same time and at the same place ('one-stop shop'). 

In order to permit effective and efficient risk management, the customs administrations of all 
Member  States  must  be  able  to  exchange  electronic  information.  This  includes  in  particular 
the exchange of pre-arrival and pre-departure declarations, risk information and information 
concerning  economic  operators.  Therefore,  customs  systems  and  practices  will  need  to  be 
convergent, and the automated customs systems of the Member States and of the Commission 
will need to be synchronised. In addition, traders will need to communicate and carry out their 
business  with  customs  online.  This  should  be  achieved  on  the  basis  of  the  principle  of 

18 
19 

COM(2003) 452. 
Commission, COM(2003) 567. 

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"inclusive  access"  (multi-platform  access),  as  defined  in  the  above-mentioned  Commission 
Communication on the role of e-Government for Europe's future. 

2.3. 

Improving European and national regulation 

2.3.1.  Modernising VAT rules 

Better regulation is an important element of the renewed Lisbon strategy. In the area of VAT, 
the Commission has made  several proposals aimed  at improving the regulatory framework 
so as to remove obstacles to market functioning and to introduce more competition.  

The  basic  VAT  legislation  laid  down  in  the  6th  VAT  Directive  has  undergone  numerous 
modifications  and  has  become  complex  and  difficult  to  understand.  The  Commission  has 
therefore  proposed  a  recast  of  the  6th  VAT  Directive20  in  order  to  provide  clear  EU-level 
rules  for  traders  wishing  to  do  business  in  the  EU.  The  discussions  on  this  proposal  have 
progressed  significantly  in  the  Council  and  will  be  continued  with  a  view  to  its  adoption 
before the end of 2005. 

In  addition,  it  has  becoming  increasingly  apparent  that  there  is  a  need  for  a  more  uniform 
application  of  the  VAT  system  in  order  to  facilitate  the  Community-wide  activities  of 
businesses. In 2004, the Council provided for the possibility of adopting measures to ensure 
the uniform implementation of existing VAT rules21. The first Regulation proposed22 by the 
Commission under this new legal basis has recently been agreed by the Council and will be 
adopted shortly. The Commission considers that a more extensive use of this possibility to 
adopt  binding  secondary  VAT  legislation  at  Community  level  would  go  a  long  way  to 
eliminating 
the  difficulties  encountered  by  businesses  confronted  with  divergent 
interpretations of EU VAT law. 

The need for a more uniform application of VAT rules is particularly evident where different 
interpretations  can  lead  to  double  taxation  (or  conversely  to  non-taxation).  Nevertheless, 
there are also circumstances where cases of double taxation or a requirement for a trader to 
pay VAT on the same transaction in two different Member States may be due to the fact that 
Member  States  have  different  views  of  the  nature  of  a  particular  supply.  This  different 
appreciation  of  facts  can  result  despite  the  Member  States  concerned  having  identical  VAT 
legislation.  The  Commission  will  therefore  make  a  proposal  by  the  end  of  2005  for  an  EU 
mechanism to resolve or at least alleviate such situations of double taxation. 

3. 

KNOWLEDGE AND INNOVATION FOR GROWTH 

3.1. 

Increasing and improving investment in Research and Development (R&D) 

Both  economic  theory  and  empirical  analysis  emphasise  the  key  role  of  R&D  in  economic 
growth. R&D investments typically create spill-over effects whereby the social return of the 
investment  is  higher  than  the  private  return  to  the  company.  Hence,  without  public 
intervention  the  level  of  business  research  would  remain  at  a  sub-optimal  level  and  fail  to 
enhance the full growth potential of the economy.  

20 
21 
22 

COM(2004) 246. 
Directive 2004/7/EEC. 
Commission, COM(2004) 641. 

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Accordingly, various measures designed to promote R&D are included in the Lisbon agenda. 
The Presidency conclusions of the European Council of March 2005 explicitly state that the 
3%  R&D  investment  objective  "will  be  obtained  inter  alia  by  tax  incentives  for  private 
investment….." 

