Tax reforms in EU Member States : tax policy challenges for economic growth and fiscal sustainability: 2012 report.
Date: 2012-12-19
Institutions: Directorate-General for Economic and Financial Affairs, Directorate-General for Taxation and Customs Union
Subjects: budgetary resources, public finance, report, tax reform, tax system

European Commission 

Directorate-General for Economic and Financial Affairs 
Directorate General for Taxation and Customs Union

Tax reforms in EU Member States

Tax  policy  challenges  for  economic  growth  and 
fiscal sustainability

2012 Report

EUROPEAN ECONOMY 

6/2012 

ACKNOWLEDGEMENTS

This  report was  prepared  under  the  direction  of  Marco  Buti  (Director-General  of  DG  ECFIN),  Heinz 
Zourek (Director-General of  DG TAXUD), Servaas Deroose (Deputy Director-General of DG  ECFIN), 
Lucio Pench (Director of DG ECFIN) and Philip Kermode (Director of DG TAXUD).

The report was coordinated by Florian Wöhlbier (DG ECFIN) and Doris Prammer (DG TAXUD) under 
the supervision of Gilles Mourre (Head of Unit, DG ECFIN) and Jean-Pierre De Laet (Head of Unit, DG 
TAXUD).  The  main  contributors  were  Serena  Fatica,  Jonas  Jensen,  Asa  Johannesson-Linden,  Gilles 
Mourre, Florian Wöhlbier (DG ECFIN) and Marco Fantini, Mayya Hristova, Zornitsa Kutlina-Dimitrova, 
Gaetan Nicodeme and Doris Prammer (DG TAXUD). 

Special contributions were provided by George-Marian Isbasoiu, Savina Princen, Dario Paternoster (DG 
ECFIN),  Katri  Kosonen  (DG  TAXUD),  Salvador  Barrios,  Jonathan  Pycroft  and  Bert  Saveyn  (JRC 
Seville).

George-Marian Isbasoiu (DG ECFIN) was responsible for layout and IT support. Tamas Gabor Szin (DG 
ECFIN) kindly provided layout support. Secretarial support was provided by Patricia Tuite (DG ECFIN). 
Comments  and  suggestions  by  members  of  the  Economic  Policy  Committee  (EPC)  and  the  Working 
Group  'Structures  of  Taxation  Systems'  are  gratefully  acknowledged.  The  report  benefitted  from 
comments and suggestions by colleagues in the Directorates-General for Economic and Financial Affairs 
and Taxation and Customs Union as well as by other services of the Commission. 

Comments on the report would be gratefully received and should be sent, by mail or e-mail to:

Gilles Mourre

European Commission
Directorate-General for Economic and Financial Affairs
Directorate for Fiscal Policy
Office BU-1 00-147
B-1049 Brussels
e-mail: Functional Mailbox  ECFIN-C3@ec.europa.eu

or

Gaetan Nicodeme

European Commission
Directorate-General Taxation and Customs Union
Directorate for Direct taxation, Tax Coordination, Economic Analysis and Evaluation
Office SPA3 6/017
B-1049 Brussels
e-mail: Functional Mailbox  TAXUD-UNIT-D4@ec.europa.eu

2

ABBREVIATIONS

AETR

AEFC 

AGS 

AW

CGE

CIT

Average effective tax rate

Alternates of the Economic and Financial Committee 

Annual Growth Survey

Average wage

Computable General Equilibrium

Corporate income tax

CCCTB

Common Consolidated Corporate Tax Base

DG ECFIN

Directorate-General Economic and Financial Affairs

DG TAXUD

Directorate-General Taxation and Customs Union

EA

EC

ECB

Euro area

European Commission

European Central Bank

ECOFIN

Economic and Financial Affairs (Council)

EPC

EPP

ESA79

ESA95

EU

EMU

FAT 

FTT

GDP

GHG

GNI

ITR

Economic Policy Committee

Euro Plus Pact

European System of Accounts 1979

European System of Accounts 1995

European Union

European Monetary Union

Financial activity tax

Financial transaction tax

Gross domestic product

Greenhouse gas

Gross national income

Implicit tax rate

JRC-IPTS

Institute  for  Prospective  Technological  Studies  of  the  European  Commission's  Joint 
Research Centre

METR

MCPF

MTO

NMS

NRP

OECD

PIT

pp

SCP

SSC

TFP

VAT

Marginal effective tax rate

Marginal cost of public funds

Medium-term budgetary objective

New Member States

National Reform Programme

Organisation for Economic Cooperation and Development

Personal income tax

percentage points

Stability and Convergence Programme

Social security contributions

Total factor productivity

Value added tax

3

CONTENTS

Editorial

Summary and conclusions

1.

Introduction

2.

Level, structure and trends of tax revenue in the EU

2.1.

Level and development of the overall tax burden

2.2.

Tax composition

3. Recent reforms of tax systems in the EU

3.1. General trends in tax reforms

3.1.1. Overall tax policy direction

3.1.2. The overall structure of taxation

3.2. Main tax reforms in member states

3.2.1. Direct taxation

3.2.2. Social security contributions

3.2.3. Indirect taxation

3.2.4. Taxation of property

3.2.5. Tax administration and tax compliance

3.3. Concluding remarks

9

10

13

17

17

18

23

23

23

23

25

25

28

28

29

31

31

4.

The EU VAT system: economic implications and policy challenges 47

4.1. Choosing between an ‘origin’ and a ‘destination’ system

4.1.1. Issues related with the origin system and merits of the destination system

4.1.2. Dealing with VAT fraud in the current destination system

4.2. General implications of the current vat system on trade

4.2.1. The current VAT system: strengths and weaknesses

4.2.2. Theoretical impacts on the current systems on trade

4.3.

Estimating the impact of cross-border compliance costs

4.4.

Estimating the impact of VAT exemptions on trade neutrality

4.5.

Estimating the cost of exemptions and reduced rates and its distributional benefits

4.6.

Policy conclusions

5.

Tax policy challenges in EU Member States

5.1.

Fiscal consolidation and growth-friendly tax structures

5.1.1. Consolidation on the revenue side

5.1.2. Promoting growth-enhancing tax structures

47

47

49

50

50

50

51

53

54

55

57

58

58

60

5

5.2.

Broadening tax bases

5.2.1. Reviewing tax expenditures in personal and corporate income taxation

5.2.2. Increasing VAT efficiency

5.3.

Improving tax governance

5.3.1. Tax compliance issues: Reviewing available indicators

5.3.2. Quality of tax administration

5.4.

Specific issues

5.4.1. Housing taxation

5.4.2. Environmental taxation

5.4.3. Some redistribution aspects

5.5. Overview of tax policy challenges

References

Glossary

Statistical annex

LIST OF TABLES

3.1.

Tax changes in 2011 and 2012

3.2.

Excise duty changes in 2011 and 2012

3.3. Overview of tax reforms in Member States

5.1.

Sustainability gap and primary balance

5.2. Assessment of 'tax space'

5.3. Overview: fiscal consolidation challenges

5.4.

Tax burden on labour and overall labour market situation

5.5.

Labour market situation of and tax burden on specific groups

5.6.

Indirect and consumption taxes

5.7.

Tax burden on the environment

5.8. Overview: tax structure indicators

5.9.

Reduced corporate income tax rate for small businesses

5.10. Reduced corporate income tax rates and special tax regimes for specific regions and 

sectors

5.11.

Issues in the area of corporate tax expenditures in EU Member States

5.12. ACE, CBIT, thin-capitalisation and earnings-stripping rules in EU Member States

5.13. VAT ‘compliance’ gap

5.14. Size of the shadow economy and undeclared work in the EU Member States

5.15. Use of third party information in Member States

5.16. Overview table of tax administration challenges

5.17. Tax rates on real estate transactions in EU Member States

6

66

67

71

73

74

78

80

81

87

92

97

100

107

111

24

29

36

58

60

60

61

62

63

65

66

67

68

69

70

73

75

79

80

81

5.18. Rules for mortgage interest deductibility for owner-occupied properties in EU Member States

5.19. Summary of challenges in area of environmental taxation

5.20. Overview table: Tax policy challenges in Member States

A.1.

Total taxes (including social security contributions) and tax structure

A.2.

Total taxes (including social security contributions) and tax structure

A.3. Development of implicit tax rates

A.4.

Statutory tax rates

A.5.

Energy tax revenues in relation to final energy consumption

A.6.

The composition of tax wedge in 2011, single average income worker

A.7.

Standard and reduced VAT rates in the EU

A.8. Measures of tax progressivity

LIST OF GRAPHS

2.1. Development of overall tax ratio

2.2. Overall tax-to-GDP ratio (incl. SSC) in the EU

2.3. Dispersion (coefficient of variation) of total taxes

2.4.

Tax composition

2.5.

Tax revenue by type of tax

2.6.

Implicit tax rates

2.7. Decomposition of the implicit tax rate consumption

2.8. Decomposition of the implicit tax rate on labour

2.9.

Implicit tax rate on capital

2.10. Environmental tax revenue

2.11. Breakdown of environmental tax revenue

2.12. Energy tax revenue in relation to final energy consumption (real ITR on energy)

4.1.

Standard VAT rate in EU-27

5.1.

Effective marginal tax rates on debt- and equity-financed new corporate investment

5.2. Actual VAT revenues as a percentage of theoretical revenues at standard rates in 2009 and 

2010

5.3. Administrative cost per net revenue collection

5.4.

Size of tax administrations (total staffing) and number of local branches

5.5.

Use of electronic filing for PIT, CIT and VAT

5.6. Administrative burden of tax systems for a medium-sized company

5.7.

Revenues from property taxes

5.8. Diesel/petrol ratio

5.9. Concentration of market income and disposable income measured by the Gini-coefficient

5.10.

Index of progressivity at the 100% and 167% level of the wage of the average worker (single 

no children)

5.11. Ratio of tax wedge 167% / 67% of the average worker (single, no children)

86

91

97

111

112

113

114

115

116

117

118

17

17

18

18

19

19

19

20

20

20

21

21

49

70

72

78

78

80

80

84

89

92

96

97

7

LIST OF BOXES

1.1.

Importance of taxation in main policy processes

3.1. Determinants of tax reforms

3.2. Assessing the efficiency losses of tax increase in the EU: the case of labour and energy 

taxation

4.1. Commission's Communication on the future of VAT

5.1.

Benchmarking approach to identifying Member States that face a challenge in a particular 

tax policy area

5.2.

Screening principles to identify a potential need for tax-based consolidation

5.3.

Screening principles when identifying a potential need, and room, for a tax shift

5.4.

Selected measures to improve tax compliance and promote efficient tax administration

5.5. Distributional effects of environmental taxation

15

30

32

56

57

59

64

76

95

8

EDITORIAL

Reforming the European economy to ensure that it generates sustainable growth and creates jobs remains 
a key challenge. At present, many Member States face substantial consolidation needs while at the same 
time  have  to  support  ailing  economic  activity  and  employment.  Tax  policies  contribute  to  the 
consolidation of public finances. They also have an important influence on the growth and job potential of 
the EU economy, while promoting social inclusiveness. Given their dual functions, tax policy issues have 
been comprehensively covered in the 2012 cycle of economic policy coordination, commonly referred to 
as the 'European Semester'. 

The 2012 edition of the report ‘Tax reforms in EU Member States’ intends to contribute to the tax policy 
debate  in  the  EU.  Following  the  successful  2011  edition,  the  report  consists  of  two  parts:  i)  a  short 
analysis of tax revenue data and an overview of recent tax reforms in Member States, and ii) a discussion 
of selected up-to-date tax policy topics in the form of two analytical chapters.  

The first analytical chapter focuses on the economic implications and policy challenges of the EU VAT 
system, of which it provides an overview of the history and possible future. It analyses welfare gains and 
economic  benefits  from  simplifying VAT  procedures  and  reviews  options  to  reduce  VAT  fraud  and 
evasion. This chapter is particularly topical in light of two recent Commission Communications on  ‘the 
future of VAT’ and on ‘concrete ways to reinforce the fight against tax fraud and tax evasion including in 
relation to third countries’.

The second analytical chapter deals with economic challenges that EU Member States are facing in the 
field of taxation and tax policy in times of slow growth and high fiscal consolidation needs. Applying an 
indicator-based approach, the report identifies horizontal challenges related to (i) fiscal consolidation on 
the revenue side and growth-friendly tax structures, (ii) broadness of tax bases in both direct and indirect 
taxation,  with  a  particular  focus  on  corporate  tax  expenditure,  (iii)  the  need  to  improve  tax  governance 
and  (iv)  specific  tax  issues,  namely  housing  taxation,  environmental  taxation  and  some  redistributive 
aspects of taxation.  

We  trust  that  the  analysis  in  this  year's  report  will  again  contribute  to  the  tax  policy  debate  in  the 
European  Union.  In  particular,  the  cross-country  consistent  identification  of  tax  challenges  for  all  EU 
Member States, based on indicators, may serve as technical background for the analysis of necessary tax 
policy measures. In line with last years' practice, the tax challenges identified in this report require further 
scrutiny in the framework of the 'European Semester'.

Marco Buti

Director-General
Economic and Financial Affairs

Heinz Zourek

Director-General
Taxation and Customs Union

9

SUMMARY AND CONCLUSIONS

The  first  effects  of  the  global  financial  and  economic  crisis  on  revenue  were  felt  in  2008.  Due  to  the 
strong  contraction  of  GDP  and  expansionary  cuts  in  labour  taxes  and  capital  taxation, the  overall 
tax-to-GDP ratio  reached  its  lowest  value  since  the  beginning  of  the  decade  in  2009. Consolidation-
oriented tax increases and a modest recovery of the  economy  stabilised tax revenue in  2010.  Given the
deterioration of public finances and strong turbulence in sovereign debt markets, fiscal policies in 2011 
and 2012 were generally driven by the need to restore the sustainability of public finances. As far as tax 
policy  is  concerned,  for  most  Member  States  the  need  for  more revenue  to  support  the  overall 
consolidation effort  was compounded by other difficulties stemming  from the  need to support recovery 
and restore sustained growth over the medium and long term. Tax revenue in the EU increased in 2011 
and this upward trend is expected to continue until 2013 at least.

In  the  period  2011–12,  many  Member  States  increased  personal  income  tax,  mainly  by  increasing
statutory rates. This was often done on a temporary basis in the form of general surcharges or solidarity 
contributions for high-income earners. Measures to reduce tax on labour aimed mainly to increase work 
incentives  for  specific  groups.  Social  security  contributions  were also  increased  in  many  countries,  by 
increasing the standard rate  and  the  rates applicable to specific  groups. Several Member States reduced 
their headline tax rate  on corporate  income,  while in a few others  marginal tax rates  were increased by 
means of  surcharges or levies applicable only to the  largest companies. Changes in corporate  tax bases 
were slightly  more  common. They  consisted  mostly  of  generous  tax  relief  on investment  in  physical 
capital or R&D, whilst restricting the deductibility of other items (e.g. operating losses). In about half of 
the Member States standard and reduced VAT rates were increased. Targeted increases in the VAT rates 
applicable  to  specific  categories  of  goods  and/or  services  were  quite common.  Excise  duties  were
increased  in  most Member  States,  mostly  by changing the  statutory  rates  for  environment  and  energy 
products  and  for  alcohol  and  tobacco.  These  reforms  resulted  in  a  slight  change  in  the  composition of 
total tax revenues for 2011 and 2012 compared to 2010, with the share of indirect taxes forecast to rise by 
almost one percentage point of GDP.

Despite  these  reforms,  structural  features  of  European  tax  systems  remain  entrenched.  For  example, 
differences in the tax-to-GDP ratio across the EU are still quite pronounced, with the cross-country range 
standing at twenty points and a higher overall tax-to-GDP ratio in the euro area than in the EU. Following 
a period of cross-country convergence, marked by tax reductions in countries with high taxes, tax-to-GDP
ratios diverged again between 2008 and 2010. This was due to the different degree to which the recession 
affected Member States and the difference in policy reactions to the crisis. There are differences between 
EU Member States both in terms of the overall tax burden  and in terms of its composition. While most 
‘old’ Member States raise roughly equal amounts of revenue from direct taxes, indirect taxes and social 
security contributions, the share of direct taxes in total revenue is lower for Member States that joined the 
EU in or after 2004. This is mostly because they have adopted flat-rate systems.

Some key economic issues related to the legal and institutional features of VAT in the EU, as well as new 
analytical evidence, are presented, broadly based on a recent study by the Institute for Fiscal Studies. This
study served as input into the Commission’s Communication on the future of VAT  issued in December 
2011. The first important policy conclusion is that the long-standing plan of moving to VAT taxation at 
origin,  where  the  goods  are  produced  instead  of  consumed,  is  no  longer  feasible.  It  may  not  even  be 
economically  desirable,  on  account  of  the  loss  of  flexibility  it entails,  the  risk  of  trade  diversion  and 
distortion in the single market and its incompatibility with heterogeneous VAT systems. This disparity is 
seen in terms not only of standard rates but also of reduced rates and exemptions (on different goods and 
with very different rates). The confirmation of the destination principle reinforces the need to tackle VAT 
fraud, in particular VAT carousels  fraud. This requires better coordination between Member  States and 
reflects  the  general  objective  of  combating  tax  fraud  in  the  Annual  Growth  Survey  2012.  Simplifying 
VAT procedures would also bring economic benefits. Recent research shows that trade and GDP  would 
increase in the EU if the number and complexity of VAT procedures were reduced. The second important 
policy conclusion concerns the use of reduced VAT rates and exemptions. These largely account for why 
different VAT regimes may have an impact on trade, despite the use of the less distortionary destination 

10

Summary and conclusions

system. The use of reduced VAT rates and exemptions mostly reflects policy choices made in the past. 
These  were often  linked  to  distributional  objectives.  They  are,  however,  debatable  from  an  economic 
viewpoint,  because  consumption  taxes  are  poor  instruments  for  redistribution.  While  the  part reduced 
VAT rates play in boosting employment or the consumption of merit goods is not supported by empirical 
evidence,  reduced  rates  and  exemptions  generally  have  a  significant  budgetary  cost  and  increase  the 
complexity of the system. The latter increases administrative and compliance costs.  The third important 
conclusion is that new evidence suggests that the differences in VAT regimes, exemptions and reduced 
rates generate high costs in terms of the distortion and fragmentation of the internal market. These costs 
are probably higher than previously believed. This confirms the potential  welfare  gains from increasing 
the efficiency of VAT systems by limiting exemptions and phasing out most reduced rates, subject to a 
careful  cost-benefit analysis,  and  making  use  of  alternative  policy  instruments,  as  recommended  in  the 
Annual Growth Survey 2012.

This report also analyses economic challenges that EU Member States are facing in terms of taxation and 
tax  policy  in  these  times  of  slow  growth  and  great fiscal  consolidation  needs.  This  analysis  may  be 
relevant for the 2013 European Semester, underpinning sound national tax policies to support growth and 
fiscal  sustainability  and  avoid  macroeconomic  imbalances.  This  analysis is  consistent  across  Member 
States  and based on  indicator-based  evidence.  It should  be  completed  with country-specific  evidence 
before drawing firm policy conclusions.

The  analysis  found  that  several EU  Member  States  could,  albeit  to  a different  extent,  consider  using 
revenue measures in addition to expenditure measures to consolidate their public finances and make them 
more sustainable.  Around a third of Member  States appear to have both  need  and  room  for a  tax shift. 
They could benefit from shifting labour taxes to taxes considered less detrimental to growth (consumption 
taxes, recurrent property taxes, environmental taxes). With a view to broadening tax bases, many Member 
States  need  to  review  and  possibly  reduce  tax  expenditure  in  direct  taxation,  especially  in  corporate 
income tax. The debt bias in corporate tax is an issue for almost a third of Member States. Despite recent 
measures to improve VAT efficiency, there is still a compliance gap in this area in many Member States, 
often combined with the large use of exemptions and reduced rates (i.e. VAT ‘policy’ gap).

A  number  of  Member  States  face  the  challenge  of  improving  tax  governance.  This  relates to  a  large 
shadow  economy  and/or  high  levels  of  potential  VAT  fraud  and  evasion  in  some  countries,  or  the 
efficiency of tax administration in others. Better tax administration is a challenge in a  third of Member 
States  due  to  various  factors.  They  are  high  administrative  costs  per  net  revenue  collected,  not  using
third-party information to prefill tax returns, the  little use made of e-filing and the heavy administrative 
burden of tax systems for medium-sized companies.

Housing taxation in EU Member States is often based too much on transaction taxes relative to recurrent 
taxes  on  immovable  property.  Due  to  such  a  situation,  in  particular  a  third  of  Member  States  should 
consider a shift within property taxes. Moreover, several Member States face the challenges to reduce the 
debt bias in housing taxation.

Finally, there are several tax-related challenges related to environmental policy. Firstly, it is important to 
ensure  that  the  policy  instruments  in  place,  including  taxes,  are  sufficient  to  achieve the  agreed 
environmental  objectives.  If  more policy  measures are  needed,  environmental  taxes  should  play  a  role. 
Secondly, energy taxes and other environmental taxes should be designed so that they provide appropriate 
incentives  to  reduce  emissions  over  time.  Various  measures  could  be  implemented at  national  level  to 
improve the tax system, in particular by i) adjusting tax rates on fossil fuels according to their carbon and 
energy  content,  ii)  indexing  environmental  taxes,  iii)  reconsidering  reduced  VAT  rates  on  energy,  iv) 
reducing tax subsidies for company cars and v) introducing CO2-related vehicle taxation. Overall,  there 
appears to be scope for improving the design of their environmental taxes in a third of Member States.

11

European Commission

Tax reforms in EU Member States

While this report mainly  focuses on the potential to improve  the efficiency of national tax systems, the 
redistributive effects of the tax system can be equally important. Redistribution can occur in several ways, 
including through taxation, notably the progressive taxation of labour income. It can also take the form of
income-replacing  transfers,  targeted  benefits,  public  consumption  spending  and  the  provision  of  public 
goods.  Redistribution  through  the  tax-benefit  system  is  the  prerogative  of  Member  States,  which  have 
different  perceptions  of  social  equity  and  different  collective  preferences  for  balancing  efficiency  and
equality.  However,  a  Member  State  that  has substantial  challenges  with  efficiency  in  the  tax-benefit 
system  (e.g.  a  large  amount of  tax  expenditure)  and  does  not  do  well in  terms  of  mitigating  income 
inequalities, may be able to improve efficiency without compromising redistribution policies or increase
redistribution without hampering efficiency. Member States also need to take the sustainability of public 
finances into account when deciding on their redistributive policy.

12

1.

INTRODUCTION

Initial mandate and overall purpose 

In  2009,  the  first  edition  of  the  report  entitled 
‘Monitoring revenue trends and tax reforms in EU 
Member  States’  was  published.
In  the  2011 
edition, the title  was  shortened to ‘Tax reforms in 
EU  Member  States’  for  ease  of  communication 
and to better reflect the content of the report. 

to 

The  report  is  prepared  jointly  by  DG  ECFIN  and 
DG  TAXUD  of  the  European  Commission under 
its  own  initiative. It  includes  comments  provided 
by Member States in the context of the Economic 
Policy  Committee  attached 
the  ECOFIN 
Council  and  DG  TAXUD's  working  group 
'Structures  of  Taxation  Systems'. It  builds  on  a 
substantial body of work done by the Commission 
services,  including  numerous  assessments  of  the 
budgetary implications of tax reforms, analyses of 
their  effects  on  employment,  growth  and  equity 
and of their contribution to meeting environmental 
policy  objectives. (1)  Given  its  focus  on  policy-
relevant  aspects  of  taxation  and  on  recent  tax 
reforms 
fiscal 
having 
report 
sustainability,  growth  and 
complements  the  annual  report  entitled  ‘Taxation 
Trends  in  the  European  Union’  prepared  by  DG 
is more 
TAXUD  and  Eurostat.  That  report
a 
gives
statistical 
descriptive 
comprehensive overview of the level and structure 
of revenue systems in the EU. (2)

bearing 
jobs, 

on 
this

direct 

and 

and 

in 

implemented 

that  have  been 

This report has several purposes. First, it identifies 
how tax revenues in EU Member States have been 
evolving,  as  a  result  of  past  reforms  and  other 
factors, such as the business cycle or the slowdown 
in  potential  growth.  Second,  it  takes  stock  of  tax 
reforms 
the 
Member  States.  Third,  it  reviews  various  policy 
issues  relevant  for  future  reforms,  which  are 
presently  considered  in  the  policy  debate,  such  as 
broadening  the  tax  base  of  certain  taxes  and  thus 
increasing  revenue  or  reducing  harmful  high  tax 
rates.  Other  topical  issues  are  shifting  taxation 
away  from  labour  towards  revenue  sources  both 
more  innovative  and  less  detrimental  to  growth 
and improving the efficiency of tax collection and 
tackling tax evasion. 

in 

by 

e.g. 

using

As  a  first  attempt  to  identify  relevant  tax  policy 
challenges, 
indicator-based 
screenings, the report also represents an analytical 
input  to  the  economic  integrated  surveillance 
carried  out 
the  European 
the  context  of 
Semester,  which  is  presented  in  the  next  section 
and in Box 1.1. This report may in particular feed 
into  or  analytically  underpin the  2013  European 
Semester,  starting  with  the  formulation  of  the 
cross-cutting  issues  reported  in  the  2013  Annual 
Growth  Survey.  Member  States  should  take  these 
issues into account when designing future reforms 
of their national tax systems. 

is also 

intended 

The  report 
to  stimulate  a 
structured,  multi-faceted tax  dialogue  between the 
Commission  and  Member  States.  This has  been 
stressed  as  particularly  important  in  Annex  IV  of 
the  2012  Annual  Growth  Survey  on  'Growth-
friendly  tax  policies  in  Member  States  and  better 
tax coordination in the EU' This will stimulate the 
exchange  of  best  practice  on  tax  reforms  among 
Member  States  and  foster  debates  on  the  role  of 
efficient  tax  policies  for  growth,  employment  and 
social equity. Lastly, the report aims to contribute 
to more  effective  communication  with  the  civil 
society on this topic. 

Greater relevance of tax policies under the 
European Semester

Taxation  is  particularly  important  in  the  current 
economic context in which Member States need to 
speed up consolidation. Many Member States have 
to consider revenue-raising measures,  while at the 
same time trying to maintain still fragile European 
economic growth. 

integrated 

these  glaring  challenges,  a  new 
To 
tackle 
framework  of 
economic  policy 
coordination, the European Semester, was set up in 
the  EU.  This  process  looks  at economic  policies, 
including tax reforms, at Member State level with 
a  view  to  supporting  economic  growth  and  fiscal 
sustainability  (see  Box 1.1  for  a  more  detailed 
description  of  the  European  Semester  and  related 
processes).  It  also  enables  the exchange  of  best 
practices  and  the  definition  of  some  common 
challenges,  e.g.  in  the  area  of  tax  policies,  which 
may benefit all Member States. It provides helpful 
guidance on  how  to  take  common  steps  towards 

(1) See, e.g. European Commission (2008a, 2010a, 2010b).
(2) European Commission (2012a). 

13

European Commission

Tax reforms in EU Member States

job-friendly 

more  sustainable,  growth-and 
tax 
systems,  while  meeting  the  need  for  substantial 
fiscal  consolidation,  removing  distortions 
that
imbalances  and 
to  macroeconomic 
contribute 
keeping their (re)distributional abilities.

to 

At country level, the European Semester agenda is 
the  need  for 
distinct  but  complementary 
strengthened  tax  coordination,  especially  when 
cross-border issues are involved. On the one hand, 
well-coordinated taxation will help to improve the 
efficiency of the Internal Market, given that  some 
remaining  obstacles  stem  from  the  uncoordinated 
tax policies of Member States. On the other hand, 
tax 
the 
can 
implementation  of  national  growth-friendly  tax 
policy strategies, for example when it leads to the 
elimination  of  harmful 
and 
strengthens national tax governance. 

tax  practices 

coordination 

support 

also 

Main trends in tax revenue and tax policy that 
emerge from the European Semester

The Country Specific Recommendations  endorsed 
by  the  European  Council  on  28/29  June  2012, 
adopted  by  the  ECOFIN  Council  on  10  July and 
closing  the  second  European  Semester  highlight 
the  importance  of  further  tax  reforms  that  give 
priority  to  growth-friendly  sources  of  taxation 
while  maintaining  or  raising  total  tax  revenues  to 
help the consolidation process. 

A  review  of 
the  Stability  and  Convergence 
Programmes  shows  that  the  revenue-to-GDP  ratio 
is expected to increase in nearly all Member States
of  the  euro  area in  2012.  It  is  expected  to  remain 
stable  in  the  rest  of  the  euro  area.  The  picture  is 
more  mixed  for  the  non-euro area,  where higher 
and lower revenue ratios are expected in 2012. All 
tax  categories,  indirect
taxation, direct  taxation, 
and  social  security  contributions  are  expected  to 
increase  as a percentage of GDP in the EU in the 
coming years. 

With  regard  to tax  policy  as  outlined  in  the 
Stability  and  Convergence  Programmes,  Member 
States  tend  to  increase  taxes  considered  less 
detrimental  to  growth,  i.e.  consumption  taxes, 
including environmental taxes, and property taxes. 
VAT revenue is increased by raising tax rates and 
broadening  the  tax  base.  Increased  excise  duties 
and  other  indirect  taxes, including  environmental

14

taxes,  are  also  used  frequently  to  raise  additional 
revenue.  If  a  lot  of consolidation  is  needed,  tax 
increases  tend  to  be  applied  also  on  labour  and 
capital  incomes,  although  Member  States  usually 
do  not increase the  corporate  income  tax  in  line 
with  a  growth-friendly  tax  policy  and  possibly  to 
avoid  an  adverse  impact  on  a  mobile  tax  base. 
Distributional concerns appear to often play a role 
in  tax  measures,  as  new  measures  often target 
high-value  properties  or  high-income  earners. 
Many  Member  States  are  trying  to  improve  tax 
governance,  in  particular  by  fighting  tax  evasion 
more efficiently and improving tax administration.

Outline of the report

The report is structured as follows.

Chapter  2  summarises  the  major  developments  in 
tax revenues and revenue composition (by type of 
focuses on 
tax  and  economic 
developments  before  and  since  the  beginning  of 
the economic and financial crisis. 

function). 

It 

Chapter 3 gives an overview of recent tax reforms 
implemented  in  Member  States,  driven  in  many 
cases  by  short-term  consolidation  needs.  Whilst 
relevant for the European Semester, this  keeps the 
promise  made in the 2012 Annual Growth Survey 
to  give  information 'on  the  main  features  of 
national  tax  reforms'.  On  the  basis  of  individual 
country  information,  it  identifies  common  trends 
across  countries,  identifying  the  types  of  reforms 
implemented since the financial crisis began.

Chapter 4 focuses on how the VAT system works, 
reviewing  reform  needs  and  options.  In  most 
Member States, consumption  taxes,  notably  VAT, 
have  greatly  contributed  to  consolidation  on  the 
revenue side. At the same time, the importance of 
a  well-designed  VAT  system,  with  a  view  to 
generating revenues in the  most efficient  way and 
minimising compliance  costs  for  businesses,  has 
been  recognised  in  the  Communication  on  the 
future  of  VAT.  This  section  recalls  the  main 
economic aspects of VAT, and reports on the main 
results of the evaluation of the VAT system.

Chapter  5  looks  at  tax  policy  challenges  in  EU 
Member States. To foster a better understanding of 
Member  States'  tax  systems,  it  updates  last  year's 
analysis of challenges linked to the contribution of 

Box 1.1: Importance of taxation in main policy processes

The European Semester (I): horizontal recommendation including Annual Growth Survey

The Annual Growth Survey for 2012 launched the 2012 European Semester of economic governance. It is 
the basis for  a common understanding about the priorities for action at national and EU level for the next 
twelve  months. It  should  feed  into  national  economic  and  budgetary  decisions putting the  EU  country-
specific recommendations and the commitments made under the Euro Plus Pact (EPP) into practice.

To take better account of the need to integrate tax policy, this year’s Annual Growth Survey contains a new 
annex  on  growth-friendly  tax  policies  in  Member  States  and  better  tax  coordination  in  the  EU.  It is  also 
relevant to the  EPP.  It underlines  that  to  improve  the  contribution  of  revenue  to  fiscal  consolidation,  tax 
systems should be better designed and structured to make them more effective, efficient and fair, taking into 
account  that  Member  States  may  need  to  increase  taxes.  Tax  reforms  are  already  under  way in  many 
Member States. They should take account of the following:

 There  is  scope  for  broadening  the  tax  base  of  certain  taxes, thus  increasing  revenue  or  reducing 
distortively  high  tax  rates.  For  example,  deductions  and  exemptions  from  the  standard  tax  base  often 
create  economic  distortions  and  make the  tax  system less  efficient.  This  is  particularly  the  case  with
VAT exemptions and reduced rates but it also applies to corporate and personal income tax. Phasing out 
some  hidden  tax  subsidies  could  help  to  widen  the  tax  base.  In  particular,  environmentally  harmful 
subsidies should be eliminated.

 Greater  efforts  should  be  made  to  shift  taxation  away  from  labour  towards  taxation  that is  less 
detrimental  to  growth. For  example,  increasing  consumption,  environmental,  wealth  (including  high 
value property) taxation can help alleviate the tax burden on labour. This makes it more attractive to hire 
people. Particular attention should be paid to the needs of the most vulnerable groups in any tax shifts.



In  several  Member  States,  making tax  collection  more  efficient  and  tackling  tax  evasion  can  increase 
government revenue. Applying tax rules in all areas of taxation more effectively will help in this respect. 
Measures  to  encourage  moves  from  informal  or  undeclared  work  to  regular  employment  should  be 
reinforced.

 New  sources  of  national  revenue  such  as  the  auctioning  of  CO2 emission  allowances  and  spectrum 
auctioning will start to become available. They could be used to support expenditure in growth-friendly 
areas, including  green  growth,  given  the  commitment  to  devote  a  substantial  share  of  these  new 
resources to combating climate change.

 To  maximise  the  impact  of  their  tax  reforms,  Member  States  should  coordinate  their  efforts  through 
enhanced  dialogue  at  EU  level.  Progress  should  be  made  on  the  proposals  announced  by  the 
Commission  in  its  last  Annual  Growth  Survey  for  a  common  consolidated  corporate  tax  base,  for  a 
financial transaction tax and for energy taxation – which are now on the table of the European legislator.

The macro-annex of the Annual Growth Survey also said that while expenditure-based consolidation is more 
likely  to  succeed,  the  structure  and  design  of  taxation  should  be  developed  to  better  spur  growth.  In  this 
respect, tax reforms can serve two purposes. Firstly, they can support the consolidation of public finances in 
those Member States where there is room for tax revenue increases and they can be used as a complement to 
expenditure  control. Secondly,  they can  support  growth  by changing the  structure  of  taxation  or  better 
designing individual  types  of  tax,  such  as  taxes designed to improve  the  incentives  to  work,  produce or
invest or to improve resource efficiency.

The  European  Semester  (II):  assessment  of  national  reform  strategies  by  the  Commission  and  the 
Council

The  European  Semester  is  closed  in  June  each  year  with  the  endorsement  of  the  Country Specific 
Recommendations (CSRs) by the Council. The national policy strategy of each Member State is set out in its 
Stability and Convergence Programme (SCP) and in its National Reform Programme (NRP).  The SCP sets 

(Continued on the next page)

1. Introduction

15

European Commission

Tax reforms in EU Member States

Box (continued)

out measures to ensure sound public finances, while the NRP sets out the measures planned to boost growth 
and jobs and address potential macroeconomic imbalances. The Commission assesses the EPP commitments 
of the participating Member States to the extent that they are included in the NRPs.  It provides a detailed 
assessment of the implementation by Member States of the CSRs and the EPP commitments in the country-
by-country  analysis  it  presents  to  the  June  European  Council  each  year  and  proposes  changes  or 
amendments to CSRs based on that analysis.

The Commission’s assessment of EU Member States’ SCPs and NRPs suggests that tax structures should be 
adapted to support growth, while tax increases may complement the control of government expenditure to 
help meet the sizeable consolidation challenges in some Member States. Growth-friendly tax policies should 
aim to broaden tax bases and raise indirect taxation  if necessary,  while  not increasing direct taxation. The 
SCPs  and  NRPs  show  that  Member  States  who have problems  with debt  sustainability  intend  to  increase 
taxes in addition to curbing public spending.  Although in general all taxes  were increased, including SSC 
and  personal  income  tax,  the  emphasis  was  on  indirect  taxes,  resulting  in  a  relative  shift  towards  indirect 
taxation.  This  often  takes  the  form  of  narrowing  the  scope  of  reduced  VAT  rates  and  increasing  excise 
duties,  including  energy  taxes.  New  special  provisions  have  been  introduced  generally  to  support  R&D, 
green innovation or SMEs. Reducing tax loopholes also seems to be a priority in order to broaden tax bases 
and  lower  tax  rates,  thus  supporting  growth  and  fiscal  sustainability.  New  tax  expenditure  should  be 
rigorously reviewed and assessed ex ante and ex post.

Euro Plus Pact

The Euro Plus Pact has been agreed by the Heads of State and Government of the euro area countries and of 
Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. Hungary, the Czech Republic, Sweden and the 
United Kingdom decided not to take part, partly to retain their tax independence. The EPP is embedded in 
the institutional set-up of the EU and consistent with the European Semester. It adds a political impetus to 
the Europe 2020 growth strategy and steps taken to reinforce economic governance in EMU.

It  stipulates  that  labour  tax  reforms  will  be  instrumental  in  increasing  employment  and  highlights  the 
importance of pragmatic tax coordination in the form of structured discussions  on tax issues, the exchange 
of good practice and the adoption of the Commission’s proposal for a common consolidated corporate tax 
base.  In  this  context,  Member  States  undertake ‘to  engage  in  structured  discussions  on  tax  policy  issues, 
notably  to  ensure  the  exchange  of  best  practices,  avoidance  of  harmful  practices  and  proposals  to  fight 
against fraud and tax evasion’.

taxation  to  fiscal  consolidation  and  more  growth-
friendly  tax  structures  as  well  as  the  design  of 
individual 
tax  administration.  All 
Member States are covered, unlike last year, when 
only Member States in the euro area were covered.

taxes  and 

Moreover,  the  chapter  deepens  the  analysis  on 
housing  taxation  and  tax  governance  further.  It 

also provides a  first analysis  of challenges related 
to  additional  areas  of  taxation,  including  tax 
expenditure  in  corporate  taxation,  environmental 
taxation  and  the  redistributive  effects  of  taxation. 
The chapter concludes with a synoptic overview of 
EU  Member  States  that  may  need  to  consider  tax 
policy measures in the different areas analysed.

16

2.

LEVEL, STRUCTURE AND TRENDS OF TAX REVENUE IN THE 

EU

This chapter presents the trends in tax revenue and
the  latest  available  detailed data  for the 27 EU 
Member States. It  provides  an overview of tax
revenue  levels across the EU (Section 2.1) and
information about 
their composition (Section
2.2). (3) 

2.1.

LEVEL AND DEVELOPMENT OF THE 
OVERALL TAX BURDEN

Revenue stabilised in 2010 but picked up in 
2011

For the  first  time  after several  years of declining
tax revenue  and after it  reached the lowest  value
since the  beginning of the  decade in 2009, the 
overall  tax-to-GDP (4) ratio stabilised in 2010.
Compared to 2009 it  remained unchanged in the
EU-27 at 38.4%, decreasing only marginally in the
EA-17 (see Graph 2.1). Despite  the  significant
drop in revenue  since the  global  economic  and
financial  crisis began, in international  terms the
European Union as a  whole is still regarded as an
area with high taxes. (5)  As for trends after 2010,
the Commission's spring 2012 forecast reports that 
general  government  tax revenue  in the  EU-27
increased in 2011 and projects that it will continue
to do so until  2013, when it is forecast  to reach
almost 40% of GDP. (6) This is because tax policy
in 2010–12 was strongly affected by the  response
to the  crisis and weakened public  finances across
most  EU Member States. While  2010 was a
transitional  year with no clear trend for raising or
lowering taxes (7), tax policy measures in 2011 and
2012 were  predominantly focused on increasing
revenue,as detailed in Chapter 3 of this report.

(3) Unless otherwise stated the source for the data up to 2010
in this  chapter
is  European Commission (2012a).
Information from  DG ECFIN's  annual macro-economic
database and the Commission's  spring 2012 forecast were
used to extrapolate some of the time series  for the years
2011-2013.

(4) Unless  otherwise stated, averages  quoted in the report are

GDP-weighted.
(5) See OECD.Stat.
(6) See European Commission (2012b). General government
tax revenue for 2011-2013 includes  voluntary social
security contributions. It does  not include indirect taxes 
levied by national governments  on behalf of the EU
institutions.

(7) See European Commission (2011b).

Graph 2.1:

Development of overall tax ratio, % of GDP,
1995-2013

42

41

41

40

40

39

39

38

38

37

37

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Commission services.

EU

EA

Big differences in tax levels across the EU

Despite  the  high average  level  of taxation in the
EU, tax levels across the Member States vary a lot.
In 2010, the overall tax-to-GDP ratio ranged from
27.1%  in Lithuania to 47.6%  in Denmark (see
Graph 2.2).

Graph 2.2:

Overall tax-to-GDP ratio (incl. SSC) in the EU,
2000/2010, in %

60

50

40

30

20

10

0

DK SE BE FR IT

FI AT NL DE SI HU LU CY UK EE CZ MT ES PL PT EL

IE SK BG LV RO LT

EU EA

2000

2010

Source: Commission services.

Tax levels are in general higher in the EU-15 than
in the NMS-12; the first nine positions in terms of
overall  tax ratio are  indeed occupied by EU-15 
countries. The  exceptions are  Ireland (8), Greece,
Portugal  and Spain whose  tax-to-GDP ratios are 
amongst the lowest in the EU. Consequently, since
most  countries  in the  euro area are EU-15
countries, its overall  tax-to-GDP ratio is slightly
higher than that of the EU-27.

(8) Tax ratios  are usually calculated using GDP as  a base.
Using GNP as  a base would lead to Ireland being much
closer to the average.

17

European Commission

Tax reforms in EU Member States

Convergence of tax-to-GDP ratios since 2000 
interrupted during the crisis

points. However,

there  were  signs

Big differences between national tax levels are not 
new. In 2000, the  gap between the  tax-to-GDP
ratio in the Member State with the highest tax and
the  Member State  with the  lowest  tax was almost
24
of
convergence from 2000 until 2007, as  shown by
the  falling ratio of the  standard deviation and the
mean (see Graph 2.3). The trend came to a halt in
2007/2008 when tax-to-GDP ratios diverged. This
could be  due  to the difference  in the depth of the
recession across the EU  and to the  various policy
reactions to the crisis.

shares of direct  taxes  are recorded in Lithuania
(only 17.4%), Bulgaria (18.8%), Slovakia (19.1%)
and Estonia  (19.9%). All  of these countries have
adopted flat  rate  systems, which usually greatly
reduce direct tax rates. 

Graph 2.4:

Tax composition, 2010

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Graph 2.3:

Dispersion (coefficient of variation) of total taxes,
1995-2010

BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK

EU EA

Indirect taxes

Direct taxes

SSC

Source: Commission services.

25

20

15

10

5

0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

EU

EA

Source: Commission services.
Note: The coefficient of variation is a normalised dispersion measure. It 
is calculated as the standard deviation divided by the mean (both un-
weighted).

All countries, except Italy, whose tax-to-GDP ratio
was above  average  in 2000, reduced it  between
2000 and 2010. Sweden and Finland, two of the
countries  with the  highest  tax-to-GDP ratio in
2000 have  cut  the  tax burden since then by more
than 5 points (see Graph 2.3). The  trend is less
uniform for the group of countries whose tax-to-
GDP ratios were below average tax ratios in 2000.
Only four of them had higher revenues in 2010
than in 2000.

2.2.

TAX COMPOSITION

Diverging tax composition in the EU 

There are differences across the EU not only in the
overall tax level, but also in its composition. While
most EU-15 Member States raise roughly the same
indirect
amount of revenue  from direct  taxes,
taxes,  and social  security contributions, NMS-12
countries, except Malta, usually have fewer direct
taxes  in the  total  (see Graph 2.4). The  lowest 

At the other extreme, the Nordic countries and the
United Kingdom have relatively high shares  of
direct taxes in total tax revenues. In Denmark and,
to a  lesser extent  in Sweden and the  United
Kingdom the share of social security contributions
is low. The  extremely low share  in
(SSCs)
Denmark is due  to the  fact  that most  welfare 
spending is financed out of general  taxation. This
requires high direct tax levels. Indeed the share of
direct taxation in total tax revenues in Denmark is
by far the highest in the EU. With a high share of
SSCs and a relatively low share of direct taxes, the 
German and French tax systems are the opposite of
Denmark’s.

Revenue  raised from the  three major tax bases -
labour and capital- also varies
consumption,
greatly (see Graph 2.5).  On average,
taxes on
labour income amount  to almost  50%  of overall
revenue, followed by consumption at  roughly one
third and capital  at around one  fifth. However,
NMS-12 countries  tend to have a  high share  of
consumption taxes. Apart  from the  fact  that  in
general  a  large  share  of GDP in the  NMS-12 is
final  domestic  consumption, the  lower taxation of
labour in these countries tends to increase the share
of consumption taxation. Also, the  economy of
these countries is generally more  energy-intensive
and mineral  oil  taxes are  an important  part  of
consumption taxes. Revenue  from taxation of
capital  and business income varies  even more.
Some smaller revenue sources, such as the taxation
of stocks of capital/wealth and the taxation of non-
employed labour (essentially pensions and social

18

2. Level, structure and trends of tax revenue in the EU

from significant 

security benefits)
to
range 
negligible. The  latter primarily reflects  the  choice
made  in the  different  Member States to provide
social  benefits and pensions on a  gross or a  net
basis.

Graph 2.5:

Tax revenue by type of tax, 2010, % of GDP

50

45

40

35

30

25

20

15

10

5

0

DK SE BE FR IT

FI AT NL DE SI HU LU CY UK EE CZ MT ES PL PT EL

IE SK BG LV RO LT

EU EA

Consumption

Labour employed

Labour non-employed

Capital and business income

Stocks of capital

Source: Commission services.

27 average  having risen strongly by 1.5 points in
only four years, stands at around 21% in 2012 (see
Table A.7 in Annex 1).

The decomposition of the ITR shows that the VAT
component is the largest, accounting for more than
half of the  overall  indicator's  value  (see Graph
2.7). 

Graph 2.7:

Decomposition of the implicit tax rate consumption,
2010, in %

35%

30%

25%

20%

15%

10%

5%

0%

Consumption taxation

Source: Commission services.

DK SE LU HU NL EE FI SI BG IE AT BE CZ PL DE FR RO MT CY UK LT SK PT LV IT EL ES

EU

VAT component

Energy component

Tobacco and alcohol component

Residual

and

crisis

financial

One  area strongly affected by the  response  to the
economic 
been
consumption taxation. The  implicit  tax rate  (ITR)
on consumption increased sharply in 2010 (19.7%
in the  EU-27) interrupting the downward trend
since 2007 and almost  reaching pre-crisis level
(see Graph 2.6).

has 

Graph 2.6:

Implicit tax rates, EU-27, 1995-2010

38

36

34

32

30

28

26

24

22

20

18

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ITR consumption

ITR labour

ITR capital

Note: ITR on capital: due to data availability the EU average does not 
include BG, LU, MT and RO.
Source: Commission services.

The increase was quite broad across the EU. It can
be  largely attributed to an increase  in VAT rates. 
Stagnant  since 2002, standard VAT rates have 
often increased since 2009. (9) The arithmetic EU-

(9) Only in two cases did the VAT rate decrease. In the United
Kingdom  the rate was  temporarily cut by two points in
2009 to support consumption. In Ireland the rate was 
decreased by half a point
in 2010 after a temporary
increase in 2009. Both countries  are currently applying
higher rates.

However, non-VAT consumption taxes  are  not 
negligible;  their share  in the  ITR ranges  from
in Sweden to 41.4 % in the  United
26.6 % 
Kingdom. On average, taxes on energy (typically
excise duties on mineral oils), tobacco and alcohol
make up around one  quarter of the  revenue  from
consumption taxes. Differences in the consumption
of excisable  goods are  such that  their revenue
effects go well beyond the spread in tax rates: For
example  in  percent of GDP Bulgaria  raises about 
five  times as much revenue as  the  Netherlands
from excise duties on alcohol and tobacco.

Labour taxation

Despite  a  wide  consensus on the  desirability of
lower taxes on labour, the high ITR on labour (10) 
confirms the widespread difficulty of achieving
this aim. Although the  ratio decreased by half a 
percentage  point  in 2009 and is below the  peaks
reached in the  late 1990s, it remained stable  in
2010 at 36% (see Graph 2.6). More than half of the
Member States' ratio increased, but  the  increase
was higher than one point in only six of them (see
Table A.3 in Annex 1).

(10) The ITR on labour (employed) is calculated as the ratio of
taxes and social contributions on employed labour income
to the total compensation of employees and payroll taxes.

19

European Commission

Tax reforms in EU Member States

Graph 2.8:

Decomposition of the implicit tax rate on labour,
2010, in %

2.5. For a  more  detailed discussion see European
Commission (2012a)).

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

IT BE FR AT HU FI CZ SE DE EE NL SI DK ES LV SK LU LT EL PL RO CY IE UK BG PT MT

EU EA

Personal income tax

Employees' SSC

Employers' SSC and payroll taxes

Source: Commission services.

and

taxes

social 

income 

The tax burden on labour is essentially consists of
personal 
security
contributions.
In most  Member States, SSC
account  for a  much greater share  of labour taxes
than personal income tax. On average, about  two
thirds of the overall ITR on labour consists of non-
wage 
and
employers (see Graph 2.8). Only in Denmark,
Ireland and the  United Kingdom is personal 
income  tax a  relatively large  part  of the  total
charges paid on labour income. In countries  such
as  Poland, Greece and Slovakia  less than 20%  of
the ITR on labour consists of personal income tax.

costs paid by employees

labour

Capital taxation 

Graph 2.9:

Implicit tax rate on capital, 2010, in %

40

39

37 37

35 35

30

20

10

0

31 31

30

28 28

24

22

21 20

29

28

18 17

17 16

14

13

09

07 07

DK FR UK SE IT CY PT BE ES FI

AT SI DE PL EL HU CZ SK IE NL EE LV LT

EA EU

Note: No data for BG, LU, MT, RO and IS; data for DK, ES and UK
refer to 2009.
Source: Commission services.

Environmental taxation

Roughly one  euro out  of every 16 in revenue  is
raised from environmental  taxes.  After declining
between 2003 and 2008, the EU-27 average picked
up in 2009 and remained stable in 2010 at 2.4 % of
GDP (see Graph 2.10). At 4.0 % of GDP in 2010,
Denmark and the Netherlands had the highest level 
of ‘green’ taxes followed by Slovenia at 3.6 %. 

Graph 2.10:

Environmental tax revenue, 2000-2010, % of GDP

The ITR on capital (11) has decreased considerably
since 2007. However it stabilised in 2010 when it
reached 28.8 %,  only half a  percentage  point  less
than what it was in 2009 (see Graph 2.9). Cyclical
effects and big cuts in corporate income tax (CIT)
rates  affected the  ITR. However, it  seems likely
that 
broadening measures which
frequently accompanied the rate cuts sustained the
ITR.

tax-base

2.7%

2.6%

2.5%

2.4%

2.3%

2.2%

2.1%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

EA

EU

Source: Commission services.

levied

Environmental taxes are a sub-category of indirect
taxes,  in general consumption taxes. They also
sometimes  include taxes on capital  stock. Energy
taxes,  mainly
fuels,
predominate  in most  Member States. In some,
however, the  contribution of taxes  on transport, 
is also significant. For
other
example, in Denmark, Ireland, Cyprus and Malta
they account  for between 36%  and 44%  of
environmental  taxes. In 2010, revenue  from these

than on fuels,

transport 

on

The  indicator’s levels  differ widely in the  EU,
ranging from 39 %  in Denmark (based on 2009 
data) to a mere 9.1 % in Estonia (see Graph 2.9). A 
breakdown of the  ITR shows  that  in most  cases,
the difference in the tax burden on capital is due to
wide  differences
capital 
stocks/wealth, while  the  ITRs on capital  and
business income  cluster around 20 %  (see  Graph

taxation of

in the 

(11) The ITR on capital is the ratio between taxes on capital and
aggregate capital and savings income. It includes taxes on
the income earned from  savings  and investments  by
households and corporations and taxes on stocks of capital
in previous  periods.  The
from  savings  and investment
denominator of
the
worldwide capital and business  income of residents  for
domestic tax purposes.

the ITR is  an approximation of

20

taxes  amounted to 0.5 %  of GDP in the  EU-27,
while taxes on pollution/resources raised only
0.1 % of GDP (see Graph 2.11).

Graph 2.11:

Breakdown of environmental tax revenue, 2010,
in % of GDP

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

DK NL

SI MT

EE CY

BG

FI

SE UK HU

IT

PL

PT

EL

LV

CZ

LU

AT

IE

DE

BE RO SK

LT

FR ES

EU EA

Energy

Transport

Pollution/Resources

Source: Commission services.

A high ratio of environmental tax revenue to total
taxation or a  high level  in %  of GDP do not
necessarily mean that environmental protection is a
high priority. Originally, taxes  on energy (incl.
fuel) and transport  were  often used to raise 
revenue, without  environmental  purposes.  Tax
revenues  are  a product  of tax rates  and the  tax
base. Hence the  high level of the  indicator can be 
the  result  not  only of high level  of tax rates,  but
also of a high tax base in relation to GDP. This is
an indication of the inefficient use of resources in a
country or of a  very energy-intensive  economy.
The indicator can therefore give a misleading view 
of a country’s environmental policy goals if the tax
base is not thoroughly assessed.

In contrast,  the  indicator ‘ITR on energy’ is not
affected by the size of the tax base. It therefore 
provides a  more  reliable  measure  of the  effective
taxation. 
level  of environmental  (or energy)
However,
some
peculiarities. The  ITR treats all  kinds of energy
consumption in the same  way, regardless of their

indicator

also

this

has

2. Level, structure and trends of tax revenue in the EU

environmental impact. An energy unit  produced
from hydroelectric  power has the  same  weight  as
one produced from coal.
In many countries,
however, renewable  energy sources are  taxed at  a
lower tax rate  than exhaustible  ones, or they are
exempted to provide  incentives  to switch from
fossil  fuels
to more  environmentally-friendly
sources of energy. Thus, paradoxically, a  country
with a large share of renewable energy may have a
lower ITR on energy than a  country that  relies
heavily on carbon-based energy sources.

Graph 2.12:

Energy tax revenue in relation to final energy 
consumption (real ITR on energy), Euro per tonne
of oil equivalent, deflated with cumulative % change
in final demand deflator, 2000-2009

175

170

165

160

155

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

EA average

EU average

Source: Commission services.

Data show that  in real  terms taxation on energy
increased sharply in 2009, breaking the downward
trend from 2002 to 2008 (see Graph 2.12).
Moreover,
the  EU-27  base-weighted average  in
2009 was just above its highest level in 2002. The
real ITR on energy increased in nearly all  EU
Member States, except in Luxemburg, Hungary,
Bulgaria  and Slovakia  where it  remained almost 
unchanged (see Table A.5 in Annex 1). The rise is
probably due  to the  discretionary increase  in the
rates of excise duties on energy products and other
environmental  taxes across the  EU  over the  last
few years.

21

3.

RECENT REFORMS OF TAX SYSTEMS IN THE EU

This  chapter  reviews  tax  reforms  implemented  in 
the 27 EU Member States in 2011 and in the first 
half  of  2012.  Section  3.1  reviews  the  general 
developments across the EU. Section 3.2 describes 
tax  reforms  in  Member  States  in  more  detail, 
looking at each type of tax systematically. Section 
3.3 presents the conclusions  and an assessment of 
the overall trends. 

Reforms  are  sometimes  difficult 
to  achieve 
because  they  create  winners  but  also  losers  and 
have  to  overcome  the  bias  to  maintain  the status 
quo.  Political  economy 
theories  can  help 
understand these stumbling blocks. For this reason, 
Box 3.1 at the end of the chapter provides a short 
analysis  of  political  economy  considerations  and 
determinants of tax reforms. 

3.1. GENERAL TRENDS IN TAX REFORMS

The  financial  and  economic  crisis  that  started  in 
2008  has  resulted  in  a  significant  deterioration  of 
public  finances  across  most  EU  Member  States. 
Consequently,  fiscal  policies  in  2011  and  2012 
have  typically  been  driven  by  the  need  to  bring 
public finances back on a sustainable path.  As  far 
as tax policy is concerned, in most Member States 
the  need  for  tax  revenue  to  make  a  larger 
contribution to the overall consolidation effort has 
been coupled with additional challenges stemming 
from  the  need  to  support  the recovery  and  restore 
sustained  growth  over  the  medium  and  longer 
term. 

to 

In  July  2012,  all  but  six  Member  States  were 
subject 
the  excessive  deficit  procedure 
(EDP). (12)  Most  have  to  correct  their  excessive 
deficits in 2012 or 2013. Against this background, 
the  Stability  and  Convergence 
according 
Programmes 
the  National  Reforms 
and 
Programmes, most Member States expect to make 
a  positive  and  significant  contribution  to  fiscal 
consolidation by taking discretionary tax measures 
in 2012, in addition to cutting public spending. 

to 

(12) In  June  2012,  the  Council  adopted  the  Commission 
recommendations to abrogate the decision on the existence 
of  an  excessive  deficit  in  Germany  and  Bulgaria  (see 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pre
ssdata/en/ecofin/131128.pdf). 

3.1.1. Overall tax policy direction

In  2011  and  2012  tax  policy  has  continued  to  be 
strongly  influenced  by  the  consequences  of  the 
financial and economic crisis broken out at the end 
of 2008 and  the  subsequent  debt  crisis.  2010  saw 
no  clear  overall trend  to  increase or  cut  taxes,  as 
some countries put in place expansionary measures 
and  others  focused  already  on  public  finance 
consolidation.  Nonetheless,  tax  reforms  in  most 
EU  Member  States  in  2011  and  2012  have  more 
clearly responded to the need to consolidate public 
finances, including on the revenue side. 

to 

in  2011.  According 

This  is  reflected  in  the  trend  in  the  overall  tax 
burden  (incl.  SSC).  The  EU-27  average  remained 
stable in 2009 and 2010, as discussed in Chapter 2,
and  is  estimated  to  have  increased  by  around  ½ 
percentage  point 
the 
Commission  spring  forecast,  it  is  foreseen to 
increase  by  around  ¾  percentage  points  in  2012. 
These 
increased 
contribution  of  tax  policy  changes  in  the  yield 
from  discretionary  fiscal  measures.  In  2011, 
measures  on  the  revenue  side  accounted  for 
roughly one third of the total balance correction in 
the 27 Member States (2.2% of GDP). (13) In 2012, 
the impact of discretionary tax measures is forecast 
to  amount  to  0.9%  of  GDP,  against  0.5%  on  the 
expenditure side. 

developments  mirror 

the 

3.1.2. The overall structure of taxation

Table  3.1  gives  an  overview  of  the  general 
direction  of  tax  changes  implemented  in  the EU 
Member States in 2011 and the first half of 2012.

have 

often 

in  order 

rates.  These 

Over  that  period,  many  Member  States  have 
increased  taxes 
to  speed  up  fiscal 
consolidation. Most Member States have increased 
personal  income  tax,  mainly  through  hikes  in 
been 
statutory 
implemented on a temporary basis, and have taken 
the  form  of  general  surcharges  or  solidarity 
contributions  for  high-income  earners (Belgium, 
Greece,  Italy,  Cyprus,  Luxembourg,  Portugal  and 
Spain). At  the  same  time,  measures  reducing  the 
tax burden have been mainly targeted at increasing 
work  incentives  for  specific  groups.  Overall,  the 
net  effect  is  a  more  progressivity  of  the  personal 
income tax schedule. 

(13) See European Commission (2012b). 

23

European Commission

Tax reforms in EU Member States

Social  security contributions have also been
increased in many countries, through hikes both in
the  standard rates (Greece, Latvia, Poland and the 
United Kingdom) and in the rates  applicable  to
specific  groups
(Bulgaria, France, Hungary,
Austria and Portugal). Only Germany has cut  the
general contribution rate to the pension insurance, 
albeit modestly.

Roughly half of the  Member States have  raised
VAT rates,  both the  standard rate  (Portugal, the
United Kingdom, Cyprus,
Ireland, Hungary,
Poland, Slovakia  and Italy) and the  reduced rate 
(Latvia, Poland, France, Bulgaria, Greece and the
Czech Republic). (14) Targeted increases in the
VAT rate  for specific  categories  of goods and/or
services  have  also been relatively frequent.  These 
have been achieved by repealing exemptions (e.g.,
in Cyprus, Belgium, Denmark, Finland) and by
narrowing the  application of the  reduced rates
(e.g., in Greece, Latvia, Portugal and Finland).

Excises duties have been increased in most
Member States, mostly through changes in the
statutory rates, both for environment  and energy
products and for alcohol and tobacco.

Several Member States have reduced their headline
tax rates  on corporate  income  (United Kingdom,
Finland, Slovenia, Greece and the Netherlands). At
the  same  time, however, marginal  tax rates  have 
increased in France, Greece and Portugal by means
of surcharges  or levies applicable  only to the
largest companies. Changes in the bases have been
slightly more  frequent,  mostly focused on more
generous treatment  of investment  expenditure  on
physical capital or R&D, and on restrictions to the
deductibility of other items, such as losses.

All in all, 2011 and 2012 have seen a slight change
in the  composition of total  revenue  compared to
2010. While 2009 saw a  marked drop in the  yield
from direct taxes (from 33.3% to 31.4%) and only
a  small  increase  in that  from indirect  taxation
(from 31.8% to 32.1%), more recently, increases in
the  indirect  tax burden have been coupled with
increased revenue from direct taxation in the EU as

a  whole, although of moderate  magnitude.
In
particular, in 2012, the share of indirect taxes over
the  total  tax burden is forecast  to rise  by 1
percentage point from 32.1% in 2009. At the same
time,
the  share  of direct  taxes  in the  total  tax
revenue  is set  to increase from 31.5%  in 2009 to
32.1% in 2012. (15)

The change in the structure of taxation is generally
associated with strong economic  effects, notably,
in terms of the  reduction of economic  distortions.
As an analytical illustration, Box 3.2 at the end of
the  chapter provides  results of recent  simulations
for the efficiency loss of tax increases in the EU in
the  area of
labour and energy taxation. This
analysis uses  the  concept  of 'marginal  costs of
public  funds' (MCPF)  and is conducted by the 
European Commission's Joint  Research Centre
(JRC-ITPS)  using a CGE model. Generally the
cost is found to be  higher for labour tax increases
than for energy tax increases.

Table 3.1:

Tax changes in 2011 and 2012

Statutory rates

Base or special regimes

Personal 
Income Tax

Corporate 
Income Tax

Social Security
Contributions

Value Added
Tax

Excise Duties

Taxation of 
Property

Increase

Decrease

Increase
Decrease

Increase

Decrease

Increase

Decrease

Increase

Decrease
Increase
Decrease

BE, DK,CY, FI, EL, ES, IE, IT, 
LU*, NL, PT

FI, HU, LV, NL

FR, PT
UK, FI, EL, SI, NL, 

AT, BG, CY, FR, EL, HU, LV, 
PL, PT, UK

DE, IE
PT, UK, CY, ES**, IE, HU, LV, 
PL, SK, IT, FR, BG, EL, CZ

AT, BE, BG,  CY, CZ, DE, EL, 
ES, FI, FR, HU, IE, IT, LT, LU, 
LV, MT, NL, PL, PT, RO, SE, 
SK, SI, UK
SI
CY, EL, ES, IE, PT, UK
NL

AT, BE, CZ*, DK, ES**, FI, FR, 
EL, HU, IE, PL, PT, SK, UK
CZ, DK, EE, FI, DE, ES, HU, IE, 
LV, MT, NL, SE, UK
CZ, AT, BE, DK, ES**, HU
ES, HU, IT, LT, LU, UK

IE, SK

CZ
AT, BE, BG, CY, DK, EL, ES**,
FI,  LV, NL, PL, PT,
CY, EL, ES, IE, LT, PL

DK, EE, LV, PL

 CY, IT, LT, LV

Note: The table encompasses tax changes implemented in 2011 and the
first half of 2012 including temporary but significant changes. Minor
changes are not included. Tax measures are reported individually, and 
not consolidated on the basis of their budgetary impacts. Introduction of
new taxes is listed as an increase in statutory rate. Changes in tax
brackets (thresholds) are considered as base changes.
Solidarity charges levied in: BE on financial income, CY on SSC, EL on
high income, IT on high income, LU temporary, PT and ES all of which
are classified as increases in statutory rate. PIT: In FI and NL labour
income taxation has been decreased while capital income taxation has
been increased.
* temporary increase in 2011. ** measure introduced after the cut-off
date.
Source: Commission services.

(14) Spain raised its  reduced and standard VAT rates,
broadening at the same time the scope of application of the
latter, in the context of the tax reform  approved in July
2012, i.e. after the cut-off date.

(15) The composition of tax revenue can change not only
because of exogenous tax reforms but also for endogenous
factors, e.g. business cycle developments.

24

3.2. MAIN TAX REFORMS IN MEMBER STATES

This  section  presents  the  main  measures  taken  on
direct taxation (personal income tax and corporate 
income  tax),  and  social  security  contributions.  It 
then  details  the  reforms  in  indirect  tax  (VAT  and 
excise  duties).  Measures  on housing  taxation  and 
to combat tax evasion are reviewed in turn. Further 
details  on  tax  reforms  in  each  of  the  27  Member 
States  are  outlined  in  Table  3.3  at  the  end  of  this 
chapter.

3.2.1. Direct taxation

Personal Income Tax

Around  half  of 
the Member  States  have 
implemented  substantial,  albeit  in many  cases 
temporary, changes to personal income tax in 2011
and  2012.  The  need  for  budget  consolidation  has 
resulted  in  marked  increases  in  personal  income 
tax  in  many Member  States,  with  tax  cuts  mainly 
targeting special groups.

Ireland,  France, 

income,  both  from  capital  and 

Most Member  States  have  increased personal 
income  tax (Belgium,  Denmark, Cyprus,  Finland, 
Greece, 
Italy,  Luxembourg, 
Netherlands,  Portugal,  Spain, Slovakia, and  the 
United Kingdom), often by increasing statutory tax 
rates.  In contrast  to 2010, many  tax rate  increases 
are  temporary  and  often  represent  surcharges  on 
high 
labour. 
Belgium,  Greece,  Italy,  Cyprus,  Luxembourg, 
Portugal and Spain introduced solidarity levies, all 
temporary  measures,  except  in  Belgium.  Austria 
announced  that  it  will  bring  in  a  temporary 
progressive 
solidarity  contribution  on  high 
incomes in 2013 (and lower tax allowances for the 
self-employed).  Similar  measures  are  planned  in 
the Czech Republic. 

As  solidarity  contributions  are  levied  on  high 
incomes or increase with the level of income, these 
tax  systems have 
countries' personal 
income 
become  more  progressive.  While 
Italy  and 
Portugal levy surcharges on high incomes, at rates 
of  3%  and  2.5%  respectively (16),  Greece,  Cyprus 
and  Spain  have  increased  taxes  for  all  income 
brackets,  but  progressively. For  2011  only, 
Portugal applied a surcharge of 3.5% to the income 
above  the  minimum  wage. Luxembourg  levied  a 
0.8%  crisis  tax  on  all  income  except  minimum 

(16) The 3% levy in Italy is deductible from PIT base.

3. Recent reforms of tax systems in the EU

wage salary in 2011, and Belgium brought in a 4% 
solidarity  charge  on  financial  income  above  a 
threshold. The Spanish progressive tax schedule on
savings  and  capital  gains  in  three  brackets  is  a 
temporary measure for two years. 

For Member States that have shifted the tax burden 
away from personal income tax,  most tax reforms 
have aimed to increase work incentives. The focus 
has  been  mostly on  participation  incentives  for 
vulnerable groups and generally involved  changes 
in  the  tax  base. Austria  and  the  Netherlands, 
security 
the 
however,  have  cut 
advantages  for  older  workers. Only  Finland  and 
Germany’s  tax  base  measures  lowered  the  tax 
burden for the entire working population. 

tax/social 

Germany, the Czech Republic, Hungary and Malta 
have  introduced  tax  measures  supporting  parents. 
Germany  facilitated tax deductibility  for childcare 
costs,  the  Czech  Republic  and  Hungary  increased 
tax  allowances  for  families  with  children  and  tax 
credits  for  families  with  three  or  more  children, 
respectively,  and  Malta  increased  the  tax  brackets 
for parents with children under 18. 

Tax  reliefs  were  also  granted  to  low  and  medium 
income earners by increasing tax credits and basic 
allowances in Belgium, Finland and Hungary. The 
Netherlands decreased the tax rate in the lowest tax 
bracket  in  2011.  Other  targeted  tax  base  reliefs 
were  given  in  Denmark,  Sweden  and  Spain. 
Denmark  introduced  a  temporary  deduction  for 
wage  expenses 
for  household  services  and 
refurbishment expiring at the end of 2012. Sweden 
raised  basic  income  tax  allowances  for  labour 
income  of  people  older  than  65  and  Spain 
reintroduced the general 15% tax credit for buying 
or  restoring  a 
taxpayer's  primary  residence.
Clearly,  the  Spanish  tax  measures  are  intended  to 
increase  consumption  and  investment,  and  the 
Swedish  initiative  aims  to  increase  life  spent  in 
work  (since  retirement  age  can  be  voluntarily 
postponed from 65 to the age of 67).   

Some measures in Italy and Ireland aim to improve 
tax  compliance  and  enhance  human  capital, 
respectively. In Italy, a lower proportional tax rate 
of  between  19-21% was  introduced  on  rental 
income  from  buildings  for  residential  purposes, 
replacing the inclusion of 85% of rental income in 
the personal income tax base (with a marginal tax 
rate  of  around  30% on  average). To  attract  key 

25

European Commission

Tax reforms in EU Member States

individuals,  Ireland  grants  qualifying  individuals 
from  abroad  an  exemption  from  income  tax  on 
30%  of  their  annual  salary  between  €75000  and 
€500000  if  they  are  employed for  a  minimum of 
one year to a maximum of five years.

The  2011  Hungarian  tax  reform  brought  the 
highest marginal tax rate down from 32% to a 16%
flat rate. However, as the tax base rose to 127% of 
gross  earnings  (in  2010),  the  tax  rate  actually 
corresponds  to  20.3%. In 2012,  the 27%  base-
increasing  component  was  phased  out for  low  to 
medium earnings  below  HUF  202000  (€653), 
roughly the average wage, leading to a system with 
two  rates, 16%  and  20.3%.  Latvia  lowered  the 
general  PIT 
to  25%,  partly 
from  26 
compensating for  the  increase  in  social  security 
contributions.  In  Finland  there  has been  a  slight 
reduction  in  progressivity:  the  top  marginal  tax 
rate  was  cut by  0.25 pp in  2012.  The  United 
Kingdom  announced  that  it  would  cut  its  highest 
PIT rate from 50% to 45% in 2013.

rate 

The  overall  trend towards  steeper  progression  in 
personal  income  tax  could reflect  the  fact  that 
personal  income  tax  is  the  only  tax  that  is  well 
suited  to  redistribute  consumption  power  among 
different  income  groups.  The  increase in  other 
taxes in  response  to  the  need  for  consolidation 
tends to be flat or even regressive.

The  EU-27  (arithmetic)  average  top  personal 
income tax rate increased slightly, by 0.2 pp, in the 
period 2010-2012 from 37.9% to 38.1% (see Table 
A.4  in  Annex  1).  This  development  has  not  been 
steady as the PIT top rate fell in 2011 by 0.3 pp to 
37.6%,  and  then  returned  to  38.1%,  the  highest 
level  since  the  crisis  began  in  2008.  While  the 
decrease  in  2011 was  mainly  the result  of  the 
reform in  Hungary,  where  the  rate  was  halved  to 
20.3% in 2011, the 2012 increase is driven by the 
(temporary) tax increases in Cyprus and Spain.  In 
comparison to 2010, six Member  States  – France, 
Spain,  Italy,  Cyprus,  Luxembourg  and  Portugal  –
increased top rates levied on personal income. The 
largest  increase,  by  more  than  28%,  from  30  in 
2011  to  38.5  in  2012  was in  Cyprus, due  to  the 
introduction of an additional tax bracket with a tax 
rate  of  35% and  a  temporary  surcharge.  The  top 
rate  on  personal  income  increased  significantly  in 
Spain from 43% in 2010 to 52% in 2012. In 2011

the Spanish government introduced two additional 
tax  rates  on  income  above  €120000  and  €175000 
of  44% and  45% respectively.  In  2012, a 
temporary  supplementary  progressive  levy  was 
brought  in,  raising  the  top  personal  income  tax  to
52%.

Concerning  the  taxation  of  capital  income,  recent 
measures  have  typically  increased  the  tax  burden 
on  capital.  In  Austria,  as  from  1  April  2012  a 
withholding  tax  of  25%,
independent  of  the 
holding  period,  applies  to  capital  gains  from 
financial assets. Measures taken in other countries 
mostly  comprise  increases  in  tax  rates,  namely  in 
Belgium,  Cyprus,  Finland,  France, 
Ireland, 
Portugal  and  Spain.  In  Belgium,  the  withholding 
tax  rate  on  interest  and  dividends  increased  from 
15%  to  21%, and  in  Cyprus  the  rate  increased 
permanently  from  10%  to  15%  for  interest  and 
temporarily  for  2  years  from  17%  to  20%  for 
dividends.  In  France,  the  optional  final  levy  on 
dividends and interest  was increased from 18% to 
19%  in  2011, and  21%  and  24%  respectively  in 
2012, whereas  the  mandatory  final  levy  was 
increased  from  18%  to  19%  on  capital  gains.  In 
Ireland taxes on capital and interest were aligned at 
30% in 2012. In Portugal, the tax rate applicable to 
capital  gains  on  the  sale  of  shares  and  other 
securities  was  increased  from  21.5%  in  2011  to 
25% in 2012. Portugal also adopted an increase in 
withholding  tax  from  21.5%  to  25%  on  income 
from  dividends, 
interest  and  other  forms  of 
remuneration  on  shareholders’ loans  and  share 
capital.

Two  countries,  Finland  and  Spain  rendered  their 
capital  taxation  more  progressive.  In  Finland, the 
tax  rate  on  capital  income  increased  from  28%  to 
30%  and  for  income  exceeding  €50000  to  32% 
from  2012.  As  of  2012,  Spain  taxes savings  and 
capital  gains  separately  under  a  progressive  tax 
schedule  with  three  brackets  of  21%  on  the  first 
€6000,  25%  up  to  €24000,  and  27%  on  income 
above that (in 2011, they were taxed at 19% on the 
first  €6000,  and  21%  on  income  above) from    
2012-2013.

Several  countries  introduced  measures  to  broaden 
the tax base, often by reducing tax expenditures. In 
particular, this was done through measures related 
to  housing  taxation  (although  on  personal  capital

26

income). In the Netherlands, a new top bracket was 
introduced  in  the  imputed  income  for  owner-
occupied  housing,  increasing  the  imputed  income 
for  the share of  the  value  in  excess  of  €1  million 
from 0.55% in 2009 to 1.05% in 2011 As a result,
it is slightly closer to the 4% imputed income that 
applies 
tax 
to  other  assets.  In  Finland, 
deductibility  of  mortgage  interest  rate  payments 
will be gradually cut to 85% in 2012, 80% in 2013 
and 75% in 2014. In Spain, the housing investment 
deduction  in  personal  income  tax, which  was 
incomes  above  €24 170,  was 
removed 
reintroduced for all primary residences in 2012.

the 

for 

Corporate Income Tax

The  long-term  trend  to  cut  the  statutory  rates 
across  the  EU  has  continued,  albeit  at  a  slower 
pace, as most Member States have left the headline 
rates  unchanged 
in  2011-2012,  with  some 
exceptions. 

The  United  Kingdom  cut
the  small  profits 
corporate  tax rate by  1  point  to  20%,  and  the 
headline rate  in two  steps to  24%, 4 points below 
the  2010  level.  Further  reductions  in  the  rate  are 
planned  to  bring  it  to  23%  in  2013  and  22%  in 
2014. Finland also cut its corporate income tax rate 
from 26 to 24.5%. In Greece, the statutory rate was 
cut from 25% in 2009 to 24% in 2010 and 20% for 
income  earned  as  of  2011.  At  the  same  time,  as 
from  2009  and  until  2014,  Greece  applies  a 
temporary special contribution at progressive rates 
for  enterprises  with  a  net  income  above  €100000. 
Slovenia  cut  the  statutory  rate  from  20%  to  18%, 
and plans to cut it further progressively to 15% in 
2015.  In  the  Netherlands, the  rate  applicable  to 
profit  in  excess  of  €200000 was  cut  by  half  a 
percentage point to 25%. 

income 

France  and  Portugal  introduced  surcharges  to  the 
in  2012.  France 
tax  rate 
corporate 
introduced  a 
surcharge  on 
temporary  5% 
companies  with  (group)  gross  income  exceeding 
€250  million,  while  in  Portugal  the  surcharge  on 
the  state  corporate  income  tax  (IRC)  is  levied  at 
3% on income between €1.5 and 10 million and at 
5% above that. At the same time, the reduced CIT 
rate of 12.5% was abolished. 

Overall, the average top corporate  income tax  fell 
in  the  EU-27  in  the  period  2010-2012  by  0.2  pp 
from  23.7%  in  2010  to  23.5%  in  2012.  In  this

3. Recent reforms of tax systems in the EU

the 

top  CIT 

period  only  two  Member  States  – France  and 
Portugal  – increased 
through 
surcharges while four countries – Greece, Finland, 
Netherlands  and  the  United  Kingdom  cut  the  top 
rate  (Table  A.4  in  Annex  1  provides  an  overview 
of the  statutory  top  corporate  income  tax  rates  in 
2012 compared to previous years). 

Several Member States have made changes to their 
tax  base.  The  United  Kingdom  and  Slovenia 
introduced  measures 
incentivise  corporate 
to 
investment.  Slovenia  increased  the  allowance  for 
investment  in  equipment  and  intangible  assets  to 
40%  (previously  30%) and raised  the  relief  for 
investment  in  research  and  development  from  40 
to  100%. Similarly,  in  the  United  Kingdom  the 
SME tax relief rate for investment was increased in 
stages  to  225%  as  of April  2012.  In  addition,  a
special regime  introducing a  reduced 10% rate  on 
corporate  profits  attributed  to  patents  and  other 
types of intellectual property  (Patent Box)  will be 
phased  in  over  five  years  as  from  April  2013.  At 
the  same  time,  an  'Above  the  Line'  (ATL)  credit 
for R&D with a minimum rate of 9.1% before tax 
In  March 2012,  Spain 
will  be 
introduced several base-broadening measures such 
as the deferral of tax benefits for goodwill arising 
from  acquisitions  and  business 
restructuring 
operations,  a  permanent  limit  to  the  deductibility 
of interest expenses, lower limits to the deductions 
aimed  at  promoting  certain  activities  (e.g.  R&D), 
limits to the ‘free depreciation’ regime (introduced 
in 2010).

introduced.

Restrictions  to  the  favourable  tax  treatment  of 
losses  have  been introduced in  Austria (limited to 
cross-border  losses),  Denmark  and  France,  where 
upper  limits  were  set  to  the  amount  that  can  be 
overall  carried  forward,  or  utilised  annually, 
respectively. Similar limitations were introduced in 
Spain  for  larger  companies  in  2012,  while  in  the 
previous  year  the  carry-forward  period  had  been 
extended from 15 to 18 years.

Some  countries  have  reduced  the  tax  burden  on 
corporate profits by enlarging the scope of special 
regimes. In Hungary, the threshold for the reduced 
10%  rate  was  increased  tenfold  to  HUF  500 
million  (€1.8  million).  Lithuania  and  Spain  also 
increased the maximum annual threshold to qualify 
for  the  simplified  taxation  regime  for  small 
companies.

27

European Commission

Tax reforms in EU Member States

3.2.2. Social security contributions

In  contrast  with  2010,  when  social  security 
contributions  remained  virtually  unchanged  in 
most Member States  - only Bulgaria and Hungary 
implemented cuts – significant changes were made 
in  2011  and  even  more  in  2012.  The  changes 
mainly take the form of increases. Almost always, 
the  increase  was  achieved  by  rate  hikes,  both  for 
general and for targeted groups. The standard rate 
increased  in  Greece,  Latvia,  and  the  United 
Kingdom.  Special  items  of  the  social  security 
contributions,  which  effectively  also  increase  the 
overall  social  security  contribution  rate,  were 
raised  in  Bulgaria  for  pension  contributions,  in 
France 
in 
Hungary  for  health  insurance,  and  in  Poland  for 
disability contributions. Increases for special types 
of  employees  were  brought  in  in  Austria  for 
farmers, 
old-age 
self-employed 
unemployed and in Portugal for civil servants.

(investment) 

for  passive 

income, 

and 

the 

to 

the 

Cyprus  and  Slovakia  brought  in  increases  via 
amendments 
tax  base.  In Cyprus  a 
contribution  of  3%  on  gross  earnings  of  current 
government employees to the government pension 
schemes  was  introduced,  and  in  Slovakia,  taxable 
non-monetary  benefits  provided  to  employees 
were  also  made  subject  to  social  security  and 
health  insurance  contributions.  In  most  of  the 
Member States where social security contributions 
were  increased,  this  increased  the  tax  burden  on 
labour as they were not compensated by decreases 
in the PIT, except in Latvia. 

The  only  exception  was  Germany,  which  reduced 
the  contribution  to  pension  insurance  from  19.9% 
to  19.6%  from  1  January  2012.  France  plans  to 
increase SSC on passive income. Belgium brought 
in  tax  relief  in  the  employer  social  security 
contribution for the first three employees hired by 
medium-sized  enterprises  in  order  to  address  the 
rigid labour market.

3.2.3.

Indirect taxation

VAT

In line with the trends over the previous biennium, 
between  2011  and  2012,  many  Member  States 
increased the standard VAT rate. In Portugal, as of 
January 2011 the standard rate was increased by a

increased 

two-step  hike  to  23%,  3  points  above  its  level  in 
June  2010.  Following  the  temporary  reduction  to 
15%  in  2009,  the  United  Kingdom  raised  the 
standard rate from 17.5% to 20% in January 2011. 
In  2012  Cyprus  and  Ireland 
their 
standard  rates  by  2  percentage  points  to  17%  and 
23%,  respectively.  The  two-point  hike  in  January 
2012 brought the standard rate to 27% in Hungary, 
the highest level in the EU, and 7 points above the 
level before the July 2009 increase. Increases by 1 
point  were  also  made  in  Latvia,  Poland,  Slovakia 
and  Italy  in  2011.  (17) In  Italy  an  additional  two-
point  hike  to  23%  will  take  effect  in  October 
2012. (18) (19) 

This implies a progressive increase in the average 
standard  VAT  in  EU-27 from 19.8%  in  2009  to 
21%  in  2012  (See  Table  A.7  in  Annex  1). Over 
2010-2012,  almost  half  the  Member  States  raised 
the standard and/or reduced rate to raise revenue.

Reduced rates were increased in several countries, 
such  as  Latvia,  Poland,  France  (excluding  some 
goods  and  services  still  taxed  at  the  previous 
level), Bulgaria (where reduced rates apply only to 
tourist services) and Greece, with a parallel sizable 
increase  in  the  standard  rate  made  in  2010.  In 
2012, the reduced rate  in the Czech  Republic  was 
raised from 10 to 14%. 

Increases  in  the  VAT  base  were  achieved  by 
repealing  exemptions  (for  instance,  in  Cyprus, 
Belgium,  Denmark,  Finland)  and  by  reducing  the 
scope  of  application  of  existing  reduced  rates 
(notably, 
in  Greece  Latvia  and  Portugal). 
Interestingly,  in  Finland,  the  application  of  the 
reduced  rate  to  labour-intensive  services  was 
abolished. 

In  Hungary  and  Denmark,  the  increase  in  the 
statutory VAT rate  and base broadening  measures 
were adopted in the context of broader reforms that 
aim to shift the fiscal burden away from labour and 
capital towards consumption. In the other Member 
States, the  increases  were  brought  in  to  increase 
overall tax revenue. 

(17) Latvia  brought  the  standard  rate  back  to  21%  from  July 

2012.

(18) This  measure  is  approved  unless  the  general Spending 
it  unnecessary  by  generating 

Review  reform  makes 
expenditures saving.

(19) In July 2012, Spain increased the standard rate by 3 pp to 

28

21% as of September 2012.

3. Recent reforms of tax systems in the EU

Several Member States have implemented targeted
– and in some cases temporary – reductions in the
tax burden to specific  goods and services by
moving them to the lowest rates (Belgium, Cyprus,
Greece, Spain and Sweden). These  changes  were,
in most of these Member States, justified not only
on distributional  grounds
(reduced rates  on
necessities such as food or on merit goods thought
to be under consumed), but also by concerns on the
economic  developments in specific  sectors (e.g.
construction). (20)

Excise duties

In 2011 and 2012, a number of excise  duty rates
were  significantly increased in most  Member
States, with the  only decrease  in fuel excises
implemented in Slovenia. In several  of the  new 
Member States, excise  duties on transport  fuels,
electricity, tobacco and alcohol  have  been raised
considerably, although in many instances from a
low level close  to the  EU minimum before  the
hikes implemented in 2010.

Excise  duties  on energy and other environmental
taxes were increased in many Member States.
Germany introduced a tax on nuclear fuel. Austria
and Germany introduced a duty on airline  tickets
for planes leaving from domestic  airports. Air
passenger duty was also increased in the  United
Kingdom. In Finland, energy taxation has been
restructured to take into account the energy content
and CO2-emissions of energy products.  Ireland
introduced a  tax on CO2-emissions and Slovakia
introduced a  tax on ETS  quotas  allocated free of
charge. In line  with the  Energy Directive, Poland
abolished the exemption on coal, lignite and coke. 
Latvia re-introduced excises on natural gas in 2011
and widened the  tax base  by including certain
lubricating oil groups in 2012.

Several countries have implemented changes to the
taxation of cars. Austria, Belgium and the
Netherlands have  increased the  CO2-incentives in
car registration tax. In 2011 Latvia  changed the
structure  of the  vehicle  operation tax,  at  the  same
time 
tax burden on luxury,
environmentally unfriendly and powerful  cars. In
Romania, a pollution tax was introduced on both

increasing the 

(20) Reduced VAT rates  are generally not the most efficient

way of redistributing income.

new and second-hand vehicles produced locally or
abroad on their first registration.

France,

Excise  duties on tobacco and/or alcohol were
increased in Belgium, Cyprus, Czech Republic,
Estonia,
Finland, Hungary, Latvia,
Lithuania, Luxembourg, Malta, the  Netherlands,
Poland, Portugal, Romania, Slovenia, Spain and
the  United Kingdom. Concerning other health-
related products, Finland introduced an excise duty
on sweets and ice cream, while in France a specific
contribution was 
introduced on suppliers of
beverages (sodas) with added sugar or sweeteners.
Latvia’s excise  duty rate  on sweetened non-
alcoholic drinks was increased by 30%.

Table  3.2 summarises the tax changes  in excise
duties across Member States and breaks down the
overview from Table 3.1 into two main excise duty
categories. 

Table 3.2:

Excise duty changes in 2011 and 2012

Base or special
regimes

DK, EE, LV, PL

Statutory rates

AT, BG, FI, DE, EL, 
ES, HU, IE, IT, LV, 
LT, MT, NL, PT, RO, 
SK, UK
SI
 AT, BE, CY, CZ, DE, 
EE, ES, FI, FR, HU, 
LV, LT, LU, NL, PL, 
PT, RO, SE, SK, SI, 
UK

Energy &
Environment

Increase

Decrease

Tobacco, Alcohol
and Sugar etc.

Increase

Decrease

Note: See note to Table 3.1.
Source: Commission services.

3.2.4. Taxation of property

increases 

Only a  few Member States implemented tax
reforms in the  domain of property taxation. In
particular,
taxes  were
in recurrent 
brought
in in Greece, Italy, Latvia, Lithuania,
Portugal  and Spain. Greece introduced a  special 
real  estate  duty on residential property, calculated
on the  surface  area of buildings, also taking into
account its age and location. The duty is collected
through the  payment  of electricity bills.
In
addition, the  tax-free bracket  of the  progressive
real  estate  tax introduced in 2010 was halved to
€200000. Italy abolished the exemption on main
residences granted by the  property tax and raised
cadastral values by 60%. This is expected to yield
0.7% of GDP in extra revenue. Latvia doubled its
residential  buildings and
progressive rates  for

29

European Commission

Tax reforms in EU Member States

Box 3.1: Determinants of tax reforms

Tax  systems  are  amended  relatively  frequently.  While  the  recent  reforms  are  clearly  influenced  by  the 
general economic conditions, one interesting question is whether political or social factors also play a role in 
tax policy.

The political economy of tax policy has investigated why tax systems are as they are and why they are going 
towards  specific  structures.  For  instance,  reviewing  the  UK,  Alt  et  al.  (2011)  highlight  a  decline  in 
preferences  for  redistribution  that  materialised  in  cuts  in  statutory  rates.  They  also  identify  hysteresis 
features  in  terms  of favourable  tax  treatments  (e.g.  R&D  tax  credits,  mortgage  interest  tax  relief,  married 
couple allowances, etc.),even if these measures do not tend to be lobbied for in the first place. The authors 
also note a low level of information in the electorate on the effects of tax and interaction between different 
types of tax. These features are echoed by Castanheira and Valenduc (2006). They find that many features of 
the Belgian tax system (e.g. reduced corporate tax rates, the favourable taxation of financial instruments or 
the  financial  sector,  or  the  tax  treatment  of  couples)  benefit  from  the  status  quo  due  to  political 
considerations. A third example is Profeta (2007), who argues that the 2007 reform of bequest taxes in Italy 
was driven by political considerations.

A  second  strand  of  the  economic  literature  focuses  on  the  levels  of  various  taxes,  in  particular  those  on 
corporations. By estimating tax reaction functions, the seminal work of Devereux, Lockwood and Redoano 
(2008)  shows  interdependence  in  the  setting  of  corporate  tax  rates in  Europe.  However,  the  empirical 
approach does not allow one to distinguish between reasons relating to tax competition (defined as the wish 
to attract a mobile tax base) or other reasons. In fact, Slemrod (2004) finds that tax systems tend to converge 
because  the  features  of  economies  tend  to  converge.  Alternatively,  according  to the  yardstick  competition 
argument  (Besley  and  Case,  1995),  countries  would  actually  mimic  each  other  for  political  reasons.  The 
influence of political and institutional factors seems to be particularly relevant as they appear to be strong 
determinants of corporate tax rates (Gérard and Ruiz, 2009).

This  feature  is  also  strong  in  a  third  strand  of  the  literature  that  tries  to  identify  the  determinants  of  tax 
reforms. In a recent article, Castanheira et al. (2012) take the political economy arguments to the data. They 
find  that  political  competition  (expressed  for  example as  a  large  number  of  parties  in  the  governing 
coalition) increase the likelihood of tax reforms, that targeted reforms tend to gradually overcome the status 
quo bias and that reforms may be easier to implement for governments that are perceived less as pro-reform. 
In their empirical test, economic variables, unlike political ones, have little predictive power — besides the 
finding that governments tend to reform more in good than in bad times. The time period covered in their 
study (2000–2007) may however not reflect the current policy stance. It is an open question whether crisis 
periods produce more, and better, reforms.

broadened  the  base  of  the  real  estate  tax  by 
including  auxiliary  buildings,  parking  slots  and 
houses and lands owned by religious organisations 
but  not  used  for  a  religious  purpose.  Base-
broadening  measures  were  also  introduced  in 
Lithuania,  where  the  annual  tax  now  applies  to 
immovable property owned by individuals and not
used for commercial purposes (previously exempt) 
at  a  1%  rate  on  values  above  LTL  1000000 
(€290000).  Portugal  increased  the  minimum  and 
the  maximum rates of the real estate tax on urban 
property by 0.1 pp. Spain introduced for 2012 and 
2013  a  temporary  surcharge  in  the Real  Estate

Tax (municipal tax) for immovable properties with 
an  updated cadastral value over the average  value 
in each municipality. 

The  Netherlands  and 
the  United  Kingdom 
amended  their  property  transaction  taxes.  The 
Dutch  cut  the  property  transfer  tax  for  owner-
occupied  dwellings  from  6%  to  2%.  The  United
Kingdom introduced a 7% rate of the Stamp  Duty 
Land Tax (increased to 15% if the buyer is a non-
natural  person)  applicable  to  the  purchase  of 
residential  property  with  a  value  above  GBP  2 
million (€2.5 million).

30

3. Recent reforms of tax systems in the EU

taxpayer  office,  improving  the  procedure  for
handling  tax  appeals  in  the  judicial  system  and 
implementing a strategic plan to combat fraud and 
evasion. 

income  based  on 

Italy implemented reforms addressing tax evasion, 
such  as lowering  of  the  threshold  for electronic 
‘income-meter’
the  so–called 
payments  and 
estimating individuals’
the 
expenses.  In  January  2012,  Slovakia  launched  the 
project  UNITAS  project,  which  aims  to  unify
revenue  collection  (taxes  and  customs)  into  a 
single  institution,  the  Financial  Administration 
(FA).  The  reform  ultimately  aims  to  reduce 
administrative  and  compliance  costs  and  tackle 
fraud  and  tax  avoidance. Measures  to  combat tax 
evasion  have  also  been  implemented in  Hungary. 
These  include  allowing  unannounced  audits  and 
increasing penalties.

Denmark has locked further fields on the tax return 
for editing by the taxpayer where the coverage and 
quality of third party information is high.

3.3. CONCLUDING REMARKS

3.2.5. Tax administration and tax compliance

the 

that 

relevant 

and  ensure 

Improving  the  efficiency  of  tax  collection  and 
tackling  tax  evasion  can  increase  government 
redistributive 
revenue
properties  of  the  tax  system  functions.  This  is 
particularly 
fiscal 
consolidation,  also  with  a  view  to  enhancing  the
social  acceptability  of  tax  hikes  by  creating  a 
perception of a fairer distribution of the adjustment 
burden.  Measures  to  combat  tax  evasion  and 
improve  revenue  collection  were  introduced  in 
several Member States.

times 

of 

in 

contributions 

At  the  end  of  2011,  the  Czech  Republic  passed  a 
bill aimed at introducing gradually a one-stop-shop 
for all taxes, duties, and social security and health 
insurance 
(Integrated  Revenue 
Agency). The first stage envisaged the creation of 
a  Financial  Office  administered  by  the  newly 
established  General  Financial  Directorate,  and 
tax 
the 
action 
administration. 
already 
Other 
implemented  include  the  introduction  of  a  stricter 
penalty  system,  and  measures  to  combat  VAT 
fraud and evasion. 

layers  of 
measures 

reduce 

the 

to 

Between the  end  of  2011  and  2012,  Latvia 
introduced new measures to fight VAT fraud in the 
fields of construction and scrap metal, and several 
legislative measures in 2012 under the Action Plan 
to Combat the Shadow Economy and Promote Fair 
Competition.  Moreover,  the  Law  on  Individual 
Declaration  of  Property  and  Reporting  of 
Undeclared  Income,  effective  from  March  2012, 
makes it possible to legalise previously undeclared 
taxable income and aims to improve oversight over 
an individual’s financial position, in particular the 
accuracy of expenses incurred and the payment of 
taxes and the legality of derived income.

tax  evasion.  Among 

As  part  of  their adjustment  programmes,  Greece 
and Portugal have planned a number of initiatives 
aimed at strengthening revenue administration and 
fighting 
those  already 
implemented in Greece are: merging of smaller tax 
offices  and  consolidation  of  key 
functions, 
introduction  of  performance-based  contracts  for 
auditors,  establishment  of  a  large  taxpayer  unit. 
Portugal is proceeding with a merge of the Tax and 
Customs  Authority,  putting  in  place  a  large

for 

the  need 

influenced  by 

Reforms undertaken in 2011 and 2012 have clearly 
been 
fiscal 
consolidation,  more  so  than  in  2010.  Overall,  this 
has led to an increase in personal income taxes in 
many Member States. Social security contributions 
have  also  been 
increased,  while 
frequently 
reductions  typically  target  specific  groups.  In  the 
taxation  of  corporate  income,  rate  changes  have 
not  been  frequent:  while  headline  rates  have  been 
cut  in  some  countries,  a  few  Member  States  have 
introduced  surcharges  on  large  companies.  In  the 
domain of indirect taxation, there has been a clear 
tax 
towards 
generalised 
burden, 
rates 
form  both  of  higher 
in 
(particularly  for  excise  duties)  and  broader  tax 
bases.  Only  a  minority  of  countries  has  increased
property  tax  to  secure  additional  revenue  in  a 
growth-friendly  manner.  Action  to  combat  tax
evasion  and  enhance  the  functioning  of  the  tax 
administration  is being  taken  in  an  increasing 
number of Member States. Overall, 2011 and 2012
have  seen  a  slight  change  in  the  composition  of 
total tax revenue,  with  an increase of the share of 
both  indirect  and  direct  taxes  over  total  revenue, 
albeit only slightly for direct taxation.

trend 
the 

increasing 

the 

31

European Commission

Tax reforms in EU Member States

Box 3.2: Assessing the efficiency losses of tax increase in the EU: the case of labour and 
energy taxation

Introduction

The appropriateness of a given tax increase must be gauged on the efficiency loss associated  with it, i.e. its 
deadweight  loss  (Feldstein,  1997).  Minimising  the  economic  distortions  caused  by  tax  measures,  given  the 
extra  revenues  generated,  is  particularly  important  at  a  time  when  both  fiscal  consolidation  and  long-term 
growth are pressing policy issues in most EU Member States.

The efficiency loss associated  with tax increases depends on the behavioural responses of economic agents 
which affect the tax bases.  An appropriate metric  for gauging such loss should compare the economic cost 
and the extra revenue for a given tax increase. One such metric is the so-called marginal cost of public funds 
(MCF),  which  is  defined  as  the  ratio  between  the  change  in  consumer  surplus  and  the  extra  tax  revenue 
obtained  from  a  given  (marginal)  tax  rate  increase.  This  indicator  is  widely  used  in  the  public  economics 
literature for the  evaluation of tax reforms and public spending programmes (Dahlby, 2008).  The available 
evidence  based  on  this  measure  suggests  that  the  efficiency  loss  of  tax  hikes  varies  widely  across  tax 
categories  and  countries,  increasing  with  the  level  of  the  total  tax  burden  in  the  economy  (Devarajan  and 
Robinson,  2002;  Dahlby  and  Ferede,  2011).  In  addition,  structural  rigidities  in  the  labour  market  may 
magnify  the  distortionary  effect  of  tax  reforms  via  the  behavioural  response  of  economic  agents  (Nickell, 
1997).

The results presented hereinafter are drawn from Saveyn et al. (2012), who measured the marginal cost of tax 
increases in the EU with the computable general equilibrium model GEM-E3. The model is calibrated using 
social  accounting  matrices  derived  from  Eurostat  national  account  data.  Thus,  the  tax  rates  used  in  the 
simulations  reflect  the  actual  effective  tax  rates in  each  Member  State,  which  could  be  seen  as  a  good 
description of national tax systems. (1) The simulations focus on labour and energy taxes. The results support 
the  well-established  view  that  a  revenue-neutral  shift  from  labour  to  environmental  taxes  would  increase 
consumer welfare (particularly by reducing GHG emissions) and favour job creation. Moreover, the success 
of such tax shifting policy crucially depends on the starting level of the tax burden, the actual tax structure 
and rigidities in the labour market, which ultimately affect behavioural responses.(2)

The efficiency losses of tax increases in the EU: results for energy and labour taxes

Using a  CGE  model  it  is  possible  to  capture  the  overall  effects  of  a  given  tax  increase  and  interactions 
between agents and markets in the economy. The MCF can be calculated using the following formula:

MCF

,
ki







W

,
ki
TR
i

(1)

where  ΔWi,k is  the  welfare  loss  due  to  the  increase  of  tax  k in  country  i and  is  calculated  as  the  change  in 
consumer  utility. (3) It  could be  seen  as  the  reduction  in  consumption  relative  to  a benchmark  of  no-policy 
change,  with  prices  and  incomes  remaining  fixed  at  their  ‘no-policy-change’ benchmark  level after  the  tax 
increase  under  consideration.  This  technically  corresponds  to  the  ‘equivalent  variation’.  The  term  ΔTRi in 
equation (1) represents the corresponding change in tax collection in country  i (including all tax revenues). 
The MCF therefore provides a metric for the loss in welfare (the efficiency loss) per unit of tax revenue gain. 
If the MCF equals one, then the tax is merely a lump-sum transfer from households to government with no 
distortion. Typically, however, the MCF is greater than one, so that MCF =1+α, with α>0 representing the 

(1)   For more details on the GEM-E3 model see European Commission (2011b) and www.GEM-E3.net.
(2)  Other conditioning factors discussed in Saveyn et al. (2012) include the degree of substitutability between domestic 
and  foreign  goods  (i.e.  representing  the  degree  of  foreign  competition)  and  the  potential  cross-country  spillovers 
associated with tax increases. These additional results are not discussed here, however.

(3)   The indirect utility function is used in order to give a monetary value.

(Continued on the next page)

32

3. Recent reforms of tax systems in the EU

Box (continued)

cost of the distortion. This means that for every euro that goes into the government’s purse, the economy pays 
an efficiency cost of α euros. The higher the MCF, the larger the distortive cost vs the tax revenue gains. The
results presented here provide estimations of the MCF for a marginal increase (0.05 pp) of the effective tax
rate in 2005. In the case of labour, the tax increase affects total social security contribution. Personal income
taxation remains unchanged. The energy tax considered is energy tax for households per petajoule of energy
(which is  the measure commonly used to express energy consumption by large customer  groups,  such as
countries). It  is  important to note  that  the environmental  benefits  of lower  CO2-emissions  (which are
modelled in GEM-E3) following higher energy taxes are not taken into account in the utility functions, so that 
the results  are driven by the traditional price and income effects  for  the bundle  of goods consumed by the
representative consumer. Likewise, it is assumed that the additional tax revenues generated are allocated to
the rest  of the world (i.e. outside the EU), instead of being used to finance policy objectives  such as  an
increase in public expenditure, a subsidy or repayment of public debt.

Table 1:

The Marginal cost of public funds in the EU: labour and energy taxation

EU average
Standard deviation / average

Labour tax
1.9
17.38%

Energy tax
1.08
22.21%

Note: EU averages are calculated using GDP level in 2005 as weight.
Source: Saveyn et al. (2012).