3.1.1.  A Communication providing guidance on R&D tax incentives 

Depending  on  the  economic  background,  the  R&D  capacity  and  the  overall  tax  system  in  a 
given  country,  tax  incentives  can  help  to  address  market  failures  and  increase  business 
research  investment  by  reducing  the  cost  of  R&D.  Fiscal  measures  allow  firms  to  better 
determine  the  appropriate  allocation  of  R&D  investment  across  projects  and  priorities  and 
offer them greater legal and planning certainty. They also allow creating a direct link between 
public incentives  and  increase  in private R&D spending, which is crucial given the average 
lack of private research and innovation in Europe. However, the value of R&D tax incentives 
has to be assessed in the context of the overall tax system. For instance, the level of overall 
corporate tax rates decisively influences the impact of tax incentives in connection with the 
level of business R&D investment. 

In recent years, Member States have introduced a variety of different R&D fiscal incentives or 
have  reinforced  existing  ones.  Over  the  last  two  years,  an  exchange  of  information  among 
Member States on the best practices in this domain has been overseen by CREST as part of 
the  mutual  learning  process  aimed  at  increasing  the  level  of  R&D  investment.  Currently, 
however,  there  is  a  great  diversity  of  R&D  incentives  in  Member  States  which  creates  a 
largely  uncoordinated  situation  at  the  EU  level.  Given  that  Member  States  are  often 
confronted  with  the  same  types  of  challenges,  this  lack  of  coordination  can  results  in  sub-
optimal allocation of public resources and is an obstacle to an EU-wide level playing field.  

A  Communication  providing  guidance  on  R&D  tax  incentives  could  help  to  tackle  this 
relative failure and ideally help Member States jointly develop solutions to common problems 
and  even  devise  mutually  reinforcing  R&D  incentives,  thus  creating  a  favourable  tax 
environment  for  R&D  in  the  EU  research  area.  In  line  with  the  announcement  made  in  its 
State  Aid  Action  Plan,  in  2006  the  Commission  will  review  its  framework  for  State  aid  in 
favour  of  R&D  and  innovation.  In  parallel,  a  Communication  offering  guidance  to  Member 
States  on  how  to  design  and  implement  measures  on  R&D  tax  incentives  in  their  general 
taxation  system  will  be  presented  to  provide  them  in  particular  with  a  clear  view  of  the 
relevant constraints in Community law. 

The Communication will: 

•  set out the key EU legal conditions for Member State R&D tax incentives; 

•  highlight  best  practices  as  regards  R&D  tax  treatment  and  incentives  in  some 

Member States that could serve as a model for other Member States; and 

•  where  appropriate,  set  out  the  political  message  and  main  contents  of  possible 

future initiatives directed to Member States. 

Clearly,  such  a  Communication  will  be  designed  to  help  those  Member  States  who  wish  to 
use tax incentives but would in no way oblige Member States to use them. 

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3.2. 

Facilitating the sustainable use of resources 

Indirect taxation, as a market-based instrument, can play a significant role in the sustainable 
use  of  resources  in  the  European  Union.  Appropriately  designed  excise  duties  or  specific 
environmental charges provide improved price signals by internalising external environmental 
costs,  and  thus  lead  economic  actors  to  change  their  behaviour  accordingly.  Moreover, 
taxation provides incentives to companies to pursue technological innovation to reduce their 
tax  burden.  Energy,  transport  and  environmental  taxes  could  be  used  to  facilitate  such 
sustainable  use  of  resources,  preferably  in  a  coordinated  EU  framework  in  order  to  avoid 
distortions of competition.  