Table 1 provides the results of the value of the MCF for the EU (using the weighted average of individual
country figures) for labour and energy taxes respectively. It shows that the efficiency loss related to a labour 
tax increase is 1.9. This means that for each euro of extra labour tax revenue raised, the efficiency loss for the
economy as a whole is 90 cents. In this case the efficiency loss is therefore more or less the same as the extra 
tax revenue raised. Energy taxation appears to be much less distortionary. The efficiency loss associated with
one extra euro of revenues obtained using this tax instrument amounts to 8 cents on average for the EU, i.e.
roughly ten times lower than for labour tax. These first results would suggest that for a given target of extra
tax revenue, an increase in the tax rate on energy is more desirable than an increase in labour taxation. This
implies  that, from a revenue neutral  perspective, shifting the tax burden from labour  to energy would
minimise the resulting economic distortions,  as  already found in the literature (OECD,  2006;  Aldy et  al.,
2008).

Looking more closely at country-specific results, the general message still holds: energy tax hikes potentially
have a lower efficiency cost than labour tax increases. Figure 1 shows the cross-country dispersion of results
for labour  and energy taxes respectively (it should be noted that the two graphs have very different scales,
which reflects the systematically higher  value of the MCF for  labour  taxation). Graph 1 also shows  that
countries where the relevant tax burden is already high tend to have higher MCF, independently of the tax
category considered, a result which is also in line with the literature on MCF, see Dahlby (2008).

(Continued on the next page)

33

European Commission

Tax reforms in EU Member States

Box (continued)

Graph 1:

The marginal cost of public funds vs tax burden in the EU: the cross-country dispersion

MCF Labour vs. Labour tax (SSC) in % GDP

MCF Energy vs. Energy tax revenues in % GDP

3.00

2.50

2.00

1.50

1.00

0.50

s
d
n
u
F
c

i
l

b
u
P

f
o

l

i

a
n
g
r
a
M

0.00

0.00

0.05

0.10
Social security contribution (% GDP)

0.15

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00

s
d
n
u
F
c
i
l

b
u
P

f
o
t
s
o
C

i

l
a
n
g
r
a
M

0.20

0

0.005

0.01

0.015
Energy tax (consumption) in % GDP

0.02

0.025

0.03

Source: Saveyn et al. (2012).

A comparison of the level of distortion for energy and labour tax and their weights as a share of GDP shows
that, generally speaking, lower  MCF for  energy taxes  combined with a lower  tax burden offers  greater 
potential for further tax increases in order to minimise related distortionary effects (see Graph 2). It should
also be borne in mind that the extra tax revenue obtained from a given increase might differ, depending on
existing levels of taxation according to the traditional Laffer-curve argument.

Graph 2:

The marginal cost of public funds vs. tax burden for labour and energy taxes in the EU (% of GDP)

Labour taxes ▲
Energy taxes ●

f
o
s
d
n
u
f
c
i
l

b
u
p
f
o
t
s
o
c
l
a
n
g
r
a
M

i

s
e
x
a
t
y
g
r
e
n
e
d
n
a
s
e
x
a
t

r
u
o
b
a
l

3.00

2.50

2.00

1.50

1.00

0.50

0.00

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

Labour taxes (SSC) and energy taxes (households consumption) in % GDP

Source: Saveyn et al. (2012).

Structural rigidities tend to magnify the efficiency losses of tax increases

Beyond the existing level  of tax burden, the impact  of tax increases  can also depend on the underlying
economic structure, and on market rigidities in particular. The latter are especially relevant when considering
labour markets  in view of wide-ranging regulation and institutional  arrangements  (Pissarides,  1998). The
degree of labour market flexibility reflects the extent to which a change in prices resulting from a tax increase
affects the wage setting. In the model used here, the labour market is modelled as in Shapiro/Stiglitz (1984),
where workers benefit from a wage premium which firms are obliged to pay to induce employees not to shirk.
As a result, effective labour supply is determined by efficiency wages. The balancing of labour demand with
the effective, rather  than the potential, labour supply implies  that  the equilibrium rate  of unemployment  is 
determined as  the difference between potential  and effective labour. These assumptions are validated
empirically by the observed negative correlation between wages and unemployment levels, see Blanchflower 
and Oswald (1994).

(Continued on the next page)

34

 
 
 
 
 
 
 
 
 
 
 
 
3. Recent reforms of tax systems in the EU

Box (continued)

In principle  a high degree of labour  market  flexibility (i.e. low  wage premium)  should lead workers  to
experience a lower  level  of welfare loss as  a result of a change of a specific  tax rate.  A  low degree of 
flexibility would instead result in higher welfare loss as wages adjust less to the lower labour demand. The
results  presented are therefore intended more to illustrate  the change in the value of the MCF on average
across EU  countries  rather  than  to show whether  the country-specific  degrees  of ‘flexibility’ are correctly
reflected in the model. Table  2 below provides  the EU  average estimates of the MCF for  the two tax
categories considered here and for  the cases  of  relatively high and low labour  market  flexibility (vs.  a
benchmark case where the degree of flexibility in the labour market  lies  between these two opposite
scenarios).

The results show that the degree of labour market rigidities can have a non-trivial impact on the marginal cost 
of public funds. The MCF increases by 33.7 % (from 1.90 to 2.54) and 4.7 % (from 1.08 to 1.13) for labour
and energy tax respectively when labour markets  are less  flexible, and decrease by 13.7 % and 3.7 % 
respectively when labour market flexibility is high. Although these results should be interpreted with caution,
given the highly stylised assumption regarding the magnitude of the change in the degree of labour market 
rigidities, they are indicative of the direction of the changes  in the efficiency losses  related to a given tax
increase when labour  market  rigidities are altered. This  result illustrates the potential  complementarity
between structural reforms aimed at lowering market rigidities and fiscal objectives.

Table 2:

The Marginal cost of public funds and labour market flexibility in the EU

Low flexibility of labour market
High flexibility of labour market
Benchmark case

Source: Saveyn et al. (2012).

Labour tax
2.54
1.64
1.9

Energy tax
1.13
1.04
1.08

35

European Commission

Tax reforms in EU Member States

Table 3.3:

Overview of tax reforms in Member States

Austria
Personal income tax increase. From 2011, capital income tax rates and rates for private trusts were harmonised at 25% and the holding 
period, after which realised speculative capital gains were tax exempt, was abolished. Capital gains on shares, bonds and deposits are now 
subject to a final 25% withholding tax [0.08% of GDP]. The single earner's allowance is only granted if child support has been received.
The stability law from April 2012 contains several revenue-raising measures. They include a temporary progressive solidarity contribution 
for high income earners (from approximately € 186 000) on their holiday and Christmas pay (in force from 1 January 2013), and reducing 
the state premium on building saving and (third pillar) pension saving (in force from April 2012). To reflect PIT changes tax free earnings 
(Gewinnfreibetrag) have also been reduced. 
VAT increase. From September 2012, there are restrictions to deductibility and reclaiming of input VAT for premises.
Corporate income tax increase. From 2013 the deductibility for losses made in foreign subsidiaries is restricted in group taxation.
Excise duty increase. In 2011, the excise duty on petrol was increased by € 40 /1000 litres and on diesel by € 50 /1000 litres (€ 20/tonne 
of CO2) [0.16% of GDP]. Other environmental tax measures include a flight tax and a higher car registration tax depending on the CO2 
emissions of the vehicles. Excise duties on tobacco were significantly increased in three stages, in January and June 2011 and in January 
2012. From 1 January 2013 mineral oil tax reimbursement for agriculture and public transport is abolished.
Social  security  contribution  increase. From  May  2012,  social security contribution  rates  for  farmers  and  the  self-employed  were 
increased. The ceiling for the SSC base will again be increased in 2013. Unemployment contributions will be levied on formerly exempt 
older workers (from 59 onwards) until they reach the legal minimum retirement age. Employers terminating an employment contract will 
be subject to a processing fee.
Other tax increases. A bank levy based on the balance sheet total (excluding own capital and secured deposits) was introduced in 2011.  it 
ranges from 0% for banks with balance sheets of up to € 1 billion to 0,055% up to € 20 billion and 0.085% above that [0.1% of GDP]. 
Derivatives trading will be taxed on 0.013% of its volume. Under the stability law, capital gains from rezoning of land property will be 
taxed and the 10-year holding period, after which realised gains from real estate sales are tax exempt, is abolished. An additional stability 
surcharge on banks and an advance tax payment on certain company pensions have been introduced in 2012.

Belgium

Personal income tax increase. With effect from 1 January 2012, the withholding tax on interest and dividends rose from 15% to 21%. An 
additional levy of 4% was introduced on the share of qualifying financial income exceeding € 20020 [0.2% of GDP]. PIT tax expenditure 
cuts include the abolishment of federal subsidies for environmentally-friendly cars and most of energy saving investments, which might 
only partly be replaced by regional subsidies. The base for taxation of company cars (catalogue value) was broadened for the  user of the 
car. Moreover, company car taxation takes into account car-specific CO2 emission levels. From January 2012, the taxable benefit in kind 
for non-quoted stock options was increased from 15% to 18%.
Corporate income tax increase. In line with the 2012 budget the cap for the notional interest deduction  is reduced to 3% from tax year 
2013 [0.4% of GDP]. The new base for company car taxation (catalogue value) also affects the company (with a new component in the tax 
base). Stricter thin capitalisation rules, lowering the maximum threshold for the tax deductibility of interest expenses, were introduced. 
The possibility of carrying forward the excess notional interest deduction will be abolished from tax year 2013. 
VAT increase. From 1 January 2012 the VAT on digital television was increased from 12% to 21%. Notary and bailiff fees were made 
subject to the standard VAT rate [0.5% of GDP]. 
Excise duty increase. From January 2012, excises on tobacco were increased [0.04% of GDP]. 
Other tax increase. From 1 January 2012, stock exchange stamp duty rose by 30% and another increase is scheduled from mid-2012.

Bulgaria

Social security contribution increase. The state pension contribution rate was increased from 16% to 17.8% in 2011. 
VAT increase. From April 2011 the reduced VAT rate on travel services was increased from 7% to 9%. 
Excise  duty  increase. From 1  January  2012  the  excise  duties  on diesel,  natural  gas  (used  for  transport  purposes)  and  kerosene  were
increased. In June 2012, an excise duty on natural heating gas used by the businesses was introduced. [0.1% of GDP]

Cyprus
Personal income tax increases. In August 2011, an additional tax bracket with a top rate of 35% for personal income over € 60000 was 
introduced, with effect from 1 January 2011. The tax rate on deemed and accrued dividend distribution was increased from 17% to 20% 
for a period of two years [0.1% of GDP]. The defence contribution on interest payments on deposits in local banks was  also increased
from 10% to 15%. In  August 2011 a temporary special contribution to strengthen public finances was introduced.  It is levied on gross 
wages  at  progressive  rates  for  24  months,  starting  on  1  September  2011  for  public  sector  employees.  This  special  contribution  was 
extended  to  private  sector  employees  and  pensioners.  The  rates  for  public  and  private  sector  employees  were  set  at  2.5% for  income 
between € 2 501 to € 3 500, 3% for income between € 3 501 and € 4 500 and 3.5% for income above that.
Social security contribution increase. A permanent contribution of 3% of the gross earnings of current government employees towards 
government pension schemes was introduced. The contribution to the widows and orphans fund was increased by 1.25 pp to 2% of gross 
earnings [0.3% of GDP].
VAT increase. From 10 January 2011, 5% VAT on food and medicines, that were previously exempt, was introduced [0.4% GDP]. In line 
with the austerity package adopted in December 2011 the standard VAT rate was increased from 15% to 17%  from 1 March 2012 [0.7% 
of GDP]. 
VAT decrease. From 1 November 2011 the reduced 5% VAT rate applies to the construction or purchase of first residences by eligible 
individuals. 

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36

3. Recent reforms of tax systems in the EU

Table (continued)

Excise  duty  increase. Excise  duties  on  tobacco  were  increased by  20% for  cigarettes  and  by  30% for  loose  tobacco  in  2011 [0.2% of 
GDP].
Other tax increases. In line with the austerity package of August 2011, an annual levy of € 350 on registered companies was introduced.
A bank  levy  was  introduced  only  for  two  years  in  2011.  It  is 0.095%  of  the  deposits  held  in  banks  on 31  December  2010  and  2011, 
payable in four instalments in 2011 and 2012, with a maximum of 20% of the total taxable profits of the financial institution [0.4% of 
GDP]. Real estate tax rates were increased. They now range from 0% to 0.8%, depending on the property value (previously 0% to 0.4%)
[0.1% of GDP].

Czech Republic
Personal  income  tax  changes. The  basic  personal  income  tax  credit  was  reduced  for  2011  on  account  of the  unexpected  floods 
expenditure [0.1% of GDP]. In 2012, the tax allowance for families with children was increased [0.1% of GDP]. A comprehensive direct 
tax reform was adopted on 27 December 2011. It is planned to implement it in 2014. It introduces a personal income tax of 19% of the 
gross  salary  (instead  of  15%  of  the  'supergross' salary) and  replaces social  and  health  insurance  employers  have  to  pay  with  a  32.5% 
payroll tax (currently 34% of the contribution base). The maximum amount of mortgage interest payments deductible for a main residence 
have been reduced from CZK 300000 to CZK 80000 per year. A temporary consolidation package approved by the government in April 
2012 to respond to current consolidation needs due to the crisis contains tax measures that should remain in force only from 2013 to 2015. 
The main ones include removing the basic tax allowance for employees, introducing a temporary 7 pp additional PIT surcharge for high-
income earners, limiting tax deductibles for the self-employed and a temporarily increasing in the PIT rate from 19% to 20%.
Corporate income tax increase. From January 2012, a new tax on lottery companies was introduced [0.1% of GDP]. Until then lottery 
companies had not had to pay corporate income tax. General CIT is now applicable to these companies and the revenue from the tax will 
be divided between the state budget and municipalities.    
Social security contribution decrease. Contribution ceilings were reduced from six times to four times the average wage in 2011 [0.1% of 
GDP].
Social  security  contribution  increase. under  the reform  mentioned  above, social  security  and  health  insurance  contributions  paid  by 
employees and self-employed people will be taxed at 6.5% in each case. Currently, the rate for health insurance is 4.5%, while the rate for 
social security contributions is 6.5%.
VAT increase. From 1 January 2012 the reduced VAT rate was increased from 10% to 14% [0.7% of GDP]. This rate will be in force for 
the fiscal year 2012. Under the temporary consolidation package, from 2013, a 1 pp increase will bring the standard rate to 21% and the 
reduced rate to 15%. The previous plan to set the two VAT rates at 17.5% was postponed to 2016.
Excise duty increase. Excise duties on tobacco were  increased from 1 January 2012. Under the  consolidation package, it is planned to 
introduce a carbon tax and a wine tax, to further increase excises on tobacco and to reduce the number of exemptions from excise duties 
on certain commodities. 
Other  tax  issues: At  the  end  of  2011 a  bill  created a  one-stop-shop  for  all  taxes,  duties,  and  social  security  and  health  insurance 
contributions.  This  Integrated  Revenue  Agency  for  public  revenue  is  being  set  up  gradually. At  first,  a  Czech  Financial  Office 
administered by the newly established General Financial Directorate was set up with effect from January 2011. From 2012, Regional Tax 
Directorates will be abolished, so that tax administration will consist of two layers (the Financial Directorate and local tax offices). From 
2013,  social and health insurance services, and from 2014 customs administration, which currently administers the collection of excises, 
will  be  integrated.  The  creation  of  the  one-stop-shop  for  all  taxes  is  accompanied  by  recent  tax  administration  measures,  such  as a 
disciplinary fine of up to CZK 50000 for not fulfilling certain procedural duties and a fine for not filing a tax return  on time. Measures 
against  VAT  fraud  and  evasion  have  also  been  adopted.  They  relate to  optional  provisions  of  the  VAT  Directive  on  suppliers'  and 
customers' joint liability for VAT payments.

Denmark
Personal income tax decreases. From 1 June 2011, Denmark introduced a temporary deduction for wage expenses for household services 
and refurbishment. It will expire by the end of 2012. 
Personal income tax increases.  From 2011, there is a 6% tax on payments from pension schemes exceeding DKK 362 800 (€ 48 370) 
(part  of  the  2010  Spring  Package).  A  Fiscal  Consolidation  Agreement  was  reached  in  May  2010.  It  includes measures  such  as  the 
suspension from 2011 to 2013 of automatic adjustments to various tax thresholds (including personal allowances), and  the postponement
from 2011 to 2014 of the planned increase in the threshold for the top income tax rate. The tax deductibility of trade union membership 
fees is limited to DKK 3 000 (€ 403) from 2011. Child allowances  are gradually being reduced by 5% from 2011 to 2013. In the 2012 
budget, the limit for deductible contributions to individual pension insurance schemes with less than lifelong coverage was decreased from 
DKK 100000 to 55 000 with effect from income year 2012 [0.08% of GDP in 2012; 1/5th of that in the long run]. The tax exemption for 
employer-paid health insurance is abolished as of 2012 [0.03% of GDP].
Corporate  income  tax  increase. From 2012,  limitations  to  loss  carry-forward  were  introduced.  Losses  can  still  be  carried  forward 
indefinitely, but may be set off against current year income only up to € 1 million without restriction. Amounts over € 1 million may be 
offset only by 60% of the remaining income (similar to the rules in Germany) [0.02% of GDP].
VAT increase. VAT exemptions were removed for travel agencies, property management and the supply of buildings and building land 
[0.07% of GDP in 2011]. 
Excise duty increase. In February 2012 the government put forward a bill attempting to close a loophole in the car registration tax that 
gives leased cars preferential treatment and to reduce evasion by car dealers related to demonstration cars [0.05% of GDP].
Other tax increase. In 2012 the taxes/duties on unhealthy products such as sweets, soft and alcoholic drinks and cigarettes were increased.
From 2011, financial activities tax (FAT) was increased from 9.13% to 10.5% (part of the 2010 Spring Package). FAT is a tax on wage 
and salary costs for businesses engaged in financial services.

(Continued on the next page)

37

European Commission

Tax reforms in EU Member States

Table (continued)

Estonia
Excise  duty  increase. In  2011  excises  on  tobacco  were  increased  by  10%  [0.1%  of  GDP]  and  in  2012  by 10%  [0.1%  of  GDP].  The 
Estonian parliament  increased the  excise  duty  on alcohol  by  5%  from  February  2012 [0.04%  of  GDP].  Tax benefits  of  using  specially 
marked fuel in mining, building and forestry were abolished in 2012 [0.1% of GDP].
Personal income tax decrease. At the end of 2011, the Income Tax Act was amended abolishing the cap for the reimbursement of tax-free 
accommodation expenses from 1 January 2012. Previously, the reimbursement of accommodation expenses for business trips was exempt 
from tax up to € 77 for domestic trips and € 128 for foreign trips.

Finland
Personal income tax decrease. Tax on earned income was slightly reduced in 2012. This was due to a 3.3% inflation adjustment to state 
income  tax  scales  and  a  slight  increase  in the  labour  income  tax  credit.    The  basic  income  tax  allowance  was  increased  in  municipal 
income taxation to ease the tax burden for low incomes. As a result, the top marginal tax rate fell by 0.25 pp and the earned income tax 
credit and tax allowances in state and municipal taxation increased [0.3% of GDP].
Personal  income  tax  increase.  From 2012  the  tax  rate  on  capital  income  was  increased  from  28%  to  30%  and  to  32%  for  income 
exceeding € 50000. Tax deductibility of mortgage interest rate payments is gradually decreased by 2014, so that the share of deductible 
interest payments will decrease from 100% to 85% in 2012, to 80% in 2013 and to 75% in 2014. The threshold for tax-exempt dividends 
of non-listed companies was reduced from € 90000 to € 60000 from 2012. From 2012, the maximum amount of the tax credit for the cost 
of domestic help decreased from € 3 000 to € 2 000 per person per year. The creditable  amount of labour costs decreased from 60% to 
45%, including VAT that has been paid out, if the party  that did the work was a tax-registered firm or an entrepreneur. The creditable 
amount of the total costs incurred for hiring a worker, including his wages and social costs, decreased from 30% to 15%.
Corporate income tax decrease. The corporate income tax rate was decreased from 26% to 24.5% from 2012 [0.2% of GDP].
VAT increase. From 2012, the VAT rate on newspapers and magazine subscriptions was increased from 0% to 9% and the application of 
reduced VAT rates on labour-intensive services abolished.
Excise duty increase. From January 2011 a tax on sweets and ice cream was introduced and the current tax on soft drinks was increased.
The excise duty on heating fuels and  electricity  were increased and  energy taxation was restructured to take the energy content, CO2-
emissions and local emissions of energy products into account. From 2012 the excise duty rates on alcohol, tobacco, sweets, ice cream and 
soft drinks were increased. The tax rates on transport fuels will increase by 10% in 2012 and 2014, in addition to the  previously agreed 
increase in the diesel rate, implemented in 2012 [0.2% of GDP]. The rates of vehicle taxes (registration tax and annual circulation tax) and 
the CO2 dependence of tax rates were also increased. 

Other tax increase. From 2011 the waste tax was increased and the tax base was broadened to include private landfill sites.

France
Personal  income  tax  increase. The  2011  Finance  Law  increased  the  top  PIT  rate  from  40% to  41%.  The allowance  that reduces  the 
amount of employment income subject to the generalized social contribution (CSG) and the social security deficit contribution (CRDS) 
was  reduced  from  3%  to  1.75%  from January  2012. From  January  2012,  the  overall  amount  of  tax  incentives  (niches  fiscales)  that  a 
taxpayer may obtain during a fiscal year for individual income tax purposes was further capped for households (foyer fiscal) at € 18 000 
(2011: € 18 000; 2010: € 20000) plus 4% (2011: 6%; 2010: 8%) of net taxable income. Many tax credits, including the deductibility of 
mortgage interest payments, were abolished or reduced as part of a government plan to reduce the budget deficit. From January 2011, the 
optional levy  on dividends and interests  was increased from 18% to 19%, and the mandatory final levy on capital gains was increased 
from 18% to 19%. From January 2012, the optional final levy on dividends was increased from 19% to 21% , and the optional levy on 
interest was increased from 19% to 24%.The tax shield will be fully abolished in 2013. From 2012, a temporary progressive contribution 
on top incomes (more than 250000€ a year) was introduced. From August 2012, the exemption of personal income tax and the reduction 
in social contributions for overtime earnings was abolished. However, the reduction in employers’ social contributions for overtime was 
maintained for small companies (less than 20 employees).
Corporate  income  tax  increase. A temporary  CIT  surcharge  of  5% on  companies  with  (group)  gross  income  over € 250  million was 
introduced in 2012. In 2011, the carry-back of losses was reduced from three years to one and the carry-forward of losses limited to 60%
over  €  1  million  of  taxable  profits. The  R&D  reimbursable  tax  credit  (credit  d’impôt  recherche)  has been  reduced.  The  worldwide  tax 
consolidation regime was abolished. An additional contribution of 3% on distributed earnings was introduced in 2012.
VAT  increase. From  2012,  a new  reduced  rate  of  7%  was  introduced.  It  covers  all  products  and  services  previously  taxed  at  5.5%
(including restaurants), bar those for disabled people, food and gas and electricity subscriptions . these are still taxed at 5.5%. 
Excise duty increase. A specific contribution of € 7.16 per hectolitre was introduced for suppliers of beverages (sodas) with added sugar 
or sweeteners. The tax base for spirits was broadened and the tax schedule revised, leading to a 10% price increase.
Social security contribution increase. From July 2012 the overall rate of social taxes (i.e. social levies, CSG and CRDS) applicable to 
passive income will be increased to 15.5% (from the current 13.5%). This is due to the increase in the social contribution from 3.4% to 
5.4% for certain types of income (prélèvement social sur les revenus du patrimoine et produits de placement).
Other tax increases. France also announced the introduction of a Financial Transaction Tax with effect from August 2012. Its rate will be 
0.2% on the transaction of shares of publicly traded resident companies whose capital exceeds  € 1 billion and 0.01% on high frequency 
and automated trading and on 'naked' credit default swaps for European sovereign debt. From January 2012, a temporary contribution on 
wealth  was  also  introduced  doubling  current  revenue  from  tax  on  wealth  (the  so  called  “impôt  sur  la  fortune  (ISF)”).  In  2012,  the 
allowance for descendants in the direct line that reduces taxation on inheritance and gifts was reduced from € 150000 to € 100000. The 
time allowed to lapse between two exempt gifts was increased from 10 years (6 years in 2010) to 15 years in 2012.

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Table (continued)

Germany
Personal income tax decrease. Tax simplification measures that took effects on 1 January 2012 include better deductibility of child care 
costs and an increase in the employee allowance (Arbeitnehmer-Pauschbetrag) from €920 to €1,000 [0.022% of GDP]. 
Social  security  contribution  decrease. At  the  end  of  2011, the  German  government  decreased  the  pension  insurance  contribution  from 
19.9% to 19.6% with effect from 1 January 2012.
Excise  duty increases. A  tax  on  nuclear  fuel  (Kernbrennstoffsteuergesetz)  was introduced  from 2011.  The  supplementary  Budget Bill 
2011  introduced  from 2011  a duty  on  all  airline  tickets booked  after  1  September  2010  for  flights departing from  Germany.  The  rates 
depend on the flight distance (€ 8 for short-distance flights, € 25 for medium- distance flights and € 45 for long- distance flights).

Greece
Personal income tax increase. A new solidarity contribution was introduced for individuals in July 2011. It applies to income earned from 
2010 to 2014. The rates range from  1% for income above € 12 000 to 4%  for income above € 100000. The rate for high-ranking state 
officers is  5%. The  maximum  PIT  exemption  was  reduced  from  €  12  000  to  €  8  000  in July  2011,  and  to  €  5  000  in  October  2011 
(applicable since January 2011). The number of tax brackets was also reduced from 9 to 8. Law 4024, enacted in October 2011, amended 
the provisions of the Income Tax Code on tax credits. Tax credits are still granted for medical expenses, home rent, annual educational 
expenses, the conversion or installation of environmentally friendly heating systems and other environmentally friendly interventions in 
buildings,  for  the  annual  mortgage  interest  on  the  taxpayer's  principal  home  and  for  life  insurance  premiums.  The ceiling  was  reduced 
from 20% to 10% of the cost, subject to certain thresholds depending on the type of cost. The new system also applies to social security 
contributions, previously fully deductible.
Corporate income tax decrease. The tax law of March 2011 reduced the CIT rate to 20% for income earned in 2011 and abandoned the 
split system introduced in 2010 for retained and distributed profits. 
Corporate income tax increase. The extra contribution charged on large profitable corporations (at progressive rates, initially, of 5, 7 and 
10% and since 2010, for income earned in 2009, at progressive rates of 4, 6, 8 and 10%) was previously extended until 2014. From 2012, 
a 25% withholding tax is levied  on profits distributed by corporations, limited liability companies and cooperatives; for the year 2011 the 
withholding tax rate was 21%.
VAT  decrease. From  1  January  2011  the  reduced rate  on hotels,  medicines  and  picture books  for  children was  decreased  from 13% to 
6.5%. 
VAT increase. From January 2011, reduced VAT rates were set at 13% (up from 11%) and 6.5% (up from 5.5%).  The VAT rate on non-
alcoholic drinks  and  restaurant  services  was  increased  from 13% to  23%  from  September  2011. The  VAT  exemption  on the  supply  of 
water by public bodies was abolished on 22 August 2011. 
Excise duty increase. An excise duty was introduced on electricity in January 2011 and on natural gas in September 2011.
Social  security  contribution  increase. With  effect  from  August  2011,  social  security  contributions  were  increased  by  0.5%  both  for 
employers  and  employees,  paid  to  the  unemployment  fund  of  the  Workforce  Employment  Organisation.  This  change  brought  the 
contribution rate to 16.5% for white-collar workers and to 19.5% for blue-collar workers. 
Other tax increases. In September 2011 a special real estate duty on residential property was introduced. It is calculated in terms of the 
surface  area  of  buildings,  taking  into  account  also  their  age  and  location.  It  is  collected  through the  payment  of  electricity  bills.  Since 
2011, the tax-free bracket of the progressive real estate tax introduced in 2010 is reduced from € 400000 to 200000. Until 2012 inclusive, 
real estate worth more than € 5 million is subject to tax at the rate of 2% (rather than the 1% rate applicable above € 800000). Several 
measures  of  the  comprehensive  reform  plan  to  combat  tax  evasion  were  implemented,  such  as  merging  smaller  tax  offices  and 
consolidating key functions, introducing performance-based contracts for auditors and establishing a 'large taxpayer' unit. 

Hungary
Personal income tax decrease. A flat personal income tax rate of 16% was introduced in January 2011 [1.8% of GDP]. It means that one 
tax rate applies to income from wages, rent and capital. In 2011, as in 2010, employers' SSC were still fully included in the tax base, so 
that the tax base amounts to 127% of the gross wage and the effective tax rate is 20.3%. Also in 2011, the amount of the employment tax 
credit, benefiting low to medium earners, was reduced by 20% and the income threshold for its application was increased.  Substantial tax 
credits for families with children were also introduced. They are particularly favourable for  families  with  three or more children (HUF 
10000 per  child  per  month  for  one  to  two  children,  HUF  33000 per  child  per  month  for  three  or  more,  with  no  negative  tax  possible) 
[overall, 1.8% of GDP].With effect from 2012, the tax base of tax payers earning less than HUF 202 000 (€ 653) does not include the 
employers' social security contributions. The result is a two rate system with rates of 16% and 20.3%. The family tax credit introduced in 
2011 was maintained in 2012.
Personal income tax increase. From 2012 the employment tax credit was fully phased out, leading to a net tax increase to low earners 
with no children..
Corporate income tax decrease. In 2011, the threshold for the lower 10% rate was increased tenfold to HUF 500 million (€ 1.8 million). 
Accordingly, in 2013 the reduced rate  will be 10% and the regular rate 19%. The introduction of a higher 30% rate applicable  only to 
energy and utilities companies was announced. The sectoral surcharges will be phased out (only halved for banks).  [0.7% of GDP].
Corporate  income  tax  increase. In  2012,  the  simplified  corporate  income  tax  rate  was increased  to  37%  (from  30%).  The eligibility 
threshold was increased to HUF 30 million (€ 97 000) of annual turnover (from HUF 25 million).
Social  security  contribution  increase. In  2012  the  health care  contribution  was  increased to 7%  (from  6%). This  led  to  an increase  in 
employees total SSC from 17.5% to 18.5% [0.45% of GDP].
VAT increase. From 1 January 2012 the standard VAT rate was increased from 25% to 27% [0.5% of GDP].
Excise duty increase. Alcohol, tobacco and fuel excise duties were increased in 2012. 

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Table (continued)

Other tax increases. A "cultural tax" on pornographic material was introduced on 1 January 2012. A new tax on unhealthy packaged food 
came into force in September 2011. A levy on phone usage was introduced with effect from July 2012. It amounts to HUF 2 per minute of 
call or sms [0.1% of GDP]. The introduction of a financial transaction tax in 2013 was announced. Measures to fight tax evasion have 
been implemented. They include  allowing unannounced audits and increasing penalties. 

Ireland
Personal  income tax  increase. Income  tax  measures  contributed  around €  1 billion to  fiscal  consolidation  in 2011  mainly  through  the 
reduction of tax credits (€ 435 million) and changes in the rate band (€ 395 million). From 2012 the taxes on capital and interest earned are 
aligned at 30%, in particular tha capital acquisitions tax and the capital gains tax were increased were increased from 25% to 30%, and the 
deposit interest retention tax (DIRT) from 27% to 30%. . For certain windfall gains the windfall gains tax rate is 80%.
Personal  income  tax  decrease. Under  the Finance  Bill  2012,  it  is  planned  to  increase the  lower  exemption  threshold  of  the  Universal 
Social Charge, exempting around 330000 people, and the mortage interest relief for first-time buyers during the property boom of 2004-
2008.  The  same  Bill  also plans  to  create  tax  incentives  to  attract  key  employees  that  are  currently  foreign-based.  Under  the  Special 
Assignee Relief Programme (SARP) individuals from abroad who are eligible can receive an exemption from income tax on 30% of their 
annual salary between €75 000 and €500000 if they are assigned for a minimum of one year to a maximum of five years. Furthermore, a 
deduction  for  foreign  earnings  (FED)  is  granted  for  employees  assigned  from  Ireland  to  work  in  certain  emerging  market  countries  in 
order to increase trade with those countries. In addition, it is also planned to amend the Research and Development Tax Credit, where the 
first € 100000 expenditure will be allowable on a volume basis.
VAT increase. The standard VAT rate was increased from 21% to 23% from January 2012.
VAT decrease. The Jobs Initiative temporarily introduced a new reduced VAT rate of 9% on tourism services until end-2013 [0.2% GDP].
Excise duty increase. The mineral oil tax on petrol and auto-diesel was increased first by four cent and then by two cent in 2011 [0.07% 
of GDP]. 
Social security contribution increase. Base-broadening measures for Pay Related Social Insurance (PRSI) contributed to fiscal adjustment 
in 2011, in particular removing ceiling on employee PRSI contributions [0.2% GDP].
Social security contribution decrease. As part of the Jobs  Initiative, until end of 2013,  the lower rate of PRSI was halved from 8% to 
4.25% on jobs that that pay up to €356 per week [0.1% GDP].
Other tax increases. A household charge of €100 was introduced in 2012, as an interim measure before implementation of the valuation-
based property tax [0.1% GDP]. The temporary measures of the Jobs Initiative are financed by a levy on the pension funds (yielding € 460 
million annually in 2011-2014).

Italy

Personal income tax decrease. Changes to the municipal fiscal system were made in 2011 (Law n. 42/2009). Among other things they
involve: i) taxing rental income from buildings for residential purposes at a separate, flat rate from 19% to 21%, rather than including it in 
the personal income tax base (average rates around 30%), with around 20% of the revenue accruing to municipalities; and ii) removing the 
‘tax rate freeze’ on the increase in additional personal income tax (between 0.2% and 0.4%) to be levied by town councils [0.1% of GDP]. 
Personal income tax increase. The regional PIT surcharge  was  increased by 0.3% and a temporary 3% solidarity contribution on high 
incomes was introduced. The 3% levy is deductible from the PIT base.
Corporate  income  tax  decrease. A  new  allowance  for  corporate  equity  (Aiuto  alla  Crescita  Economica,  ACE),  similar  to  the  Belgian 
notional interest deduction, was introduced. The ACE is retroactively applied to 2011. It covers capital increases of corporations and even 
unincorporated businesses. The IRAP, a business tax with a different base than the CIT,  saw an increase in deductions for labour costs, 
notably for women and for employees under 35. Companies can also deduct from their CIT taxable income an amount equal to the part of 
IRAP paid with reference to tha tax base allocated to their share of labour costs [Overall, 0.15% of GDP].  
VAT increase. The standard VAT rate was increased by 1 pp on 17 September 2011 (from 20%) [0.3% of GDP]. An additional 2% rise
planned for October 2012, unless a general spending review reform makes it unnecessary by generating expenditures saving.
Excise duty increase. From 1 January 2012 fuel excises were increased by about 10 cent per litre [0.5% of GDP].
Other  tax  increases. A  new tax  on  high-powered  automobiles,  private  boats  and  aircraft  was introduced  in  2012.  Property  taxes  were 
increased by abolishing the exemption on main residences and increasing cadastral values by 60%, although some reductions are granted 
depending on household composition; properties held abroad, too, were made subject to a 0.76% tax on their value [0.7% of GDP]. Stamp 
duties  on  cash,  deposit  and  security  accounts  were  increased  and  extended  to  all  financial  instruments. The  withholding  tax  on  both 
interest (except interest from government bonds) and dividends was set at 20% [0.1% of GDP]. Other reforms addressed tax evasion, e.g. 
lowering the threshold for electronic payments and the 'income-meter', that estimates the income of individuals based on expenses [0.1% 
of GDP in 2011; 0.5% in 2012].

Latvia
Personal income tax decrease. In 2011 the general PIT rate was lowered from 26% to 25%. Non-taxable allowances and allowances for 
dependent persons were increased.
Social security contribution increase. The SSC rate  was increased by  two percentage points  from January 2011 to compensate  for the 
lowering of the general PIT rate.
VAT increase. With effect from January 2011, the standard VAT rate was increased from 21% to 22% and the reduced rate from 10% to 
12%. From 1 July 2012 the standard rate of VAT was reduced from 22% to 21%. The reduced rate on electricity was abolished in January, 
the one on natural gas in July, thereby increasing the rate from 10% to 22%. The reduced VAT rate for medical equipment was amended 
from 1 June 2011. A VAT on real estate auctions within insolvency process was amended in January 2011 (0.1% of GDP). The usage of 
reverse VAT was broadened by applying reverse VAT on scrap metal supplies and related services form 1 October 2011 and construction 
services form 1 January 2012.

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Table (continued)

Excise duty increase. From June 2011 excises on petrol and on ethyl alcohol were increased; the reduced excise tax rate on fuel with bio 
fuel admixture 5% of volume was abolished from 1 January 2011. From July 2011 excises on tobacco products were increased  and the 
allowance of excises on natural gas for producing electricity was abolished. The  excise tax on sweetened non-alcoholic drinks was also 
increased by 30% from 1 January 2011. From July 2011,  allowances for excise duty  for  diesel fuel used in agriculture were reduced. 
From 1 February 2012 excise tax base has been widened by including certain lubricating oil groups. From 1 July 2011 an excise tax on 
natural gas was re-introduced with a reduced rate.
Other tax increases. In 2011 the structure of the vehicle use tax was changed, providing for three components to be taken into account by 
tax calculation - vehicle gross weight, engine capacity and maximum engine power, thus increasing the tax on luxury, environmentally 
unfriendly and powerful cars (0.1% of GDP). In 2011 the progressive property taxation of residential buildings was doubled, now ranging 
from 0.2%-0.6% (0.1%  of GDP). From 2012 the tax on gambling, slot machines and gambling tables was increased by 15%. The annual 
financial  stability  duty  rate  was  increased  from  0.036%  to  0.072%.  In  addition,  the  base  of  real  estate  tax  was  broadened  to  include 
auxiliary  buildings,  parking  slots  and  houses  and  lands  owned  by  religious  organisations  but not  used  for  religious  purpose  [0.03%  of 
GDP]. The natural recource tax  was increased.  Lottery and gambling tax rates were increased and reformed in July 2011 and Janurary 
2012. Several fees and licences and state duties have been review and increased. Several legislative measures under the Action Plan to 
Combat the Shadow Economy and Promote Fair Competition entered into force in 2012. Law on Individual Declaration of Property and 
Reporting of Undeclared Income was adopted with effect from June 2012. It introduces the possibility to legalise previously undeclared 
taxable income and aims to improve oversight over an individual’s financial position, in particular the accuracy of expenses  incurred and 
the payment of taxes and the legality of income derived. [0.25% of GDP].

Lithuania
Corporate income tax decrease. The threshold of the maximum annual income of small companies with up to 10 employees subject to a 
lower rate of 5% was increased from LTL 500000 (€ 145000) to LTL 1 000000 (€ 290000).
VAT decrease. From 1 January 2012 the VAT registration threshold was increased from 100000 LTL (€ 29 000) to 155 000 LTL (€ 45 
000). The application of a 5% reduced VAT rate on medicines was extended until the end of 2012. The application of the 9% reduced rate 
for  residential  heating  was also  extended  until  31  December  2012.  The  9% reduced  rate  on  accommodation  services introduced as  a 
temporary measure in 2011was abolished from 1 January 2012 [0.02% of GDP].
Excise duty increase. The excise duty on gas oil used as motor fuel was increased by more than 10% from € 274.27 to € 302.07 per 1000 
litres with effect from 1 January 2011 [0.1%  of GDP]. From 1 March 2012 the excise duty on cigarettes was increased from € 64 to  € 
67.19 per 1000 cigarettes. It was increased from € 23.16 to € 24.32 per kilogram of cigars and cigarillos [0.02%].
Other  tax  increase. From 1  January  2012  Lithuania  broadened  the  immovable  property tax  base to  include  the  immovable property 
intended for dwelling purposes, gardens and garages etc owned by individuals. Until now these were exempt unless they were used for 
commercial purposes. The value of previously tax exempt immovable property of natural persons exceeding LTL one million (€ 290000) 
will be subject to a tax rate of 1% [0,02%].
Other changes: At the end of 2010 the government adopted 'Consolidated strategies of the state tax inspectorate of taxpayers' compliance 
with tax obligations and assurance of tax collection for the year 2011-2012. Cash registers have been installed in all indoor marketplaces 
and border control has been strengthened.

Luxembourg
Personal income tax decrease. The temporary crisis tax of 0.8% levied on total income except minimum wage salaries introduced for the 
year 2011 was abolished from January 2012. 
Personal  income  tax  increase. From January  2011,  the  top  income  tax  rate  was increased  from  38% to  39%.  The surcharge  for  the 
employment fund (solidarity tax) was also increased from 2.5% to 4% for income up to € 150000 and to 6% for income above € 150000
[0.20% of GDP]. 
Corporate income tax decrease. The 2012 budget grants a tax credit to employers hiring workers from the unemployed pool until 2014.
Corporate income tax increase. The 2012 budget introduces a new table with revaluation coefficients for the valuation of business assets 
and participations.
Excise duty increase. From January 2012 the excise duty rates on manufactured tobacco was increased to 10% of the purchase price with 
a maximum of € 10 per kilogram.

Malta
Personal  income  tax  decrease. From  2012,  new  income  tax  brackets  apply  to  income  earned by  parents  of  children  under  18  years. 
Income up to € 9 300 is tax-free. From € 9 301 to € 15 800 a tax rate of 15% applies. From € 15 801 to € 21 200 a rate of 25% applies and a rate 
of 35% applies to income above € 21 200. Parents who qualify for these tax rates should benefit from an annual tax saving of between € 75 
and € 420 per parent [0.2% of GDP]. To help women return  to the labour market the current tax credit of up to € 5 000 was extended to 
include self-employed mothers.
Excise duty increase. From 15 November 2011, excise duty rates on cigarettes was increased by 5.8% and excise duty on tobacco was 
increased by 8.5% [0.1% of GDP]. Excise duty on cement was increased by € 3 on every 1000 kg. Bunkering tax on fuel for ships outside 
Maltese territorial waters was set to €1.86 per metric ton or part thereof. 
Other tax increases. The registration tax on motor vehicles with Euro 1 to Euro 3 emissions (or worse) increased on 1 January 2012 [0.1% 
of GDP]. Measures have been introduced to improve the efficiency of the revenue collection,  notably pecuniary incentives to reduce tax 
arrears. Several other initiatives are being implemented to combat tax evasion and avoidance, including reforms aimed at increasing the 
effectiveness of VAT tax audits [0.6% of GDP].

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Table (continued)

The Netherlands
Personal income tax decrease. The rate in the first two brackets consists of two elements: income tax and social security contributions. In 
January 2011, the combined tax and SSC rate in the first bracket of personal income tax and wages tax was reduced from 33.45% to 33%. 
From 2012, the tax deduction for R&D activities for self-employed was increased to € 12 310 for entrepreneurs and can be increased by 
another € 6 157 for starting entrepreneurs. Since 2012 there is a 40% tax deduction for R&D expenses.
Personal income tax increase. From January 2012, the imputed income for the owner-occupied dwellings was increased from 1.05% to 
1.3% for the part of the value that exceeds € 1040000. From January 2012, the combined rate for the first bracket increased to 33.10%. 
From January 2012 two tax credits on labour participation by workers of 65 years and older were decreased. The amount of the cut varies 
depending on income and age.   
Corporate income tax decrease. From January 2011, the corporate income tax rate is reduced to 25% from 25.5% for profits in excess of 
€ 200000 [0.07% GDP]. Since 2012 a new tax facility provides for 40% deduction for R&D expenses.

VAT increase. From 1 July 2011, performing arts were transferred temporarily to the standard VAT rate of 19%. 
Excise duty increase. Excise duties on cigarettes and tobacco are increased from 1 March 2011. The yearly adjustment for tobacco and 
cigarettes took place in April 2012 increasing the minimum excise duty to € 157.28 per 1 000 cigarettes and to € 66.50 per 1000 grams for 
smoking tobacco. For mineral oils there is an increase of € 0.01 per litre  (only for  LPG per kilogram) from January 2012 to adjust for 
inflation.
Other tax decreases. The property transfer tax for owner-occupied dwellings was temporarily reduced from 6% to 2% from 15 June 2011 
to  July  2012.  In  July  2012,  the  reduction  was  made  permanent.  From  July  2012  the  CO2  limits  of  the  car  registration  tax  (BPM)  is 
tightened each year to ensure stable tax revenue. At the same time the fixed surcharge for diesel cars is replaced by a surcharge depending 
on the amount of CO2 emission. The taxes on groundwater and waste materials were abolished in 2012. 

Poland

Personal income tax increase. PIT thresholds were frozen at their 2009 level in 2011 and 2012 [0.1% of GDP]. 
Social security contribution increase. From 1 February 2012, non-wage labour costs were increased by increasing the disability pension 
contribution paid by employers from 4.5% to 6.5% of gross wages. The  total rate of disability pension contribution  therefore increased 
from 6% to 8% of gross wages [0.3% of GDP].
VAT increase. A series of measures came into force in 2011 [0.41% of GDP]. The VAT rates were temporarily increased for the years 
2011-13 by 1 pp, from 7% to 8% and from 22% to 23%. A new reduced rate of 5% was introduced for, amongst others, basic foodstuffs. 
VAT reimbursement for company cars and fuels was abolished in 2011 [0.08% of GDP]. From 2012 the VAT rates for certain products, 
including some medical devices, clothing and clothing accessories for infants and children's' footwear,  were increased from 8% to 23%. 
The 23% rate also applies to the previously exempt services related to the conservation and restoration of registered historical monuments 
and archive materials and to the services delivered by public institutions. 
Excise  duty  increase. The  government  is  gradually  increasing  the  excise  duties  rates  on  tobacco  products  (8%  for  cigarettes,  13%  for 
smoking  tobacco, 4%  for  cigars)  and  for  fuels  (3%  for  jet  engine  fuels,  14%  for  diesel  and intrinsic  bio-components).  In  line  with  the 
Energy Directive, from 2012 the excise tax applies to coal, lignite and coke, so far exempted (due to the transition period).
Other tax increases. On 18 April 2012, a new tax on extraction of certain minerals, targeted at copper and silver extraction,  came into 
force. The applicable tax rate is determined based on the exchange rate of American dollar to Polish zloty and copper and silver prices on 
stock exchanges’ quotations  in London [0.1% of GDP]. 

Portugal
Personal income tax increase. From 2011, expense-related tax credits were reduced by imposing an overall ceiling for the two highest 
income tax brackets. To comply with the MoU targets, a new annual surtax on individual income was introduced on 3 August 2011. It is 
levied at a rate of 3.5% and applies only to income earned in 2011 that is above the minimum wage income. In 2012 and 2013 a surtax of 
2.5% applies to the highest income bracket. The tax rate applicable to capital gains on the sale of shares and other securities was increased 
from  21.5% in  2011  to  25% with  effect  from  1  January  2012.  An increase  from  21.5% to  25% in  withholding  taxes  on  income  from 
dividends,  interest  and  other  forms  of  remuneration  on  shareholders'  loans  and  on  share  capital  derived  by  resident  and  non-resident 
individuals was adopted in 2011.
Corporate income tax increase. From 1 January 2012 the reduced CIT rate of 12.5% was abolished. A State surtax of 3% is levied on 
corporate income between € 1.5 and € 10 million and a 5% rate is levied on taxable profits over € 10 million with effect from 1 January 
2012. The withholding tax on investment income  earned by legal entities without a permanent establishment in Portugal  was increased 
from 21.5% to 25%.
Social security contribution increase. To align the rates with those of the general social security scheme, employees' contribution rates to 
the civil service social security scheme were increased by 1 pp from January 2011.
VAT increase. The standard VAT rate was increased from 21 to 23% from January 2011. From October 2011, the VAT rate on electricity 
and natural gas was increased from the reduced rate of 6% to the standard rate of 23%. A set of categories of goods and services were 
moved from the reduced and intermediate VAT rates to higher ones in 2011.
Excise  duty  increase. With  effect  from  1  January  2012  Portugal  introduced  an  excise  duty  on  electricity  consumption  by  consumer, 
producers, traders and self-producer.  The maximum rates of  excise duties on petrol, spirit drinks, heating diesel and tobacco were also 
increased.
Other tax increases. With effect from 1 January 2012 the minimum and the maximum rates of the real estate tax on urban property were 
increased by 0.1 percentage points.

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Romania
Excise duty increase. With effect from 1 July 2012, the excise duty on cigarettes  was increased from € 51.49 per 1 000 cigarettes to €
53.18 per  1 000  cigarettes.  The  total  excise  duty  on  cigarettes  (i.e.  sum  of  the  specific  excise  duty  and  the  ad-valorem  excise  duty),  is
increased from € 76.60 per 1 000 cigarettes to € 79.19 per 1 000 cigarettes for the period from 1 July 2012 until 30 June 2013. Excise 
duties on unleaded petrol and diesel were increased in January 2011. This was followed by a further increase of excise duties on diesel in 
January 2012. They currently stand at € 467 per tonne for petrol and € 374 per tonne for diesel.
Other tax increases. Under the legislation that entered into force in mid-January 2012, a pollution tax applies to both new and second-
hand vehicles produced in Romania or abroad on their first registration in Romania.

Slovakia
Personal income increase. From 1 January 2011, basic personal allowances can only  be claimed on aggregate income from employment, 
business  activities  and  independent  professional  activities.  The  amount  of  the  basic  personal  allowance  and  the  relevant  ceilings  are 
generally based on the amount of the living minimum applicable on 1 January of the tax year. This was € 185 in 2011 and it is € 189 for 
2012.
Social  security  contribution  increase. From  1  January  2011,  non-monetary  benefits  given to  an  employee,  regarded  as taxable 
employment income, are also subject to social security and health insurance contributions
Excise duty increase. With effect from January 2011, a tax on CO2 emission quotas was introduced on the emission allowances allocated 
free of charge to the taxpayer in the period 2011-12. The tax rate is 80%. The tax base made up of transferred emission quota (valued at 
market price for the calendar month preceding the transfer), and non-consumed emission quotas (valued at the average market price for the 
calendar year in question). The calculated amount of tax on emission quotas is not considered a tax deductible expense. From 2011, excise 
duties on tobacco products were increased. 
Other  tax increases. With  effect  from  1  January  2012,  Slovak banks and  branches  of  foreign  banks  operating  in  the  Slovak  Republic, 
established under special legislation on banks, are subject to a bank levy. The levy is 0.1%. It is due on the 20th day of every calendar 
quarter. It is calculated on the basis of the bank’s liabilities at the end of the previous calendar quarter (adjusted by certain items defined 
by  law) [0.1%  of  GDP]. The  UNITAS project was  launched  in  January  2012.  It  aims  to  merge revenue  collection  bodies  (taxes  and 
customs) into a single institution – Financial Administration (FA) – to reduce administrative and compliance costs and tackle fraud and tax 
avoidance.

Slovenia

Corporate income tax decrease. With  the  amendments to  the  Corporate  Income  Tax  Law  approved  in  April  2012  and  applicable  with 
effect from 1 January 2012, the statutory rate was reduced to 18% (from 20%) for the year 2012. Further decreases to 17% in 2013 16% in 
2014, and 15% in 2015 are envisaged. The allowance for investments in equipment and intangible assets was increased from 30% to 40% , 
and the cap of € 30000 was abolished. Tax relief for investment in research and development was increased from 40% to 100%. Sspecial 
regional tax relief for investment in research and development was therefore abolished [overall, 0.3% of GDP].
Excise duty decrease. After the 7% increase in 2010, excises on fuel were reduced by 15% in 2011.
Excise duty increase. Excise duties on tobacco were increased in 2011 and 2012. Excise duties on alcohol were increased by around 10%
in April 2012 [0.2% of GDP].
Other tax increases. Under the Bank Balance Sheet Tax Act adopted in July 2011 a new bank tax was introduced on 1 August 2011. The 
new tax is applicable to domestic banks, banks from EU Member State and banks from third countries that operate in Slovenia.  The tax 
rate is set at 0.1% of the tax base. The tax base is the average amount of the total assets of the bank within the tax year. Under certain 
conditions, the amount of the tax may be reduced up to 0.167% of the loans provided to non-financial companies or private entrepreneurs. 

Spain
Personal income tax increase. In January 2011, the government introduced two additional tax bands/rates for taxpayers over € 120000 
and  €  175  000  raising  the  former  top  marginal  personal  income  tax  rate  to  44%  and  45%,  respectively).  From January  2012  the 
government  introduced  a  temporary  supplementary  progressive  levy  (covering  years  2012  and  2013)  applied  to  each  tax  band  of  the 
general government tax base, which implies now the existence of seven brackets (24.75%, 30%, 40%, 47%, 49%, 51% and 52%). During 
2012 and 2013, savings and capital gains are taxed under a progressive tax schedule with three brackets of 21% on the first € 6 000, 25%
up to € 24 000, and 27% on income above (in 2011, they were taxed at 19% on the first € 6 000, and 21% on income above). [Overall, 
0.4% of GDP]. (*) The withholding tax rate applied to some types of employment income and to income from professional activities is 
increased to 21% from 1 September 2012 to 31 December 2013.  The mortgage interest deductibility for new mortgages taken for house 
purchases is abolished from 1 January 2013.
Personal  income tax decrease. From January  2012,  (and  with  effect  from  1  January  2011),  the  government  re-introduced the 15% tax 
credit for the acquisition or restoration of the taxpayer's primary residence for all taxpayers, regardless on their tax base.

(Continued on the next page)

43

European Commission

Tax reforms in EU Member States

Table (continued)

Corporate  income  tax  increase. In  March 2012  measures were  introduced  intended  to  increase  the  effective  taxation  of  corporate 
(including  hidden) income,  such  as:  the  deferral  of  tax  benefits  for  goodwill  arising  from  acquisitions  and  business  restructuring 
operations  (for  which  the  annual  deductibility  limit  is  one  hundredth  of  the  amount),  a  permanent  limit  to  the  deductibility  of  interest 
expenses (30% of the operating profits), reduction to 25% (from 35%) of the limits to the deductions aimed at promoting certain activities 
(e.g.  R&D);  permanent  limits  to the  "free  depreciation"  regime  (introduced  in 2010) for  large  companies, while  for  small  and  medium 
business  "free depreciation" is  linked  to  job  creation (for  assets  acquired  before 31  March  2012  the  incentive  applies  with  certain 
limitations); a special 8% tax on qualifying foreign dividends and income derived from the transfer of foreign companies operating in tax 
havens  or  similar  jurisdictions.
(*)  Following  the  measures  introduced  with  Royal  Decree-Law  12/2012  of  30  March  2012,  further 
important reforms have been introduced with Royal Decree – Law 20/2012 of 13 July 2012, such as: a new special tax of 10% applicable 
to dividends and capital gains that do not qualify for participation exemption; limits to the loss carry forward applicable in 2012 and 2013 
(50% - instead of 75% - for companies with net turnover between € 20 and 60 million; 25% - instead of 50% - above € 60 million). Rates 
for  the  payment  on  account  are  increased  to  23%  (from 21%) if  net  turnover  is  between  €  10  and  20  million;  to  26%  (from  24%)  if 
turnover  is  between  €  20  and  60  million;  to 29%  (from 27%) if turnover  is  at  least  € 60  million.  In  the  calculation  of the payment  on 
account 25% of the dividends and capital gains accrued should be included. The minimum payment on account rate for companies  with 
turnover above € 20 million is set at 12% (previously 8%).  
Corporate income tax decrease. In Spain several measures took place for encouraging investment and employment from 1 January 2011. 
The annual  turnover  threshold  to  be  included  within  the  scope  of  the  special  regime  for  small  and  medium  sized  enterprises  (SMEs) 
increases from € 8 million to € 10 million. Moreover, the taxable amount taxed at the reduced tax rate has been increased from € 120 202
to  € 300000.  Companies  that  have  less  than  25  employees and a  turnover  below  € 5 million  are  taxed  on their  annual  profits  below 
€ 300000 at 20%; annual profits above this threshold are taxed at 25%. As part of additional measures taken in the course of 2011, the loss 
carry forward period was increased from 15 to 18 years for all companies. At the same time, the amount of losses to be carried forward 
was limited for big companies for the tax years 2011-2013 (to 75% for companies with turnover between € 20 million and 60 million and 
50% for companies with higher turnover. 
VAT decrease. At the end of 2011, the application of the super-reduced 4% VAT to the acquisition of new dwellings was extended by one 
year.
VAT  increase.  (*) From  1  September  2012 the  standard  and  reduced  VAT  rates  are  increased  to  21%  and  10%  (from  18%  and  8%, 
respectively).  In  addition,  the  standard  rate  applies  also  to  some  goods  and  services  (e.g.  combined  hotel  and  catering,  entertainment, 
discotheque  and  night-club  services,  cinema  and  theatre  tickets,  supply  and  receipt  of  digital  radio  broadcasting  and  digital  television 
services) previously taxed at the reduced rate. 
Excise duty increase. From January 2012 the tax on diesel for professional use was increased, reducing the amount for partial refunds. (*)
Tobacco excises are increased and their structure is modified by reducing the proportional rate and raising the specific one. The minimum 
tax rate for cigarettes has been fixed at € 119.1 per 1000 units.
Other tax increase. From January 2012 a temporary surcharge (up to 2013) applies in the Real Estate Tax (municipal tax) for immovable 
properties with an updated cadastral value over the average value in each municipality. In September 2011, the net wealth tax (impuesto 
sobre el patrimonio) was temporarily restored for the years 2011 and 2012. The exemption for dwelling houses was nearly doubled to € 
300000 (previously € 150 253.03) and the tax-free amount (after application of specific tax exemptions) was substantially increased to € 
700000 (previously: € 108 182.18). A special programme was approved to encourage regularisation of the tax status concenring personal 
and corporate income. 
Note: Measures indicated with (*) were taken after the cut-off date. 

Personal income tax decrease. From January 2011 the basic income tax allowance was increased for people over 65 [0.2% of GDP]. 
VAT decrease. From 2012 the VAT on restaurant and catering services was reduced by 13 pp to 12% [0.2% of GDP].
Excise duty increase. In 2012 the excise duty on tobacco was increased and annual indexation was introduced, corresponding to a total tax 
increase of roughly 10%.

Sweden

United Kingdom
Personal income tax increase. For the fiscal year 2012-13 the basic rate limit was lowered to GBP 34 370 (from GBP 35 000 in 2011-
2012). The personal tax allowance was increased to GBP 8 105. Since the 2010-11 tax year, this personal allowance is reduced for income 
over GBP 100000 - by GBP one for every GBP two of income over GBP 100000. This reduction applies irrespective of age. From April 
2011  the  annual  allowance  for  tax-privileged  pension  saving  was  reduced  from  GBP 255  000  to  GBP 50000. From  April  2013  the 
availability of the income tax age-related allowances will be restricted for current recipients and a cap on all unlimited income tax reliefs 
will be introduced through a ceiling of GBP 50000 or 25% per cent of income, whichever is higher. From January 2013 the child benefit 
will  be  withdrawn  through  an  income  tax  charge  applicable  only  to  households  with  someone  earning  over  GBP  50000  a  year; the 
withdrawal will be gradual for households with someone earning between GBP 50000 and GBP 60000. 
Personal income tax decrease. From April 2013, the personal tax allowance will increase to GBP 9 205, and the additional rate of income 
tax (applicable above GBP 150000 since 2010) will decrease from 50% to 45% [-0.23% of GDP]. 
Corporate income tax decrease. From April 2011 the headline and small profits rates were reduced from 28% to 26% and from 21% to 
20% From April 2012 the standard CIT rate  was reduced further to 24% [0.03% of GDP]. The SME tax relief rate for investment  was
increased to 200% in April 2011, and further to 225% in April 2012. A special regime introducing a reduced 10% rate on corporate profits 
from patents and other types of intellectual property (Patent Box) will be phased in over five years from April 2013. An 'Above the Line' 
(ATL) credit for R&D with a minimum rate of 9.1% before tax will be introduced. 
VAT increase. From 2011 the standard VAT rate was increased from 17.5% to 20%.

(Continued on the next page)

44

3. Recent reforms of tax systems in the EU

Table (continued)

Excise duty increase. The general duty  rates on alcohol and tobacco  were increased by 2% above inflation in March 2011. They  were 
increased by a further 2% (alcohol) and 5% (tobacco) above inflation in March 2012. The fuel duty escalator was abolished and replaced 
by a fair fuel stabiliser. this means that fuel duty now increases in line with inflation when oil prices are high. When the price of oil falls 
below a certain level, fuel duty increases by inflation plus GBP 0.01 per litre. 
Social  security  contribution  increase. In  April  2011  the  main  and  additional  rates  of  National  Insurance  Contributions  (NICs)  were 
increased by one percentage point.
Other  tax increases. With  effect  from January 2012  the  bank  levy  full  rate  was  increased  from  0.078% to  0.088% Another  increase to 
0.105% is scheduled for January 2013. Since 22 March 2012, a new 7% rate of the stamp duty land tax (increased to 15% if the buyer is a 
non-natural person) applies to the purchase of residential property  worth over GBP two million. The government set up an independent 
Office of Tax Simplification and in Budget 2012 it announced a consultation on a new general anti-abuse rule (GAAR) to tackle artificial 
and abusive tax avoidance. 

Note:  Cut-off date is June 2012.
Source: Commission services.

45

4.

THE EU VAT SYSTEM: ECONOMIC IMPLICATIONS AND 

POLICY CHALLENGES

Value-Added  Tax  has  been  at  the  core  of  the 
Country  Specific  Recommendations  (CSRs)  on 
taxation  resulting  from  the  European  Semester. 
The CSRs stress the potential of Member States to 
make their tax structure more growth-friendly and 
improve the  design  of  their  individual  taxes.  For 
VAT, this mainly means using it as a substitute for 
taxing income but also improving its efficiency as 
(21)  lower  tax  collection 
reduced  VAT  rates
without always achieving their economic or social 
objectives.

At  EU-level, 
the  European  Commission  has 
recently  started  a  wide-ranging  review  of  the  EU 
the 
VAT  system.  This  process  began  with 
presentation  of  a  Green  Paper  on  the  future  of 
VAT  in  December  2010.  (22) Then  an  ex-post 
evaluation of the system was carried out through a 
study  produced  by  the  Institute  for  Fiscal  Studies 
and  published  in  December  2011.  (23) Combined 
with  the  numerous  contributions  received  from 
stakeholders in response to the public consultation 
its  findings 
launched  with  the  Green  Paper, 
provided the analytical input for the Commission’s 
Communication on  the  future  of  VAT  adopted  in 
December  2011(24).  The  main  points  of 
the 
Communication are summarised in Box 4.1, at the 
end of the chapter.

This  chapter  presents  some  key  economic  issues 
related  to  the  legal  and  institutional  features  of 
VAT  in  the  EU  and  provides  new  analytical 
evidence, largely based on the IFS study. The first 
section will consider the cause and consequence of 
abandoning the  ‘origin  principle’ in  favour  of  the 
‘destination  principle’.  Section  4.2 discusses  the 
general economic implications of the current VAT 
systems  on  trade.  Sections 4.3  and  4.4 give
estimations of cross-border VAT compliance costs 
and  the  economic  impact  of  VAT  exemptions  on 
trade  neutrality.  Lastly,  Section  4.5 assesses  the 
welfare economic cost of exemptions and reduced 

(21) Throughout  this  report,

the  term  ‘reduced  VAT  rates’
covers  all  VAT  rates applied  in  the  EU  other  than  the 
standard rate.

(22) COM(2010) 695 final, 1 December 2010.
(23) IFS et al. (2011).
(24) COM(2011) 851 final, 6 December 2011.

rates and their distributional effects. Section 4.6 is 
the conclusion. (25)

4.1. CHOOSING BETWEEN AN ‘ORIGIN’ AND A 

‘DESTINATION’ SYSTEM

4.1.1.

Issues related with the origin system and 
merits of the destination system

Although  the  review  of  the  VAT  system  has  only 
recently  begun,  a  significant  change is  already 
apparent:  the  Commission  no  longer  aims  to
change over  to  a  VAT  origin  system  in  the 
foreseeable future. This is important as, ever since 
the  1992  Single  Market  Programme, the  current 
destination  system  was  supposed  to  be  just  a 
temporary  solution  before  switching to 
the 
permanent origin system. The Council has decided 
to abandon the objective of switching to the origin 
principle,  although  it  should  be  noted  that  this  is 
justified  on  the  basis  of  political  feasibility  rather 
than  on  the  economic  desirability  per  se of  this 
objective. (26)

The  difference  between  the  two  systems  lies  in 
how  imports and  exports are  treated.  Under  the
origin system, the country of the seller levies tax at 
its  domestic  rate,  and the  importing  country  does 
not  levy  any  VAT.  Under  the destination  system, 
the importing country levies tax at its domestic rate 
and conditions. In the current EU system, which is 
a variant of a destination system, goods for export 
are zero-rated, that is to say they are free of VAT, 
and the seller can claim back the VAT paid on the 
inputs. VAT is levied on imported goods at the rate 
and  according  to  the  rules  applicable  in  the 
importing country, with the customer paying VAT 
to the Treasury. In the destination country, VAT is 
levied  at  the  same  rate  on  imported  goods  as  on 
domestic goods and there is thus no direct effect of 
VAT  on  relative  prices.  Thus,  the  benefit  of  the 
destination system is that it allows Member States 
to  have  different  VAT  rates  according  to  their 

(25) Due  to  space  restrictions, this  chapter  does  not  assess  the 
effects  of  broader  VAT  bases  on  inflation  or  as  a 
possibility for fiscal devaluation.

(26) See  Conclusions  of  the  3167  meeting  of  the  Council  of 

Economic and Finance Ministers, 15 May 2012.

47

European Commission

Tax reforms in EU Member States

revenue  needs  and  preferences.  Under  the origin 
system, by contrast, any rate  difference will result 
in a corresponding impact on the relative terms of 
trade.  (27) For  this  reason,  use  of  the  destination 
principle  was  never  really  challenged  until  the 
Single  Market  programme  of  1992  led  to  the 
abolition  of  border  controls,  which  had  been 
identified  by  the  Cecchini  report  as  costing  intra-
community  traders  2 %  of  their  turnover.  (28)  The 
problem,  as  far as  VAT  was  concerned,  was  that 
abolishing border  controls  removed  one  crucial 
element of the destination system, i.e. certification 
that  the  goods  that  were  zero-rated  for  export 
actually  left
the  country  and  were  taxed  on 
importation in the destination country.

The  solution  initially  proposed  in  1987  by  the 
Commission (29)  involved  a  shift  to  the  ‘origin 
principle’. Instead of being zero-rated, transactions 
between  Member  States  liable  to  VAT  would  be
subject to the tax already charged in the country of 
origin, which traders could then deduct as input tax 
in the normal way. Hence, the origin system is by 
design  not  exposed  to  types  of  fraud  such  as 
carrousel  fraud  that  exploit  the  zero-rating  of 
exports. The system would have resulted in goods 
moving  between,  say,  England  and  France,  or 
France  and  Germany,  treated  in  exactly  the  same 
way  as  those  moving  between  England  and 
Scotland  or  Bavaria  and  Baden-Württemberg. 
There would have remained, however, one obvious 
difference:  VAT  paid  in  England  and  Scotland 
goes into the same Treasury; that paid in England 
and  France  does  not.  Estimates  showed  that  there 
would  have  been  substantial  transfers  of  tax 
revenues,  notably  to  Germany  and  Benelux  from 
the rest. Accordingly, the Commission proposed a 
clearing  system (30) 
the  VAT 
collected in the countries of origin to the countries 

to  re-allocate 

of  destination.  This  might  have  been  based  on 
VAT returns or on macro-economic statistics. (31)

the 

transitional  system  proposed  by 

The  Commission  proposals,  however,  were  not 
accepted  by  the  Council.  In  the  second  half  of 
1989, a high-level working party convened by the 
Council outlined an alternative  which retained the 
destination  principle  for  transactions  involving 
VAT-registered traders. (32) This became the basis 
of 
the 
Commission  in  the  following  year,  and  which 
came  into  effect  at  the  beginning  of  1993. (33)
However, for sales to private individuals other than 
distance  sales  exceeding  a  significant  threshold 
and sales of new means of transport, the principle 
of  taxation  in  the  Member  State  of  origin  was 
accepted.  The  system  was  originally  intended  to 
apply until the end of 1996 and was known as the 
‘transitional  VAT  system’.  However,  after  a 
second  set  of  simplification  measures (34) and 
numerous  other  modifications,  it  has  remained  in 
force until today.

Therefore  the destination  principle  continues  to 
apply  to  most  transactions  between  registered 
traders. However, as tax controls at frontiers have 
been  abolished,  traders  are  required to  keep 
detailed  records  of  purchases  from,  and  sales  to, 
other  countries,  and  the  system  is  policed  by 
administrative  cooperation between Member State 
tax authorities. In practice, goods supplied between 
taxable  persons  (or  VAT  registered  traders)  are 
exempted  with  a  right  to  deduct  the  input  VAT 
(zero-rated) on dispatch if they are sent to another 
Member  State.  This  is  known  as  an  ‘intra-
Community  supply’.  The  customer  can  establish 
his status by providing his VAT number, which the 
supplier  can  check  using  the  VAT  Information 
Exchange System (VIES).

Three  main  reasons  explain  the  reluctance  of 
Member  States  to  change over  to  the  origin 

(Genser  and  Schulze,  1997).  However, 

(27) It is theoretically possible that, in an origin system in which 
two  countries  have  different  VAT  rates,  trade  will  not  be 
distorted  in  the  long-term,  if  there  is  a  free  trade 
environment and flexible exchange rates because these will 
the 
adjust 
conditions required seem unlikely to apply to a real-world 
situation.  Furthermore,  trade  neutrality  would  presumably 
take even longer to be achieved in a multi-country setting 
with a fixed exchange rate regime, i.e. the euro zone. 
(28) The  following  discussion  on  the  origin  and  destination 
principle is largely based on the report from the European 
Parliament (2000).

(29) COM(87) 322 final/2, 21 August 1987.
(30) COM(87) 323 final/2 25 August 1987.

48

(31) COM(89) 260, 14 June 1989.
(32) The  origin  system  applies  to  most  sales  made  directly  to 
final consumers, except those by mail order companies and 
similar entities, which, over a certain threshold, must apply 
the rate at destination. Sales of new means of transport, too, 
constitute an exception, as they are taxed at the rate of the 
country of destination.

(33) Directive 91/680/EEC of 16 December 1991 together with 
Directive  92/111/EEC  of  14  December  1992, which 
introduced a first set of simplification measures.

(34) Directive 95/7/EC of 10 April 1995.

4. The EU VAT system: economic implications and policy challenges

system.  The  first  was  that  Member  States  had 
some  doubts  that  the  proposed  clearing  house 
system  would  offer  all  the  necessary  guarantees 
and incentives regarding fiscal controls and ensure 
a  fair  distribution  between  Member  States  of  the 
VAT collected.

Second,  shifting to  an  origin-based  VAT  would 
have required substantial convergence of the VAT 
rates between Member States, as the origin system 
can  tolerate  only  very  small  differences  in  rates, 
owing  to  its  immediate  implications  on  trade 
distortion. This would mean a significant reduction 
in  Member  States’  room  for  manoeuvre.  Today, 
the  difference  between  the  highest  (HU) and  the 
lowest  (LU)  rate  in  the  Union  is  12  percentage 
points, which is very high. Overall, there has been 
only a very gradual and limited closing of the gap 
between  standard  rates,  even  partly  reversed  in 
recent years (see Graph 2.1).

Third,  the  differences  in  the  tax  base  may  be  (for 
tradable  goods,  of  course)  even  greater than  for
standard  VAT  rates.  Although  EU  legislation  has 
limited the right of Member States to grant a more 
favourable  VAT  treatment  to  a  specific  set  of 
goods,  major  differences  in  the  base  for  VAT 
remain. (35)

Graph 4.1:

Standard VAT rate in EU-27

22

21

21

20

20

19

19

0.18

0.16

0.14

0.12

0.10

0.08

0.06

0.04

0.02

0.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

average (lhs)

coefficient dispersion (rhs)

Source: Commission services.

(35) The  VAT  revenue  ratio  can  give  a  rough  measure  of  this. 
The indicator is the ratio between actual VAT revenue and 
the theoretical amount that could be obtained by taxing all 
consumption  at  the  standard  VAT  rate.  The  low  value  of 
the indicator for most countries highlights that actual VAT 
revenue  is  only  a  small  fraction  of  the  theoretical total. 
While this is likely to be to some extent due to differences 
in  rates  of  tax  evasion,  the  large  variation  in  the  levels  of 
the  indicator  seems  to  confirm  that  Member  States  differ 
substantially  in  the  degree  by  which  they  exempt,  or  tax 
more favourably, certain goods and services.

this,  as 

flexibility 

It  appears  highly  unlikely  that  there  will  be 
convergence in VAT (standard and reduced) rates 
in  the  future.  VAT  is  one  of  the  main  tax  policy 
variables  left  for  Member  States  to  adjust  their 
revenue in the short term, but only a VAT system 
based  on  taxation  at  destination  provides  the 
necessary 
it  allows 
for 
differentiated  levels  of  VAT  between  Member 
States and changes in rates. The room for increases 
in  taxes  other  than  VAT  has  been  gradually 
eroded,  either  because  they  have  already  reached 
high  levels,  or  due  to  increased  competition  for 
mobile tax bases. In addition, recourse to the main 
alternative revenue raiser in all Member States, i.e. 
labour  taxation,  has  been  made  more  and  more 
problematic  by  the  need  to  boost  the  EU’s 
unsatisfactory  employment  levels. (36)  VAT  hikes 
have  predominated  as  the  preferred  tax  revenue 
raiser  since the  beginning  of  the  crisis  (see 
European  Commission, 2012a).  This  also  reflects 
policy suggestions by the European Commission to 
shift 
less 
distortionary  tax  bases  (European  Commission, 
2012b).

tax  away 

towards 

labour 

from 

4.1.2. Dealing with VAT fraud in the current 

destination system

A consequence of abandoning the origin system is 
that  it  removes  a  promising  systemic  solution  to 
deal  with  VAT  carousel  fraud  in  the  current 
destination-based  system.  ‘Carousel  fraud’ is  a 
type  of  fraud  that  exploits  the  zero-rating  of 
exports  combined  with  the  deferred  payment  of 
VAT  on  imported  goods  to  disappear  before 
paying  the  VAT  charged  on  the  subsequent 
domestic  sale  with  the  customer  claiming  its 
refunds. Although,  given  the  nature  of  fraud,  it  is 
difficult to quantify its extent, all estimates put the 
level  of  fraud  at  extremely  high  levels  (Baldwin 
(2007) quotes estimates ranging from € 60 to € 250 
billion annually EU wide). Carousel fraud is linked 
to  the  design  of  the  current  VAT  system,  which 
provides for an exemption of exports from VAT—
this  is  the  step  targeted  by  fraudsters.  So  far,  two 
types of solutions have been put forward to tackle 
this  problem:  one  relies  on  better  cooperation 
within  national  tax  administrations,  aiming  at 
facilitating  and  speeding  up
detection  and 
repression;  the  other  relies  on  system  reforms  of 
various  kinds. One  proposal,  put  forward  in  the 

(36) See also Chapters 2 and 3 of this report.

49

European Commission

Tax reforms in EU Member States

past notably by Germany and Austria, involves the 
‘domestic reverse charge mechanism’, where VAT 
on  products  and  services  delivered  in  the  same 
Member State is owed by the recipient and not by 
supplier. Other solutions,  such  as  the  VIVAT 
system  proposed  by  Keen  and  Smith  (1999), 
centres  on  reducing  the  financial  incentives  for 
fraud, essentially  by  preventing  the  VAT  chain 
from being broken by levying a low common rate 
of  VAT  on  trade  between  registered  traders, 
including intra-EU trade. (37)

4.2. GENERAL IMPLICATIONS OF THE CURRENT 

VAT SYSTEM ON TRADE

The  basis  of  the  EU  system  dates back  to  the  1st
and  2nd Directives,  originally  adopted in  1967. 
Although the Directives on VAT – in particular the 
6th Directive (40)  have  been  amended  over  time, 
the  changes  have been  adaptive,  rather  than 
systemic reforms. A number of initial choices have 
not  been 
their  negative 
consequences.  The  main  characteristics  of  the 
current VAT system are as follows.

reassessed,  despite 

Although the legal form of the tax must conform to 
the  EU  VAT  Directive (41),  Member  States  have 
considerable leeway to define their rates.

the  destination  principle 

The  focus  of  this  section  is  on  the  general 
implications  of  the  current  VAT  system  on  trade. 
If 
to  be  used
permanently, it is even more important to examine 
critically  the  weaknesses  of  the  current  VAT 
system, which is a variant of a destination system,
and to reflect on alternative solutions  to achieve a 
properly functioning destination system.

is 

4.2.1. The current VAT system: strengths and 

weaknesses

VAT was first introduced in the EU and has been a 
very successful tax since its inception. Its  success 
is measured by the fact that it has been introduced 
in at least 145 countries so far (38), including many 
developing countries where it was initially deemed 
to  be  too  complicated  (Bird,  2005:  ‘VAT  has 
swept the world’). In the EU, the long-term growth 
of  VAT  rates,  compared  with  the  trend for  lower
taxation of labour and capital income, is testimony 
to the robustness of this. Furthermore, according to 
recent research, VAT is considered to be one of the 
taxes
that  have  the  least  negative  effect  on 
economic  growth. (39) VAT  also has,  at  a  first 
approximation,  by  and  large  a  neutral  effect  on 
international  trade,  a  factor  that  was  instrumental 
in its adoption in the EU, as the previous old-style 
sales tax ran the risk of generating trade distortions 
among  Member  States  due  to  the  difficulty  in
exempting taxes on inputs.

(37) The main advantage of VIVAT is that it enables neutrality 
for  international  trade  and  subsidiarity  for  domestic 
taxation at the same time.

(38) See PwC (2011).
(39) European  Commission  (2011b)  gives  a  good  overview  of 

this literature.

50

Member States can even amend the base for VAT. 
Reduced  rates  and  exemptions  differ  strongly,  in 
practice,  from  one  Member  State  to  another.  This 
is because overall,  the  current VAT system in the 
European  Union  gives considerable  operational 
and 
national 
governments. The  main limit  to Member States is 
that goods or services cannot be freely moved from 
the  standard  rate  to  a  reduced  rate,  as  only  those 
listed  in  Annex  III  of  the  VAT  Directive  can  be 
taxed at a reduced rate.

administrative 

freedom 

to 

Despite  some  safeguards  to  guarantee  an  equal 
playing  field,  the  system  exempts  most  of  the 
output  of  the  public  sector,  creating  a  number  of 
distortions  wherever  public  and  private  producers 
of a good or service compete or could compete one 
with  another.  Other  newer systems  have  limited
the public sector exemption.

The  system  excludes  most  of  the  financial  sector 
from  taxation  due  to  technical  difficulties  in 
determining  the  value  added  in  margin-based 
activities,  creating  distortions  and  probably 
contributing 
to  overconsumption  of  financial 
services. (42)

4.2.2. Theoretical impacts on the current 

systems on trade

These  fundamental  choices  have a  number  of 
consequences  for trade.  First,  the  patchwork  of 
legal  rules  on  VAT,  the  differences  in  procedures 
and in the definition of the base create an implicit 
tax barrier for intra-EU trade, even though VAT is, 
in principle, neutral with regard to trade due to the 

(40) 77/388/EEC of 17 May 1977.
(41) 2006/112/EC of 28 November 2006.
(42) See Section 4.4 for further details.

application  of  the  destination  system  to  most 
transactions.  A  number  of  elements  support  the 
view that  the  different  VAT  regimes  do  have  an 
impact on trade.

rules.

country’s  VAT 

IFS et al. (2011) (43) identifies four potential types 
of impacts. First, the higher cross-border costs and 
the  sizeable  one-off  learning  costs  needed  to  start 
exporting, due  to the  need  to  learn  about  the 
destination 
Second, 
differences  in  VAT  regimes  may  also  affect  the 
choice  of  exporting  vs  setting  up  a 
local 
subsidiary,  particularly  for  firms  that  organise 
complex  trade  networks  in  intermediary  goods.
Third,  they  may  also  have  an  impact  on  the 
structure of demand. VAT rates, VAT exemptions 
and  the  compliance  cost  burden  associated  with  a 
national VAT regime may have domestic price and 
volume  effects  that  affect  the  structure  of  a 
country’s  foreign  trade.  This  is  because  multiple 
VAT rates and exemptions influence the structure 
of  relative  prices  in  a  country.  This  may  push  up 
the  demand  for  low-rated  or  exempted  goods  and 
services,  while putting a brake on the demand  for 
other  items.  This  may  well  affect  a  country’s 
specialisation in international trade.

The  fourth  impact  of  VAT  regimes  on  trade  is 
immediate  and  relates,  of  course,  to  cross-border 
purchases  of  goods  by  final  consumers, (44) 
particularly between  Schengen  area  members,  as 
identity  checks 
the  abolition  of  cross-border 
impact  of 
shopping.  The  main 
facilitates 
differences  in  tax  regimes  is  on  excisable  goods. 
Cnossen  (2002)  notes  that  the  impact  of  different 
VAT  rates  was  found  to  be  relatively  limited  in 
Denmark,  despite  a  significant  difference  in  rates 
vis-à-vis  neighbouring  Germany.  However,  the 
strong  recent  increases  of  VAT  standard  rates, 
which  still  diverge,  may  increase  the  scale of 
cross-border 
distance-selling 
arrangements  laid  down  in  the  VAT  Directive 
ensure 
therefore 
neutralise  the  differences  in  VAT  rates,  but  only 
for those supplies for which the supplier takes care 
of the transport of the goods. (45)

taxation  at  destination  and 

shopping.  The 

(43) See p. 159-160.
(44) Most of them are subject to the origin principle.
(45) The  rise in  the  use  of  the  internet  by  the  population  may 
increase 
in 
neighbouring countries find it easier to shop for goods and 
services  on  the  other  side  of  the  border  and  modern  GPS 

cross-border 

shopping, 

shoppers 

as 

4. The EU VAT system: economic implications and policy challenges

Therefore,  cross-country  differences 
in  VAT 
regimes  are  likely  to  result  in  a  sub-optimal 
international division of labour. These are not only 
limited to compliance costs and the effects of rate 
and  base  differences.  In  an  early,  well-known 
discussion  of  the  impact  of  VAT  on  international 
trade,  Feldstein  and  Krugman  (1990),  while 
starting from the well-known theoretical result that 
in  the  first  approximation  that  VAT  is  neutral  on 
trade,  also  demonstrate 
that  exemptions  and 
reduced  rates  may  well  have  an  impact  on  the 
international  division  of  labour,  notably  on  the 
financial sector. (46)

4.3.

ESTIMATING THE IMPACT OF CROSS-
BORDER COMPLIANCE COSTS

The  compliance  costs  of  VAT  are  not  trivial. IFS 
et  al.  (2011)  reports  that  past  estimates  for 
compliance  costs  have  ranged  from  0.3 %  of 
turnover  to  as  high  as  8  or  even  25 %  of  VAT 
collected in countries such as Croatia or Slovenia. 
Compliance costs are known to differ substantially 
between  Member  States,  even  though  the  general 
principles of VAT are common. Data from World 
Bank  /  PwC  (2011)  ‘Paying Taxes’ (47)  show  that 
for a model company, the time required to comply 
with VAT obligations varies very  greatly amongst 
fictional  model 
EU  Member  States.  For  a 
company,  they  range  from  22  hours  in  Finland  to 
288 in Bulgaria (PwC, 2010). This suggests a high 
level  of  inconsistency.  Furthermore,  the  estimates 
of ‘Paying Taxes’ assume that companies carry out 
solely domestic transactions.

that 

There  are  good  reasons  to  believe 
the 
compliance  costs  linked  to  cross-border  trade  are 
even  higher.  This  is  because  cross-border  trade 
requires  applying  complex  rules  and  fulfilling 
additional  obligations.  Very  often  it  also  requires 
acquiring knowledge of the foreign legislation and 

technology  facilitates  driving  to  new  destinations  in 
neighbouring countries.

(46) Anecdotal  evidence  suggests,  for  example,  that  cross-
border  trade  in  personal  services  like  hairdressing  or 
dentistry  has grown,  notably  in  the  border  regions  of 
Austria or Germany. While the main driver of these trends 
probably  lies  in  strong  differences  in  the  cost  of  labour, 
VAT  factors  may  either  amplify  or  artificially  restrict  this 
trend. This  explains  the  attention  of  Member  States  to 
issues  such  as  granting  reduced  rates  to  labour-intensive 
services in neighbouring countries.

(47) See PwC et al. (2011).

51

European Commission

Tax reforms in EU Member States

VAT  practice.  These  costs  are  proportionately 
much higher for SMEs, as the profit to be obtained 
from foreign sales may be uncertain and limited at 
the beginning,  whereas  the costs  sunk into  setting 
up a system for dealing with foreign VAT are up-
front and certain. But there are other,  more subtle 
effects.

It  has  been  known  for  a  long  time  that  the  cross-
border VAT compliance costs are well above those 
for domestic transactions. In general, VAT-related 
obligations have been identified as a major source 
of the compliance costs for European firms, due to 
their pervasive  role  in  everyday  transactions.  A 
European Commission survey in 2000 showed that 
26 % of businesses found difficulties related to the 
VAT  system  and  VAT  procedures  to  be  an 
obstacle  to  doing  business  in  the  Internal  Market. 
A  further  survey (48) in  2001  showed  that  VAT 
payments  and  refunds  were  the  third  most  costly 
regulatory burden  for companies. The  multiplicity 
and complexity of VAT requirements in the EU-15 
Member  States,  i.e.  the  ‘old’ EU  Member  States, 
combined  with  difficulties  for  businesses 
in 
obtaining VAT refunds from other Member States 
leads  to  substantial  costs  and  represents  a  real 
barrier  to  cross-border  activities.  (49)  Out  of  25 
priority areas  identified in the VAT legislation by 
their contribution to the compliance cost burden of
European  companies,  eight  specifically  pertain  to 
cross-border activities. (50)

The  impact  of  this  on  trade  has  always  been 
difficult  to  quantify  due  to  a  lack  of  estimates of
the  scale of  cross-border  compliance  costs, 
compared with domestic costs. However, IFS et al. 
(2011)  sheds  some  new  light  on  the  issue.  It 
suggests  that  the  distortionary  effect  on  trade  is 
strong.  It  found  many  differences  across  Member 
States  in  VAT-related  administrative  procedures: 
on  average,  a  firm  trading  in  two  EU-15  Member 
eleven 
States  would  have 
differences (51).  These intra-EU  differences  are a 

to  deal  with 

(48) European Commission (2001).
(49) An overview of these results is given in IFS  et al. (2011), 

pp. 157-158.

(50) See  the  report  by  the  High  Level  Group  of  Independent 
Stakeholders  on  Administrative  Burdens  (2009),  and 
http://ec.europa.eu/enterprise/policies/better-
regulation/administrative-burdens/priorityareas/
tax/index_en.htm;  Ministry  of  Finance,  et  al.  (2005); 
Diemer (2010); Skatteverket (2006), Verwaal and Cnossen 
(2002).

(51) IFS et al. (2011), p. 15.

52

source of trade costs that hamper the development 
of the internal market and discourage cross-border 
trade.

that 

finding 

The  results  confirm  that  there  are  considerable 
differences, not only in the structures and levels of 
VAT but also in the administrative procedures. An 
administrative 
is 
interesting 
procedures  in  the  EU-15  have  not  tended  to 
converge  appreciably, although  several  decades 
have  gone  by  since  the  VAT  system was  set  up.
The VAT dissimilarity indicator (52) for the EU-15 
shows that on average, more than 11 out of the 30 
aspects of the  administrative  and procedural VAT 
regime  differ  between  each  EU-15  country  pair. 
By contrast,  the ten  member  states  that joined  the 
EU in 2004 have  fewer administrative differences 
in  their  VAT  regimes  than  the  EU-15  countries 
have among each other. This may be because these 
countries were able to start a VAT tax system from 
scratch  and  have  chosen  to  adapt  best-practice 
procedures from  the  EU-15  countries. (53) Rates 
also  differ  less  between  the  new  Member  States 
than  among  the  EU-15  Members.  This  suggests 
that convergence is not a natural phenomenon over 
time, but the result of deliberate policy alignment.

IFS  et  al.  (2011)  uses  an  innovative  indirect 
approach  to  simulate,  in  the  absence  of  data  on 
the  order  of 
cross-border  compliance  costs, 
magnitude  of 
the 
the  possible 
economy. (54)  The  estimates  suggest  that  a  10 % 
reduction in differences in VAT procedures could 
boost  intra-EU  trade  by  up  to  3.7 %  and  GDP  by 
up  to  0.4 %.  The  simulation  results  also  suggest 
that  removing  national  VAT  obligations  that  go 
beyond  EU  requirements  would  yield  a  growth  in 

impact  on 

(52) The  VAT-regime  dissimilarity  indicator  compares  across 
countries  various  aspects  and  functional  domains  in 
national VAT regimes. The aspects include rate structures, 
the  heterogeneity  of  administrative  procedures,  and  the 
compliance cost burdens created by national VAT regimes. 
Dissimilarity indicators are calculated for all 676 (=26x26) 
bilateral  country  pairs  in  the  EU  in  order  to  allow 
maximum accuracy  in  detecting  the  VAT  influences  on 
bilateral trade between Member States.

(53) IFS et al. (2011), p. 168.
(54) The  method 

is  an  econometric  approach  based  on 
comparing  the  trade  structure  of  each  country  with  the 
above-mentioned  estimates  for  the  dissimilarity  of  VAT 
regimes. The results capture the direct (partial equilibrium) 
effects  of  VAT  policy  on  trade  only  and  do  not  take  into 
account  trade diversion  or other  indirect  effects.  For  trade 
in  services, the  study  distinguishes  three  types  of  trade 
flows: total services, travel, and other business services.

intra-EU  trade  volumes  by  2.6 %  and  GDP  by 
0.2 %.

estimates, 

Overall, although the authors of the study consider 
these 
to  methodological 
owing 
limitations,  to  be clearly  the  upper  bounds  of  the 
range  of  possible  impacts,  the effects  of  this 
magnitude  clearly  highlight  that  simplifying  and
harmonising procedures  and  converging tax  rates 
and  bases are an  important  policy  issue.  This  is 
confirmed  by  the robustness  check  performed  by 
the  study. It simulates the  impact  on  trade  of 
abolishing all VAT compliance costs, on the basis 
of  the  assumption  that  it may raise  firm  turnover 
by 1 %. The estimated increase in intra-EU trade is
4.3 % and the estimated impact on GDP is 0.4 %.

4.4.

ESTIMATING THE IMPACT OF VAT
EXEMPTIONS ON TRADE NEUTRALITY

The  basic  result  that VAT has  a  neutral effect on
vertical  integration  and  world  trade  is  no  longer 
strictly  true  when  there  are  exemptions  and
reduced rates.

(given the  difficulty  of 

Exemptions apply in a significant number of areas 
and  sectors:  examples  include  many  financial 
services 
identifying 
economic  value  added  in  a  financial  transaction) 
and certain  services  of  public  interest  (e.g.  health 
services). The distortion affects both the input and 
the output side. On the input  side, it is due to the 
fact that exempted sectors do not have to add VAT 
to the sale price and are also not allowed to deduct 
the VAT they pay on their inputs. (55) As a result, 
exempted  sectors  have  a  financial  incentive  to 
internalise  production  inputs,  because  internal 
value added goes untaxed, but VAT paid on inputs 
acquired  from  other  sectors  is  irrecoverable  and 
increases  production  costs.  This  may  lead  the 
public or the financial sector to engage in activities 
which could be outsourced at a lower total running 
cost.  A  recent  study (56) on  VAT  in  the  public 
sector and exemptions in the public interest found 
that in the EU public  sector alone, thus excluding 
the  financial  and  charity  sector,  eliminating  this 
distortion would results in gains of up to 0.3 % of 
consumption.

(55) This situation is different from ‘zero rating’ where turnover 
is  not  taxed  and  the  producer  is  allowed  to  deduct  VAT 
paid on inputs, resulting in zero effective taxation. Exports, 
for example, are zero rated. 

(56) Copenhagen Economics et al. (2011).

4. The EU VAT system: economic implications and policy challenges

There is also a distortion on the output side: when 
an exempted sector, i.e. financial services, sells to 
a business, the sale cost must include a component 
to  compensate  for  the  VAT  on  inputs,  which  the
banking  sector  cannot  recover.  The  business  will 
be  unable  to  recover  this  amount,  departing  from 
the  normal  case  whereby  VAT  paid  on  inputs  is 
wholly  recovered  and  therefore  indifferent  to  the 
business.  Therefore  the  output  of  the  exempted
sector  is  overtaxed  when  it  makes  a  sale  to  an 
ordinary  business.  On  the  other  hand,  not  taxing
value added results in under-taxation of the output 
whenever  the  financial  service  industry  sells  to 
households or exempt entities. This may skew the 
composition  of  sectoral  demand.  Copenhagen 
Economics  (2011)  found  that  a  full  taxation 
solution,  which  would  eliminate  both  distortions, 
would  create  potential  economic  gains  from  0.04 
up  to  0.19 %  of  EU  GDP,  which  is  significant. 
Furthermore, there are frequent situations in which 
businesses  trade  in  both  exempt  and  non-exempt 
goods.  This  creates  substantial  extra  compliance 
costs.

As  recognised  by  the  seminal  Feldstein  and 
Krugman  (1990)  contribution,  having exempt 
sectors  weakens  the  neutrality  properties  of  VAT 
with  regards  to  international  trade.  The  authors 
argue that generally, the fact that exemptions are in 
practice  mostly  found  in  the  non-traded  sector 
means that they will reduce the size of the tradable 
sector. In addition, there is a competitiveness issue,
which may affect the financial sector in particular. 
Financial  sector  exports  are  harmed  by 
the 
inability  to  deduct  input  VAT  and  this  creates  a 
competitiveness  distortion  whenever 
there  are 
different  rates.  The  effect  is  significant:  IFS  et  al 
2011  reports  that  if  financial  services  firms  could 
reclaim VAT on their inputs, the  cost of financial 
services to businesses would be reduced by around 
3–5 %  in  the  four  biggest  euro-area  countries 
(France,  Germany,  Italy  and  Spain),  leading  to  an 
increase 
price 
competitiveness of 0.16 %, on average. For the EU, 
financial  institutions  may  well  be  handicapped  by 
this effect when competing with US institutions (as 
the US levies no VAT). Overall, this may result in 
barriers  to  trade  in  financial  services.  Several 
authors consider comprehensive VAT rates as one 
of the most important advantages of more modern 
VAT systems like the New Zealand system, which

international 

their 

in 

53

European Commission

Tax reforms in EU Member States

gives no exemption for the public sector (Aujean et 
al., 1999).

4.5.

ESTIMATING THE COST OF EXEMPTIONS 
AND REDUCED RATES AND ITS 
DISTRIBUTIONAL BENEFITS

Last year’s Tax Reforms Report discussed the issue 
of  VAT  efficiency  and  called  for  coordination  of 
policies on VAT rates among Member States. This 
section adds to this discussion by  highlighting the 
theoretical  arguments  in  favour  of  using  uniform 
VAT  rates  and  presenting  some  new  empirical 
results on their effects.

theory 

reduce 

should 

system 

According to Ramsey (1927), an efficient indirect 
the 
in 
tax 
consumption  of  any  good  in  the  same  proportion. 
However, this is not possible in reality. The design 
of  such  a  rate  structure  would  require  knowledge
of cross-price  demand  elasticities,  which  are  very 
difficult to measure. A similar theoretical approach 
is  followed  by  Corlett  and  Hague  (1953),  who 
showed  that  efficiency  could  be  enhanced  by 
increasing  the  tax  burden  on  goods  that  are 
complementary  to  leisure.  However,  this policy 
suffers  from 
that  price 
elasticities between leisure and those goods are not 
led 
discernible.
economists  to  pragmatically  favour  uniform  VAT 
taxation.

(57)  These  difficulties  have 

the  same  drawback 

This  is  reinforced  by  the  fact  that  consumption 
taxes  are  poor  instruments  for  redistribution. (58) 
Historically,  the  main  argument  for  introducing 
reduced  VAT  rates  was  the  attempt  to  counteract 
the regressive properties of VAT. IFS et al. (2011) 
relativises  this  problem,  arguing  that,  while  zero 
and  reduced  rates  can  be  progressive  and  can  be 
used  to  encourage  the  consumption  of  socially 
desirable  goods  and  services,  they  are  costly 
instruments,  as  the  benefit  is  by  nature  spread 
between  all  consumers,  regardless  of  income. 
Indeed,  their  estimates  indicate  that  it  would  be 
possible, in principle, to abolish zero and reduced 
rates of VAT, compensate low income households 

(57) For  an  in-depth  discussion  of  VAT  differentiation  applied 
to  environmental  policy,  see  Kosonen  and  Nicodeme 
(2010), on which we draw.

(58) See Atkinson  and  Stiglitz  (1976)  for  the  theoretical 
argument and Copenhagen Economics (2007, 2008) for the 
empirical evidence.

54

and still have revenue left over. (59) In addition, it 
is  not  certain  that  reduced  rates  or  exemptions 
effectively result in lower prices for consumers as 
traders  may  not  pass  the  gains  on  to  consumer 
prices.  Although  one  might  expect 
in 
competitive markets, tax savings should be largely 
passed on to consumers in the long run, it appears 
that  only  30 %  of  the  2009  cut  in  VAT  on 
restaurant  and  catering  services  in  France  from 
19.6 %  to  5.5 %  was  passed  on  to  consumers.  A 
similar effect was reported for a 2010 VAT cut in 
hotel services in Germany and in South Africa on 
paraffin (Owens et al, 2011). (60)

that 

The  effects  of  reduced  VAT  rates  to  promote 
employment or the consumption of merit goods are 
not  supported  by  empirical  evidence  either  (see 
Copenhagen  Economics,  2007).  For  employment, 
although there may be some positive effects in the 
short-term,  the  long-term  impact  appears  at  best 
low. In addition, the cost of the jobs created appear 
high. (61) As for the promotion of merit goods, the 
concept  does  not  tally with  the  purpose  of 
redistribution  as  many  of  these  goods  ultimately 
benefit high-income earners (e.g. cultural goods).

Reduced  rates  and  exemptions  generally  tend  to 
have  a  significant  budgetary  cost.  Mathis  (2004) 
found that in the EU-15, only about 69 % of VAT-
taxable transactions were taxed at the standard rate 
in  2000,  with the  share  falling  to  about  50 %  in 
some  Member  States.  Besides  reducing  revenue, 
rates  and  exemptions  also  distort 
reduced 
households’ spending patterns.

reduced 

Furthermore, 
rates  and  exemptions 
increase  the  complexity  of  the  system  — thereby 
increasing administrative costs, litigation costs and 
compliance  costs.  Because  a  large  proportion of 
compliance  costs  are  generated  by  differences  in 
rates  between  different  products,  or  between  the 
same products in different countries, this creates a 
risk of a gradual increase in system complexity and 

(59) Additional  details  on 
Commission (2011a).

this  are  given 

in  European 

(60) Preliminary reports on the VAT cut on restaurant services 
in  Sweden  in  2012  suggests  that  around  30 %  of the  tax 
reduction  affected  prices  while  at  the  same  time  the 
employment level in the restaurant sector has increased.
(61) See  the  report  by the  French  Senate  on  the  effects  of 
reduced VAT rates in restaurants, which estimates that the 
measure created 20 000 jobs for a net cost of € 2.4 billion, 
representing a cost of €  120 000 per job created
(http://www.senat.fr/rap/r10-042/r10-042_mono.html).

4. The EU VAT system: economic implications and policy challenges

in  the  degree  of  fragmentation  of  the  internal 
market.  Indeed,  the countries  that  have  adopted 
VAT more recently seem to have preferred single-
rate  regimes  to  avoid  these  problems.  Australia,
Canada,  Korea,  New  Zealand,  Singapore  and 
South Africa have broader bases for VAT than the 
EU. In  Africa,  two  thirds  of  the  21  countries  that 
adopted  the  VAT  in  the  1990s  and  all  but  one  of 
the  nine  that  did so  in  the  2000s  have  chosen 
single-rate  systems.  Current  proposals  for  VAT
reform  in  Switzerland  also  plan  to replace the 
current three rates of VAT with a single rate. Some 
studies  suggest  this  may reduce  compliance  costs 
by 20-30 % and add 0.1-0.7 % to growth (Owens et 
al., 2011). Moreover, avoiding the cost associated 
with 
rates  and  exemptions  allows 
governments  to  set  a  lower  standard  VAT  rate. 
This  may also  partly  explain  why  the  OECD 
countries  that  have  adopted  VAT  more  recently 
also  have,  on  average,  lower  standard  VAT  rates 
(although this may also be due to lower overall tax 
levels than in the EU in general).

reduced 

to 

and 

lobbyism 

less  prone 

Granting  exemptions  and  reduced  rates  tends  to 
generate constant demand to extend the favourable 
treatment  to  other  sectors.  Uniform  VAT  is  more 
stable 
and 
manipulation.  Experience  in  operating the  EU 
VAT  system  does  not  lead  to  excessive  optimism 
that the prevalence of reduced rates may diminish 
over the longer term. On the contrary, events over
the  past  years  have  tended  to  highlight  that  under 
normal circumstances, reduced rates or exemptions 
are very difficult to roll back  for political reasons. 
Fundamentally, the constituency that would benefit 
from  the  reform,  i.e.  the  general  public,  would 
derive from the reform only a limited advantage in 
per capita terms, whereas the affected sectors stand 
to lose much more from the withdrawal of special 
tax  treatment  and  are generally  much  better 
organised politically.

Overall, Copenhagen Economics (2007) concludes 
that there is a strong overall argument for a (more) 
uniform VAT rate structure in the EU. Although in 
a  few  cases  (like  sectors  whose  services  can  be 
easily  substituted  by  shadow economy  activity)
there is a convincing case for a lower VAT rate, in 
general  the  arguments  for  reduced  VAT  rates  or 
exemptions  are  limited  and  contingent  and  the 
policy  aims  of  reduced  rates  or  exemptions  can

often  be  equally  well  or  better  achieved  by  other 
means.  In  particular, 
the  case  for  granting 
exemptions  on  equity  grounds  is  substantially 
same
weakened 
objectives can be reached at a lower budgetary cost 
and  without  distorting  the  consumption  decision 
through  direct  payments  to  needy  households  (on 
this point see also IFS et al., 2011).

fact 

that 

the 

the 

by 

4.6.

POLICY CONCLUSIONS

The  first  policy  conclusion  of  the  ongoing  review 
of  the  EU  VAT  system is  that  the  long-standing 
plan to change to a VAT system based on taxation 
at  origin  is  no  longer  feasible. Maybe,  due  to  the 
loss of flexibility that the origin system entails, it is 
not even economically desirable under the present 
circumstances.