3.2.1.  Energy, transport and environment-related taxes 

The Energy Products Taxation Directive23 has given Member States new scope for using taxes 
in order to facilitate the sustainable use of resources. For instance, it allows tax reductions for 
companies  which  implement  agreements  leading  to  the  achievement  of  environmental 
protection objectives or to improvements in energy efficiency.  

a) 

Taxation of commercial diesel 

This Directive requires amendment, however, in order to tackle the distortion of competition 
on  haulage  markets  created  by  wide  divergences  in  the  levels  of  taxation  of  commercial 
diesel  in  EU  Member  States.  While  the  recent  screening  exercise  relating  to  pending 
legislation has led to the withdrawal of the proposal of 200224 concerning commercial diesel, 
the  Commission  intends,  before  the  end  of  2005,  to  present  a  new  proposal  taking  into 
account  the  comments  made  by  the  European  Parliament,  the  Council  and  operators  during 
the debates on the initial proposal. 

b) 

Energy taxation 

In  addition,  the  Commission  is  considering  whether  to  propose  changes  to  the  Energy  Tax 
Directive to introduce more ambitious environmental targets for energy taxation aimed at 
full  internalisation  of  external  costs.  In  the  2005  Green  Paper  on  Energy  Efficiency25,  the 
Commission  has  stated  that  further  initiatives  need  to  be  considered  with  a  view  to 
strengthening the positive impact of taxation policies in favour of greater energy efficiency. 
These include, for instance, bringing excise rates on energy products and electricity consumed 
in  production  activities  closer  together,  but  at  the  higher  end  of  the  scale,  and  introducing 
automatic indexing of all excise rates. 

c) 

Car taxation 

Moreover,  it  should  be  noted  that  the  newly  adopted  car  tax  proposal  referred  to  in  section 
2.1.4 above also includes provisions for the introduction of a CO2-sensitive element into the 
tax  base  of  Member  States'  car  tax  provisions.  Fiscal  measures  constitute  one  of  the  three 
pillars  of  the  Community  strategy  to  reduce  CO2  emissions  from  passenger  cars.  Their 
optimal use, together with commitments from the car industry and consumer information, is 

23 

24 
25 

Directive  2003/96/EC  (OJ  L283  of  31.10.2003,  p.51),  as  last  amended  by  Directive  2004/75/EC  (OJ 
L157 of 30.04.2004, p.100) 
COM(2002) 410. 
COM(2005) 265. 

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critical  in  achieving  the  Community's  target  of  120  g  CO2  per  km.  The  reduction  in  CO2 
emissions  would  go  hand  in  hand  with  savings  in  the  energy  consumption  of  cars,  which 
would  in  turn  contribute  positively  to  the  efficient  use  of  energy  products  and  the 
sustainability of energy supplies. 

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ANNEX 

Lisbon Strategy: Key Taxation and Custom Policy Measures already adopted or under 
consideration 

Making  Europe  a  more  attractive  place 
to invest and work  

Knowledge and innovation for growth 

1.  Extending  and  deepening  the  internal 
market 

1.  Increasing  and  improving  investment  in 
R&D 

•  A Common Consolidated Corporate 
Tax Base for EU businesses (2008); 

•  A Communication providing 

guidance on R&D tax incentives 
(2006). 

•  Simplifying the tax environment 
and creating a level playing field: 

. 

VAT  compliance  obligation:  one  stop 
taxation, 
shop,  (2004);  home  state 
(2005);  VAT 
international 
services  and  financial  services  (2005), 
(2006); VAT public bodies, (2006); 

rules 

•  Targeted measures to remove cross-
border tax barriers faced by EU 
businesses: 

cross-border loss relief, (2006); transfer 
pricing, (2005); capital duty, (2006); 

•  A new strategy for car taxation 

(2005); 

•  Reducing distortions created 

through tax fraud and tax evasion 
(2006). 

2.  Ensuring  open  and  competitive  markets 
inside and outside Europe 

2.  Facilitating 
resources  

the  sustainable  use  of 

•  A strategy against counterfeiting 

•  Energy, transport and Environment-

• 

(2005); 
Improving customs legislation with 
a view to promoting e-Customs 
(2005). 

related taxes: 

taxation  of  commercial  diesel,  (2005); 
energy  taxation,  (2006);  car  taxation, 
(2005). 

Improving  European  and  national 

3. 
legislation 

•  Modernising VAT rules (2005). 

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