Confirming the destination principle reinforces the 
need  to  tackle  VAT  fraud  (in  particular  VAT 
carousel  fraud),  as  it  results  in  part  from  the 
endemic weaknesses of the destination regime and 
from  the  high  VAT  compliance  costs  for  cross-
border trade. This  will require  substantial  work to 
devise  alternative  concepts  for  a  more  robust  and 
simpler  destination-based  system  tailored  to  the 
Single  Market.  This, as  well  as  coordination 
between  Member  States, should  be  the priority,
under the  general  objective  set  in  the  Annual 
Growth Survey 2012 of combating tax fraud and in 
the Single Market Act. (62)

economic  benefits 

There  would  be 
from 
simplifying  and  standardising  VAT  procedures  as 
recent  research  shows that  there  is  a  potential 
increase in trade and GDP in the EU if the number 
and  mismatches  of  procedures  are reduced.  The 
high VAT compliance costs for cross-border trade 
must also  be  addressed  when  seeking solutions  to 
cross-border VAT fraud.

The  second  important  policy  conclusion  concerns 
the  use  of  reduced  VAT rates  and  exemptions.
Reduced  VAT  rates  and  exemptions 
largely 
explain why  different  VAT  regimes  can impact 
trade,  despite  the  use  of  the  destination  system. 
Their  use  mostly  reflects  policy  choices  made  in 
the past, often linked to distributional objectives.

(62) COM(2011) 206, 13 April 2011.

55

European Commission

Tax reforms in EU Member States

Box 4.1: Commission's Communication on the future of VAT

This Communication, which was first presented in December 2011, had a dual purpose. First, it set out the 
fundamental  characteristics  that  must  underlie  a  new  VAT  regime  (long-term  objectives).  Secondly, it 
defined the priority actions that were needed for the coming years in order to create a simpler, more efficient 
and more robust VAT system in the EU, tailored to the single market (short- and medium-term).

First,  VAT  needs  to  be  simplified  in  order to  make  it  more  workable  for  businesses.  A  simpler,  more 
transparent  VAT  system  would  relieve  businesses  of  considerable  administrative  burdens  and  encourage 
greater cross-border trade. Second, VAT must be made more efficient in supporting Member States'  fiscal 
consolidation efforts and sustainable economic growth. Broadening tax bases and limiting the use of reduced 
rates could generate new revenue for Member States without the need for rate increases. Third, the current 
huge  revenue  losses,  that  are due  to  uncollected  VAT  and fraud, need  to  be  stopped.  It  is  estimated  that 
around 12% of the total VAT which should be collected is not (the so-called VAT Gap).

Finally, the Commission has concluded that the long-standing issue of changing to a VAT system based on 
taxation at origin is no longer relevant. VAT will continue to be collected in the country of destination, and 
the Commission will work on creating a modern EU VAT system based on this principle. 

In its Conclusions adopted on 15 May 2012, the Council expressed its support for an EU VAT system which 
should  be  simpler,  more  efficient  and  neutral,  as  well  as  robust  and  fraud-proof.  The  Council  also 
emphasized that the current financial and economic situation is difficult and complex, and requires  strong
fiscal consolidation of national budgets. This should be taken into account at EU level  when implementing
the  objectives  of  the  Communication  on  the  future  of  VAT. The  Council  conclusions  also  invite  the 
European  Commission  to  continue  its  in-depth  analytical  work  and  to  set directions  for  legislative  works, 
and thus are important for the future reform of VAT.

Using  reduced  VAT  rates  and  exemptions  is,
however, debatable from an economic perspective, 
since  consumption  taxes  are  poor  instruments  for 
redistribution. The effect of reduced VAT rates to 
promote employment or the consumption of  merit 
goods is not supported by empirical  evidence,  but 
reduced  rates  and  exemptions  generally  tend  to 
have a significant budgetary  cost and increase the 
complexity  of  the  system,  thereby  increasing 
administrative and compliance costs.

the  study  has 

found  new  evidence 
Third, 
suggesting 
in  VAT  regimes, 
exemptions  and  reduced  rates  generate  high  costs 
in  terms  of  distortion  and  fragmentation  of  the

that  differences 

internal  market,  probably  higher  than  previously
the  recommendations 
believed.  This  confirms 
made  under  the  Annual  Growth  Survey  2012, 
which  stressed  that  there  are  potential  welfare 
gains  to  be  made  by increasing the  efficiency  of 
limiting  VAT  exemptions,
VAT  systems  by 
phasing  out  most  VAT  reduced  rates  and  using
alternative  policy  instruments  to  achieve  their 
aims.

The  findings  of  the  study  and  the  outcome  of  the 
public consultation have provided the input for the 
Commission’s  Communication  on  the  future  of 
VAT presented in December 2011 (see Box 4.1).

56

5.

TAX POLICY CHALLENGES IN EU MEMBER STATES

to 

an 

than 

rather 

chapter 

analysis 

systems, 

provides 

This 
of 
macroeconomic  challenges  that  individual  EU 
Member  States  are  facing  in  the  field  of  taxation 
and tax policy. The purpose of this  chapter serves 
to  supplement  understanding  of  Member  States' 
tax 
prescribe 
recommendations. The coverage is extended to all 
Member  States,  while  last  year's  Tax  Reforms 
Report only covered euro-area Members. It should 
be  borne  in  mind  that  all  EU  Member  States  are 
covered  by  the  European  Semester,  which  also 
recommends  sound  national tax policies to  favour 
growth  and  fiscal  sustainability,  while  avoiding 
and  correcting  macroeconomic  imbalances.  This 
cross-country  analysis  is  a  first  screening  and 
needs to  be  qualified  to  take  relevant  country-
specific features into account. 

Member  States  are  benchmarked  using  the  so-
called  Lisbon  Assessment  Framework  (LAF) 
approach (as explained in more detail in Box 5.1). 
In  short,  a  Member  State is considered  to  face  a 

the  distribution 

challenge  in  a  particular  area  of  tax  policy  if  it  is 
amongst  the  worst  performers,  that  is,  the  bottom 
third  of 
(under  normality 
assumption). (63) This approach is more restrictive 
than  the  one  applied  last  year  when  the  GDP-
weighted average (for the euro-area Member States 
only)  was  used  as  a  benchmark.  Certainly 
assessing countries against best practices would be 
also  very  useful  but  requires  in-depth  country 
specific examination, which is outside the scope of 
this  report.  In  some  limited  cases,  mainly  for 
alternative  well-
sustainability 
established benchmarks are used (instead of LAF). 
While  revisions  of  challenges  compared  to  last 
year's report are often due to recent reform efforts, 
they  may  also  relate  to  the  more  restrictive 
screening  approach,  the  revision  of  (backward-
looking) data and the improvement of the analysis, 
which has been dug deeper on various dimensions.

indicators, 

(63) Based  on the sign  of  the  indicator  value,  a  high  value 
corresponds to a good performance. All averages are GDP-
weighted unless otherwise indicated.

Box 5.1: Benchmarking approach to identifying Member States that face a challenge in a 
particular tax policy area

In the horizontal screening applied in this Chapter, the GDP-weighted average of the EU-27 Member States is used as a 
reference  point  for  benchmarking.  A  Member  State  is  considered  to  have  performed badly  in  a  particular  area  if  the 
indicator  under  consideration  is  significantly  lower than  the  EU average after  normalising, so  that  a  high  indicator 
corresponds  to  a  good  performance.  This  normalisation  – not displayed  in  the  tables – is key  to  calculate  the  two 
performance  thresholds:  ‘LAF  plus’ and  ‘LAF  minus’,  indicating  a  good  and  a  poor  performance  respectively.  The 
direction of performance needs to be indicated, and this is always a delicate normative exercise: is the high value of the 
original indicator indicative of a bad or a good performance? Each indicator may point to several different concepts and 
its interpretation depends on its purpose. For example, the tax-to-GDP ratio may indicate either the overall tax burden or 
the existence of ‘overall tax space’.

A Member State is considered to have performed badly in a particular area, if the indicator is significantly worse than this 
average.  Technically,  being  significantly worse means  that  the indicator  is  at  least  0.4  standard  deviations  below the 
weighted EU average (after normalising). This approach captures the bottom third of total distribution under the normality 
assumption (i.e.  the  worst  performers).  It  is  applied  in  the  LIME  Assessment  Framework  – LAF (see  European 
Commission, 2008). For the sake of simplicity, the wording ‘LAF plus’ and ‘LAF minus’ or ‘very high’ and ‘very low’
are used in the Chapter. If a high value of a  – normally distributed – indicator refers to a  good  (bad) performance, the 
values above (below) ‘LAF plus’ capture the third best performers. The values below (above) ‘LAF minus’ capture the 
third worst performers. The values between ‘LAF plus’ and ‘LAF minus’ capture the third of the distribution which is not 
significantly different from the EU average.

A more elaborate approach is applied if several indicators are used to assess whether a Member State faces a challenge in 
a particular policy area. In that case, the general approach is to consider that a country faces a challenge if at least one of 
the  indicators is  significantly  below  the  average.  Different  rules  are  applied  in  the  various  policy  areas  concerning  the 
required minimum level for the other indicator(s). A more detailed explanation is provided in the different sections of the 
chapter and in Boxes 5.2 and 5.3.

While this mechanical screening is consistent across countries, it does not take country specificities into account. This also 
implies that Member States coming out as better than ‘LAF minus’ for a specific policy area could still face a challenge in 
that area. Hence,  before  firm  policy  conclusions  can  be  drawn,  an  in-depth  analysis  would  have  to  be  carried  out. 
However,  such  detailed  country-specific  scrutiny  clearly  lies  outside  the  scope  of  this  report. Moreover,  countries  not 
displaying a strong tax challenge may still require subtle policy adjustments, which would require a more detailed analysis 
of  best  practices  than  EU-27  average  performances. Nevertheless,  the  ‘LAF  plus’ value  might  be  a  first  – and rough  –
screening device for identifying countries with good practices.

57

European Commission

Tax reforms in EU Member States

This chapter first  of all  updates  and refines  the
analysis carried out  in last year's  report  on the
broad challenges linked to the  contribution of
taxation to fiscal  consolidation or related to the 
need of growth-friendly tax structures  (Section
5.1). The  chapter then identifies challenges linked
to the  broadening of tax bases  in direct  taxation
and VAT (Section 5.2). Tax governance is the
subject  of Section 5.3. Specific 
are
addressed in Section 5.4, namely challenges
related to housing taxation and environmental
taxation. In addition, this section also touches upon
some  redistributive  aspects of the  tax system in a 
non-normative  way.
5.5
summarises the results of the analysis and provides
in a  synoptic  table  an overview of the  tax policy
challenges faced by individual EU Member States.

Finally,

Section

issues

5.1.

FISCAL CONSOLIDATION AND GROWTH-
FRIENDLY TAX STRUCTURES

the  analysis

Last year's  edition of the report  analysed two
macroeconomic  dimensions of taxation in detail:
the  sustainability of public finances and the
growth-friendliness of tax structures. This section
updates  and refines
aimed at 
identifying Member States that  face  overarching
macroeconomic
fiscal
consolidation and growth-enhancing tax structures.
As  last  year, Member States  are  subject  to
preliminary quantitative screening. Before drawing
firm policy conclusions, it  would, of course, be 
necessary to complement  this with an in-depth
country analysis, which is outside the scope of this
first horizontal analysis.

relating to

challenges

5.1.1. Consolidation on the revenue side

In the  current  economic context,  many Member
States need to undertake significant  consolidation
efforts. This sub-section identifies those  Member 
States that  face  sizeable  consolidation needs and
could consider
tax revenues.
increasing their
Member States that  are  currently following an
economic  adjustment  programme  (Greece, Ireland
and Portugal) are  excluded from the analysis in
this sub-section. The fiscal sustainability indicators
used in this sub-section cannot replace detailed and
frequent  monitoring of debt  sustainability carried
out by the European Commission, the IMF and the
ECB in the context of the adjustment programme.

58

There  is considered to be  potential  for using tax
increases  to help consolidation if:  (i) tax-to-GDP
ratio is relatively low, and (ii)  at  the  same  time
there is scope for increasing the least distortionary
taxes  and/or
the  overall  tax burden has  not 
increased substantially (unless warranted by large
consolidation needs). The  section is based on the
approach set  out  last  year, which has been
amended this year to take medium-term fiscal
sustainability into account.  The  approach is
summarised in Box 5.2 and is explained in more
detail  in Wöhlbier et  al.
the
screening results are presented in Table 5.3.

(2012). Finally,

Table 5.1:

Sustainability gap and primary balance

Sustainability gap indicators (2012)

Country

S1 - "medium-
term"

BE
DE
EE
ES
FR
IT
CY
LU
MT
NL
AT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17

6.2
0.6
-2.1
3.7
3.0
-0.9
2.3
0.3
2.9
4.1
2.3
2.2
4.4
1.2
-1.7
0.4
-0.6
-1.9
-0.1
-0.7
-0.1
-1.5
-2.9
5.1
2.2
2.1

S2 - "long-term"

Total

of which:

Initial Budgetary
position
0.5
-0.5
1.2
2.3
1.3
-3.4
-0.2
1.2
1.3
2.4
0.2
0.6
3.5
-0.3
0.4
1.1
0.5
0.9
0.8
-0.5
0.5
0.1
-1.1
2.6
0.7
0.3

Ageing
component
7.0
2.3
0.8
2.0
0.9
0.5
5.7
8.7
4.8
5.4
3.5
6.8
5.1
5.1
2.2
3.8
2.9
-1.6
3.5
1.0
1.0
3.5
2.9
2.5
2.3
2.2

7.5
1.8
2.1
4.3
2.2
-2.8
5.5
9.8
6.1
7.9
3.7
7.5
8.6
4.9
2.6
4.9
3.3
-0.7
4.3
0.5
1.5
3.6
1.8
5.2
2.9
2.4

Source: Commission services.

As  regards the  fiscal  sustainability of Member
States, the values for the main indicator for long-
term fiscal sustainability, referred to as ‘S2’, were
revised substantially in spring 2012, following the
publication of the  new age-related expenditures
projections by the  Commission and the  Ageing
Working Group. The  S2 indicator (64) shows the
structural  primary
adjustment 

to the  current

(64) Last year's  edition of the report includes  a Box with an
explanation of the concept of fiscal sustainability and of the
S2 indicator (see European Commission, 2011b, p. 77). S2
indicators used in this year's report have been calculated on
the basis of the Commission services' 2012 Spring Forecast
and the new age-related expenditures  projections  by the
Commission and the Ageing Working Group of
the
Economic Policy Committee (EPC). 

5. Tax policy challenges in EU Member States

Box 5.2: Screening principles to identify a potential need for tax-based consolidation

Quantitative  screening  on  the  basis  of  selected  indicators  is  applied  to  Member  States  with  a  view  to 
identifying countries that might consider using taxation – in addition to expenditure control – to consolidate 
their  public  finances  and  steer  them  onto  a  more  sustainable  path.  Such  screening should  identify  both  a 
strong  need  for  consolidation  and  the  availability  of  tax  space.  The  following  screening  criteria  are 
considered: 

Fiscal sustainability problems

1) Fiscal sustainability is considered problematic, if:

(i) The  indicator  of  fiscal  sustainability  gap  in  the  medium-term,  "S1", is  high (more  than 3,  which 
corresponds to the very top of the indicator distribution).

OR 
(ii) The  indicator  of  fiscal  sustainability  gap  in  the  long-term,  "S2", is  high (more  than  6,  which 
corresponds  to  the  very  top  of  the  indicator  distribution). This  generally  means  that  both  the  initial 
budgetary  position  component  of  the  sustainability  gap  (i.e.  the initial  deficit)  and  the  long-term 
budgetary projections of age-related expenditure are very unfavourable. 

Availability of tax space

AND: 2)  There  is  ‘overall  tax  space’  currently  available (relatively  low  tax-to-GDP  ratio).  This  main 
criterion needs to be met in conjunction with one of the two qualifying criteria below:

AND EITHER:  2(a)  There  is  still  scope  for  increasing  the  least  distortionary  taxes (i.e.  the  share  of 
consumption and/or recurrent property taxes in GDP is not (significantly) above average or there is scope for 
increasing environmental taxation; see Box 5.3 for details).

OR: 2(b)  The  tax  burden  has  not  increased  substantially in  the  recent  past (i.e.  no  marked  increase  in 
tax-to-GDP ratios in the period 2009-2012). The distance between the structural deficit and its medium-term 
budgetary objective (MTO) is used as a supplementary indicator to check the magnitude of the tax increase in 
relative terms, i.e. compared with the  current consolidation need. Thus, a country is considered not to have 
experienced  a  strong  rise  in  its  tax  burden if  the  tax-to-GDP  ratio  increase  is  above  LAF  minus  and  the 
distance to the MTO is below average.

A low current tax-to-GDP ratio in conjunction with a high fiscal sustainability gap does not necessarily point 
to a need to change the tax code by increasing tax rates or broadening tax bases. Higher tax revenues might 
also be achieved by improving tax compliance/administration and fighting tax evasion, without changing tax 
rules. Similarly, tax increases implemented in the recent past may not lead to equivalent increases in tax-to-
GDP ratios due to (higher) tax evasion and Laffer-Curve effects (negative feedback of higher taxes on output 
and employment, i.e. tax bases).

balance  which  is  required  to  fulfil  the  infinite 
horizon inter-temporal budget constraint, including 
paying  for  any  additional  expenditures arising 
from an ageing population. It, therefore, considers 
the  projected  changes  in  age-related  expenditures
over a very long time horizon (to 2060). Moreover, 
unlike last year, an indicator of medium-term fiscal 
sustainability has been used, referred to later on as 
‘S1’.(65) S1 corresponds to the required adjustment 

of the primary balance until 2020 to reach a public 
debt  of  60%  of  GDP  – the  debt  threshold  in  the 
Treaty  – by  2030.  For  the  sake  of  a  prudent 
assessment  and  as  explained  in  Box  5.2,  the 
analysis  in  this  report  considers  that  Member 
States need a strong fiscal adjustment to make their 
public finance sustainable if either the indicator of 
medium-term  sustainability  (S1)  or  that  of  long-
term  sustainability  (S2)  is  high according  to  the 

(65) The values of S1 and S2 are published in the  Commission 
Staff Working Papers published for each Member States by 
the European Commission on 30 May 2012 to underpin the 
Country-specific
for 
Recommendations 
Stability,  Growth  and  Jobs  under  the  European  Semester. 

2012-2013 

http://ec.europa.eu/europe2020/making-it-happen/country-
specific-recommendations/index_en.htm.

59

European Commission

Tax reforms in EU Member States

usual 
Sustainability Report. (66)

thresholds

used

in

Commission

the  indicators in Table  5.1 and 5.2 the  screening
results are presented in Table 5.3.

Table 5.2:

Assessment of 'tax space'

Country

Overall tax
space: tax-to-
GDP ratio

BE
DE
EE
ES
FR
IT
CY
LU
MT
NL
AT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17
LAF plus
LAF minus

2012
45.1
39.4
32.8
31.8
44.7
44.8
37.8
37.9
35.2
38.8
42.6
37.7
28.8
43.3
27.4
35.4
47.2
28.0
26.6
38.2
33.8
27.8
45.0
37.9
39.8
40.4
37.9
41.8

Room to 
increase least 
distortionary
taxes

X
X
(X)
X
X
X
(X)
X
X

X
(X)
X

(X)
X

X
X
(X)

X

(X)

No 'Tax Fatigue': 
Change in tax-to-
GDP ratio

Distance 
to MTO

2009-12
1.9
-0.2
-3.1
1.1
2.7
1.8
2.2
0.2
0.9
0.5
0.1
0.1
-0.2
0.4
-1.6
1.8
-0.6
1.3
-2.6
-2.1
2.0
0.8
-1.9
2.0
1.1
1.2
0.6
1.6

2012
3.2
-0.1
0.8
4.8
3.2
0.7
2.7
1.1
3.5
1.9
1.7
2.2
3.9
0.2
0.2
0.8
1.2
1.7
3.4
0.6
1.8
1.1
-1.3
---
1.5
1.9
---
---

Note: The definition of the tax-to-GDP ratio applied is slightly broader
than the one in Chapter 2, as it includes voluntary social security
contributions and taxes assessed but unlikely to be collected.
Source: Commission services (AMECO database, Commission’s 2012 
Spring Forecast).

to

this

due 

challenges

approach, Belgium,

Spain,
on
Based
Luxembourg, Malta,
the  Netherlands, Slovenia,
Slovakia  and the United Kingdom face  particular
consolidation
serious
sustainability issues in the  medium run or/and the 
long run. Among those  Member States with high
sustainability challenges, Spain, Malta, Slovenia
and Slovakia show some overall 'tax space', which
may be used to contribute to consolidation (on the
revenue  side). As shown in Tables  5.2,  such
Member States are  characterised by a  relatively
low tax-to-GDP ratio. Moreover, they still  have
scope  for increasing the  least  distortionary taxes
and/or they have not increased taxes strongly in the
2009-2012 period, unless the  distance from the
fiscal  balance to the  medium term
structural
is relatively high.
budgetary objective  (MTO)
Using available  tax space  would be  particularly
relevant for these countries given the extent of the
sustainability issue  (see Table  5.1).  (67) Based on

(66) For the methodological underpinning and updated results

see European Commission (2012k).

(67) The data, however, does not reflect the substantial tax

increases decided upon by Spain in July 2012.

60

A more detailed discussion of which tax categories
could be  used to increase  revenues (i.e. that  have
scope  for increases) can be  found in Sub-section
5.1.2. Of course, while  further detailed country
specific  analysis is necessary to ascertain the
results below, some  countries with little  tax space
(reflected in a  relatively high overall  tax burden)
may still need to raise taxes further – in addition to
curbing public expenditures significantly – to meet
their consolidation challenges, at least in the short
to medium run.

Table 5.3:

Overview: fiscal consolidation challenges

Country

 Potential need for 
higher tax revenues 
to help consolidation 

Overall 'tax space'
available (low tax-
to-GDP ratio)

No significant
increase in tax-to-
GDP ratio in recent
years

BE
DE
EE
ES
FR
IT
CY
LU
MT
NL
AT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

X

X

X
X
X

X
X

X

X
X

X

X

X
X

X
X

X
X

X
X

X
X
X
X
X

X
X
X
X
X
X
X
X
X

X
X
X
X
X
X
X
X

Scope for 
(further)
increasing least
distortionary 
taxes
X
X
(X)
X
X
X
(X)
X
X

X
(X)
X

(X)
X

X
X
(X)

X

(X)

Note: For an explanation which Member States are considered to have
scope to increase least distortionary taxes see Table 5.8.
Source: Commission services.

5.1.2. Promoting growth-enhancing tax 

structures

In many Member States, a  high tax burden on
labour, especially on those groups that face  a
particularly weak attachment to the labour market, 
coexists with relatively low levels  of those  taxes
considered
i.e.
detrimental 
consumption taxes,  recurrent property taxes and
environmental taxes. (68) This indicates that  there
is room for a shift away from labour taxes to other

growth,

less

to

(68) Consumption taxes  include excise duties  on tobacco and
alcohol. These are part of the so-called 'sin taxes'  and
meant
to reduce their consumption and related health
problems. A possible complement for recurrent property
taxes could be raising inheritance taxes which are very low
in some countries.

tax bases. Certainly, in some Member States the
fiscal consolidation constraints are  so demanding
that  a  reduction in labour taxes  becomes  very
difficult. However, even those Member States that
need to increase  revenues to contribute  to fiscal 
consolidation should consider a  shift within the
overall tax burden in order to limit the detrimental
effect  of the  overall  higher tax burden on the
economy. Shifting the tax burden towards indirect
taxation might  require  accompanying policies  to
strengthen tax compliance, which may be  more 
problematic for consumption taxes. (69)

Box 5.3 outlines 
the  horizontal  quantitative
screening principles used to identify countries that
have both a need and room for improving the
structure of taxation to enhance growth. This sub-
section first identifies Member States that  have  a
particular need to reduce (overall  or group-
specific) labour taxation and then highlights those
countries that  appear to have particular scope  for
increasing taxes which are the least detrimental for
growth. (70)

High tax burden on labour – need for a shift

The  overall tax burden on labour, as  measured by
the implicit tax rate on labour and the tax wedge at
average  earnings, is considered to be  particularly
high in Belgium, Germany, France, Italy, Austria,
Finland, the Czech Republic, Hungary and Sweden
(see Table 5.4). However, it  is necessary to look
also at  output  indicators to assess the  importance
of a  labour tax reduction. Of the  abovementioned
countries, Germany, Austria, Finland, and Sweden
have an employment rate  significantly above  the
EU-27 average  (above  LAF plus), and with the
exception of Finland, also above  the  Europe  2020
employment target of 75%. For these countries, the
issue  of high labour costs still remains but  is
considered to be less problematic in the  screening
analysis when analysing the overall tax burden.

It  is, however,
important  to place a special 
emphasis on specific  labour market  groups that
face  particular employment  problems and are  at 
the same time considered to be rather responsive to
labour supply disincentives  created by a  higher

(69) See, e.g., Watrin and Ullman (2008).
(70) This  sub-section focuses  on the main results,  whereas  a
more detailed analysis  can be found in Wöhlbier et al.
(2012).

5. Tax policy challenges in EU Member States

after-tax wage: low-skilled workers (71) and second
earners.

Table 5.4:

Tax burden on labour and overall labour market
situation

Country

Employment 
rate (2011)

Unemployment 
rate (2011)

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17
LAF plus
LAF minus

67.3
76.3
70.4
64.1
59.9
61.6
69.1
61.2
73.8
70.1
61.5
77.0
75.2
69.1
68.4
65.1
73.8
63.9
70.9
75.7
67.2
67.2
60.7
64.8
62.8
80.0
73.6
70.1
69.3
72.5
67.6

6.9
5.9
12.3
14.1
17.6
21.1
8.9
8.1
7.7
4.8
5.7
4.0
3.9
12.8
8.2
13.1
7.1
10.9
6.5
7.0
15.3
15.4
10.9
9.5
7.4
6.6
7.0
8.7
9.1
6.9
10.5

Implicit tax 
rate on labour
(2010)
42.5
37.4
37.0
26.1
31.3
33.0
41.0
42.6
27.0
32.0
21.7
36.9
40.5
23.4
35.0
32.0
39.3
24.4
39.0
34.8
32.5
31.7
39.4
30.1
27.4
39.0
25.7
36.0
38.1
33.7
38.3

Tax wedge
(100%
AW, 2011)
55.5
49.8
40.1
26.8
38.0
39.9
49.4
47.6
13.9*
36.0
22.4*
37.8
48.4
39.0
42.5
38.9
42.7
32.5*
42.5
38.4
44.2*
40.7*
49.4
34.3
44.3*
42.8
32.5
43.7
46.4
40.9
46.6

Notes: Employment rate and unemployment rate (20 to 64 years),
tax wedge of single earner without children at 100 % of the average
wage for full-time work (AW), implicit tax rate on employed labour;
* data for the tax wedge refer to 2010 in the case of Bulgaria, Greece,
Lithuania, Latvia, Malta and Romania, and 2007 in the case of Cyprus.
Source: Commission services, OECD.

Low-skilled workers also face  difficulties  with
employability given their supposedly high labour
costs (including labour taxes) compared with their
productivity. Other groups that are often seen to be 
in
facing particular
particular young workers and older workers will
not  be  discussed here. It  is generally considered
that the tax burden is not one of the key drivers of
these  problems. (72) Table  5.5 nevertheless also

labour market  problems,

(71) In this  document, low-skilled and low wage earners  are
used as  synonyms  although it is well understood that low
wage earners  are not necessarily the same as  low-skilled
workers, partly due to a trend towards over-qualification.
(72) Reducing the tax burden is not the best way to address the
problems  faced by young and older workers.  Older
workers'  disincentives  to work may be due to their wage
career
age-
productivity profile and encouragement to retire earlier.
Unemployment among young workers  is  the result of a
wealth of complex factors, ranging from labour protection

supposedly

declining

rather

than

the

61

European Commission

Tax reforms in EU Member States

Table 5.5:

Labour market situation of and tax burden on specific groups

Tax burden on low-wage earners and labour market situation of low-skilled
(1)

Country

Labour market 
performance

Employment 
rate (low-skilled)

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17
LAF plus
LAF minus

2011

59.3
62.0
55.1
48.8
62.4
57.9
68.2
61.2
74.9
73.9
59.9
71.5
69.2
73.4
62.9
36.9
65.8
43.5
54.8
69.9
55.7
41.0
46.0
52.7
57.2
69.2
62.5
62.8
63.4
65.1
60.6

Disincentives to work

Youth labour
market 
performance (2)

Tax burden on second earners and female labour market situation
(3)

Labour market performance

Disincentives to work

Tax wedge
(67% AW)

Inactivity trap (67%
AW)

Unemployment trap
(67% AW)

2011

2010

of which 
contribution 
from labour
tax

2010

of which 
contribution 
from labour
tax

Unemployment 
rate (youth)

Employment 
rate - female 

Employment 
rate - male

2011

2011

2011

49.7
45.6
38.8
21.3
35.6
36.6
46.5
44.5
11.9*
29.2
18.1*
33.1
43.7
33.1
38.5
36.1
37.2
32.5*
39.5
36.8
43.5*
38.8*
45.2
33.4
43.1*
40.7
28.5
40.2
42.6
35.9
43.0

66.8
65.6
46.3
78.5
5.9
44.7
61.2
24.5
---
69.7
59.1
82.0
65.2
36.3
60.2
40.3
68.6
37.7
62.2
86.8
59.5
44.0
49.9
51.5
36.9
69.8
50.0
54.6
54.4
47.6
61.4

35.5
34.4
17.6
7.9
16.0
17.5
26.1
24.5
---
16.6
12.0
32.7
26.3
16.8
28.7
17.6
25.3
20.9
18.2
26.3
29.9
19.7
27.8
27.0
27.1
28.8
22.6
26.3
27.0
23.8
28.7

92.7
74.7
62.7
78.2
60.8
83.2
77.0
78.3
---
85.7
58.6
83.7
66.8
79.2
83.2
67.6
72.2
80.9
80.0
89.2
89.9
69.8
82.1
81.9
70.6
74.7
50.0
74.0
77.6
69.4
78.4

35.5
34.4
12.7
7.5
16.0
13.2
19.3
21.7
---
5.7
12.0
8.7
26.3
16.8
13.2
17.6
13.9
20.9
18.2
11.6
29.9
19.7
22.1
21.4
27.1
9.8
22.6
22.1
22.7
18.8
25.3

18.7
8.6
22.3
29.4
44.4
46.4
22.1
29.1
22.4
16.8
13.7
7.6
8.3
30.1
15.7
33.2
20.1
26.6
18.0
14.2
29.1
32.9
26.1
25.8
23.7
22.9
21.1
21.6
21.6
17.2
26.0

73.8
77.8
74.8
64.8
57.7
62.7
76.2
58.9
76.6
72.9
50.6
79.0
80.2
74.1
81.3
70.4
79.6
73.0
74.3
78.9
75.4
78.3
66.6
71.4
67.4
83.2
74.5
72.6
71.8
75.4
69.6

84.9
87.7
81.5
74.1
80.0
74.5
86.7
83.4
86.5
90.8
89.7
89.4
89.6
81.6
84.8
82.6
84.8
75.0
90.9
85.7
76.2
76.3
79.6
83.0
80.7
88.8
85.9
84.9
84.7
86.5
83.3

Inactivity trap (67%
AW)

of which 
contribution 
from labour
tax

46.5
43.8
23.2
11.0
16.0
23.1
25.4
30.7
---
22.5
16.2
38.2
28.8
19.2
28.7
21.8
25.3
20.9
25.4
27.4
34.9
19.7
27.8
23.4
28.2
28.8
22.6
30.2
32.1
26.6
33.7

2010

46.5
47.8
23.2
40.6
30.4
23.1
38.8
39.7
---
32.9
32.9
45.7
28.8
21.3
52.4
21.8
27.6
20.9
33.2
79.0
34.9
49.4
31.0
42.2
32.9
22.5
46.8
40.4
39.2
36.8
44.7

Low-wage
trap (33% to 
67% AW, 
2010)

59.2
55.2
23.2
14.5
19.1
28.4
49.6
38.8
---
54.9
19.7
60.3
38.1
21.7
44.8
26.7
51.4
20.9
47.6
40.9
32.7
26.3
38.3
35.6
30.6
40.4
58.4
46.4
45.4
42.3
51.8

Notes: (1) Employment rate and unemployment rate of low-skilled workers (25-54 years, pre-primary, primary and lower secondary education -
levels 0-2, ISCED 1997), long-term unemployment in % of active population. Tax wedge, inactivity trap and unemployment trap for single worker
with no children at 67 % of average earnings. *Tax wedge data for the indicators measuring the disincentives to work refer to 2010 in the case of
Bulgaria, Greece, Lithuania, Latvia, Malta, and Romania and 2007 in the case of Cyprus. (2) Unemployment rate of young workers (15-24) (3) 
Employment rate for age group 25-54. Inactivity trap for second earner in two-earner couple with two children, principal earner with 67% of average
wage, second earner with 67%, low-wage trap for second earner in two-earner couple with two children, principal earner with 67% of average wage,
second earner moving from 33% to 67% of average wage. Data for the traps refer to 2009 in the case of Bulgaria, Lithuania, Latvia, Malta, and 
Romania. No detailed breakdown of the contribution from labour taxes to the low-wage trap is available. 'Contribution from labour taxes' refers to the
contribution to the respective trap in percentage points. Inactivity includes household work.
Source: Commission services, OECD.

presents data  on the  unemployment rate  of young
workers whose 
labour market  situation has
deteriorated dramatically in several Member States
since the beginning of the crisis.

On the  basis of the  indicators presented in Table
5.5, in particular Belgium, Germany, France, Italy,
Austria, Latvia, Hungary, Romania, and Sweden
are  faced with the  challenge of reducing the  tax
burden on low-skilled workers. (73) Austria  and

however,

Sweden,
high
employment  rates  for low-skilled workers, which
is again reflected in the screening. (74) 

relatively

show 

Turning to second earners, the  data  in Table  5.5
show that 
the
in Belgium, Germany
Netherlands there  are  specific  disincentives to
return to work from inactivity and to increase  the
number of hours worked, whereas in Latvia the tax
disincentives to return to the labour market from

and

legislation to wage gaps  for a supposedly inexperienced
segment of the population and labour market mismatches. 
Thus,  these two groups  are not referred to in the taxation
annex of the 2012 AGS, although they are stressed in the
2012 AGS itself.

(73) Given that the indicators look at specific wage levels, they
do not reflect potential measures aimed at reducing labour

supply disincentives  and/or labour costs  at lower wage
levels, as, e.g., in place in Belgium and France.

(74) For a discussion of which components  of the tax burden
should be reduced – which of course depends  on the
specific Member State – see last year's report. Generally, a
reduction of employers' social security contributions has a
direct impact on labour costs, at least in the short term.

62

5. Tax policy challenges in EU Member States

inactivity are  high. The labour market situation of
second earners, taking the female employment rate
as  a  proxy, is, however, significantly better than
the  EU-27 average  in Germany, the Netherlands
and Latvia. Again this is reflected in the screening.
The  employment  rate, however, does  not  capture
the  number of hours worked, which is another
important  indicator of labour underutilisation. In
particular, the average number of hours worked is
low for second-earners in the  Netherlands, while
the  share  of women working full-time  is low in
Germany.

Room for  manoeuvre– potential  to increase 
consumption, property or environmental taxes 

Member States are  considered to have  room to
shift taxes away from labour if their tax burden is
relatively low in at least one of the following three
areas: consumption taxes, recurrent property taxes
or environmental taxes. All of these tax categories
have been found to be among those  which are the
least detrimental to growth.

By far the broadest  tax base to which a  tax shift
could be considered is consumption. As measured
by the share of consumption taxes in GDP in 2010,
revenues from consumption taxes are  particularly
low in Ireland (75), Spain, Italy, Luxembourg and
Slovakia and are also below the EU-27 average in
Belgium, Germany, France, the  Czech Republic
and Latvia  (see Table  5.6). In addition to those
countries, Greece, Portugal, Lithuania and the UK
as  well  as  Cyprus, Malta  and Romania  had a  tax
burden on consumption below the  EU-27 average
in 2010, as  measured by the implicit  tax rate  on 
consumption.  (76) Moreover, in France there  is a 
large  gap between the  tax burden on labour and
consumption, as  measured by the  two implicit tax
rates, clearly above the  EU-27 average. Hence,
there  appears to be potential  room for shifting
taxation from labour to consumption.

However, as the data used in the screening stop in
2010, there is a need to take into account the often
substantial  tax reforms implemented in 2011 and
early 2012 and presented in Chapter 3. As a rough

(75) The rather low value is  also due to a high share of
multinational companies  in the Irish economy and a
comparison of consumption taxes to GNI would provide a
more favourable picture.

(76) For an explanation of the concept of implicit tax rates see

Glossary and Chapter 2.

proxy for the impact of these changes on revenues
from consumption taxes,  the change in revenues
from indirect  taxes over the  2010-2012 period is
used. (77) Among those countries found to have the
potential  to increase  consumption taxes, revenues
from indirect taxes are forecast to increase by more
than one  percentage  point  in Italy, Malta  and
Portugal and by more than 0.5 percentage points in
Greece, France, the Czech Republic, Romania and
the  United Kingdom. (78) Assuming that  these
increases  are  confirmed and indeed linked to
higher consumption taxes, they would tend to limit
the actual scope for future increases. This points to
the  need for further country-specific  analysis, as
this dimension is not factored into the screening.

When considering increases  in consumption taxes
it is important to see in which sub-category (VAT,
excise  duties on alcohol  and tobacco or energy)
Member States have  a  particular
scope  for
increasing revenues, as  was done  in last year's
report.(79)

Table 5.6:

Indirect and consumption taxes

Share of indirect taxes 
in total taxation

Indirect taxes as % of
GDP

2012

28.7
28.9
42.4
39.5
39.1
30.8
35.0
34.5
39.9
31.6
43.4
29.6
33.9
43.6
38.3
36.5
33.0
53.3
34.2
36.1
42.1
44.8
45.6
41.4
45.6
41.3
35.4
33.9
32.5
35.6
32.2

change
2008-12
0.4
1.1
4.8
-2.2
0.4
1.1
0.4
2.4
-6.7
-1.5
1.2
-1.5
0.9
0.7
0.7
1.0
3.1
-0.7
3.6
0.5
4.9
6.9
6.9
0.2
4.0
2.9
4.3
1.6
0.9
2.3
0.9

2012

12.9
11.4
13.9
11.5
12.8
9.8
15.6
15.5
15.1
12.0
15.3
11.5
14.5
14.8
14.4
10.5
14.3
14.6
12.1
17.0
11.8
11.9
17.4
14.0
12.7
18.6
13.4
13.5
13.1
14.3
12.6

change
2010-12
0.1
0.3
0.0
0.1
0.8
-0.6
0.8
1.4
-0.4
0.2
1.6
-0.6
0.0
1.4
0.1
0.3
1.0
-0.2
0.9
0.3
0.5
0.1
0.5
0.4
0.8
0.7
0.7
0.5
0.4
0.7
0.3

Country

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27 
EA-17 
LAF plus
LAF minus

Share of
consumption 
taxes in total 
taxation

Consumptio
n taxes as %
of GDP

ITR on 
consumption

Gap: ITR on 
labour and
consumption

2010

2010

24.7
28.4
39.8
35.5
38.9
27.2
25.6
24.2
37.8
26.8
39.5
31.0
28.1
37.1
37.5
36.1
31.2
53.0
32.3
31.5
39.5
42.5
39.2
38.6
42.4
29.0
31.5
29.1
27.7
30.7
27.4

10.9
10.8
13.6
10.0
12.1
8.7
10.9
10.2
13.5
9.9
13.2
12.0
11.8
11.7
14.2
10.1
13.1
14.5
10.9
15.0
10.8
11.5
14.8
12.3
11.5
13.3
11.2
11.0
10.7
11.5
10.5

21.4
19.8
25.6
21.6
15.8
14.6
19.3
16.8
18.8
27.3
18.9
27.0
21.4
17.4
24.1
17.7
25.2
22.8
21.1
31.5
17.3
18.2
27.2
20.2
18.9
28.1
18.4
19.7
19.2
21.0
18.2

21.1
17.6
11.4
4.5
15.5
18.4
21.7
25.8
8.1
4.7
2.8
9.9
19.1
6.1
10.9
14.4
14.0
1.6
17.9
3.3
15.2
13.5
12.2
9.9
8.5
10.9
7.3
16.3
18.9
13.4
18.7

Note: The last column shows the difference between the ITR on labour
and the ITR on consumption.
Source: Commission services.

(77) Indirect taxes  are broader than consumption taxes  as they
also include revenues  from  other taxes,  in particular large
parts  of property tax revenues,  some additional smaller
environmental taxes, stamp taxes and payroll taxes.

(78) The data does  not include the increase in VAT in Spain

applicable since 1 September 2012.

(79) The scope for increases in environmental taxes is discussed
below. For a detailed discussion on which consumption
taxes could be increased, see Wöhlbier et al. (2012).

63

European Commission

Tax reforms in EU Member States

Box 5.3: Screening principles when identifying a potential need, and room, for a tax shift

Quantitative  screening  on  the  basis  of  selected  indicators  is  applied  to  Member  States  with  a  view  to 
identifying countries that might consider shifting taxation away from labour. Such screening should identify 
both a need for a reduction in labour taxation and the availability of tax space for specific tax categories. The 
following screening criteria are considered:  

Need to reduce labour taxation

Labour taxation is problematically high if:

1(a)  The  ‘overall  tax  burden  on  labour’ is  very  high (significantly  above  the  average,  i.e.  above  LAF 
minus). This is considered the case if either the implicit tax rate (ITR) on labour or the tax wedge at average 
earnings  are  significantly  above  the  average, with  the  other  indicator  not  being  significantly  below  this 
average.

OR:  1(b)  The  tax  burden  on  specific  labour  market  groups  is  very  high (low-skilled  workers  and/or 
second earners). The assessment is based on different tax wedge and trap indicators.

The tax burden on low-skilled workers is considered very high if

(i) the tax wedge on low-skilled workers is very high (significantly above the average)
AND/OR
(ii)  labour  taxes  contribute  to  a  high  inactivity  trap  and/or  a  high  unemployment  trap  (with  the 
contribution from labour taxes to the other trap not being significantly below the average).

The tax burden on second-earners is considered very high if  

(i) the contribution from labour taxation to the inactivity trap is very high
AND/OR
(ii) the low-wage trap is very high (with the contribution from labour taxes to the inactivity trap not being 
very  low.  The  low-wage  trap  acts  as  a  disincentive  for  the  second-earner  to  work  full-time,  instead  of 
part-time).

If the employment level is very high (either overall or for specific groups), a very high tax burden is still an 
issue, but less problematic.

Scope for increasing the least distortionary taxes

There is still scope for increasing the least distortionary taxes. Increasing taxes does not necessarily point to a 
need  to  increase  tax  rates.  The  result  could  also  be  achieved  by  a  broadening  of  tax  bases,  while  paying 
attention to enhance tax compliance effectively in the short- to medium-term.

AND EITHER: 2(a) There is scope for increasing consumption taxes. This means that:

(i) the share of consumption taxes in % of GDP is (significantly) below the EU average,
OR
(ii) the ITR on consumption is (significantly) below the EU average
OR
(iii) the gap between the ITR rate on labour and consumption is very high and the ITR on consumption 
not yet very high.

OR: 2(b)  There  is  scope  for  increasing  recurrent  taxes  on  housing (i.e.  the  share  of  revenues  from 
recurrent tax on housing in GDP is significantly below average).

OR: 2(c)  There  is  scope  for  increasing  environmental  taxation  (i.e.  either  the  share  of  revenues  from 
environmental taxes or the ITR on energy are significantly below average with the other indicator not being 
significantly above it).

64

The rise of consumption taxes might lead to a rise
in price  levels, translating into higher inflation in
the short run. This may (partly) counteract the cut
in labour costs from the tax shift, depending on the
response of wages to prices.

A second category of less growth-harmful taxation
is recurrent  property taxes, although substantially
smaller in revenue  terms than consumption taxes.
In terms of revenues, those are particularly low in
Malta, Luxembourg, Austria, the  Czech Republic,
Greece, Bulgaria, Hungary, Estonia, Lithuania,
Slovakia, Germany and Slovenia (see Graph 5.7 in
Sub-section 5.4.1). Those  Member States could
raise  revenues by 0.4%  of GDP or more  by
bringing
the  EU-27
average. (80) However, taxes  on imputed rent,  the
revenue  from which are  not  included in the  data,
are  applied in the  Netherlands and Luxembourg
and could explain the  very low revenue  from
recurrent  taxes  on immovable  property in these
countries. As  discussed in Sub-section 5.4.2,
revenue  from recurrent  housing taxes should, first
of all, be increased by bringing the cadastral values
of housing in line  with market  values.  Tax rates
should only be increased as a second step.

line with

revenue 

in

The third tax category which has been found to be 
less detrimental to growth is that of environmental
taxes,  in particular those  falling on consumption.
Moreover, as  discussed in more detail  in Sub-
section 5.4.2 they can help to reach environmental
targets. There  is potential  to raise  revenue  both
through tax increases as well as  through reducing
i.e. by reforming
tax expenditure  in this area,
environmentally
subsidies. Revenue
expectations should not  be too high, however.
Based on the  criteria  outlined in Box 5.3 and the 
data  provided in Table  5.7, Belgium, Greece,
Spain, France, Austria, Slovakia,
the  Czech
Republic, Latvia, Lithuania  and Romania seem
from
particularly
environmental taxes. (81) 

revenues

increase 

harmful 

apt 

to

(80) Countries  that are below, but not significantly below, the
EU-27 average are not
looked into here as  the EU-27
average is  partly driven by the United Kingdom.  The
EU-27 average excluding the UK would be rather in line
with LAF minus.

(81) The two indicators shown in Table 5.7 are both used for the
assessment. Each
own weaknesses. 
has 
Environmental (or energy) tax revenue as a % of GDP does
not take into account the level of energy consumption in a
country and, therefore, does not measure a 'true' tax burden.

one

its

5. Tax policy challenges in EU Member States

Table 5.7:

Tax burden on the environment

Country

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17
LAF plus
LAF minus

Environmental taxes as % of
GDP, 2010
2.1
2.2
3.0
2.4
2.4
1.6
1.8
2.6
2.9
2.4
3.1
4.0
2.4
2.5
3.6
1.9
2.8
2.9
2.4
4.0
2.4
1.9
2.6
2.6
2.1
2.8
2.6
2.4
2.3
2.6
2.1

 Implicit tax rates on energy, 
2009
125.2
215.4
127.5
198.3
135.5
154.2
178.8
259.4
142.1
210.1
195.5
231.9
169.5
175.3
226.8
100.7
129.1
108.6
130.6
330.9
97.1
116.4
112.6
106.8
86.1
210.0
220.9
198.5
198.3
217.0
179.9

Source: Commission services.

Summary findings  on  the  need and potential 
for tax shifting

Based on the  screening summarised in Table  5.8, 
Belgium, France, Italy, the Czech Republic, Latvia
and Romania  in particular and, to a  lesser extent,
Germany, Austria, and Hungary face the challenge
of reducing the tax burden on labour (either overall
or for specific groups) and at the same time appear
to have  room to increase  taxes  which are  less
detrimental to growth. Thus, these Member States
should analyse in greater detail whether to shift the
tax burden away from labour and if so, how.

In this analysis, Member States  need also to take
into account  the  effect  of such a  shift  on tax
compliance, which, in some countries,  might  be 
more  difficult  to ensure  in the  area of indirect
taxation than direct  taxation. Therefore, tax shifts
should go hand in hand with measures to improve
tax compliance, namely in the  area of VAT and

In the case of the implicit tax rate on energy, it is not the
whole base (level of energy consumption) that is actually
taxed: i.e. transport is  heavily taxed in most countries,
while energy use for heating and industrial production is
taxed much less or exempt. Therefore, Member States with,
in relative terms, a large low taxed industrial sector and
low, or not taxed, heating use appear 'bad'. Moreover, an
increased use of (untaxed) renewable energy over time (as 
set out
in the energy/climate policy) leads  to a lower
indicator and hence a weaker performance.

65

European Commission

Tax reforms in EU Member States

indirect 

other
taxes.  The  effect  on income
redistribution – discussed in more  detail  in Sub-
section 5.4.3 – also needs to be  taken into
consideration.

Table 5.8:

Overview: tax structure indicators

Country

High tax burden on
labour

Overall

Specific 
groups

Potential to shift

Low
consumption 
taxes

Low
recurrent 
taxes on
housing 

Low tax 
burden on the
environment

Need and
room for
tax shift

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

X
(X)

X
X

(X)

(X)

X

X

(X)

X
(X)

X
X

(X)
(X)

X

X

X
(X)

(X)
(X)

X
X
X
X
X
(X)
X
(X)

X

X

(X)

(X)
X

(X)

(X)

X
X

X

X

X

X
X

X
X

X
X

X

X
X
X

X

X

X

X
X

X

X
(X)

X
X

(X)

X

X

(X)

X

Note: High tax burden on specific labour market groups in a Member
State either refers to low-skilled workers or second earners in couples or
both. (X) depicts borderline cases. Member States are considered to 
have a room to shift if consumption tax indicators are very low (below 
LAF minus), if they are low (below average) combined with a very low 
burden on at least one of the two other potential bases for tax shifts, or if
the burden on at least one of the other bases is very low with the burden
on the other one being low. Member States are considered to have
limited room for a tax shift if at least one of the indicators signals some
potential to shift.
Source: Commission services.

5.2.

BROADENING TAX BASES

There  is wide  agreement  that  broader tax bases
allow for lower tax rates and, therefore, help to
reduce the distortionary effects of taxation. (82) As
discussed in Chapter 3,
in recent  years many
Member States have implemented measures aimed
at  broadening tax bases via a  reduction in tax
expenditures. Tax expenditures not only reduce the
amount of revenues collected and tend to lower the
efficiency of the  tax system;  they also increase
compliance costs and the  costs of tax collection
(see Section 5.3). However, a  reduction is often
difficult, notably for political reasons.

(82) See, e.g. OECD (2010b).

66

Tax expenditures  can be defined as ‘…provisions
of  tax  law, regulation or practices that  reduce or
postpone  revenue  for a comparatively  narrow
population of  taxpayers relative  to a benchmark 
tax.’ (Anderson, 2008). As stressed in last  year's
edition of the report  and in OECD  (2010a), it  is
difficult 
tax
expenditures from what is considered to be a norm,
is loosely defined. This makes
as  the latter
(83) 
international  comparisons very difficult.
Moreover, estimates of tax expenditures, based on 
micro studies,  are  not  available  for all  Member
States and not consistent across countries.

unambiguously

distinguish

to

It is important that Member States regularly inform
the  public  about  the  cost  of tax expenditures in
terms of revenues foregone and that they assess to
what  extent  the  original  objectives  are  still  being
met  or if they could be  met  via  other means at  a
lower cost.  The  redistributive  effects (84) of tax
expenditures are also important as several of these
items tend to benefit high-income households and
therefore have  a  regressive  effect.  It also needs to
be  ensured that such tax expenditures  do not
illegal  state  aid under Art.  107
constitute 
TFEU. (85)  Tax measures meeting the  cumulative
criteria  of Art.  107 TFEU  are subject  to a  system
of prior Commission authorisation and Member
States may not put the proposed aid measures into
effect  until  the  Commission has  approved them.
When designing their tax measures and especially
differential 
States
therefore  have  to assess the need to notify the
Commission,
tax
measures  introduce favourable  tax treatment  for
certain categories  of undertakings or
the
production of certain goods.

treatments, Member

particular where 

such

tax

for

in

section

analyses 

This
in
personal and corporate income taxation, looks into
the debt bias in corporate taxation, and assesses the
efficiency of the VAT system in Member States.

expenditure 

tax

(83) See OECD (2010a and 2010b) for a discussion of the

difficulties of measuring tax expenditure.

(84) For an analysis  of redistributive aspects  of the tax system 

see Sub-section 5.4.3.

(85) Article 107(1) TFEU state that

'any aid granted by a
Member State or through state resources  in any form
distort
distorts  or
whatsoever which
competition by favouring certain undertakings  or
the
production of certain goods  shall, in so far as  it affects
trade between Member States,  be incompatible with the
Internal Market'.

threatens 

to

5. Tax policy challenges in EU Member States

5.2.1. Reviewing tax expenditures in personal 
and corporate income taxation

Reduced tax rates and special regimes

This sub-section restates the  main findings of last
year's report on tax expenditure in personal income
taxation (86) and analyses  in more  detail  tax
expenditure in corporate income taxation.

Personal income tax expenditures

to

are

available. According

The  analysis contained in last year's  report 
highlighted those  euro-area countries for which
OECD data or other specific information on levels
of tax expenditure  in the  area  of personal  income
taxation
this
analysis (87), Greece, Spain, Italy, Portugal, France
and Austria  as well  as Belgium need to review 
their tax expenditure  in personal  income  taxation
given their scale and the overall revenue  foregone
(as  a  % of total revenue from personal  income
taxes). In general, several  Member States have
implemented base-broadening measures  in recent
years but no updated data on tax expenditure levels
have been published by the OECD  since. (88) In
addition to the above mentioned euro-area Member
States, OECD  data  points to high levels of tax
expenditure  in two non-euro-area Member States,
namely the United Kingdom and, to a lesser extent,
Poland. In both these  countries,  tax expenditures
amounted to around 20% (in 2007-08) and around
11%  (in 2007) of revenues  from personal  income
of
taxation,
(comparable) data 
those
Member States that  have  not published data  yet,
step up their efforts to do so. Moreover,
it  is
important that individual tax expenditure items are 
assessed regularly.

the
important  that 

respectively. Given

it  is

lack

Corporate tax expenditures

Tax expenditures
are  also widely used for
corporate  tax purposes.  An important distinction
should be  drawn between those  affecting the  tax
rate and those impacting the tax base.

(86) Tax expenditure items  related to housing taxation are

discussed in more detail in Sub-section 5.4.1.

(87) The data does not take into account all the specific features 

of the national tax system.

(88) Portugal has, e.g.
Understanding
started
expenditure in personal
Commission, 2012l).

in line with the Memorandum  of
to
tax
income taxation (see European

substantially

reduce

Many Member States favour specific  companies
by granting them reduced corporate  income tax
rates or special regimes. Table 5.9 and Table 5.10
show which Member States make use of reduced
tax rates to support particular types of companies,
regions or sectors. In most cases,  these reduced
rates  are  provided for small  and medium-sized
enterprises  (SMEs), for companies operating in
economically-distressed regions or for companies
operating in specific economic sectors.

Table 5.9:

Reduced corporate income tax rate for small
businesses (2012)

Country

Standard 
rate

Reduced 
rates for 
SMEs

Eligibility criteria for reduced rates /
thresholds for lower rates

BE

33%

Companies that fulfil a number of
conditions relating to the activities of
the company, the shareholding of the 
company, the rate of return of
distributed profits and the remuneration 
of their managers benefit from reduced 
rates.
24.25% profits of up to €25,000

31% profits between €25,000 and €90,000
34.50% profits between €90,000 and €322,500

+ 3% austerity surcharge on income tax rate

ES

30%

25%

20%

FR

LU

NL

LV

LT

HU

RO

33.33%

15%

21%

20%

+ 5% solidarity tax

25%

20%

15%

9%

15%

5%

19%

10%

16%

3%

UK

24%

20%

Companies with a turnover below €10 
million. Only on a taxable base of up to 
€300,000.(1)

In 2009-2012: micro-enterprises with a 
turnover less than €5 million, 
employing fewer than 25 employees and 
maintaining or increasing employment. 
Only on a taxable base of up to 
€300,000.

Largely independent businesses with an 
annual turnover no greater than €7.63 
million. Only on the first €38,120 of
profit.
Taxable base up to €15,000

On the first €200,000 of profits
Micro-enterprises with a turnover less 
than LVL 70,000, employing up to 5 
employees (if turnover above, excess
taxed at 20%)
Companies with a taxable profit less 
than LTL 1 million, employing up to 10 
employees
On the first HUF 500 million of profits 
per annum

Privately-owned companies with a 
turnover less than €100,000, employing
up to 9 employees (optional)

Companies with profit under GBP 
300,000. Marginal relief is available on 
profits between GBP 300 000 and GBP 
1.5 million

Notes: (1) As of 2011, companies in Spain that grow above the limits
applicable for small companies can benefit from the lower rate for three
years after losing their small-business status.
Source: Commission services, national authorities.

67

European Commission

Tax reforms in EU Member States

As  discussed in last year’s  report, the  preferential
treatment of SMEs may find its roots in the general 
perception that  corporate
taxation could be 
regressive, in the wish to make  up for possible
market  imperfections — such as  difficulties in
accessing credit, the absence of large economies of
scale  for SMEs or their lack of resources to
optimise  their tax burden. However, using the  tax
system to correct  these  possible  distortions does 
not seem to be the  first-best  solution. (89) Instead,
considerations of political economy may lie behind
the  choice 
to provide  SMEs with reduced
corporate  income  tax rates, even though the  latter
encourage entrepreneurs to incorporate  for tax
purposes (90) and discourage companies to grow.
As  shown in Table  5.9,
ten Member States
currently make  use  of reduced corporate tax rates 
to support SMEs.

In some  Member States  companies operating in
regions
specific, often economically-distressed,
may also benefit  from reduced tax rates.  Table 
5.10 indicates those  Member States which grant
tax relief to companies solely on the basis of their
location, (often) independently of their economic
activity.

of

sectors

activity

specific 

Moreover,
are 
sometimes granted a favourable tax regime, which
affects the  general  tax rate  to which those  sectors
are  in principle subject. (91) Many EU  Member
States (see Table  5.10), for instance, provide  a
specific  corporate  tax regime  for the shipping
sector (‘tonnage  tax’) under which the  taxable
income 
is determined based on the  volume
transported (tonnage  of vessels)  rather than the
income generated.

In the past, regional and sector-specific incentives
used to be more numerous but as a consequence of
the  OECD work on harmful tax practices, of the
EU Code of Conduct on Business Taxation and the
rules on State Aids, as well as the supervisory role
performed by the  European Commission as  the
these
guardian of

the  Treaties (92), many of

specific  measures have  been put  on standstill and
rolled back.

Table 5.10:

Reduced corporate income tax rates and special tax
regimes for specific regions and sectors

Country

BE

DE
IE
EL

ES

FR

IT
CY
MT
NL

PT

SI
FI

BG

Standard
Rate

33% + 
austerity
surcharge
31%
12.5%
20%

30%

33.3%

31.1%
10%
35%
25.5%

25%

20%
26%

10%

Reduced rates for
economically-distressed 
regions

Special tax 
regimes for
specific sectors

Some Aegean islands (12%)
Canary Islands (4%)
Ceuta and Melilla (15%)
Basque country (28%)
Navarre (20%-27%)

Overseas departments      (0%
for newly-created companies)

Sh

Sh
Sh
Sh

Sh

Sh

Sh
Sh
Sh, In
Sh

Azores (17.5%)
Madeira (20%)
Koper and Maribor (10%)

High unemployment regions 
(0%)

Sh, In (0%)
Sh

Sh, Ag

19%
25%
15%
15%
19%
19%
24%

Free Economic Zones (3%)
Free Economic Zones (0%)

CZ
DK
LV
LT
HU
PL
UK
Note: The list of economic sectors is non-exhaustive. ‘Sh’ refers to the
shipping sector (tonnage tax), ‘Ag’ refers to the agricultural sector, ‘In’
refers to investment companies, and ‘Tr’ refers to trusts.
Source: Commission services.

In (5%)
Sh
Sh
Sh
Tr (0%)
Sh
Sh, Tr (0%)

Reduced tax bases

Tax provisions impacting the computation of the
tax base are common in almost all Member States. 
By deviating from the  domestic  tax norm, those
provisions grant  a  favourable  tax treatment  for
specific  items. These tax provisions often serve
economic  purposes,  but  their extended use  may
make corporate 
taxation more distortive. This
section focuses  on the  most  common tax
expenditures used across Member States. (93)

Most EU Member States allow the taxable base to
be reduced by the economic depreciation of assets
according to a straight-line method or a declining-

(89) An alternative solution could be to impose a minimum

corporate tax as some Member States already do.

(90) See de Mooij and Nicodeme (2008).
(91) Some Member States, like Hungary, also apply surcharges 

to specific sectors.

(92) http://ec.europa.eu/taxation_customs/taxation/

company_tax/harmful_tax_practices/index_en.htm

(93) Tax expenditures related to company cars are discussed in
Sub-section 5.4.2. Although many Member States offer the
possibility to carry-forward (or back) unused losses for tax
purposes,  this feature of the tax system  is  not analysed
here. For
item  see European
Commission (2010d) and 'Taxes in Europe' Database.

information on this 

68

5. Tax policy challenges in EU Member States

balance method. (94) In all, 15 of them allow
accelerated depreciation or immediate  expensing
for small-value  items (95) (see Table 5.11), which
not  only narrows the  tax base  but  also distorts
investment  choices.  That said, going closer to a 
cash-flow tax where  investment  is immediately
expensed has interesting economic properties, in
particular a  zero marginal  effective tax rate  on
investment.

particularly suitable  for such a  tax expenditure
review. Although some  of the tax expenditure
items may find their rationale  in the  achievement
of specific policy objectives (growth, employment,
innovation, etc.),
the  question remains whether
they are  effective and whether they are  the  best
instruments for achieving their goals. 

Table 5.11:

Issues in the area of corporate tax expenditures in
EU Member States

aiming

The  corporate  tax system of most EU  Member
States
at
includes  provisions
also
spurring investment. A 
promoting R&D  or
majority of Member States has R&D or investment
incentives (see Table 5.11), which are given in the
form of a tax credit or a tax allowance. Obviously,
is
fine-tuning the  focus of
important  to avoid distortions in investment  and
R&D  choices.  Some  Member States also direct
their investment  incentives to specific  economic
activities, such as  audio-visual  activities (e.g.
Luxembourg),
sport  (e.g.
Hungary), venture  capital  (e.g. Luxembourg),
urban renovation (e.g. Portugal) or new industrial
activities (e.g. Luxembourg). 

these  measures 

sponsoring of

the

A number of Member States also try to boost 
employment
specific tax
through the  use  of
expenditures. These employment  incentives  take
the form of a tax credit for disabled workers in the
Czech Republic and tax deductions for newly
created jobs in Bulgaria, Portugal (young or long-
term unemployed) and Slovenia (young or older
unemployed).

Table 5.11 indicates for each EU Member State the
corporate tax expenditure items that may be worth
assessing and points to which Member States  are

(94) Depreciation

on

based

declined-balance

does  not
necessarily provide a more accelerated system 
than
straight-line. It all depends on how many years straight-line
depreciation is given for
(e.g. a 4-year straight-line
depreciation for PCs allows faster depreciation than a 25%
declined-balance system).

(95) For more information on the items  for which accelerated
depreciation is  available,
see the 'Taxes  in Europe' 
Database. This  report lists  Member States  with available
accelerated depreciation. An assessment of the budgetary
impact, which might be relatively low for some  schemes, 
is, however out of the scope of the report and for example, 
the impact of the depreciation at will for environmentally
friendly assets (VAMIL) in the Netherlands is estimated at
€ 40 million per year. For Belgium,  accelerated
depreciation is almost limited to newly launched sea ships.
In Spain, a recent decree from  March 2012 limits  the
choice of depreciation by large companies.

Corporate tax expenditures

Accelerated 
Depreciation

R&D 
Incentives

Investment
Incentives

Room for 
tax
expenditure 
review

Country

Reduced 
rates for 
SMEs

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

X

X
X

X

X

X

X
X
X

X

X

Reduced 
rates for 
regions / 
sectors
X
X

X
X
X
X
X
X

X
X

X
X

X
X

X
X
X

X

X

X
X

X
X

X

X

X
X

X
X
X
X

X
X

X

X

X
X

X

X
X
X

X
X

X

X
X
X

X

X

X
X

X
X
X
X
X

X

X

X

X

X

X
X

X
X
X

X

X

X
X

X

X

Note: Member States are considered to have a room for a tax
expenditure review if they have an 'x' in at least three categories in
columns 2-6.
Source: Commission services, IBFD and Taxes in Europe Database.

In the light of this overview and on the  basis of a 
cost-benefit  analysis, some  countries  may review 
their tax systems and consider making use of other
channels to accomplish their policy objectives.
Based on available  information, a  regular (partial 
or complete) assessment  of tax expenditures  is
carried out in a  limited number of Member States
only (Austria, Belgium, Finland, France, Germany,
Greece,
Italy, Netherlands, Poland, Portugal,
Spain, Sweden and the United Kingdom (96)). Such
regular assessment by Member States should be

(96) See OECD (2010b) for an overview and IGF (2011) for the
full French review. No information is  currently available
for non-OECD EU Member States. So far a review of tax
expenditures  in Poland has  only been carried out once (in
2010). According to national authorities,  Sweden also
carries out a regular review.

69

European Commission

Tax reforms in EU Member States

the  norm as it  provides relevant  information to
policy-makers and taxpayers.

Debt bias in corporate taxation

The corporate tax system of almost all EU Member
States allows interest  payments on corporate  debt
to reduce the  taxable  base. This type of
tax
expenditure, however, considerably favours the
use  of debt  over equity as  a  financing mode. The 
issue of tax-induced debt-bias in corporate taxation
was developed in last year’s report. (97) Graph 5.1
shows the effective marginal tax rates (EMTR) on
debt-
new corporate 
investment.  It  highlights the  gap between the  tax
treatment of debt and equity in all Member States.
As  in 2010, Malta, Greece, Luxembourg and
France stood out as the  countries  with the  highest
gap in 2011.  Although clearly lower, the  gap was
also significantly above  the  EU  average  gap, in
Portugal  and Italy and above  the  EU  average  in
Belgium, Spain, Germany and Sweden in 2011.

equity-financed

and

Graph 5.1:

Effective marginal tax rates on debt- and equity-
financed new corporate investment, 2011

%
n

i

60

50

40

30

20

10

0

-10

-20

-30

MT EL LU FR PT IT BE ES DE SE NL DK AT FI CZ SI SK UK PL EE HU LT RO IE CY BG LV

EU

EMTR new equity

EMTR debt

LAF minus

LAF plus

Debt bias

equity in 2011 (99) - after a  previous episode 
between 1997 and 2003. (100) Although an ACE
further narrows the corporate income tax base and
would, at least ex ante, lead to a revenue shortfall
at  unchanged tax rates, it  seems an appropriate
way of limiting the debt bias.

to

limit 

alternatives 

On the  other hand, some  Member States have
interest
developed
thin-
deductibility. One  alternative 
capitalisation rules, which disallow the 
tax
deductibility of
interest  costs related to debt
exceeding a given ratio of total  (or alternatively
internal) debt to equity.

the
involves

Table 5.12:

ACE, CBIT, thin-capitalisation and earnings-
stripping rules in EU Member States, 2012

Country

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

Some form of 
ACE/CBIT
X

Thin capitalisation
rule
X

Earnings-stripping
rule

X

X
X

X

X

X

X

X
X
X

X

X
X

X
X
X 
X
X
X
X
X

X

Source: ZEW (2012), unpublished, partly provisional data.

Source: Commission services and Blouin et al. (2012).

To counter this debt-bias,  some  Member States,
have  introduced some  type of Allowance for
Corporate  Equity (ACE) making it  possible  to
deduct  equity costs for corporate  tax purposes.
Belgium has an ACE in place  since 2006 and
Latvia  since 2009. (98)  Italy introduced it  for new 

(97) Fatica et al. (2012) also review the topic and possible

In 2012, 16 Member States are using some kind of
thin-capitalisation rule  for corporate  tax purposes, 
although their details  vary dramatically from one
country to another. Another possibility involves
earnings stripping rules,  which disallow the  tax
a
deductibility
percentage  of a company’s taxable  profit  (often
measured as  the  earnings before  interest,  taxes,

interest  costs

exceeding

of

solutions to address the bias.

(98) For Belgium,  the notional interest rate used in the EMTR
rate (OLO).
computation is  the 10-year state interest
Because this rate is relatively low (3.425% for 2011), there
remains  a gap between the EMTR on debt-financing (-
28.2%)  and on equity financing (13.2%). A sensitivity
increasing this  rate reduces  and
analysis  shows that
the European
eventually nullifies  this  gap. Note that
Commission has  officially asked Belgium  to amend its
legislation on the notional
interest deduction. Current
Belgian rules  provide that a notional interest deduction is
permanent
real
granted

for Belgian

estate

and

establishments, while no deduction is  granted for foreign
real estate and permanent establishments.

(99) This recent reform is not reflected in the data in Graph 5.1.
(100) Portugal has applied a form of ACE for SMEs since 2010. 
Austria had an ACE in place between 2000 and 2004. See
Klemm (2007)
for an overview of ACE  systems  in
practice.

70

 
depreciation  and  amortisation  — EBITDA). (101)
Table  5.12 provides an  overview  of  rules  which 
reduce the debt-bias in EU Member States. Estonia 
only taxes distributed earnings. (102)

5.2.2.

Increasing VAT efficiency

As discussed in detail in  Section  4.5, results  from 
literature,  confirmed  by  recent 
the  economic 
econometric  estimations,  underline  the  benefits  in 
terms  of  efficiency  of  a  uniform  VAT  system. 
Deviations from uniformity even though justifiable 
from  a  theoretical  point  of  view,  seem  to  lack 
practicability (e.g. updating cross price elasticity in 
real time), not to fulfil their primary objective (e.g. 
redistribution)  or  to  lead  to  substantial  economic 
costs  (including  compliance  costs).  Regarding  the 
latter,  VAT  should  in  general  be  levied  to  the 
extent  possible  on  a  broad  base  minimising 
revenue losses from exemptions and reduced rates.

When  designing  their  VAT  systems  Member 
States  are  bound  by  the  VAT  Directive.  In  this 
respect  they  are  not  free  to  transfer  goods  or 
services  from  the  standard  to  the  reduced  rate,  as 
only those listed in Annex III to the Directive can 
be  taxed  at  a  reduced  rate.  However,  within  this 
legal  framework  national  governments  retain 
significant operational and administrative freedom 
as to the possibility of amending the base for VAT. 
In  practice,  VAT  is  heterogeneously  designed 
across  Member  States  and  reduced  rates  and 
exemptions differ strongly. (103)

Broadness of VAT base

To  give  an  idea  of  the  share  of  consumption 
expenditure  spared  from  taxation  at the  standard 
VAT  rate,  Graph  5.2 compares  actual  VAT 
revenue  with  the  revenue  that  would  accrue  if  all 
private  consumption (104)  were 
the 

taxed  at 

(101) Germany  and  Italy  introduced  this  kind  of  rule  in  2008. 
Finland  and  Spain  are  in  the  process  of  adopting  similar 
rules.

(102) Estonia applies an S-base cash flow tax.
(103) Denmark is the only Member State that does not apply any 
reduced  rates. However,  Denmark  applies  zero  rates  to 
supplies such as newspapers and exempts supplies such as 
education and passenger transport.

(104) Note  that,  although  this  is  a  reasonable  approximation, 
private consumption is in some respects narrower than the 
VAT  base  (as  the  latter  includes  some construction  work, 
which is classified as investment in the national accounts) 
and  in  some  respects  wider  than it  (some  items  belonging 
to  personal  consumption  are  exempt  from  VAT,  such  as 
spending on financial services or on public services).

5. Tax policy challenges in EU Member States

the 

and 

rate 
effectively 
revenue 
standard 
(105)  This  share  gives  a  good  first 
collected.
indication  of 
impact  of  exemptions  and 
reduced rates, i.e. of ‘policy efficiency’. However, 
it is also affected by the share of tax evasion or tax 
non-compliance  (‘collection  efficiency’),  which 
also diminishes the ratio. (106)

Graph 5.2 suggests  that  the  impact  of  reduced 
rates, exemptions and/or VAT fraud and evasion is 
indeed  significant,  as  actual  VAT  revenue  in  the 
EU-27  is  less  than  50 %  of  the theoretical  total  in 
2010. It should be mentioned, however, that these 
figures  might  be  overestimated  as  the  indicator 
includes (untaxed) imputed rents in the base.  This 
leaves the country ranking largely unchanged. (107)

Compared  to  the  previous  year  the  indicator 
increased  by  1.5  percentage  points, reversing  a
backward trend since 2007. The same development 
can be seen for the euro-area, where the  indicator
rose  even  more markedly, by  1.9  percentage 
points. This indicates that old EU Members States 
have increased reduced rates and/or broadened the 
base more strongly. 

Although quite  high  on  average,  the  impact  of 
reduced  rates, exemptions  and  tax  fraud  varies 
significantly  across Member  States. In  fact  the 
difference between the highest VAT revenue ratio 
in Luxemburg (108) and the lowest one in Greece is 
to 
substantial:  56  percentage  points.  Next 

(105) This  measure  is  analogous  to  the  ‘C-efficiency’ or  the 
‘VAT  revenue  ratio’ computed  by  the  OECD,  see  OECD 
(2011c).

(106) Unless, due to the existence of the informal sector, private 
consumption  is  understated  by  national  accounts  in  an 
equal proportion to the share of VAT evasion, which seems 
unlikely.

(107) The consumption of housing services by owner-occupiers, 
an  item  on  which  VAT  cannot  be  levied,  on  average 
accounts  for  slightly  less  than  12 %  of  final  consumption, 
which is used as a proxy for the potential tax base. On the 
other  hand,  while  this  results  in  a  downward  bias  in  the 
ratio, other items tend to boost it, one example being sales 
of  residential  housing,  which  yield  VAT  revenues  but  are 
not  part  of  final  consumption.  Overall,  the  exclusion  of
consumption of housing services by owner-occupiers does 
not  have  a  major  impact  on  the  ranking  of  countries  in 
terms  of  the  ratio.  An  alternative  calculation,  e.g.  the  one 
made  in  the  OECD  review  of  France,  identifies  the  same 
countries  as  having  the  narrowest  VAT  base  (see  OECD, 
2011a, page 17).

(108) However,  the  high  value  of  Luxemburg  might be  affected 
by cross-border shopping, as VAT revenues are included in 
the  nominator  of  the  indicator  while  the  denominator 
excludes 
expenditure  of  non-resident 
households.

consumption 

71

European Commission

Tax reforms in EU Member States

Luxemburg only five countries  – Cyprus, Estonia, 
Bulgaria, Slovenia and Austria – gather more than 
60% of the theoretical amounts. 

The two dotted lines  shown in Graph  5.2 indicate 
an indicator's value significantly below the EU-27 
average  (LAF  minus) and  significantly  above  the 
average (LAF plus). According to this assessment, 
six  Member  States  – Greece,  Italy,  Spain,  Latvia, 
Romania  and  United  Kingdom  – exhibit  a  VAT 
revenue  ratio significantly  below 
the  EU-27 
average  (LAF  minus).  This  means  that  these 
countries could substantially improve the design of 
VAT in order to increase its efficiency. In addition, 
the  ratio  is  below  the  EU  average  in  Slovakia, 
Portugal,  France,  Belgium,  Ireland,  Poland  and 
Lithuania,  signalling  scope  for  increasing  VAT 
efficiency.

From a comparison of 2010 to 2009 it is clear that 
the  increase  in  the  EU-27  VAT  revenue  ratio  is 
driven  by  an  augmentation  in  fifteen  Member 
States. The strongest increase  was in Spain  where 
the  indicator's  value  rose  by  almost  a  fifth  from 
35% to 41.7%. This development could to a large 
extent  be  due  to  the  increase  of  the  two  reduced 
rates by 1 percentage point as of July 2010. Latvia 
exhibited  the  second  and  Italy  the  third  strongest 
increase of 13% (from 37.9% to 42.8%)  and 10% 
(from  37.6 
respectively.  The 
improvement of the ratio in Latvia may have been 
driven  by  an  augmentation  of  the  reduced  rate  by 
100%  (from  5%  to  10%)  which  was  effective  in 
2009 but came fully into effect in 2010 most likely 
due to the crisis.

to  41.3%) 

There  are  a  number  of  reasons  why  the  indicator 
could  have  been  affected  negatively  by  the  crisis 
and  the  economic  cycle  in  general,  even  though
VAT  is  a  proportional  tax.  First,  the  recession  is 
likely 
to  have  shifted  consumption  patterns 
towards primary goods, which are more frequently
subject  to  lower  VAT  rates.  Second,  the  share 
calculated  here  is  affected (109)  by  the  decline  in 
construction  activity,  which  was  particularly 
marked in this recession. Third, rising bankruptcies 
reduce the amount of VAT paid, as do inventories 

the  ratio,  but 

(109) This is because VAT paid on construction is counted in the 
the 
numerator  of 
denominator  (not  being  consumption  expenditure).  This 
statistical  bias  implies that  any  decline  in  construction 
activity  will  tend  to  have  an  over-proportional  impact  on 
the share.

is  excluded  from 

72

involuntarily accumulated by businesses during the 
(110)  Finally,  many  countries  have 
recession.
introduced  measures  aimed  at  making  it  possible 
for  companies  to  defer  tax  payments,  including 
VAT.

Graph 5.2:

Actual VAT revenues as a percentage of theoretical 
revenues at standard rates in 2009 and 2010

100

90

80

70

60

50

40

30

20

10

00

LAF plus

LAF minus

LU CY EE BG SI AT SE DK MT NL DE CZ HU FI LT PL IE BE FR PT SK UK RO LV ES IT EL

EU EA

2009

2010

Note: The ratio consists of actual VAT revenues divided by the product 
of the VAT standard rate and net final consumption expenditure, i.e. 
final consumption expenditure minus VAT receipts. A low value of the 
ratio suggests that exemptions, reduced rates, or tax evasion have a 
significant impact.
Source: Commission services.

The  increase  of  the  revenue  ratio  in  Italy  was 
partly due to measures taken by the government to 
combat  VAT  fraud  and  evasion.  The  outlook  for 
future  development  with  respect  to  improvement 
of  the  VAT  efficiency  in  Member  States  may  be 
favourable. As shown in Chapter 3 quite a number
of Member States increased recently reduced rates 
and/or  broadened  the  VAT  base.  This  will  help 
reduce the  significant  cost  created  by  deviation 
from uniformity – not only in budgetary terms, but 
also  in  terms  of  administrative and  compliance 
costs.

VAT compliance gap

As  mentioned  above,  the  difference  between 
theoretical  and  actual  tax  revenue  is  also  due  to 
VAT fraud and evasion, which is already included 
as one element in the VAT revenue ratio discussed 
above. It is certainly very difficult to quantify this 
variable.  The  2009  study  by  Reckon  is  the  most 
comprehensive recent report attempting to do so. It 
quantifies and analyses the VAT ‘compliance’ gap 
in the EU-25 Member States over the period 2000-
2006. 

(110) National accounts data indicate, however, that a destocking 

of inventories took place in 2009.

5. Tax policy challenges in EU Member States

Table 5.13:

VAT ‘compliance’ gap, EU-25, in %

Country
BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
CZ
DK
LV
LT
HU
PL
SE
UK
EU-25
EA-17
LAF plus
LAF minus

2000
10
12
12
5
24
9
5
22
---
12
17
7
13
5
16
27
2
15
9
31
15
15
22
6
16
12
12
10
15

2002
13
13
15
3
20
12
7
24
--- 
5
4
9
10
7
13
27
4
16
8
32
18
25
20
4
17
14
13
11
16

2004
12
14
21
4
29
8
7
27
--- 
2
14
6
13
8
8
24
5
13
7
31
28
24
19
4
15
14
13
11
16

2006
11
10
8
2
30
2
7
22
--- 
1
11
3
14
4
4
28
5
18
4
22
22
23
7
3
17
11
10
8
14

Note: The study covers the EU-25 Member States. No data is available
for Cyprus. The VAT gap compares VAT receipts with a theoretical net 
VAT liability. The latter is calculated by identifying the categories of
expenditure that give rise to irrecoverable VAT and combining them
with appropriate VAT rates.
Source: Reckon (2009).

As  explained in last year’s report,  the aggregate
VAT gap for
the  EU-25 (excluding Cyprus)
amounted to € 106.7 billion in 2006, which
constituted 11 per cent of theoretical liability.

On the  basis of the  2006 results of the Reckon
Study (111), in particular the  following Member
States,  faced in this year
the  challenge  of
addressing a  high VAT compliance gap:  Greece,
Slovakia,
the Czech Republic, Latvia,
Lithuania, Hungary and the  United Kingdom. All
these countries have an indicator value higher than
LAF minus, which points to a  need to improve
VAT compliance.

Italy,

5.3.

IMPROVING TAX GOVERNANCE

Efficient 
tax collection is a  prerequisite  for
financing European welfare states with a relatively
high level of public services and redistributive tax
and transfer systems.  Tax evasion, which results
from shadow economic  activities
(undeclared
work) and underreporting of income in tax returns,
undermines the  revenue-raising and redistributive

objectives of the tax system. It leads to unintended
redistribution from those  who do respect the rules
to those  who do not. Moreover, it  creates  unfair
competition between formal  and informal  actors. 
Finally, it further weakens tax morale and can lead
to more evasion. This is a risk at a time  when tax
increases
severe
consolidation challenges. Reducing tax evasion
and improving tax compliance is,
therefore, of
particular
importance at  this juncture and, as
discussed in Chapter 3, several Member States are
seeking to step up efforts
tax
collection. 

to improve 

to meet 

necessary

are 

In the  conventional  view of economic  models  of
taxpayer behaviour,
taxpayers comply with tax
laws if the  expected value  of the  penalty where
evasion is detected exceeds the  tax to be  paid.
However, a host  of other factors such as  social
values, public morality, and people’s perception of
the efficiency of the public sector and the fairness
of the tax system also matter in shaping attitudes to
tax laws. (112)

The  goal  for revenue  authorities is to collect the 
full  amount  of
taxes  and duties payable  in
accordance with the  law. Tax authorities should
aim at reducing the  tax compliance gap while at
the same time  minimising the administrative costs
of collecting taxes for the  government  (collection
costs) and of paying taxes for
i.e.
taxpayers,
businesses and individuals (compliance costs). 

are 

compliance,

interlinked: 

as  well  as 

Tax authorities apply policies  to facilitate  and
stimulate  ‘voluntary’ compliance, to prevent  and
deter evasion, to detect  and combat  tax fraud, to
enforce
to collect 
effectively taxes  which are  due and in arrears. 
These  policies 
facilitating
voluntary compliance decreases  the  need for
enforcement,  while  an effective  enforcement
to more  voluntary
policy will
compliance.
at
enhancing voluntary compliance will  have  a
positive  impact on administrative  burdens, while
the  opposite  might  be  the  case  for enforcement
policies.  However, a  tax administration policy
needs to include both. The challenge is to strike a 
proper balance between these two elements. This

contribute 
general,
In

policies  aimed

(111) The European Commission is  in the process  of updating
this study because of possibly significant changes in VAT 
compliance.

(112) See e.g. Dell'Anno (2009) and Slemrod (2007).

73

European Commission

Tax reforms in EU Member States

section extends the  analysis  of  tax  governance 
contained in last year's report. (113)

not  be  taken  as  an  absolute  measure  of  the 
phenomenon. (116)

5.3.1. Tax compliance issues: Reviewing 

available indicators

the  extent  of 

The  size  of  the  shadow  economy gives  an  initial
idea  of 
tax  non-compliance. 
the  shadow 
to  Dell’Anno  (2003), 
According 
economy  includes  those  economic  activities  and 
the  income  derived  thereof  that  circumvent  or 
avoid  government  regulation  or  taxation.  The 
avoidance  of  tax  and  social  security  contribution 
(SSC) payments, but also the avoidance of labour 
protection 
rights 
protection  laws can  contribute  to  a large  share  of 
the shadow economy in official GDP.

legislation 

consumer 

and 

By  definition,  the  size  of  the  shadow  economy  is 
difficult  to  ascertain.  Reflecting  these  difficulties, 
different  studies,  which  apply  different  methods,
come  to  rather  different  results  for  some  Member 
States. (114)  One  of  these  approaches,  applied  by 
Schneider  (2012),  uses  the  Multiple  Indicators 
Multiple  Causes  (MIMIC)  model  which  examines 
the  relationship  between  the  unobserved  shadow 
economy  and  a  set  of  observable  variables. 
Although  the  methodology  faces  strong  criticism 
and should not be taken as producing uncontested 
values,  the  results  have  the  advantage  of  coming 
from  the  consistent  application  of  a  methodology 
across  Member  States  and  time,  allowing  for  a 
basis  for  comparisons  between  countries  and 
(115) 
identifying 
However,  the  available  results  only  provide  an 
indication  of  the  extent  of  the  problem  and  the 
development  over  time,  so  that  the  levels  should 

the  phenomenon.

trends 

in 

(113) It is also partly based on Jensen and Wöhlbier (2012). See 

According to Schneider (2012), shadow economic 
activity varies considerably across Member States. 
In  2012,  Bulgaria  is  estimated to  have  the  largest 
shadow economy in the EU, followed by Romania, 
Lithuania, and Estonia (see Table 5.14). According 
to  Schneider  (2012),  the  size  of  the  shadow 
economy  increased  steadily  between  2008  and 
2010, but dropped again in 2011 and 2012.

is 

the  European 
important  source 
Another 
Employment  Observatory,  which
collected 
national  data  in  2004  and  2007  for  the  share  of 
undeclared work. Depending on availability, these 
figures  are  based on  micro  surveys,  labour-force 
survey  studies, macro  studies or  other  available 
information. (117) Hence, the reported national data 
for  undeclared  work  are  not  fully  comparable 
across countries but appear to complement usefully 
the  indicator  scheme,  given  its  methodological 
drawbacks.  In  some  cases,  divergences  between 
the  two  indicators  stress  the  need  for  cautious 
assessment based on this set of indicators. The data 
for  undeclared  work  points  to  a  great  deal  of 
heterogeneity  with  estimates  ranging  from  2%  to 
30%.  The  estimated  size  of  undeclared  work  is 
usually significantly lower in the reported national 
data than in the Schneider (2012) estimates for the 
size  of  the  shadow  economy.  For  most  Member 
States, the difference between figures in Schneider 
(2012)  and  national  estimates  amounts  to  around 
6-8 percentage points. For Greece, Slovakia, Malta 
and  Hungary,  the  discrepancy  is  lower  or  even 
absent,  while  national  estimates  are  more  than  10 
percentage  points  lower  for  Cyprus,  Estonia  (in 
both  cases  around  21  pp),  Portugal,  Lithuania, 
(118) 
Poland,  Romania,  Denmark  and 

Italy.

also Gayer and Mourre (2012).

(114) Available  methods  include  direct  approaches  (based  on 
audits  and  taxpayers'  surveys),  indirect  approaches  (using 
the  gap  between  declared  income  and  income  in  national 
accounts;  the  currency  demand  approach  based  on  the 
relationship  between the  quantity  and  the  velocity  of 
money; the estimated gap between official income and that 
estimated  from  an  assumed  relationship  between  income 
and  the  observed  consumption  of  specific  goods  and 
services  (e.g.  energy); 
the  rate  of  non-filing;  and 
experiments using behavioural economics approaches. See 
Alm (2012) for a survey.

(115) It  is  an  indirect  measure  based  on  statistical  relationships, 
notably  the  currency  demand,  which  can  partly  capture 
home  production.
It  might  not  take  country  specific 
characteristics  and  differences  sufficiently  into  account  as 
the  parameters  of  the  model  are  estimated  jointly  for  a 
large group of countries.

(116) Arguably,  they  overestimate  the  true  measure  of  the 

shadow economy.

(117) In  micro  surveys  individuals  are  asked  if  they  have 
performed  (or  acquired)  activities  in the  shadow  economy 
during the previous year. One reason for the lower results 
is  that  micro  surveys  usually  apply  a  more  narrow 
definition of the shadow economy, focusing on households' 
supply  of  black  labour,  whereas  the macro  studies tend  to 
include also  other  types  of  tax  evasion.  Another  possible 
reason might be biased reporting. Nevertheless, it is likely 
that  the  size  of  the  shadow  economy  is  overestimated,  at 
least  for  some  countries,  in  macro  estimations  like 
Schneider (2012).

(118) In  the  case  of  Cyprus,  information  included  in  the  2012 
National  Reform  Programme  points  to  a  high  level  of 

74

5. Tax policy challenges in EU Member States

Comparable micro surveys are only available for a 
few Member States (see right-hand side column of
Table 5.14).

Lithuania, Malta, Poland, Portugal, Romania,
Slovenia and Spain as  well as Cyprus (121), face  a
particular challenge in this area.

There seem to be some common characteristics in
the  prevalence of undeclared work:  it
is most
prevalent among men, singles, people with short or
craft education as well as workers employed in the 
construction sector and in the hospitality sector. It 
is more common in sparsely populated areas.

In addition to the  shadow economy, which is not 
necessarily driven only by tax reasons but  has a 
large impact on tax revenues, a sizeable part of tax
evasion consists of underreporting in the  formal
sector. The  ability to misreport  and the  will  to
exploit opportunities to do so – tax morale – seem
to be decisive explanatory variables for the size of
the  shadow economy and the total  amount  of tax
evasion. (119)

As  discussed in Sub-section 5.2.3, Reckon (2009)
provides estimates for the VAT gap in 25 Member
States, which includes fraud, legal  avoidance (120) 
and unpaid VAT liability due to insolvencies (see
Table  5.13). Although the exact  amount  involved
in VAT fraud is difficult to quantify, filing of false
returns and unauthorised deductions of VAT are 
believed to be  a  key factor in explaining revenue
loss. For this reason, some  Member States have
tightened their measures to combat VAT fraud, by
imposing new obligations on taxpayers in the
chain of production and distribution to submit
additional information to the tax authorities.

Member States are considered to have a particular
need and scope  for improving tax compliance  if:
(i) the size of the shadow economy as estimated by
Schneider (2012) is significantly above the EU-27 
average and other national sources indicate that the 
extend of undeclared work is above  the  EU-27
average, or, (ii) the VAT gap is significantly above 
the  EU-27 average. According to these  criteria,
Italy,
Belgium, Bulgaria, Greece, Hungary,

undeclared work and confirms 
Schneider (2012).

the high figures 

in

(119) See, e.g., Robinson and Slemrod (2011) and Kleven et al.

(2011).

(120) Although legal,

tax avoidance involves 

the abusive
exploitation of ‘loopholes’ in national or international laws, 
allowing companies  to shift profits  from  one country to
another with the intention of reducing the amount of taxes 
they pay.

Table 5.14:

Size of the shadow economy and undeclared work in
the EU Member States

Size of shadow economy 
(in % of GDP)

2005

2010

2012

Undeclared work 
(share of GDP or 
employment, 1995-
2006)

Micro survey, 
Undeclared work 
(working hours in 
% of hours in 
formal economy)

20.1
15.4
30.2
14.8
27.6
21.3
13.8
24.4
28.1
9.9
26.9
12
10.3
21.2
26
17.6
16.6
34.4
18.5
16.5
29.5
31.1
24.5
27.1
32.2
17.5
12
17.4
17.6
15.1
19.1

17.4
13.9
29.3
13
25.4
19.4
11.3
21.8
26.2
8.4
26
10
8.2
19.2
24.3
16.4
14
32.6
16.7
14
27.3
29.7
23.3
25.4
29.8
15
10.7
15.4
15.5
13.4
17.4

16.8
13.3
28.2
12.7
25.0
19.2
10.8
21.6
25.6
8.2
25.3
9.5
7.6
19.4
23.6
15.5
13.3
31.9
16
13.4
26.1
28.5
22.5
24.4
29.1
14.3
10.1
14.9
15
12.8
16.8

6-10
7
7-8
NA
25
12
4-6.5
12
4.2
NA
25
2
2
5
17
13-15
4.2
22-30
9-10
3
18
16-18
15-20
12-15
16-21
5
2
7.2
8
5.3
9.1

4.1

3.8

2.3
1.2

Country

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
EU-27
EA-17
LAF plus
LAF minus

Note: The size and development of the shadow economy is calculated 
with the MIMIC estimation procedure. The currency demand approach
was used for Austria, Germany and Poland. Averages are GDP-
weighted. For undeclared work, national data is collected by European
Employment Observatory, Spring Review 2004 and 2007 (figures for
Belgium, Italy and Lithuania are based on the articles on undeclared 
work from national SYSDEM correspondents).
Source: Schneider (2012), European Commission (2004, 2007) and 
Pedersen (2003).

Various policy instruments can be used to increase
tax compliance. Box 5.4 provides  an overview of
practical measures which are crucial for improving
tax compliance. The effectiveness of each measure 
depends on the  underlying cause  of non-
compliance. Moreover,
reform priorities differ
across Member States, reflecting differences in tax
systems, stages  of development,  administrative
capacity, and the  extent  and type  of tax evasion.
Thus, reforms need to be tailored to each Member
State's circumstances. The  relatively wider tax
compliance gaps and lower revenue productivity of
less developed Member States generally
the 

(121) Based on the national source referred to in footnote 118.

75

European Commission

Tax reforms in EU Member States

Box 5.4: Selected measures to improve tax compliance and promote efficient tax 
administration*

Developing a compliance strategy and targeting efforts against tax evasion

Developing an overall compliance strategy is critical for tax authorities’ ability to improve taxpayer compliance and 
enhance  revenue  collection.(1) The  purpose  of  a  compliance  strategy  is  to  identify  and  respond  to  the  most 
significant risks in the tax collection system and achieve the widest possible impact on voluntary compliance.

Revenue agencies following this approach have moved away from administrative assessment systems,  where all or 
most  tax  returns  are  examined, to  a  system  which  relies  on  limiting  standard  taxpayers’ ability  to  evade  and  on 
taxpayers' voluntary  compliance with  their  obligations  without  the  intervention  of  a  tax  official.  Voluntary 
compliance is encouraged through an appropriate balance of targeted audits, taxpayer education and assistance, to 
help  taxpayers  and  their  advisors  understand and  fulfil
their  obligations and  entitlements  (see  European 
Commission, 2010c).

Taxpayers  are  more  likely  to  comply  if  they  perceive  the  likelihood  of  detection  as  high  and  see  blatant  non-
compliers  being  brought  to  account.  The  use  of  risk-management  approaches  improves  compliance  behaviour  by 
deterring  non-compliance  through  targeting  of  audits.  Segmenting  taxpayers  into  four  compliance  categories 
(compliant;  attempt  to  comply  but  fail;  general  non-compliant;  deliberate  fraud)  in  the  so-called  compliance 
pyramid can help tax authorities differentiate in their approach towards the taxpayer between service and control (or 
even  criminal  investigation  in  the  event  of  fraud).  Moving  beyond  segmentation  to  determine  whether  a  taxpayer 
should generally be approached with service or control, the building up of databases with information on taxpayers’
income and assets can lead to better targeting of tax authorities' audits, through a system of flags for instance. Flag 
systems use available data to pinpoint which tax returns of individuals and businesses can be expected to have the 
largest deviations and which it would be most beneficial to examine more closely. The flag system could build on 
data  relating  to  sources  of  income,  size  of  taxpayers’ reported  changes  to  the  preliminary  assessment  of  income, 
income  levels,  any  mismatch  between  income  and  consumption  levels,  and  perhaps  socio-economic  factors as 
well.(2)

Third-Party Information

Third-party reporting of income is a crucial element in an efficient tax administration. It limits a normal  taxpayer’s 
possibilities  of  under-declaring  income  and  makes  tax  evasion  considerably  more  difficult.  For  example,  it  is 
mandatory for employers to report the taxable wages of their employees directly to the revenue authorities together 
with the payee details. The relevant fields on the tax return containing third-party information can then be locked, so 
that the taxpayer cannot change the information. This is in contrast to self-declaring, where individual citizens are 
responsible for reporting their incomes and deductions themselves. In a detailed study on Danish data, Kleven et al. 
(2011) found a significant negative correlation between the share of an income type reported by third parties and the 
proportion of tax evasion for the income type.

In most Member States, employers are obliged to report to the tax authorities the taxable wages and royalties they 
pay  their  employees  (including  non-monetary  wage  components).  Some  Member  States  have  extended the 
obligation to conduct third-party reporting to financial institutions regarding each account holder's interest payments 
(positive  and  negative),  dividends  and  yields  on  bonds,  as  well  as  the  purchase  and  selling  prices  of  shares  and 
bonds. This  means  that  large  parts  of  the  taxpayer’s  capital  income, including  capital  gains, can  be  calculated 
automatically by the tax authorities. In some Member States, deductible expenses such as union fees and child-care 
expenses are third-party reported directly to the tax authorities.

The better the coverage of third-party information, the more resources are freed up  to be targeted, for example, at 
revenue sources reliant on self-reporting and at combating the shadow economy.(3)

*    This box is based on Jensen and Wöhlbier (2012).
1) Kleven  et  al.  (2001)  found  that  the  presence  of  types  of  income  difficult to  detect  (e.g.  self-employed  income  and 
other  income  not  reported  by  a  third  party)  is  the  most  important  factor  in  predicting  evasion, whereas  the 
socio-economic characteristics of the individual have little explanatory power.

(2) See, e.g., Russell (2010).
(3)

It should, however, be kept in mind that in small companies with only a few employees, it could be relatively easy for 
the employee and the employer to collaborate on under-declaring, and thus third-party reporting conducted by small 
businesses should not be totally excluded from scrutiny.

(Continued on the next page)

76

5. Tax policy challenges in EU Member States

Box (continued)

Pre-filled tax returns

Pre-filling appears to be a successful formula for improving the efficiency of tax collection for personal income tax. 
Pre-populated  tax  returns  have  become  a  significant  component  of  e-government  strategies  by  revenue  bodies  in 
many  countries.  While  not  removing  the  possibility  of  under-declaration,  pre-filled  tax  returns  with third-party 
information  have  a  significant  impact  on  tax  compliance  and  make  it  easier for  the  taxpayer  to  comply  and  pay 
taxes.

In pre-filling, revenue bodies use information already held by them (e.g. taxpayer identity information, elements of 
taxpayer  history,  and  third-party  reports  of  income  and  deductions)  to  populate  fields  within  tax  returns  that  are 
made available to taxpayers for their examination. In its most advanced form, tax return preparation has been fully 
automated  for  the  vast  majority  of the  taxpayer  population.  In  the  Nordic  countries,  at  the  end  of  the  year tax 
administrations generate a fully completed personal income tax return in electronic and/or paper form for the vast 
majority of taxpayers required to file tax returns. The remaining share of taxpayers receives a partly pre-filled tax 
return (see OECD, 2011).
When  taxpayers  receive the  pre-filled  return,  they  have  the  option  of  making  adjustments  and  submitting a  new 
return. Taxpayers’ access for adjusting the final tax return should be  limited technically to those types  of income 
and deductions for which the tax authorities do not possess hard and reliable information from third parties.

Measures to contain the shadow economy

In  most  Member  States,  the  shadow  economy  (undeclared  work)  accounts  for  the  vast  majority  of  tax  evasion. 
Increasing the probability that working in the shadow economy will be exposed, or increasing the penalties, reduces 
the  expected  gains  from  shadow-economy  activities  and  can  have  a  deterrent  effect.  However,  simply  to  increase
control  measures  could  prove  relatively  costly  in  relation  to  the  direct  revenue  gains.  Unlike  under-reporting  of 
income or over-reporting of tax deductions, it is difficult for tax authorities to detect undeclared work when auditing
annual tax returns, as it is not possible to obtain third-party reports on income from the shadow economy and the 
activity is typically concealed both by the person performing the work and by the customer.
One potentially powerful option would be to criminalise the purchaser of undeclared work if the seller does not pay 
the appropriate tax on the transaction, unless the purchaser pays by electronic means. Some studies have shown that 
the buyer of undeclared work reaps a large part of the evaded taxes through a lower price.(4) Thus, there is currently 
a lack of proportionality between buyers’ gain and their potential punishment.
In Italy it is illegal to purchase undeclared work. However, to avoid criminal liability it is sufficient for the buyer to 
show a receipt for the work performed. In other Member States it is mandatory to keep invoices for work carried out 
for some time (e.g. for two years in Germany). However, these systems create an administrative cost for the buyer, 
who must keep track of receipts. It would be preferable to require the purchaser to pay by electronic means in order 
to avoid criminal liability for purchases of undeclared services. This system has, e.g., been implemented in Norway 
and is due to be implemented in Denmark.

A  common  measure  in  the  fight  against  the  shadow  economy  is  the  use  of  mandatory  electronic  payments for 
purchases over a certain threshold, as they leave a trace. The obligation to pay for purchases over a certain amount 
by electronic means exists, e.g., in Italy (€ 1 000) and Greece (€ 1 500).
A  related  measure  to  detect  tax  evaders  is  to  exploit  data  relating  to  an  individual's  electronic  transactions  and 
compare them with that individual's declared income. If a person has a low reported income and at the same time a 
high level of private consumption, it could be an indication that the taxpayer  requires a closer audit. Italy pursues 
this  strategy  fairly  systematically  with  the  so-called  ‘income  meter’.  Denmark  and  Sweden  also  exploit  data  on 
electronic purchases for audits of taxpayers.
Introducing tax deductions for certain activities and sectors (such as the construction sector and household services) 
with a high prevalence of undeclared work, i.e. monetary incentives (‘carrot approach’), could be effective although 
very costly. This approach,  which is  applied  in  Belgium,  Denmark,  France,  Germany  and  Sweden for  example,
tends to be very costly.(5) It involves a high deadweight loss and implies an undermining of the fairness of the tax 
system.

Tax morale is considered to be a key factor for tax compliance. Low tax morale can be contagious. If an individual 
justifies  his  evasion  by  the  fact  that  everyone  else  does  it,  existing  tax  evasion  becomes  a  motive  for  further 
cheating. Hence, it is important that governments protect  and nurse the tax  morale of the population. This can be 
achieved  by  highlighting  the  risk  of  being  detected.  In  combination  with  a  high  likelihood  of  detection, an  active 
communication strategy drawing attention to successful control measures and detection of evaders can prove a cost-
effective way of underpinning tax morale and increasing the perceived probability of being detected.

(4) See Danish Economic Council (2011).
(5) This,  for  example,  concerns  the  titre  service  in  Belgium,  the  Servicefradraget in  Denmark,  mini-jobs  and  tax 

deductions for services close to home in Germany, and the RUT deduction in Sweden.

77

European Commission

Tax reforms in EU Member States

suggest potential
revenue  increases
for bigger
based on initiatives to improve  compliance. For
these  countries, taxpayer service  operations and
effective audit and enforcement should be the first
step.

5.3.2. Quality of tax administration

tax governance, an important
In the  area of
question is the  cost  of tax collection for the
administration. According to OECD  (2011a), the 
average  costs of
tax collection in the  EU-27
amounted to € 1.1 per 100 units of revenue  (see
Graph 5.3). No clear trend is discernible  for the
period 2005-2009. (122) In 2009, Poland, the Czech
Republic, Portugal, Belgium, Bulgaria and France
tax
faced a  challenge  in the high costs of
collection. Slovakia's costs were high in 2007, the 
latest year for which data are available.

In general, it is difficult to construct indicators that
give an exhaustive description of the quality of tax
administration. However, comparative  data  do
for a  few specific areas which are  of
exist
tax
for
particular
administration:  i) number of employees and local
branches  per
third-party
information to obtain information on taxpayers' 
taxable  activities;  and iii) the use  of pre-filling of
tax returns.

ii)  use  of

relevance

efficient 

capita; 

Graph 5.3:

Administrative cost per net revenue collection (costs
per 100 units of revenue, 2009)

2.5

2.0

1.5

1.0

0.5

0.0

LAF minus

LAF plus

2.5

2.0

1.5

1.0

0.5

0.0

SK PL CZ PT BE BG FR IT HU LT LV UK LU NL IE ES SI FI AT DE RO DK MT EE SE

EA EU

Note: No data available for Greece. Data for Slovakia refers to 2007.
Data for Cyprus is currently under revision following a request by the
Cypriot authorities for the year 2009 and over.
Source: OECD (2011a).

(122) The trend in the ‘cost of collection’ ratio is influenced by a
series  of factors: (i) changes  in tax rates  over time; (ii)
macro-economic changes; (iii) abnormal expenditure by
tax administrations; and (iv) changes in the scope of taxes. 
Thus, its  value as  an indicator of effectiveness  is  rather
limited.

78

Size and organisation of tax administrations 

The  size  and organisation of tax administrations
vary considerably between Member States.  Some
of these  disparities can be  attributed to different
ways of organising the  administration of SSC,
customs and excises which may or may not be part 
of the tax agency. Setting up an integrated tax and
SSC collection agency could improve  efficiency
and effectiveness, and reduce the  compliance
the
burden for businesses.
differences concern the 
tax
authorities.  This is rather low in Italy, Spain and
Estonia, while 
relatively high in the
Netherlands and Latvia. Although there are  no
norms
the  ideal  size  of a  tax
administration, the  examples of Austria, Finland,
Sweden and the  United Kingdom show that  it
appears
tax
administration with staff of slightly above 1 000
per 1 million inhabitants (see Graph 5.4).

(123) First  of all,
total  staffing of

in terms of

efficient 

possible 

run

an

to

is

it

Graph 5.4:

Size of tax administrations (total staffing) and
number of local branches

2000

1500

1000

500

0

50.8

132.1

40

30

20

10

0

IT ES EE AT MT PT BG FI SK CY SE FR LT UK RO SI DE IE BE DK CZ HU PL NL LV

EU
27

EA
17

Total staffing per 1m inhabitants (left axis)

Regional and local offices per 1m inhabitants (right axis)

Note: Averages are unweighted.
Source: OECD (2011a).

local

To ensure  cost  efficiency and specialisation of
field offices should not  be  too widely
staff,
dispersed geographically.
In smaller Member
tax centres might not contain the
States,
functions. Some  specialised
whole  range  of
functions such as corporate  income  tax,
large
corporations or frontier taxpayers (taxpayers who
derive  income  in one  Member State  but  reside  in
another), may be  concentrated at one  physical
address.

The  number of local  and regional tax offices or
branches  varies  considerably between Member

(123) See Kidd (2010).

5. Tax policy challenges in EU Member States

Table 5.15:

Use of third party information in Member States

Country

Wages and salaries (reported
by employer, entity paying the
income)

Royalties

Financial information (reported by financial institution and insurance companies)

Interest payments

Dividends

Sales and purchase of
financial assets

Suspicious transactions

P (Pre-filled Returns);  A (Audit / Control);  R (Risk Analysis)

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

P, A, R
NA
A, R
R

P, R
NA
A, R
A, R
NA
P, R
P, R
R
P, R
A, R

P, A, R

NA
P
R
P, R
A, R
A, R
P
P
R

NA

NA

A, R
NA

A

P, R

NA
P
R
P, A

P

A, R
NA

R

P, R
NA
A, R

NA
P, R
P, R

P, R

NA
P
R

A, R
A
A
P
R

NA

NA

NA
P, R
P, R

NA
P

P

NA

A
R
NA

NA

A

A

A, R
P, R

NA
P

A
A, R

A
P, R

NA
R
A, R
A

NA
A, R

NA

R

R
A, R

A, R

A

Note: 'P's for pre-filled returns are put in bold to emphasise the importance of this dimension. A missing 'P' for financial information in European
Commission (2012e) is added for Denmark.
Source: European Commission (2012e).

is

technology

States: from 35 in the United Kingdom to 3,271 in
France (124) and 1,421 in Belgium. At a time when
information
ever
playing
in connecting taxpayers and
increasing role 
administrations, a relatively small number of local 
tax offices (less than 10 per 1 million inhabitants),
could support  professional competency, ensure 
quality of service and improve administrative cost
effectiveness. (125)

an

Third-party information and easy tax reporting

An overview of the use of third party information
in the  EU by the  Fiscalis Risk Management
Platform (European Commission, 2012e), shows
that  third-party information regarding individual
income is widely used (see Table 5.15). According
to this source,
ten Member States (Belgium,
Denmark, Finland, Lithuania, Malta, Netherlands,
Portugal, Romania, Spain and Sweden) use  the
information to pre-fill  tax returns. Other sources

show that additional  countries  including France
use  pre-filling. (126) Pre-filling appears to be  a 
successful formula for improving the efficiency of
tax collection for personal  income  tax. Pre-filled
tax returns containing third-party information
make  it  easy for taxpayers to comply and pay
taxes. At  the  same  time, pre-filling more  or less
eliminates taxpayers' ability to misreport  and
evade taxes if the third-party reported fields on the
tax return are  locked for editing. Many Member
States also make use of third party information for
audit  or control  and for assessment, while the
majority of countries use  the information for risk
analysis. Third-party information is
also an
important source for debt collection.

It should be as easy as possible for taxpayers to fill
in and file  their tax returns,  even if they are  not
pre-filled. While in some  cases  complicated tax
rules  cannot  be  avoided, appropriate  IT solutions
should simplify the filling-in process. As shown in

(124) The two main fiscal administrations in France were merged
in 2008. The process  should end in 2012 and aims  at a
reducing administrative costs.

(125) There is no doubt that political factors and aspects such as
the federalist structure of a country have an impact on the
organisation of tax administrations.

(126) According to the OECD, substantial use of pre-filling to
complete tax returns (fully or partly) for a significant share
of taxpayers takes  place in Belgium,  Denmark, Estonia,
Finland, France, Lithuania,
the Netherlands,  Portugal,
Slovenia, Spain and Sweden (see OECD, 2011a).

79

European Commission

Tax reforms in EU Member States

Graph 5.5,  the  use  of electronic  filing varies
widely across Member States. (127)

Graph 5.5:

Use of electronic filing for PIT, CIT and VAT, 2009

100

90

80

70

60

50

40

30

20

10

0

LAF plus

LAF 
minus

100

90

80

70

60

50

40

30

20

10

0

AT BE CZ DK EE FI FR DE EL HU IE IT LU NL PL PT SK SI ES SE UK BG CY LV LT MT RO

EA
17

EU
27

Personal income tax

 Corporate profits/income tax

 Value added tax

Weighted use of e-filling

Note: No data is available for Slovakia, Czech Republic (for CIT and 
VAT) and Cyprus (for CIT). 'Weighted use of e-filing' is calculated with
a weight of 50% of PIT and 25% of CIT and VAT respectively.
Source: OECD (2011a).

Costs of compliance

Compliance costs are an important  variable often
associated with non-compliance. A widely used
indicator for measuring tax compliance costs for
small and medium-sized enterprises is the ‘paying
taxes’ indicator. (128) 

Graph 5.6:

Administrative burden of tax systems for a medium-
sized company

600

500

400

300

200

100

0

600

500

400

300

200

100

0

LAF minus

LAF plus

CZ BG PL LV IT HU PT SI SK EL RO DE ES LT AT BE CY DK FR NL SE UK FI EE IE LU

EU
27

EA
17

Note: Total hours to comply across the EU include: corporate income
tax time, labour income tax time, and consumption tax time. Data for
Malta are not available.
Source: PwC et al. (2011).

see Graph

showed high tax compliance costs (above  LAF
high,
however,
compliance costs have  trended downwards in the
EU  recently (2005 average:  212 hours, 2011:  189
hours).

5.6). Overall,

Overall results for quality of tax administration

tax systems

When assessing whether Member States are
considered to have a particular need and scope for
improving the administrative system, the following
four criteria  are  applied:  (i) administrative  costs
per net  revenue collection is significantly above
the  EU-27 average;  (ii)  the  administrative  burden
of
for mid-sized companies are 
significantly above the EU average; (iii) third party
information is not  used for pre-filling tax returns; 
and (iv) the  extend of e-filing is significantly
below the  EU  average. Table  5.16 presents an
overview of these  four indicators. Member States
that fulfil either the first two criteria or three of the 
four criteria  are  considered to face  a  particular
challenge  to review their tax administration. This
applies to Bulgaria, the  Czech Republic, Greece,
Portugal, Poland and Slovakia.

Table 5.16:

Overview table of tax administration challenges

Country

Cost of revenue 
collection

Cost of paying 
taxes

Use of third 
party 
information

Use of e-filling

Overall
Challenge

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

X

NA

X

NA

X

X

X
X

X

X

X

X

NA

X
X
X

X
X

X

X
X
X

NA
X
X
X

NA
X
X
X

X

X
X

X
NA

X

X
X

X

X

X

X
X
X

X
X
X
X

X
X

X

X

X

X
X

X

In 2011 the  Czech Republic  and Bulgaria in
particular but also ten other Member States

Note: An ‘X’ in columns four and five indicate that third party
information and e-filing, respectively, are not used in the Member State.
Source: Commission services.

(127) Several Member States  have implemented measures
recently to increase the share of electronic filing.
In
Cyprus,  for example, e-filing is  compulsory for legal
persons  in PIT and CIT who submit audited accounts  in
since 2010.

(128) It measures  the time required to prepare, file and pay (or
withhold) corporate income tax, value added or sales  tax
and labour taxes,  including payroll taxes  and SSC for a
case study company. The indicator is  calculated annually
by PwC, the World Bank and IFC; see PwC et al. (2011).

5.4.

SPECIFIC ISSUES

This section addresses three specific issues in more
detail:  housing taxation, environmental  taxation
and redistributive aspects of taxation. Whereas the
discussion in the first  two sub-sections is an

80

extension of the  analysis in last  year's report,  the 
discussion of the  redistributive  aspects of taxation
is an innovation which has been included in this
report  because  of its increasing importance in
policy discussions.

5.4.1. Housing taxation

Various studies  have  shown that  property taxes,
and in particular recurrent
taxes  on immovable
property,  are  among the  taxes least detrimental  to
growth. Taxes  on immovable property or housing
take  various forms and include  both recurrent and
transaction taxes. (129) Moreover, taxes  on capital
gains also affect investment decisions in residential
housing. As these taxes affect incentives to invest,
rent  and build residential  housing, the  design and
structure  of housing taxes matters for the overall
functioning of the economy. (130)

Transaction vs recurrent taxes on housing

Transaction taxes tend to discourage  transactions
that  would allocate  properties  more  efficiently.
The market will be thinner and the price discovery
process, which is already slow in the  housing
market, could be  hampered. These taxes would
also have  a negative  impact on labour mobility
given the  high transaction costs incurred by
is always
changing property.  Theoretically,
possible  to replace a  transaction tax with a
recurrent tax, which would entail less distortion on
the housing market. (131) Moreover, revenues from
transaction taxes are often very volatile as revenue 
development in the crisis has recently shown, with
tax windfalls in housing market  booms and tax
shortfalls in busts.

it

On the  positive  side, a  tax on real  property
transactions could theoretically deter speculation
and thus possibly help reduce  the  risk of housing
relationship
market

bubbles.  However,

this

(129) European Commission (2010c) provides an overview of the
literature on this  topic. The analysis  here is  limited to
residential property because commercial buildings, along
with other physical capital used as  an input
in the
production process,  should ideally not be taxed due to
efficiency considerations.

(130) This section draws on last year's  report. A more elaborate
analysis  is  available in Johannesson Linden and Gayer
(2012). See also Gayer and Mourre (2012). For a
the housing
discussion of other structural
market, e.g. regulations that are important for the stability
of market itself and of the broader economy, see European
Commission (2011g).

features  of

(131) See, e.g., Johansson et al. (2008).

5. Tax policy challenges in EU Member States

to be  politically difficult 

It  could also
remains empirically ambiguous.
prove 
the
to use 
transaction tax as  a  timely policy response  to
mitigate  price  increases  in the  housing market.
Moreover, other policies are available that can deal 
more effectively with housing market bubbles. (132)

Current  systems for taxing immovable  property
that rely heavily on transaction taxes provide scope 
for improving tax design. A  shift  from taxes  on
transactions to recurrent taxes on real estate would
reduce the  distortions introduced by taxation and
is
improve  economic  efficiency. The 
warranted by the  fact  that  this type  of tax has  a
limited negative impact on the overall allocation of
resources  in the  economy compared to other
sources of revenue.

latter

(0.5%  of GDP).

Property taxes  generally play a  relatively small
role in the EU Member States in terms of revenue
(1.4% of GDP), and around a third of that refers to
(133) 
taxes  on transactions
Variations between Member States are significant, 
and transaction tax revenues were estimated to be 
close  or higher than 1%  of GDP in Belgium,
Spain, France, Italy, Luxembourg and Malta  in
2010. However, these  data  include revenue from
other capital  and financial  transactions.  (134) The
tax rates  applied also provide  an indication of the
importance and the  distortive  impact of the  tax. 
Belgium, Italy and Greece apply a  tax on real 
estate transactions at a rate above or equal to 10 %
and
even
(see Table  5.17),
exemptions apply in some cases (e.g. for first-time
buyers). 

reductions

if

Table 5.17:

Tax rates on real estate transactions in EU Member
States, 2012

Tax level

 Member State

≥10%
5-8%
<5%
None

BE, EL*, IT*
FR, ES, LU, CY*, PT*, UK*
AT, DE, IE, MT, NL, SI, FI, CZ, DK, LV, SE, HU*
EE, SK, BG, LT, PL

Note: * indicates a progressive or multiple rate structure; no rate 
indicated for Romania; the top rate in the UK of 7% applies to properties
above GBP 2million. In Italy some rates are levied on cadastral values
rather than transaction values.
Source: Commission services.

(132) Crowe et al. (2011).
(133) For country data, see Graph 5.7.
(134) No further disaggregation of data is currently available.

81

European Commission

Tax reforms in EU Member States

first 

temporarily  and 

A  second  set  of  countries  (Portugal (135), Spain, 
Luxembourg,  France  and  Cyprus (136))  currently 
apply rates in the 5-8 % range, while nearly half of 
the Member States apply tax rates below or at 5 % 
on  real  estate  transactions. Ireland  reduced  its
stamp  duty  to  1-2%  (from  7-9%)  in  2011,  while 
the  Netherlands 
then 
permanently reduced the real estate transaction tax
from  6%  to  2%  as  from  July  2011.  Moreover, 
Cyprus has suspended the application of the tax on 
real  estate  transactions  until  the  end  of  2012. 
Several  Member  States  do  not  levy  taxes  on  real 
estate  transactions. A gradual  shift  from  a  tax  on 
real  estate  transactions  to  a  recurrent  tax  on  real 
estate could potentially improve the functioning of 
the  housing  market  in  Belgium,  Italy  and  Greece, 
but  also  in  Spain,  Luxembourg,  France,  Cyprus, 
and Portugal. (137)

The design of recurrent taxes on housing

to  designing 

Several  approaches 
taxes  on 
residential  property  have  been  discussed  in  the 
literature  and  are  applied  in  different  countries. 
One  difficulty  lies  in the  fact  that  ownership  of  a 
house  involves both a  consumption  decision  and 
an  investment  decision,  which  potentially  has  an 
impact on the design of the tax. In most cases, the 
taxation  of  immovable  property  is  related  to  the 
capital  taxation  rules.  Alternative  approaches  are 
to  consider the  real  estate  tax  as  a  tax  on  the 
consumption  of  housing  services  or  as  a  payment 
for local public services.

Capital-based housing taxation

An  ideal  tax  system  aims  at  neutrality,  which 
implies  that  returns  from  residential  property 
should  be 
income. 
Accordingly,  the  return  from  the  house,  less 
depreciation allowances and interest payments (i.e. 

taxed  as  other  capital 

(135) In Portugal the transaction for first residences ranges from 

interest 

the  net  return),  should  be  subject  to  personal 
income  tax  or  capital  income  tax  at  the  personal 
level. (138) In the case of owner-occupied housing, 
this principle of neutrality translates into taxing an 
imputed  return,  while  at  the  same  time  allowing 
for  mortgage 
and 
depreciation.  Consistent with  the  treatment  of 
other  financial  assets,  capital  gains  from housing 
transactions  should  also  be  taxed  in  order  to 
achieve neutrality vis-à-vis other assets. (139) A tax 
on  imputed  rental  income  could  be  approximated 
through 
the 
property. (140) In both cases, it is important that the 
value of the tax base is regularly updated. 

deductibility 

recurrent 

tax  on 

annual 

a 

If 

investment  possibilities. 

A tax on imputed rents and/or a recurrent property 
tax  are essential  to  balance  the  tax  subsidy 
provided  through  interest  rate  deductibility.  The 
tax is needed to achieve a neutral tax treatment of 
various 
interest 
deductibility  is  provided  to  house-owners  while 
imputed  rental  income  is  either  (i)  not  taxed  or 
taxed  too  low  or  (ii)  approximated  with  recurrent 
property  tax which  is  too  low,  a  tax  subsidy  is 
provided  which  favours  investments  in  owner-
occupied  housing  and  household  indebtedness 
through  mortgage  loans.  A  neutral  tax  treatment 
will  depend  on  the  taxation  of  other  financial 
investment, which implies that a recurrent property 
tax or a tax on imputed rents  can be motivated by
the  taxation  of  other  financial  returns/returns  on 
savings. (141)

Favourable  tax  treatment  of home ownership  is 
based  on  the  assumption  that  it generates  positive 
externalities  for  society (e.g.  in  the  form  of  better 
social  outcomes  for  the  children  of  homeowners
and  more commitment  to the  local  community). 
However, there are several drawbacks of  such tax 
subsidies  to  home  ownership  and  of  interest  rate 
deductibility.  Home  ownership  tends  to  reduce 
labour  mobility. (142) There  is  a  risk  that  interest 

0% to 8%.

(136) The  rate  in  Cyprus  varies  between  4  and  8 %,  with  lower 
rates  and  reduced  valuations  for  transactions  within the 
extended family.

(137) Under  the financial  assistance  programmes,  Greece has 
committed  to  updating  property values  and  raising more 
revenue,  while  Portugal  has  committed to  rebalancing 
property  taxation  towards  recurrent  real  estate  taxes  and 
away  from  the  transaction  tax while  protecting  vulnerable 
households.  Moreover,  incentives  to  rent  and  own  should 
be  equalised  by  removing  mortgage  interest  deductibility.
Italy  recently  increased  recurrent  taxes  on  real  estate  with 
the introduction of the so-called IMU.

(138) In  a  comprehensive  income  tax  system,  it  would  be  taxed 
as part of the (progressive) personal income tax, while in a 
dual-income  tax  system  the  tax  rate  on  capital  income  at 
the personal level would apply. 

(139) OECD (2010c).
(140) A  tax  on  imputed  income is  a  direct  tax  levied  on  the 
income. A recurrent property tax is  generally classified as 
an indirect tax as the tax burden is typically independent of 
the taxpayer’s income situation.

(141) See, e.g., Keen et al. (2010) and Andrews et al. (2011).
(142) See Andrews and Caldera Sanchez (2011) for an overview 

of the benefits and costs of homeownership (box 1).

82

to 

deductibility  encourage  households  to  invest  too 
much in housing in relation to other assets, which 
could  contribute  to  higher  private-sector  debt  and 
the  housing
an  over-allocation  of  capital 
sector. (143) Empirical  studies  also  indicate  that 
reduced  interest  costs  are  capitalised  into  higher 
house  prices,  implying  that  the  policy  does  not 
for 
its 
achieve 
lowering 
(144)  Tax  subsidies  for  mortgage 
homebuyers.
interest  payments  have  also  been  found  to  be 
correlated  with  price  volatility  on  the  housing 
market. (145)

costs 

aim 

of 

In this context, a second-best design of the taxation 
of  owner-occupied  housing  could  be: (i)  not to
allow  mortgage  interest  deductibility  and  (ii)  to 
tax  on  real  estate 
levy  a  (lower)  recurrent 
properties. In this way, housing investments would 
be  taxed  in  line  with other  capital  assets  and the 
tax system would not favour debt. In order to relate 
the tax to the return from the house, it is important 
for the  tax  base  to  be closely  linked  to  properly 
updated  market  values.  Moreover,  the  tax  level 
should broadly take account of the tax treatment of 
interests  (i.e.  the  absence  of  mortgage  interest 
deductibility in relation to other assets) and capital 
gains (possibly favourable). (146)

Consumption-based housing taxation

One  way  to  tax  the  consumption  of  housing 
services is to levy VAT on the first sale of all new 
houses. The tax  would then be regarded as a levy 
on the present value of the stream of services that 
the  house will  generate  in  the  future.  (147) This 
would  be  in  line  with  the  treatment  of other 
durable goods, e.g. cars or refrigerators. 

(143) European Commission (2010d).
(144) Capozza  et  al.  (1996),  Harris  (2010)  and  Agell  et  al. 
(1995).  Moreover,  recent
results  indicate  that  demand 
shocks (e.g. through financial deregulation) have a greater 
likelihood of being capitalised into real house prices when 
the  country  provides 
(Andrews 
2010).

interest  deductibility.

(145) Van den Noord (2005), Andrews (2010).
(146) To  ensure  neutral  tax  treatment  vis-à-vis  other  assets, 
capital gains from housing transactions should be taxed as 
other capital gains are. In practice, many countries reduce, 
exempt  or  defer  the  tax  on  the  capital  gains  made  on  the 
primary 
tax  on  housing 
transactions  generally  suffers  from  the  same  set  of 
drawbacks as a transaction tax, i.e. it creates lock-in effects 
and risks reducing labour mobility. 

residence.  Capital  gains 

(147) It  would  also  imply that  subsequent  sales  should  not  be 
taxed, nor  should  the  yearly  consumption  service,  as  the 
first application of VAT covers all future services.

5. Tax policy challenges in EU Member States

An alternative approach to taxing housing services 
would  be  to  tax  the  consumption  value  of  the 
housing service, i.e. imputed rents, every year with 
VAT,  in  the  same  way  as  for  other  services.  A 
practical problem in this context is the difficulty of 
properly  and  fairly  estimating the  housing  service 
for owner-occupied housing. Thus, most countries 
do  not  apply  this  approach,  and  with  a  view  to 
achieving equal  treatment,  do  not  levy  VAT  on 
rental payments either. (148)

In  line  with  the  tax  treatment  of  other  durable 
goods,  the  financial  return  of  a house  should 
normally  not  be  taxed  with  a  consumption-based 
approach, as the VAT is levied on the rent (i.e. the 
service provided). To achieve consistency between 
the  consumption  and 
the 
investment  aspects  of  housing,  Mirrlees  et  al. 
(2011)  propose  levying  a  tax  on  housing  services 
as  a  substitute  for  VAT,  which  ideally  could  be 
combined  with  a  capital  tax  on  above  normal 
returns on owner-occupied and rental housing. 

treatment  of 

tax 

At  present,  most  Member  States  apply  VAT  on 
some  housing-related  consumption,  namely  the 
construction,  alteration  and  maintenance  of 
immovable  property.  Moreover,  several  Member 
States levy reduced rates on renovation and repair 
rental  of 
works  of private  dwellings.  The 
residential  properties  is  normally  exempt  or  zero-
rated.  VAT is levied on the sale  of new buildings 
in about 2/3 of the Member States and exempted in 
the  others,  while  construction  work  on new 
buildings  is normally  covered by  VAT.  This 
implies  that  VAT  is  generally  levied  on  the 
construction  of  a  residential  property,  but  not 
always  on 
(European 
it 
Commission, 2012f and OECD, 2010c).

final  sale  of 

the 

A charge for local service

Property  taxation  has  also  been  regarded  as  a 
payment  for  the  local  provision  of  public  service, 
i.e. as a user charge. Tiebout (1956) and Hamilton 
(1976) model local government in order to analyse 

(148) In  the  case  of  the  UK,  the  Mirrlees  review proposes  a 
Housing  Service  Tax  to  approximate  a  VAT  on  housing 
services.  It  reflects  the  fact  that  the  UK  applies  a  zero 
VAT-rate  on  the  construction  and  sale  of  residential 
property, and the difficulties of covering both new and old 
houses.  The  proposal  is  a  tax  on  the  flow  of  housing 
service  consumed,  which  is  based  on  the  rental  value  of 
each  property,  both  owner-occupied  and  rented.  (Mirrlees 
et al., 2011)

83

European Commission

Tax reforms in EU Member States

the conditions which ensure efficiency of resource
allocation in the local public sector. In this field of
work, a  property tax is regarded as  a  payment  in
exchange  for benefits of local  public  service, and
thus is considered to be  non-distortive. Moreover,
it should not  affect  capital  intensity or aggregate
land or property values as the tax only reflects  the
local  public  service. However, most
level  of
empirical  work indicates that local  property taxes
should rather be  regarded as  a  capital  (or
consumption) tax which does  have  an impact  on
house  prices  and the  allocation of housing
their practical 
investments.
implementation,
recurrent  taxes  on immovable
property are  usually levied at the municipal level 
to finance the  local  community.  In many cases
central  government  sets  specific bands in order to 
limit municipalities' discretion in determining the
tax rates.

In terms of

(149)

Increasing tax revenue on housing: revaluation of
the tax base and increasing rates

taxes

varies  considerably

As the available data indicate, reliance on recurrent
between
property
Member States. Recurrent  taxes  on immovable 
property range from nearly 3.4 %  of GDP to nil 
(there  is no recurrent property tax in Malta) with
an average  of 0.9%  of GDP (see Graph 5.7). In
some cases very low shares can partly be explained
by the  taxation of imputed rents, whose proceeds
fall  within the personal  income tax and are
therefore  not  included in the  data. Generally
revenues  from recurrent  real estate  taxes  should
first  be  increased by bringing the  tax base  in line
with the  market  value  of the  property. This is
important if the tax is to function properly, that is
to reflect the return on the investment or the rental
value. The  rents charged for the  housing will
the property in well-
reflect 
the value of
functioning markets. Hence,
the  quality of the 
service  received will  depend on the  building's
location and its condition, which will be reflected
in its value. If the  tax is part of an overall  tax on
capital, it should be levied on the  market value of
the house in order to tax correctly the various types
of assets and not distort the allocation of capital.

Rising house prices result in higher tax liabilities if
the tax base properly reflects the market valuation. 
In a  rising market, this tends to result in political

pressures  to freeze the  valuation (or reduce tax
rates). Once the  tax base  is frozen, however, it
becomes politically very difficult to update the tax
base  as  reflected by the  actual  practice  across the 
EU. Any property revaluation creates  losers and
winners, with losers often being very vocal. (150)
As  market prices  diverge from the valuation used
economic
for
implications and the  political  difficulties of a
revaluation grow. As failures to increase  the  tax
base  support  rising prices,  it  is important  to
maintain a  regular revaluation of the  cadastral
values used as  the  tax base. Failure  to update 
regularly risks leading to erosion of the tax base
and of revenues over time.

purpose,

taxation

both

the 

Graph 5.7:

Revenues from property taxes, 2010 (in % of GDP)

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

LAF plus

LAF minus

UK FR DK BE PL ES IE SE LV RO FI CY PT IT NL SI DE SK LT EE HU BG EL* CZ AT LU MT

EU EA

Recurrent property tax

Rest

Note: Ordered by revenues from recurrent property taxes. ‘Other taxes
on property’ includes taxes on net wealth, inheritance, gifts and other
property items as well as financial and capital transactions. Data does
not include PIT on imputed rents. * Data for Greece is provisional.
Source: Commission services.

Many Member States  have  not  updated property
values for many years. Examples  include  Austria,
which applies cadastral  values from 1973, Cyprus
(1980), and the  UK  (1991). (151) Belgium (values
from 1975) and Germany (generally from 1964)
a 
update  cadastral  values with inflation or
corrective factor respectively, but do not link them
to house-price  developments. A few Member
States
show examples  of good practice  and
undertake  regular updates.  The  Netherlands does 
so annually, Denmark biannually and Sweden
every third year. According to the  information
available, at  least  ten Member States (Belgium,
Germany, Estonia, Greece, Spain, France, Italy,
Cyprus, Luxembourg, and Austria) apply out-dated
property values.  A few Member States (e.g.
Greece,
are  currently
reassessing real  estate  values  with a  view to

Portugal  and

Italy)

(149) See Zodrow (2007) for an overview.

(150) See Mirrlees et al. (2011)
(151) Cadastral values in Wales refer to 2003.

84

5. Tax policy challenges in EU Member States

and  Spain  also  provide  a  sizeable  tax  subsidy  to 
mortgage  interest  payments. (155) This  ranking  is 
based  on  an indicator  that  takes  into  account  the 
interest  payments 
deductibility  of  mortgage 
(including potential time limits or ceilings) and tax 
credits  for  loans,  but  does  not  include  taxation  of 
imputed  rents  or  recurrent  property  taxes.  The
indicator  applies the  value  of  zero  to those 
countries  that  do  not  subsidise  mortgage  interest 
payments via a tax deduction.

Several  Member  States  are  in  the  process  of 
changing  their  rules  on  the  tax  deductibility  of 
mortgage  interest  payments, thereby  reducing the
debt  bias  in  the  tax  system.  In  2011,  France 
stopped providing five years of tax deductibility of 
mortgage interest rates. Ireland is in the process of 
phasing  out  interest  deductibility  by  2017,  while 
Estonia  has  decided  to  reduce  both the  personal 
income tax  (as  of  2015)  and  the  ceiling  for  tax 
deductibility  (in  2012).  Finland  is  reducing  the 
share  of  mortgage  interest  rate  payments  that  are 
deductible.  The share  is  85%  in  2012  and  will  be 
80%  in  2013  and  75%  in  2014.  In  line  with  the 
Memorandum  of  Understanding,  Portugal  will 
eliminate the deductibility of payments of principal 
and  interests  for  new  mortgages  in  2012  and  will 
be  phasing  out  the  deductibility  of  mortgage 
interest  payments  for  owner-occupied  housing. 
Following several reforms in the recent past, Spain 
decided  in  July  2012  to  eliminate  the  income  tax 
deduction for mortgage interest payments on house 
purchases from 1 January 2013.

As  Table 5.18 shows,  around  half  of  the  Member 
States’  tax  systems  continue  to  favour  mortgage 
debt financing of homeowners.  In all, 12 Member 
States  (Belgium,  Estonia,  Greece,  Spain,  Italy, 
Luxembourg,  the  Netherlands,  Portugal,  Finland, 
the  Czech  Republic,  Denmark  and  Sweden)  face 
the  challenge  of  a  debt-biased 
tax  system 
favouring  housing  investments,  although  to  a 
different degree. It is noteworthy that nine of these 
countries  were  singled  out  in  the  context  of  the 
macro-economic imbalance procedure as having a 
private debt above 160% of GDP in 2010. (156) As 
mentioned  above,  Ireland,  Portugal  and  Spain  are 

bringing  them  into  line  with  market  values  and 
some others (e.g. Germany)  are considering doing 
so. (152)  However, Denmark  and  Sweden,  which 
regularly update cadastral values, do not use these 
updated values as a general basis for the recurrent 
property tax. (153)

One  alternative  is  simply  to  increase  the  tax  rates
for  the  recurrent  property  tax.  However,  to  adjust 
the rate without updating the tax base implies that 
the  increased  tax  burden  reflects  the  valuation  of 
properties  at  some  specific  time  in  the  past. 
Moreover, as the tax burden is not proportionate to 
current  house  values,  the  tax  increase  could  not 
properly  help  to  dampen  the  price  increase  by 
increasing the costs of owning a house. 

Measures  addressing distributional  aspects  might 
need  to  accompany  housing  taxation  reforms to 
facilitate  their  implementation.  As  property  taxes 
often  accrue  to  the  local  level  of  government, 
inter-governmental
transfer  systems  might  also 
need to be adjusted accordingly.

Reducing the debt-bias in housing taxation

tax  deductibility  of  mortgage 

The 
interest 
payments  (or  even  capital  (re)payments)  in  many 
Member States favours debt creation and leads to a 
debt  bias  in  the  taxation  of  housing. Even  if 
account  is  taken  of  recurrent  property  taxes,  the 
taxation  of  housing  appears  debt-biased  in  many 
Member  States  as  recurrent  tax  rates  or  cadastral 
values are low compared to proper taxation of the 
rental  return. This  type  of  tax  relief  is  considered 
to  have  contributed  to  the  increase  in  housing 
prices,  debt 
and  household  over-
indebtedness. (154)

leverage

An  indicator  that  measures  the  wedge  introduced 
by  tax  relief  (reflecting  tax  systems  in  2010)  is 
in  Andrews  et  al.  (2011).  These 
presented 
empirical results indicate that the Dutch and Czech 
tax rules are the most generous ones and the most 
favourable  to  debt-financed  housing  investments 
within  the  European  Union.  The  systems  in  the 
Nordic  countries  appear  generous,  but  Belgium

(152) See Chapter 3 for countries that are currently carrying out 

reassessments.

(153) In  Sweden  the  cadastral  value  is  used  to  calculate  the  tax 

burden for low-value properties. 

(154) See Keen et al. (2010).

(155) Hemmelgarn  et  al.  (2011)  confirm  the  generosity  of  the 
Dutch  system  when  calculating  an  effective  personal 
income  tax  rate  on  housing  covering  eight  EU  Member 
States.

(156) European Commission (2012g).

85

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Table 5.18:

Rules for mortgage interest deductibility for owner-occupied properties in EU Member States

Country

Belgium

Germany
Estonia
Ireland

Greece

Spain

France

Italy

Cyprus
Luxemburg

Malta
Netherlands
Austria
Portugal

Slovakia
Slovenia
Finland

Bulgaria

Czech Republic

Denmark

Latvia
Lithuania
Hungary
Poland
Romania
Sweden
UK

Mortgage interest deductibility

Yes. All of the payment (interest, insurance, and capital repayment) can be deducted up to a ceiling of €2,770 for the 
first 10 years, and €2,080 thereafter. According to the political agreeement on the reform of the federal system in
December 2011, interest mortgage deductibility will be phased out at the federal level and this competence will be 
transferred to regions as of 2014 (regions have not yet indicated their intentions with respect to deductibility).
No
Yes
Yes. To be phased out by 2017. Relief of 20% on the interest of qualifying loans for 7 tax years, (higher rates for first 
homebuyers). Mortgage interest relief is restricted to € 3000 for singles and € 6000 for married/widowed taxpayers.
Yes. Mortgage loans taken after 2002, a credit of 20% of the annual mortgage interest on principal home is granted (on
the first € 200,000 of the loan). The tax credit was reduced to 10% in October 2011.
Yes, 15% of quantities paid for the house (repair, mortgage etc) to a max EUR 9040, thus the maximum credit is
EUR1356 (for a period, the credit was removed for incomes above EUR 24170). Spain decided to abolish the mortgage 
interest deductibility for new mortgages taken for house purchases from 1 January 2013.
No (2007-2010 Tax credit for interest on loan for principal residence for 5 years. The credit is equal to 20% up to €
3750 per year, increased by € 500 per year for each dependent person. The limits are doubled for couples.) In 2010,
subsidised loan schemes were introduced targeted at first-time buyers, low-earners, housing-shortage areas, and
purchases of new dwellings.
Yes. Interest on mortgage loans for building or buying the principal residence is subject to a tax credit equal to 19% up
to a maximum interest payment of EUR 4000 (i.e. a  maximum tax credit of EUR 760).
No
Yes, with a ceiling of the tax deduction at EUR 1500 per person in the household. Reduced to EUR 750 after 12 year of
occupancy. No tax deductable on secondary homes.
No
Yes, fully.
No
Yes, tax credit of 30% of interest and principal repayments on loans for permanent residence. The Memorandum of
Unterstanding foresees that the mortage interest deductibility for new mortages will be eliminated in 2012 and the 
mortage interest deductiblity for owner-occupied housing in general will be phased out. 
No. Subsidised interest rates
No
Yes
Deductible from capital income. Beyond that, 28% of the deficit due to interest on owner occupied dwellings up to EUR
1400 can be credited against taxes paid on earned income. The share of deductible interest payments is reduced to 85% 
in 2012 (80% in 2013, 75% in 2014).
Yes, but limited to the interest payments on the first BGN 100000 of a mortgage loan.Only applicable for young married
families below 35 years of age owning one family dwelling.
Yes, interests relating to the main recidence are deductible up to a limit of CZK 300000 (a reduction to CZK 80000 will 
enter into force in 2014).
Yes. The tax deduction on interest has a taxable value corresponding to approximative 33%, which is to be phased down
to 25% by 2019.
No .
No (deduction provided for interest on a loan taken before January 1 2009, limited to one dwelling).
No
No (loan taken 1 January 2002 through 31 December qualify for deductability based on older provisions up to 2027)
No
Yes. Deductible against capital income, in case of deficit then 30% tax reduction against labour income.
No

Source: Commission services, OECD.

phasing out  interest  deductibility, while  Bulgaria
strictly limits deductibility both in monetary terms
and as regards eligibility (young families).

In the  presence of mortgage  interest  deductibility,
a  neutral  tax system of investments in residential
property should, ideally, provide for taxation of the
corresponding return on the  property.  In practice,
however, as in the above-listed countries, taxes on
imputed rents or
recurrent property taxes  are 
normally too low to tax imputed rents properly in
investments. However, a  few
line  with other

countries have recently taken steps to increase the
recurrent  property tax. Political considerations
often make it  difficult  to tax property at  the level
required to make  the  tax system neutral. If this is
the case, removing the debt bias in the tax system
by gradually phasing out interest rate deductibility
would be a viable second-best option. If necessary
for distributional concerns, the tax deductibility of
mortgage interest payments could be retained as a 
targeted subsidy for those  households that  need
this support,  e.g. low-income  households and/or
first-time homebuyers.

86

5.4.2. Environmental taxation 

to 

use 

(157)

taxes 

as  well 

Environmentally  related  taxes  primarily serve  an 
environmental  purpose,  but  also  provide fiscal 
revenue.  Fiscal  consolidation,  which  reduces  the 
scope  for  environmental  policy  measures  on  the 
expenditure  side  of  the  budget,  strengthens  the 
need 
other 
in 
market-based
environmental policy.  A uniform tax, i.e. price on 
emissions  or  other  negative 
environmental 
externalities,  has  the  advantage  of  providing  an 
incentive to change behaviour as well as allocating 
emission  reduction  efforts  in  a  cost-efficient  way. 
Market-based  instruments  also  provide  incentives 
for  further  technology  developments  which  will 
reduce the environmental impact.

instruments 

policy 

as 

that 

the  policy 

instruments 

In terms of environmental policy, there are several 
tax-related  challenges.  First,  it  is  important  to 
in  place, 
ensure 
including  taxes,  other  market-based  instruments 
and  regulation (158),  are  sufficient  to  meet  the 
agreed  policy  objectives.  If  there  is  a  need  for 
further  policy  measures,  environmental  taxes  (or 
other market-based instruments) should play a role 
in  the  policy  mix to  achieve  cost-efficiency. 
Secondly,  energy  taxes  and  other  environmental 
taxes  should  be  designed  in  such  a  way that  they 
provide appropriate incentives to reduce emissions 
over 
resource  efficiency, 
including  through  environmentally  consistent  tax 
rates across various  energy carriers and emissions
fuels).  Finally,  environmentally 
(e.g.  across 
harmful  subsidies  in  the  tax  systems  should  be 
phased out. (159) Various measures, outlined below,
could  be  taken  at  national  level  to  improve  on 
existing tax systems.

improve 

time

and 

Fulfilment  of  the  agreed  limitation  targets  for 
green-house gas emissions

Energy  taxes,  together  with  the  EU  Emission 
Trading  System  (ETS),  are  two  of  the  main 
instruments  in  climate  and  energy  policy.  In  this 

(157) The importance of market-based instruments is underlined 
in  the  Europe  2020  Strategy,  which  refers  to  the  use  of 
these  policy  instruments  as  well  as  the  work  to  phase  out 
environmentally harmful subsidies as essential elements of 
the climate and energy policy.

(158) Which can be substitutes or complements. 
(159) This concerns preferential tax treatment of specific sectors, 
uses  and  goods.  See  e.g.  the  Inventory  of  Estimated 
Budgetary  Support  and  Tax  Expenditure  for  Fossil  Fuels 
(OECD (2011d)). 

5. Tax policy challenges in EU Member States

context,  the  Member  States  have  undertaken  to 
reach  legally  binding  national  targets  concerning 
(160)  The 
greenhouse  gas  emissions  by  2020.
overall EU-wide target is to reduce greenhouse gas 
emissions  by  20%  as  compared  to  1990  levels, 
which is equivalent to a 14% reduction in relation 
to  2005  emission  levels. (161)  National  targets, 
which  cover  emissions  in  the  sectors  outside  the 
ETS, range from limiting the increase in emissions 
by 20% to implementing a 20% emission reduction 
(vis-à-vis 2005 emission levels). According to the 
latest  projections,  the  EU-wide  target  is  expected 
to  be  reached  in  2020.  However,  several  Member 
States  will  still  need  to  adopt  and  effectively 
implement  additional  policy  measures  to  achieve 
their  individual  targets  for  non-ETS  emissions. 
The  level  of  ambition  relating  to these  targets 
varies considerably between Member States.

One  sub-set  of  these  countries is  expected  to
achieve  their  reduction  targets  provided they 
implement  those  additional  measures  that  have  so 
far  only  been  planned.  These  countries  include 
Austria,  Finland,  Italy,  Slovenia,  Cyprus  and 
Denmark.  For  another  sub-set  of  countries,  the 
measures that are planned but not yet implemented 
are  judged  as  insufficient.  Projections  regarding 
greenhouse 
that 
Luxembourg,  Malta,  Ireland,  Lithuania,  Belgium, 
Greece,  and  Slovakia  risk  not  to  achieve  their 
targets in 2020 unless they implement  new  policy 
measures. (162) (163)

emissions 

indicate 

gas 

All  those  countries  that  need  to  undertake  further 
policy  measures  to  achieve  the  targeted  emission 
reduction  should  work primarily  with  market-
based  measures,  i.e.  taxes,  charges,  or  emission 
quotas.  Taxes  have  the  advantage  of  providing 
fiscal revenue while at the same time allowing for 
a cost-efficient allocation of abatement efforts. All 
those  Member  States  should  allow  carbon  and 

(160) The  national  targets  are  defined  in  the  Effort  Sharing 

Decision (406/2009/EC, 23.4.2009).

(161) This effort will be divided between the EU ETS and non-
ETS sectors as follows: a 21% reduction in EU ETS sector 
emissions by  2020 and  a  reduction  of  approximately  10% 
for sectors that are not covered by the EU ETS.

(162) COM(2011)624 final.
(163) Note that a few countries (i.e. France, Germany, Spain and 
Sweden)  have  projected  emission  gaps  close  to  0%  and 
have,  therefore,  not  been  included  in  this  list.  As  the 
emission  gaps  are  based  on  projections,  the  future  policy 
might  need  to  be  reviewed  to  take  account  of  changing 
conditions  in  order  to  ensure  fulfilment  of  the  emission 
targets. 

87

European Commission

Tax reforms in EU Member States

energy  taxation  to  play  an important  role  when 
designing 
their 
commitments  according  to  the  Effort  Sharing 
Decision.

the  policy  mix 

fulfil 

to 

to 

extent 

assess 

However, the projected distance to 2020 emission 
limitation targets per se is not specific and targeted 
to  which 
the 
enough 
environmental  taxation  reforms  are  needed.  Even 
Member  States  that  are  projected  to  meet  their 
targets  easily  should  consider  such  reforms.  The 
role of environmental taxes in fiscal consolidation 
policies and tax shifts to more growth friendly tax 
structures is analysed in Section 5.1. The following 
sub-sections  consider  the  need  to  improve  the 
design  of  energy  taxes  and  other  environmental 
taxes  so  that  they  do  not  contain  any  implicit 
environmentally-harmful  subsidies  and  provide 
appropriate  incentives  to  reduce  emissions  over 
time and improve resource efficiency. (164)

Structure of excise duty rates on fossil fuels 

In  the  current  fiscal  context, and faced  with the 
serious  challenge  of  climate  change,  it  becomes 
crucial  to  use  energy  taxes  to  their  full  extent  in 
climate and energy policy in order to minimise the 
overall  cost  of  the  policy. However,  the  current 
structures of excise duty rates in Member States do 
not normally reflect the environmental and energy 
properties of the various fuels. In fact, the current 
structures 
that  are 
relatively  more  detrimental  to  the  environment 
and/or are less energy-efficient. It is important that 
the relative tax rates reflect the environmental and 
energy  properties of  the  fuels  correctly.  Proper 
ranking of fuels could be achieved by a carbon or 
an  energy  tax,  or  through  a  combination  of  the 
two. (165) 

implicitly  promote 

fuels 

The  Energy  Tax  Directive  currently  provides  for 
lower  EU  minimum  levels  of  taxation  (expressed 
in € per 1000 litre) for diesel than for petrol. In fact 
all Members States apply lower tax rates on diesel 

results 

in  preferential 

given  the  higher  energy  and  CO2 content  of  this 
fuel. This 
treatment 
favouring  the  road  transport  sector.  It  reflects  a 
different  tax  treatment  of  fuels  mainly  used  for 
commercial  versus  private  use,  also  partly 
motivated  by  tax  competition.  As  a  result,  the 
market  share  of  diesel  cars  has 
increased 
substantially in the EU since 1995 to around 60%.

Tax  rates  determined  according  to  carbon  or 
energy content would result in a higher tax rate per 
volume  on  diesel  than  on  petrol.  A  carbon  tax  on 
motor fuels would imply a tax rate on diesel which 
is  around  15% higher  than  the  tax  on  petrol  in 
terms  of  litres.  A  tax  based  on  energy  content 
would only translate into a tax rate which is around 
8% higher for diesel.  A combination of these two 
types  of  taxes  would  result  in  a  relative  rate 
differential  within  this  range  of  9%-15%.  In 
contrast,  Member  States  tend  to  promote strongly
the  use  of  diesel  through  their  relative  tax  rates 
(see Graph 5.8). The EU average for the diesel vs 
petrol  tax  ratio has  increased  slightly  in  2012 
compared to last year. Several Member States have 
increased their tax on diesel more than their tax on 
petrol,  namely  Belgium,  Bulgaria,  Denmark, 
Hungary, Poland and Finland. In a few other cases 
(Latvia
fallen,
potentially pointing towards a larger tax subsidy to 
diesel.  Overall,  substantial  progress  still  needs  to 
be  made and  the  preferential  tax  treatment  of 
diesel, particularly in Belgium,  Germany,  Greece, 
France,  Lithuania,  Luxembourg,  the  Netherlands, 
Portugal,  Slovenia,  Slovakia,  and  Finland, to be 
reviewed.
this 
advantage  for  diesel  by  levying  a  higher  annual 
circulation tax. Such a tax adds to the overall cost 
of  owning  the  car.  However,  it  has  the  drawback 
that  it does  not  impact  on  the  marginal  cost  of 
additional  driving  in  the  same  way  as  a  fuel  tax 
does.  Consistent  and  neutral 
taxation  of  all 
transport  fuels  is  important  with  a  view  of 
providing proper incentives for the development of 
carbon- and  energy  efficient  fuel  technologies 
without favouring specific fuels or technologies.

(166)  Some  countries  offset 

and Slovenia) 

ratio  has 

the 

(164) The need to achieve resource efficiency is captured by the 
2020  renewable  energy  targets  and  the  2020  energy 
efficiency targets.

(165) A carbon tax would be based on the carbon content of the 
fuel and would thereby rank the various fuels according to 
their  carbon  content. A neutral  energy  tax,  in  terms  of 
promoting  energy  efficiency  equally  across  energy 
products, would tax fuels according to their energy content.
The  Commission  proposal  to  revise  the  Energy  Tax 
Directive (COM(2011) 169/3) addresses these issues.

There are similar inconsistencies in the taxation of 
fossil-based heating fuels in many Member States. 
Normally, heating oil is taxed heavily, while rates 
on natural gas and coal are relatively low. This rate 

(166) Some  of  these  countries  are  already  taxing  diesel  at 

relatively high rates in level terms. 

88

structure  is based on the  tradition of taxing oil
rather heavily, while  coal  and natural  gas  have
been brought into the  energy tax framework more
recently at  lower rates. Thus, coal – but  also
natural gas – is normally given a tax advantage as
a  heating fuel. The  situation is rather complex as
conditions vary considerably between Member
States according to industrial  structure  and fuel
mix. The  issue  mainly concerns households and
businesses falling outside  the  scope  of the ETS. 
Several 
household
also
consumption of heating fuels. It  is important  to
that  energy tax rates  become more 
ensure 
consistent across both fuels and uses, and that the
tax system does  not  unduly favour fossil-based
solutions. Consistent tax rates are also important in
order to provide  correct  framework incentives  for
technology development.

countries 

exempt 

Graph 5.8:

Diesel/petrol ratio, 2012

1.0

0.8

0.6

0.4

0.2

0.0

LAF plus

LAF minus

UK EE HU CY BGRO PL CZ IT SE AT IE MT LV ES DK SI FI DE LU FR BE LT SK PT EL NL

EU EA

Note: The ratio compares the excise duty rates per 1000 litres of fuel.
Source: Commission services.

Indexation of environmental taxes

taxes.

environmental 

require  automatic 

Neither the  current  EU  Energy Tax Directive  nor
the  majority of the  Members States' current  tax
indexation of
frameworks
(167)
energy and other
Indexing excise  duty levels to inflation has two
advantages: (i) it  helps maintain the  real  value  of
taxes over time and thereby also prevent an erosion
- more 
of
importantly for the  functioning of the tax - (ii) it
helps maintain the  impact of the  tax on relative
prices  and thereby on agents'  behaviour. (168) The 
fact that revenue from environmental taxation fell
in relation to GDP in the  1999 – 2008 period is

revenues  and

government 

tax

(167) Indexation is relevant for all excise duties that are levied on

the quantity of the product (i.e. not ad valorem).

(168) Indexing EU minimum level excise rates could also help to
reduce (or at least maintain the current degree of) price
divergence across  Member States and hence the potential
for downward tax competition.

5. Tax policy challenges in EU Member States

It 

partly attributed to the fact that these excise duties
are normally not adjusted to changes in the general
price  level. Only few Member States currently
apply indexation (e.g. Denmark, the  Netherlands
and Sweden).
is noteworthy that  Sweden
introduced indexation of major excise  duties, 
including the energy tax, in 1994 (169) as  part  of
fiscal  consolidation efforts. The  introduction of
indexation of excise  duties to core  inflation in
2012 is
in the Memorandum of
included
Understanding for Portugal. (170)

However, indexing environmental taxes does have
a  few disadvantages that  need to be  taken into
consideration.  The major drawback is that  it  can
potentially influence inflation expectations. Hence,
there  is a  risk of damaging feedbacks to inflation
and inflation expectations dynamics,  in particular
if the  indexation is endogenised by economic
agents. Nevertheless, this effect can be expected to
be rather limited as energy accounts for a relatively
low share of overall consumption (around 11% of
the  Harmonised Index of Consumer Prices 
(HICP)). Moreover,
should
the 
preferably be  based on an index of consumer
prices that excludes energy and unprocessed food.
Using this measure of core  inflation (rather than
headline inflation (HICP))  diminishes  volatility
stemming from energy and food prices,  which are
not  included in this core  inflation measure. As
such, this would lead to a  smoother adjustment
and, most  importantly,
it  avoids a  situation in
which the indexation of energy taxes feeds into the
same  index which is used for the indexation. This
is an important  aspect  in relation to energy price
developments.

adjustment 

Indexation also entails some  minor administrative
costs related to the  decision mechanism and the
adjustment  of tax rates. However, these  costs are 
no higher than the  transaction costs incurred by a 
discretionary increase  of energy taxes.  Such costs
could also be reduced by adjusting the frequency
of the indexation, e.g. by adjusting the rates every
second or third year and by setting a  minimum
indexation. 
threshold for
HICP change
However, at  the  same  time it is vital  to maintain
regular adjustments in order to secure  the  real 
value of the tax rate and of the revenue.

this

(169) Svensk Författningssamling (SFS) 1993:1508; 1512-1513.
(170) See European Commission (2012i).

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Reduced VAT on energy

As discussed in Chapter 4 and Sub-section 5.2.2, a
broadening  of  the  VAT  base (i.e.  removing 
reduced  rates,  zero  rates  and  exemptions) would 
improve  efficiency  by reducing  the  distortions 
generated  by  differential  treatment  while  at  the 
same  time  generating  more  revenue.  At  present, 
Member  States  have  the  possibility  to  levy  lower 
VAT rates on electricity and natural gas, as well as 
district  heating.  However,  these reduced  rates 
conflict  with  overall  ambitions  in  energy  and 
climate  policy and  constitute  environmentally 
harmful subsidies. Moreover, targeted  support can 
be  provided  more  efficiently 
to  vulnerable 
households  through  general  welfare  payments, 
which  would  also  avoid  windfall  gains  for  more 
affluent households.

According  to  the  European  Commission  (2012f), 
at  the  beginning  of  2012  Greece,  France,  Ireland, 
Italy,  Luxembourg,  Malta  and  the  UK  were 
reported  to  tax  natural  gas  and  electricity  at  a 
reduced  VAT  rate.  Moreover,  Belgium,  Ireland, 
Luxembourg,  Portugal  and  the  UK  apply  reduced 
VAT rates on fuel oil and/or solid fuels (European 
Commission, 2011h). These Member States face a
challenge in phasing out these subsidies. However, 
it  should  be  acknowledged 
that  since  2011, 
Portugal  has  removed  the  reduced VAT  rate  on 
electricity  and  natural  gas (171),  while  Latvia  has 
removed the reduced rate on natural gas for private 
consumers.

Taxation of company cars

is  distortionary and 

Company cars are defined as passenger  light-duty 
vehicles  leased  or  owned  by  companies,  but  used 
by their employees for business or personal travel. 
Copenhagen  Economics  (2009)  conclude  that  the 
favourable  taxation  of  company  cars  in  many  EU 
Member  States 
imposes 
welfare costs on society. Tax treatment depends on
how the ownership and use of the car are taxed in 
corporate taxation for the employer and in income 
tax as a benefit for the employee. The rules tend to 
encourage  car  ownership  and  affect  the  choice  of 
car model, as well as driving habits. Company car 
schemes  in  particular  mitigate  and  counteract 
incentives  to  reduce  fuel  consumption  provided

through 

through energy and vehicle taxation. Moreover, tax 
regimes  often  provide  incentives  to  buy  relatively 
larger cars, which have a detrimental impact on the 
fuel 
environment 
consumption. Roughly 50 per cent of all new cars 
sold in the EU in 2008 were company cars, which 
imply that  these  schemes  have  a  large  and  long-
term impact on the overall composition of the car 
fleet. 

increased  overall 

At  present,  the  taxation  regime  for  company  cars 
in  most  Member  States  promotes  the  use  of  such 
cars  beyond  merits.  According  to  Copenhagen 
Economics (2009) private use of company cars has 
been heavily subsidised in several Member States. 
The  subsidy  (measured  as  the  percentage  gap  in 
the  imputed  tax  base)  is  particularly  large  –
according  to  the  LAF-criteria  – in  Belgium,  the 
Czech Republic, Germany, Greece, Hungary, Italy, 
Portugal and  Slovakia.  Against this background, r 
in  particular  should  consider 
these  countries 
reviewing the tax treatment of company cars. (172) 
It  would  be  beneficial  to  reduce  these  subsidies 
and  thereby  favour  the  deployment  of  cleaner 
vehicles. Belgium  is  reviewing  its  company  car 
regime  with  a  view  to reducing the  incentive  to 
choose  large  cars,  while  Hungary and  Portugal
have increased the tax on company cars.

Vehicle taxation 

in 

taxes 

Transport  taxes  are  an  important  category  of 
environmentally-related 
the  EU, 
accounting on average  for 0.5% of GDP and 21% 
of  environmental  tax  revenues.  The  two  main 
forms  of  transport  taxes  are  registration  taxes 
levied  on acquisition  of  the  car  and  circulation 
taxes levied annually on car ownership. 

Today  the  transport  sector  accounts  for  close  to 
one  quarter  of  all  the  CO2 emissions  in  the  EU 
Member  States,  the  share  of  road  transport  being 
close  to  70%. Moreover,  the  share  of  CO2
emissions  of  the  transport  sector  in  the  EU  is
projected to rise rapidly over the next 30  years  in 
spite  of  the  fact  that the fuel  efficiency  and  CO2
intensity  of  new  cars  sold  in  the  EU  have 
constantly  improved  due  to  regulatory  and  other

(171) In  line  with  the  Memorandum  of  Understanding,  see 

European Commission (2011h).

(172) Note,  however,  that  there  is  missing  data  for  Bulgaria, 
Cyprus,  Estonia,  Ireland,  Latvia,  Lithuania,  Malta,  and 
Romania.

90

5. Tax policy challenges in EU Member States

Table 5.19:

Summary of challenges in area of environmental taxation

Country

Additional measures to 
achieve national 
greenhouse gas emission 
target

Scope to improve environmental tax design

Summary

Diesel vs. petrol
ratio

No indexation of
evironmental taxes

Reduced VAT on 
energy

Low taxation of
company cars

Scope for CO2-
related vehicle 
taxation

X

X
X

(X)
(X)
X
X

(X)

(X)
X
(X)

(X)

X

X
X

X

X
X

X

X

X

X

X
X

X

X

X

X

X
X
X
X

X

BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK

Source: Commission services.

measures  taken. (173) It  is essential  to address
transport sector emissions to achieve the ambitious
EU  climate  policy targets.  In this context,  vehicle
taxes  have  recently started to be  used as an
environmental policy instrument. (174) They are
increasingly designed in such a  way that  the  tax
burden depends on the car's CO2-emissions.

CO2-based vehicle  taxation can be  regarded as  a 
complement  to transport  fuel  taxes,  which also
induces consumers to purchase  fuel-efficient  and
hence low-emitting cars. Fuel  taxation has the
added advantage that it also affects driving habits.
Several  studies (175)  suggest that  when consumers
make decisions to purchase cars they are  more
affected by retail  prices  than by future  fuel  costs.
One  explanation could be  that  consumers are
short-sighted and hence apply very high discount
rates  on future  fuel costs. Another possible
explanation is that new cars are  sold after a  few 
years of use, and hence fuel  costs in the more
distant  future  are  not  taken into account  by the
buyer or the  initial  user of the  car. This would

(173) European Commission (2012i).
(174) Vehicle taxes were originally introduced for fiscal purposes
and to finance road infrastructure. Moreover, private cars
were seen as luxury goods that could be taxed higher than
normal goods.

(175) See the Impact Assessment accompanying the Commission
proposal for a Council Directive on passenger related taxes 
(SEC(2005) 809), Kågeson (2005) and the report for the
Commission by TNO, IEEP and LAT (2006).

X
X
X
X
X
X
X
X
X
X
X

X

X
X
X
X
X

X
X
X
X
X

X

X

X
X

X
X

X
X

X

X

X
X

X

X

X

X

X

X

X

X

X

X

apply, in particular, to company cars, which are 
generally sold after 2-3 years of use. There are also
indications of very high own-price  elasticities (in
absolute terms) of car demand. (176) Such evidence
implies that  registration taxes,  which affect  the
retail  price, could have  a  strong influence on the
fuel-efficiency of cars. There  is not  yet  much
evidence relating to the  efficiency of the  recently
introduced CO2-based vehicle  taxes  in reducing
transport-related CO2 emissions. (177)

The  number of countries applying CO2-based
vehicle  taxation has  increased rapidly in recent
years. In 2010, 17 countries applied CO2-based
registration taxes, circulation tax or both, while in
2006 only 9 countries had done so. (178) (179)

(176) See Adamou  et al. (2010). On the other hand, Vance and
Mehlin (2009) present econometric evidence according to
which circulation taxes  and fuel costs  also have a 
significantly negative impact on car demand, in addition to
retail prices. 

(177) Giblin and McNabola (2009) studied the Irish reform  in
2008 which introduced both CO2-based registration and
circulation taxes.  The reform  would bring about a 3 %
reduction in CO2 emissions  from  private transport, which
reflects  a 3.8%  reduction of emission intensity for petrol
cars and a 3.6% reduction for diesel cars, as well as a shift
of 6% from petrol to diesel car ownership.

(178) ACEA (2012); European Commission, Taxes  in Europe

Database.

(179) In 2005, a Commission proposal (COM(2005) 261final)
aimed at removing cross-border obstacles  to trade in cars
and improving the functioning of the internal market by

91

European Commission

Tax reforms in EU Member States

Graph 5.9:

Concentration of market income and disposable income measured by the Gini-coefficient

50
45
40
35
30
25
20
15
10
5
0

50
45
40
35
30
25
20
15
10
5
0

SI HU SE CZ

FI NL SK AT BE DK LU MT CY DE FR PL

IT EE EL UK BG IE RO PT ES LV LT

EU-
27

EU-
21

EA-
17

Disposable income, 2010 (Eurostat)

Disposable income, late 2000s (OECD)

Market income, late 2000s (OECD)

Note: Member States are ranked in increasing order of disposable income inequality according to Eurostat. Eurostat data is available only for 
disposable income and cover the entire population, while OECD data refer to the working-age population (18-65 years old). Late 2000s refers to a year 
between 2006 and 2009. Income data are adjusted for household size (equivalation). Averages are arithmetic and refer to the Member States for which 
the respective data is available.  EU-21 refers to those 21 OECD member countries that are also EU Member States.
Source: Eurostat and OECD.

At  present,  18  EU  countries  apply  a  registration 
tax.  In  14  of  them  the  tax  is  based  on  CO2
emissions, often in addition to other characteristics
of the car. In all, 23 Member States currently apply 
a circulation tax, and in half of these countries the 
tax  rate  is  determined,  partly  or  entirely,  by  CO2
emissions. However,  the  design  of  the  CO2-
component varies considerably between countries. 
Tax rates usually increase with CO2 emissions, but 
may  also  depend  on  many  other  of  the  car's 
characteristics.

‘bonus-malus’

Some  countries  use 
systems 
(Austria, Belgium (Wallonia), France), in which a 
‘bonus’ is  granted  for  very  low-emitting  cars, 
In  a 
while  high-emitting  cars  pay  a  penalty.
number  of  countries  (seven)  electric  (and  hybrid) 
vehicles are  exempt  from  vehicle  taxes,  while  in 
some countries they receive a subsidy (bonus).

Estonia  and  Lithuania  are  the  only  two countries
that do  not  apply  any  vehicle  taxes. Bulgaria  and 
Poland  apply  one  of  these  taxes,  but  without  CO2
or  fuel-efficiency  differentiation.  Thus, these four
countries  could  benefit  from  reviewing whether  a 
CO2-based  vehicle  tax  could  help  them  to  reduce 
transport-related CO2 emissions more efficiently.

first  making  the  registration  taxes  refundable  and  then 
phasing them  out.  A further aim  was  to  transform vehicle 
into  a  more  efficient  environmental  policy 
taxation 
instrument by introducing differentiation according to CO2
emissions. The  proposal  has  not  been  adopted  by  the 
Council,  but  as  shown  above, Member  States  have
integrated parts of the proposal into their tax systems.

92

Summary of  challenges 
environmental taxation

in 

the  area  of 

in 

issues 

tax  design 

The  challenges  discussed  in  this  section  can  be 
divided into: (i) the need to make more use of the 
taxation  tool  to  achieve  environmental  objectives; 
and  (ii) 
the  area  of 
environmental  taxation.  There  are  of  course  links 
between  these  two  dimensions.  For  example, 
indexation  of  environmental  taxes  has  an  impact 
on  incentives  and  hence  the  achievement  of  the 
objectives,  in  particular  over  time.  The  various 
measures that could be taken at a national level to 
improve  the  existing  design  of  the  tax  system  in 
this area include: (a) adjusting the  structure of tax 
rates  on  fossil  fuels  according  to  their  carbon  and 
energy  content;  (b)  indexing  environmental  taxes; 
(c) considering the abolition of reduced VAT rates 
on energy; (d) reducing tax subsidies for company 
cars;  and  (e)  introducing  CO2-related  vehicle 
taxation. Individual Member States are considered 
to  face  an  overall  challenge  regarding  tax  design 
issues if challenges have been defined in three out 
of  the  five  areas  discussed.  On  this  basis,  nine 
for 
Member  States  have  particular 
improving the design of their environmental taxes: 
Belgium,  Germany,  Greece,  France, 
Italy, 
Luxembourg,  Portugal,  Slovakia,  and  Lithuania.
Table 5.19 provides an overview of the challenges 
Member  States  face  in  the  area  of  environmental 
taxation.

scope 

5.4.3. Some redistribution aspects

The previous  sections  have  focused  on  improving 
the  efficiency  of  the  tax  systems in  EU  Member 

States. However, the redistributive effects of a tax 
system  can  be  just  as  important  as  its  efficiency. 
There is often – although not always – a trade-off 
between  efficiency  and  equity.  Assuming  that 
there  is  a  social  preference  against  inequality, 
social  welfare 
is  greater when  consumption 
possibilities  are  more  equally  distributed,  but 
redistribution  may  reduce  the  incentives  to  work 
and earn income in the first place. Therefore, when
efficiency  is  scrutinised  it  is  relevant to  consider
redistributive outcomes as well. 

is 

of 

the 

and 

and 

public 

benefits

taxation, 

tax  and 

objectives 

stabilisation, 

transfer  system 

Furthermore,  income  redistribution  is  one  of  the 
alongside 
three 
macroeconomic 
resource 
(180)  Redistribution  can  take  place 
allocation.
through  several  instruments,  including  taxation  –
in particular progressive taxation of labour income 
– but also  through  income  replacing  transfers, 
targeted 
consumption 
expenditures  (transfers  in  kind).  Redistribution 
through 
the 
prerogative of Member States, which – depending 
on  their  citizens'  preferences  – have  different 
perceptions of social equity and different collective 
preferences  for  the  balancing of  efficiency  and 
equality.  However,  a  Member  State  which  faces
substantial efficiency challenges  in  the tax-benefit 
system  (e.g. measured  by  a  large  share  of  tax 
expenditures)  and  at  the  same  time  achieves an 
inferior  outcome  in  terms  of  mitigating market 
income inequalities, may have scope for improving 
efficiency  without  compromising  redistribution 
policies  or  for  increasing  redistribution  without 
hampering  efficiency. (181) Redistributive  policies 
should also take account of the need to ensure the 
sustainability of public finances.

Comparing  the  distribution  of  market  and 
disposable income

The distribution of market income, obtained either 
from labour or capital, is a prior determinant of the
distribution  of  household  disposable  income. (182) 

(180) See Musgrave (1959).
(181) In  formal  economic  terms,  this  means  that  a  government 
could  enhance  one  dimension  without  harming  the  other 
until the optimal Pareto frontier is reached. The position on 
this 
reached,  depends  on 
‘trade-off’ 
collective choice. 

frontier,  once 

(182) Market  incomes  are  wages,  self-employed  income,  and 
personal  capital  income before  deduction  of  taxes  and 
social security contributions. Disposable income is market 
income plus social transfers less income taxes.

5. Tax policy challenges in EU Member States

The more  unequally  market income  is distributed, 
the greater the amount of redistribution required to 
achieve  a  given  degree  of  equality  in  disposable 
income. 

The distribution of market income is more unequal 
than  the  distribution  of  disposable  income in  the 
EU. (183) On average, the Gini-coefficient (184) for
market  income for  working-age  population  in  the 
EU-21 (0.41)  is  about  35%  higher  than  for 
disposable  income  (see  Graph  5.9).  This  reflects 
the  significant  role  of  (country-specific)  tax-
benefit  systems  to  smooth out  market-income 
inequality.  However,  inequality  patterns  are less 
dispersed  across  countries  in terms  of market 
income  than  in  terms  of  disposable  income, 
suggesting  differences  in  national  preferences  for 
redistribution.  Member  States  with  low  inequality 
in  market  income for  the  working-age  population
also tend to redistribute the  most (i.e. they are the 
ones  with  the  highest  difference  between  the  two 
Gini coefficients). According to OECD data for 21 
EU  countries,  the  range  of  the  Gini-coefficient  is 
about  10  points  for  market  income  (from  0.36  to 
0.46) and around 12 points  for disposable income 
(from 0.23 to 0.35).

Lithuania  and  Latvia display  the  highest  levels  of 
inequality  for disposable  income of  the  entire 
population in  2010,  followed  by  Spain,  Portugal, 
Romania,  Ireland,  Bulgaria,  the  United  Kingdom 
and  Greece.  Disposable  income  is  most  equally 
distributed  in  Slovenia,  followed  by  Hungary, 
Sweden, the Czech Republic, the  Netherlands and 
Belgium. (185) 

(183) Redistribution  is  expressed  by  the  difference  between  the 
Gini-coefficient for market income and disposable income. 
Working-age  population  (rather  than  total  population)  is 
used  to  compare  redistribution  across  Member  States 
because  it  avoids  the  influence  of  differences  in  pension 
systems and different demographic patterns.

(184) The Gini-coefficient is the most used inequality measure. It 
varies  between  0,  when  everyone  receives  an  identical 
amount of income, and 1, when a single individual receives 
all  the  income.  Higher  values  of  the  Gini-coefficient  thus 
indicate  higher  inequality  in  the  income  distribution.
Besides  the  Gini-coefficient,  several  other  indicators  are 
available  to  describe  inequality  and  the  redistributive 
impact  of  tax-and  benefit  systems;  see,  e.g.,  European 
Commission (2009b).

(185) However,  there  is  a  significant  difference  between  the 
Eurostat  figures  and  the  OECD  figures for  the  Gini-
coefficient for disposable income. This is in particular the 
case  for  Hungary,  Ireland  and  the  Netherlands,  which all 
have  a  Gini-coefficient  close  to  the  EU-21  average 

93

European Commission

Tax reforms in EU Member States

Turning  to  the difference  between  market  income 
and  disposable  income,  Slovakia,  Denmark  and 
Sweden show  the  lowest  levels  of  market  income 
inequality of the working-age population but not of 
disposable  income  inequality.  On  the  other  hand, 
Luxembourg,  Germany  and  France have  market
income  inequality  at  or  above  the  (un-weighted) 
EU-average, but the tax-benefit system reduces the 
inequality  to  a  level  below  the  average.  A  strong
redistributive effect is also visible in Italy, Poland, 
the  United  Kingdom  and  Portugal,  although the 
inequality of disposable income remains above the 
EU  average  in  these  countries.  In  Spain  and 
Estonia,  by  contrast,  the  redistributive  effect  is 
rather  modest,  as 
for 
disposable  income  is  close  to  the  one  for  market 
income.

the  Gini-coefficient 

From  a  long-term  perspective,  inequality  has 
generally been rising in the EU since the 1970', 80' 
and  90',  although  there  are  several  exceptions, 
particularly in  southern  Europe. (186)  Since  the 
mid-2000s,  however, 
in  disposable 
income has hardly changed in the EU. 

inequality 

Tax policy instruments for redistribution 

the 

power 

Different types of taxes have different distributive 
properties. Personal income taxes are in most cases 
progressive,  but  the  degree  of  progressivity  and, 
therefore, 
varies 
redistributive 
considerably  among  Member  States.  Social 
security  contributions  are  often  proportional  or 
even  regressive  (if  they  are  capped).  As  they  are 
to 
largely  equivalent,  economically  speaking,
personal  income  taxes  on  labour  income,
their 
distributional  impact  should  be  evaluated  jointly 
with personal income tax. VAT is often thought to 
be  regressive  because  of the  higher  propensity  to 
consume  at  low  income  levels.  However, all 
income  is  going  to  be  spent  at  some  point. 
Theoretically, from a life-time perspective with no 
bequests,  uniform  VAT  without  reduced  rates  is 
proportional. (187) (188) In general, excise duties are 
regressive  as  they  are  set  as  a  fixed  amount  per 
quantity,  but  the  redistributive  properties  also 

depend  on  which  income  groups  consume  the 
commodity in question.

It is well established that the most efficient policy 
instrument for redistributing income is progressive 
taxation  of  labour  income  along  with  income-
replacing transfers and targeted benefits. (189) It is 
possible to introduce progressive elements in taxes
other  than  labour  income  taxes,  such  as personal 
capital  income  taxes,  corporate income  taxes  and 
consumption  taxes.  However,  these  instruments 
are  less  efficient  than  progressive  labour  income 
taxation and subsidies.

income  at  progressive 

Personal  capital  income  taxes  adversely  affect 
savings/consumption as well as portfolio decisions 
and  capital  is  far  more  mobile  than  labour. (190)
However,  a  counter  argument  for  taxing  personal 
capital 
rates, despite 
additional distortionary effects compared to labour 
taxes,  is  that  capital  income  is  more  unevenly 
distributed  than  labour  income. (191)  Corporate 
income  taxes  do  not  directly  affect  the  income 
distribution  of  individuals
they  do 
adversely  affect  capital  formation  and,  therefore, 
reduce labour productivity and wages.

(192),  but

apply  different  VAT 

With  regard  to  consumptions  taxes,  most  EU 
rates 
Member  States
apparently  for  redistributive  reasons  (e.g.  reduced 
rates  on  food,  housing,  medicine,  children’s 
clothing etc.). However, as discussed in Chapter 4,
differential  commodity  taxation  is  an  ill-targeted 
and  costly  instrument  for  the  pursuit  of  equity 
objectives.  While  it  is  true  that  the  less  well-off 
spend  a  higher  proportion  of  their  income  on 
consumption items taxed at reduced rates than the 
better  off do,  high-income  individuals  spend  a 
larger absolute amount on such items. Crawford et 
al.  (2010)  show  for  the  United  Kingdom (which 
has a zero rate for certain consumption items) that 
it is possible to unify VAT rates, while at the same 
time  compensating the  losers  with  direct  transfers

(189) See  e.g.  Mirrlees  et  al.  (2010),  Sørensen  (2007)  or 

according  to  OECD  figures,  and  for  Denmark,  which
would rank as having the second lowest Gini-coefficient.

(186) See OECD (2011b).
(187) In  a  closed  economy,  a  uniform  commodity  tax  is 
equivalent  to  a  proportional  tax  on  wage  income,  both  in 
terms of distortions and (absence of) distributional impact.

(188) See Caspersen and Metcalf (1995).

Boadway and Keen (2000). 

(190) See Sørensen (2006).
(191) Furthermore,  property  taxes  could  be  made  progressive 
through a basic allowance. Inheritance taxes could also be 
made  progressive  on  the  same  grounds  as  capital  income 
taxation.

(192) Profits  of  corporations  net  of  corporate  income  tax  are 
eventually  taxed  as  dividends  or  capital  gains  under 
personal income tax.

94

5. Tax policy challenges in EU Member States

Box 5.5: Distributional effects of environmental taxation

Environmental  taxes  can  be  cost-effective  instruments  for  achieving  environmental  policy  goals.  They 
increase the  relative  price  of  consumption  with  a  negative  environmental  impact,  thereby  encouraging 
consumers to switch to more sustainable patterns of consumption and providing incentives for producers to 
invest in clean technologies. However, the distributional consequences of such taxes are debated and could 
be  an  obstacle  for  implementing  environmental  tax  reforms.  In  fact,  environmental  tax  reform  does  not 
necessarily have a negative impact on the distribution of consumption possibilities.

The commonest  forms of environmental taxes, and the most important ones from the  fiscal point of view, 
are taxes on energy. Energy products, such as electricity and fuels for heating and transport, are considered, 
like  food,  to  be  necessary  goods  to  the  extent  that  the  share  of  income  devoted  to  these  goods  typically 
declines with the level of income. Hence, poorer households bear a larger burden of  the taxes imposed on 
these products than richer households do, relative to their income.

Most empirical evidence indicates that taxing domestic heating and electricity does tend to be regressive. At 
the EU-27 level, Cambridge Econometrics (2008) show that a 10 % increase in gas and electricity prices will 
have a regressive impact across five income quintiles of real household disposable income (see Table 1A).

Table 1A: Changes in real household incomes (per cent) as a result of a 10 per cent increase in 
electricity and gas prices for five income quintiles, EU-27

All households

1st quintile

2nd quintile

3rd quintile

4th quintile

5th quintile

-0.54

-0.69

-0.65

-0.59

-0.53

-0.43

Source: Cambridge Econometrics (2008), reproduced in European Commission (2011).

Similar  evidence  is  found  in  studies  concerning  individual  Member  States. (1)  Evidence  in  Tuuli  (2009) 
indicates that electricity taxes are at least mildly regressive in Finland. In Denmark, the Danish Ministry of 
Taxation  (2005)  shows that  the  excise  duties  on  electricity  and  on  fuels  for  heating  purposes  are  clearly 
regressive, both measured in relation to consumption and total  household income. A recent study by Vivid 
Economics (2012) concludes that taxes on residential energy are regressive in Spain, Hungary and Poland. 
There is also evidence indicating that countries may differ  with respect to the regressive nature of energy 
taxes. For instance, energy taxes appear to be more regressive in the UK and Ireland than in other European 
countries  (see  EEA,  2011  and  Kosonen,  2012).  Differences  in  the  levels of  consumption  of  energy  for 
heating  in  northern  and  southern  Europe  and  differences  in  the  design  of  vehicle  taxation  also  affect  the 
overall distributional effects of environmental taxes across Member States.

However,  not  all  environmental  taxes  are  regressive.  Taxes  on  transport  fuels  and  other  transport-related 
taxes tend to be somewhat progressive.(2) This is because car ownership increases heavily with income, so 
that taxes affecting the cost of fuel or the purchase and ownership of cars are paid more by middle- or high-
income  households  than  by  those  with  the  lowest  incomes.(3)    Several  empirical  studies  from  individual 
countries indicate that the shares of income paid on transport-related taxes or expenses also tend to rise with 
income up to a relatively high-income level. Jacobsen et al. (2003) conclude that in Denmark the share of 
disposable  income  paid  on  transport-related  taxes  (car  registration  tax,  annual  ownership  tax,  tax  on 
insurance  premiums  and  excise  duty  on  petrol)  increase  up  to  the  9th  decile.  Thus, these  taxes  are 
progressive  as  a  whole.(4)  Tuuli  (2009)  studies  the  incidence  of  motor  fuel  taxes  in  Finland  using  total 
expenditure  as  the  income  concept.  The  findings  show  that  the  share  of  total  expenditure  spent  on  motor 
fuels  increases  up  to  the  6th-8th  expenditure  decile  and  declines slightly  thereafter  and  thus  would  be 
progressive  for  a  large  share  of  the  income  scale.  Ahola-Carlsson-Sterner  (2009)  present  similar  evidence 

(1) See EEA (2011) for an overview of the literature.
(2) Taxes on transport fuels represent about 78 % of energy tax revenues in the EU-27.
(3) While  car  ownership  and  purchase  increases  with  income  all  the  way  throughout  the  income  distribution,  annual 

driving per household is flat in the upper half of the income distribution.

(4) See also Danish Ministry of Taxation (2005).

(Continued on the next page)

95

European Commission

Tax reforms in EU Member States

Box (continued)

from Sweden: taking total expenditure, the tax burden would increase from the lowest up to the 8th decile. 
Evidence  from  the  UK  also  indicates  that  middle-income  households  would  be  more  affected  by  fuel tax 
increases than low- or high-income households (5), while if only car-owning households are considered, fuel 
taxes would be regressive. Several studies also point out that rural households are more affected by transport 
fuel taxes than urban households are.

This  evidence  implies  that  transport-related  taxes  can  significantly  mitigate  the  regressive  impact  of  other 
energy  taxes,  or  even  completely  offset  that  impact.  In  this  respect, however, there  is variation  across 
countries,  and  this  needs  to  be  taken  into  account  when  a  tax  reform is  designed.  The  Cambridge 
Econometrics  (2008)  study  for  the  Commission  investigates  the  impacts  of  various  energy  tax  reform 
packages  at  EU level.  The results indicate that  the inclusion of  transport  fuel  taxes in the reform  package 
more  or  less  neutralises  the  regressive  overall  impact  of  other  energy  taxes.  However,  the  distributional 
effect  of  tax  reforms  also  depends  on  how  the  extra  revenue  from  excise  duties  is  used.  If  distributional 
neutrality is a reform objective,  such as  in a reform increasing environmental taxes and reducing taxes on 
labour  income,  low-income  and  non-labour-income  households  could  be  compensated  through  a  higher 
basic allowance or a targeted income transfer.

As  with  many  environmental  taxes,  excise  duties  on  health-related  products  such  as  tobacco,  alcohol, 
confectionary and saturated fat (sin taxes) tend to be regressive. Again, it is possible to mitigate the impact 
on low-income households via personal income taxation or direct transfers.

(5) Blow-Crawford (1997) and Johnstone-Alavapati (1998).

in a  way that improves both the progressivity and 
the  efficiency  of  the  overall  tax  system  and  also 
increases  overall  revenues  to  finance  desirable 
reforms. A  number  of  indirect  taxes  other  than 
VAT  may  also  have  non-negligible  effects  on the 
distribution  of consumption  possibilities.  The 
distributional  impact  of  environmental  taxes  is 
reviewed in Box 5.5.

Personal 
contribution progressivity

income 

tax  and  social  security 

A tax schedule can be considered to be progressive 
if  the  average  tax  rate  rises  with  income,  i.e.  the 
marginal  tax  rate  at  a  given  level  of  income 
exceeds the average tax rate. (193) (194) An index of 
progressivity (IP) can be defined as follows:

IP = 1 – (1-MTR)/(1-ATR)

where  MTR = marginal 
and
ATR = average  tax  rate.  For  a  progressive  tax 
system,  i.e.  MTR  higher  than  ATR,  the  index  of 
progressivity is bounded between 0 and 1.  Higher 

rate 

tax 

(193) The marginal tax rate is the amount of personal income tax 
and social security contributions paid on an additional unit 
of  income.  The  average  tax  rate is the  ratio  of  the  total 
amount  of  personal  income  tax  and  social  security 
contributions to total gross income. 

(194) See  Jakobsson  (1976)  for  an  overview  of  different 

values 
progressivity. (195)

of 

the 

index 

imply 

higher 

the  average  wage  (AW) 

This index  varies  substantially  between  Member 
States  (see  Graph  5.10 and  Table  A.8  in  the 
level, 
Annex).  At 
progressivity is by far the highest in Ireland (0.41), 
followed  by  Luxembourg  and  Hungary.  Italy, 
Germany,  and  France,  rank  approximately  in  the 
middle  with  a  mean  comprised  between  0.13  and 
0.17. 

Graph 5.10:

Index of progressivity at the 100% and 167% level 
of the wage of the average worker (single no 
children), 2010

0.4

0.3

0.2

0.1

0

-0.1

-0.2

0.4

0.3

0.2

0.1

0

-0.1

-0.2

IE

LU HU

FI

BE

AT DE

PT

NL

SI

EL

ES

IT

UK CZ

SK

SE DK

EE

FR

PL

OECD EU

Index of Progressivity (Single no ch 100% of AW)

Index of Progressivity (Single no ch 167% of AW)

Note: Data not available for Bulgaria, Cyprus, Latvia, Lithuania, Malta 
and Romania.
Source: OECD.

(195) For MTR=100% and ATR <100%, IP=1. For ATR=MTR, 

measures of tax progression. 

i.e. a purely flat tax system, IP=0.

96

5. Tax policy challenges in EU Member States

Table 5.20:

Overview table: Tax policy challenges in Member States

Note: (X) depicts borderline cases. Member States under an economic adjustment programme (Greece, Ireland and Portugal) are excluded from the 
analysis in the first column.
Source: Commission services.

Most of  the  Member  States  that  have  joined  the 
EU  since  2004  display  lower  progressivity.  For 
Austria,  Germany  and  Spain, ceilings  on  social 
security  contributions  create  a  negative  index  of 
progressivity at the 167% AW level. The index of 
the 
progressivity 
threshold of the top personal income tax rate.

is  also  rather  sensitive 

to 

Another related measure of progressivity compares 
the tax wedge for a single person with no children 
earning 167% of the AW, with the tax wedge of a 
single  person  earning  67%  of  the  average  (see 
Graph 5.11 and Annex Table 8). 

Graph 5.11:

Ratio of tax wedge 167% / 67% of the average 
worker (single, no children), 2010

2.2

2.0

1.8

1.6

1.4

1.2

1.0

2.2

2.0

1.8

1.6

1.4

1.2

1.0

IE LU MT PT FI EL UK SE NL SI BE DK HU IT AT ES SK FR CZ DE LT EE PL RO LV BG

EU EA

Source: Eurostat and OECD.

At  EU  level,  the  average  tax  rate  (including SSC 
and  standard  family  benefits)  at  the  167%  AW 

level  is  19%  higher  than the  average  tax  rate  at 
67%  of  the  average  wage.  According  to  this 
measure,  redistribution  is  high  in  Ireland  (where
the  tax  wedge  is  very  low  at  67%  of  the  AW), 
Luxembourg  and  Malta.  On  the  contrary,  in 
Bulgaria the 67% earner and the 167% earner face 
exactly the  same  tax  wedge.  There  is  also  a 
relatively  low  difference  in  the  tax  wedges  in 
Romania, Poland and the Baltic countries.

5.5. OVERVIEW OF TAX POLICY CHALLENGES

This chapter analysed potential challenges that EU 
Member States are facing in the area of tax policy. 
These challenges concern both the macroeconomic 
effects  of  the  tax  system  and  the  design  of 
individual  taxes.  Table  5.20 provides  a  synoptic 
overview  of  Member States  that  may  need  to 
consider tax policy measures in the different areas 
discussed.

Based  on  a  quantitative  screening,  Section  5.1 
analysed  in  which  Member  States  tax  increases 
could  contribute  to  consolidation  and  in  which 
there  appeared  to  be  scope, and  a  need,  for  a  tax 
shift.  The  analysis  found  that  Spain,  Malta, 
consolidation 
Slovakia
the  same
challenges  and  had 

faced 
'tax  space'  at 

and  Slovenia 

97

European Commission

Tax reforms in EU Member States

time. (196)  They  could,  therefore,  consider  using 
measures  on  the  revenue  side  of  the  budget  – in 
addition  to  those  on  the  expenditure  side  – to 
consolidate  their  public  finances  and  make  them 
more  sustainable.  Such  revenue  raising  measures 
have  been  taken  recently  in  Spain  but  are  not 
reflected in the data yet.

to 

less 
detrimental 
taxes,  recurrent  property 
taxes). 

Around  one  third  of  Member  States  could  benefit
from  a  tax  shift  from  labour  taxes  to  taxes 
growth 
considered 
(consumption 
taxes, 
In  particular  Belgium, 
environmental 
France, Italy, the Czech Republic, Latvia, Romania 
and  – to  a  lesser  extent  – also Germany,  Austria 
and  Hungary  were  found  to  have  both  a  need  to 
reduce  labour  taxation  and  scope  for  increasing 
less detrimental taxes.

Section 5.2 analysed which countries might benefit 
from  a  broadening  of  tax  bases  in  direct  and 
indirect  taxation.  As  shown  in  Table  5.20 many 
Member States face the challenge of reviewing and 
potentially  reducing  tax  expenditure  in  personal 
and corporate income taxation. Concerning such a 
review  in  the  area  of  corporate  income  taxation, 
Member  States  should,  where  appropriate,  assess 
reduced rates for SMEs, special regions or sectors, 
accelerated  depreciation  schemes  as  well  as  R&D 
and 
incentives.  Moreover,  several 
Member States should consider addressing the debt 
bias  in  corporate  taxation  (in  particular  Greece,
France,  Luxembourg,  Malta,  Portugal,  but  also 
Germany,  Spain  and  Sweden).  Despite  recent 
measures 
improve  VAT  efficiency,  many 
Member States still need to address the often very 
high policy and/or compliance gaps in the  area of 
VAT.

investment 

to 

A number of Member States face the challenge of 
improving  tax  governance  as  analysed  in  Section 
5.3. Challenges can be related to either (i) the need 
to  improve  tax  compliance  as  a  consequence  of  a 
large  shadow  economy  and/or  high  levels  of 
potential VAT fraud and evasion, or (ii) a specific 
potential  to  improve  their  tax  administration  as 
indicated by high costs of paying and/or collecting 
taxes  and  little  use  of  pre-filling  or  third-party 
information.

Housing  taxation  in  EU  Member  States  is  often 
based  too  much  on  rather  distortive  transaction 
taxes as opposed to recurrent taxes on immovable 
property,  which are considered less detrimental to 
growth.  In  particular  Belgium,  Greece,  Spain, 
France,  Italy, Cyprus,  Luxembourg  and  Portugal 
should  consider  a  shift  within  property  taxes in 
favour of recurrent taxes and/or continue  with the 
measures  recently  implemented  or  discussed. (197)
Moreover,  nearly  half  of  the  Member  States  face 
the challenges of reducing the debt bias in housing 
taxation  created  by  the  (partial)  deductibility  of
mortgage interest, although to differing degrees. In 
these countries,  either  imputed  rents  or  recurrent 
property taxes on owner-occupied housing are too 
low  to  tax  immovable  property  returns  at  a  level 
consistent with alternative investment items. Given 
the  political  difficulty  of  raising  property  taxes,  a 
second-best  option  might  be  the  gradual  phasing 
out of interest-rate deductibility in order to remove 
this  debt  bias  in  the  tax  system  and  make  the  tax 
treatment of different capital goods more neutral.

Sub-section  5.4.2  analysed  tax-related  challenges
in  terms  of  environmental  policy.  First,  it  is 
important  to  ensure  that  the  policy  instruments  in 
place,  including  taxes, are  sufficient  to  meet  the 
agreed  environmental objectives concerning  GHG 
emissions.  If  there  is  a  need  for  further  policy 
measures,  environmental  taxes  should play  a  role 
in the policy mix. Secondly, energy taxes and other 
environmental  taxes  should  be  designed  so  that 
they  provide  appropriate  incentives  to  reduce 
emissions  over  time.  Various  measures could  be 
taken at  the  national level to  improve  the  existing 
design of tax systems, in particular by: i) adjusting 
the  structure  of  tax  rates  on  fossil  fuels  according 
to  their  carbon  and  energy  content;  ii)  indexing 
environmental  taxes;  iii)  considering  the  abolition 
of reduced VAT rates on energy; iv) reducing  tax 
subsidies  for  company  cars  and  v)  introducing 
CO2-related  vehicle  taxation.  Overall,  a  third  of 
Member  States  appear  to  have  specific  scope  for 
improving the design of their environmental taxes.

The  challenges  identified  in  this  chapter  relate  to 
improving  the  efficiency  of  national  tax  systems. 
However,  the  redistributive  effects  of  the  tax 
system  can  be  equally  important.  Redistribution

(196) In  that  analysis  programme  countries  Greece,  Ireland and 

(197) For instance Italy recently increased recurrent taxes on real 

Portugal were not included.

estate with the introduction of IMU.

98

instruments, 

taxation  of 

including 
can occur  via  several 
taxation,  and  progressive 
labour 
income  in  particular.  Redistribution  through  the 
tax-benefit  system  is  the  prerogative  of  Member 
States,  which  have  different  perceptions  of  social 
equity  and  different  collective  preferences  for 
balancing  efficiency  versus  equality.  Therefore,  it 
is  difficult  to  come  up  with  prescriptive  policy 
recommendations  in  this  complex  and  sensitive 
identification  of  clear  policy 
area  and 

the 

5. Tax policy challenges in EU Member States

challenges  at  national  level.  However,  a  Member 
State which faces substantial efficiency challenges 
in  the  tax-benefit  system  and  at  the  same  time 
achieves an inferior outcome in terms of mitigating 
income  inequalities,  may  have  some  scope  for 
redistribution  or  efficiency 
increasing  either 
without  harming 
the  other  dimension.  When 
deciding  on  their  redistributive  policy,  Member 
States also need to ensure that the sustainability of 
public finance is not jeoparised. 

99

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106

GLOSSARY

ACE (Allowance for Corporate Equity) allows for 
a  deduction  for  the  return  on  equity  from  the 
corporate 
tax  base  (taxable  profits).
Coupled with a deduction for interest payments, it 
would equalise the tax treatment of debt and equity 
finance.

income 

CBIT (Comprehensive  Business  Income  Tax) 
Interest payments can no longer be deducted from 
corporate  profits,  and  are  thus  fully  taxed  at  the 
corporate  income  tax  rate,  similarly  to  the  return 
on equity.

Convergence 
programmes  Medium-term 
budgetary  and  monetary  strategies  presented  by 
Member States that have not yet adopted the euro. 
They  are  updated  annually,  according  to  the 
provisions of the Stability and Growth Pact. Prior 
to 
third  phase  of  EMU,  convergence 
programmes were issued on a voluntary basis and 
used  by  the  Commission  in  its  assessment  of  the 
progress  made  in  preparing  for  the  euro.  See  also 
stability programmes.

the 

Direct  taxes  Taxes  that  are  levied  on  income, 
wealth  and  capital,  at  the  personal  or  corporate 
level.

Discretionary  fiscal  policy  Change  in the  budget 
balance  and  in  its  components  under  government 
control.  It  is  usually  measured  as  the  residual  of 
the change in the balance after the exclusion of the 
budgetary impact of automatic stabilisers. See also 
fiscal stance.

Economic  Policy  Committee  (EPC)  Group  of 
senior government officials  whose  main task is to 
prepare  the  discussions  of  the  (ECOFIN)  Council 
on structural policies. It plays an important role in 
the  preparation  of  the  Broad  Economic  Policy 
Guidelines. It is also deals with policies  related to 
labour  markets,  methods  to  calculate  cyclically-
adjusted budget balances and ageing populations.

Effective tax rate The ratio of broad categories of 
income, 
income,  capital 
tax  revenue  (labour 
consumption) to their respective tax bases.

Effectiveness The  same  concept  as  efficiency 
except  that  it  links  input  to  outcomes  rather  than 
outputs.

Efficiency Can  be  defined  in  several  ways,  either 
as the ratio of outputs to inputs or as the  distance 
to a production possibility frontier. Cost efficiency
measures the link between monetary inputs (funds) 
and outputs; technical efficiency measures the link 
between  technical  inputs  and  outputs.  Output 
efficiency indicates by how much the output can be 
input  efficiency
increased  for  a  given  input; 
indicates  by  how  much  the  input  can  be  reduced 
for a given input.

and 

transport,  pollution 

Environmental  taxes These  include  taxes  on 
resources 
energy, 
(excluding value added types of taxes because they 
are  levied  on  all  products).  Energy  taxes include 
taxes  on  energy  products  used  for  both  transport 
(e.g.  petrol  and  diesel)  and  stationary  purposes 
(e.g.  fuel  oils,  natural  gas,  coal  and  electricity). 
Transport  taxes include  taxes  related  to  the 
ownership  and  use  of  motor  vehicles.  They  also 
include taxes on other transport equipment such as 
planes and related transport services such as duties 
on  charter  or  scheduled  flights.  Pollution  taxes 
include taxes on  measured or estimated emissions 
taxes)  and  water,  on  the 
to  air  (except  CO2
management  of  waste,  and  on  noise.  Resource 
taxes include any taxes linked to extraction or use 
of a natural resource (e.g. extraction of gas and oil, 
licences paid for hunting, fishing and the like).

Euro-Plus  Pact Agreed  in  spring  2011  by  the  17 
Member  States  of  the  euro  area,  joined  by 
Bulgaria,  Denmark,  Latvia,  Lithuania,  Poland  and 
Romania.  The  Pact  commits  signatories 
to 
economic  coordination  for  competitiveness  and 
convergence, also in areas of national competence, 
with  concrete  goals  agreed  on  and  reviewed  on  a 
yearly basis by Heads of State or Government. It is 
integrated  into  the  European  semester and  the 
Commission  monitors  the  implementation  of  the 
commitments.

ESA95  /  ESA79  European  accounting  standards 
for the reporting of economic data by the Member 
States to the EU. As of 2000, ESA95 replaced the 
the 
earlier  ESA79  standard  with  respect 
comparison and analysis of national public finance 
data.

to 

European semester New governance architecture 
approved  by  the  Member  States  in  September 
2010. It means that the EU and the euro zone will 
coordinate  their  budgetary  and  economic  policies

107

European Commission

Tax reforms in EU Member States

ex ante, in line with the Europe 2020 strategy, the 
Stability and Growth Pact and the Macroeconomic 
Imbalances  Procedure.  On  the  basis  of  previous 
discussions  on  the  Commission’s  Annual  Growth 
Survey,  each  summer  the  European  Council  and 
the  Council  of  Ministers  provide  policy  advice 
before Member States finalise their draft budgets.

Excessive  Deficit  Procedure  (EDP)  A  procedure 
according  to  which  the  Commission  and  the 
Council  monitor  the  development  of  national 
budget balances and public debt in order to assess 
and/or  correct  the  risk  of  an  excessive  deficit  in 
each  Member  State.  Its  application  has  been 
further  clarified  in  the  Stability  and  Growth  Pact. 
See also stability programmes.

Implicit  tax  rates  General  measure  for  the 
effective  average  tax  burden  on  different  types of 
economic  income  or  activities,  i.e.  on  labour, 
consumption  and  capital,  as  the  ratio  between 
revenue from the tax type under consideration and 
its (maximum possible) base.

Implicit  tax rate on consumption  Ratio between 
the  revenue  from  all  consumption  taxes  and  the 
final consumption expenditure of households.

Implicit tax rate on labour The sum of all direct 
and  indirect  taxes  and  social  contributions  levied 
on  employed  labour  income as  a  percentage  of 
total  compensation  of  employees  from  national 
accounts.

Implicit  tax  rate  on  capital  Ratio  between  taxes 
on  capital  and  aggregate  capital  and  savings 
income.  Specifically, it  includes  taxes  levied  on 
the  income  earned  from  savings  and  investments 
by  households  and  corporations  as  well  as  taxes, 
related to stocks of capital, stemming from savings 
and 
in  previous  periods.  The 
denominator  is  an  approximation  of  world-wide 
capital  and  business  income  of  residents  for 
domestic tax purposes

investment 

(Real) implicit tax rate on energy Ratio between 
total  energy 
tax  revenues  and  final  energy 
consumption,  deflated  with  the  cumulative  % 
change in the final demand deflator.

Fiscal  consolidation  An  improvement  in  the 
budget balance through measures of discretionary 
fiscal policy, specified either by the amount of the 

108

improvement  or 
improvement continues.

the  period  over  which 

the 

General  government  As  used  by  the  EU  in  its 
process  of  budgetary  surveillance  under 
the 
Stability and Growth Pact and the excessive deficit 
procedure,  the  general  government  sector  covers 
local 
national 
government,  as  well  as  social  security  funds. 
Public enterprises are excluded, as are transfers to 
and from the EU Budget.

government, 

regional 

and 

from 

to  employment 

Inactivity  trap  Measure  for  the  disincentive  to 
return 
inactivity. The 
inactivity  trap  is  also  often  referred  to  as  the 
participation tax rate. The inactivity trap measures 
the part of additional gross wage that is taxed away 
in the form of increased taxes (personal income tax 
and  employee  social  security  contributions  (SSC) 
and  withdrawn  benefits  such  as  unemployment 
benefits, social assistance, and housing benefits in 
the event of an inactive person taking up a job.

Indirect taxation Taxes that are levied during the 
production  stage,  and  not  on  the  income  and 
property  arising 
from  economic  production 
processes. Prominent examples of indirect taxation 
are  value  added  tax  (VAT),  excise  duties,  import 
levies, energy and other environmental taxes.

Integrated guidelines A general policy instrument 
for  coordinating  EU-wide  and  Member  States'
economic  structural  reforms  embedded  in  the 
Lisbon  strategy, whose  main  aim  is  to  boost 
economic growth and job creation in the EU.

in  2000, 

Lisbon  Strategy 
for  Growth  and  Jobs
Partnership  between  the  EU  and  Member  States 
for  growth  and  more  and  better  jobs.  Originally 
approved 
the  Lisbon  Strategy  was 
revamped  in  2005.  On  the  basis  of  the  Integrated 
Guidelines  (merger  of  the  broad  economic  policy 
guidelines and the employment guidelines, dealing 
with  macro-economic,  micro-economic 
and 
employment  issues)  for  the  period  2005-2008, 
Member States drew up three-year national reform 
programmes at the end of 2005. They reported on 
the 
reform 
programmes for the first time in autumn 2006. The 
these 
Commission  analyses  and  summarises 
reports in an EU Annual Progress Report each year 
in time for the Spring European Council.

implementation  of 

the  national 

Low-wage  trap  Effective  marginal 
tax  rate 
defined as the rate at which taxes are increased and 
benefits  withdrawn  as  earnings  rise  due  to  an 
increase in work productivity. This kind of trap is 
most  likely  to  occur  at  relatively  low  wage  levels 
due  to  the  fact  that  the  withdrawal  of  social 
transfers 
in-work 
benefits  and  housing  benefits),  which  are  usually 
available only to persons with a low income, adds 
to  the  marginal  rate  of  income  taxes  and  social 
security contributions.

social  assistance, 

(mainly 

budgetary 

framework  An 
Medium-term 
institutional  fiscal  device  that  lets  policy-makers 
extend the horizon for fiscal policy-making beyond 
the  annual  budgetary  calendar  (typically  3-5 
years).  Targets  can  be  adjusted  under  medium-
term  budgetary  frameworks  (MTBF)  either  on  an 
annual  basis  (flexible  frameworks)  or  only  at  the 
end of the MTBF horizon (fixed frameworks).

Medium-term  objective  (MTO)  Represents  a
budgetary position that safeguards against the risk 
of  breaching  the  3%  of  GDP  threshold  of  the 
Treaty  and  ensures  the  long-term  sustainability  of 
public finances.

One-off  and  temporary  measures  Government 
transactions  having  a  transitory  budgetary  effect 
that  does  not  lead  to  a  sustained  change  in  the 
budgetary position. See also structural balance.

Policy-mix  The  overall  stance  of  fiscal  and 
monetary  policy.  The  policy-mix  may  consist  of 
various 
and 
restrictive policies, with a given fiscal stance either 
supported or offset by monetary policy.

combinations  of 

expansionary 

Pro-cyclical  fiscal  policy  A  fiscal  stance  which 
amplifies  the  economic  cycle  by  increasing  the 
structural  primary  deficit  during  an  economic 
upturn,  or  by  decreasing  it  in  a  downturn.  A 
neutral  fiscal  policy  keeps  the  cyclically-adjusted 
throughout 
budget  balance  unchanged 
the 
economic  cycle  but  allows 
the  automatic 
stabilisers to work. See also tax-smoothing.

QUEST  The  macroeconomic  model  of  the  EU 
Member  States  plus  the  US  and  Japan  developed 
by  the  Directorate-General  for  Economic  and 
Financial Affairs of the European Commission.

Recently  acceded  Member  States  The  countries
that  became  members  of  the  EU  in  May  2004 
include  Cyprus,  the  Czech  Republic,  Estonia, 
Hungary,  Latvia,  Lithuania,  Malta,  Poland, 
Slovakia  and  Slovenia.  Two  additional  countries, 
Romania and Bulgaria joined in January 2007.

Social  security  contributions  (SSC)  Mandatory 
contributions paid by employers and employees to 
a social insurance scheme to cover pensions, health 
care and other welfare provisions.

Stability  and  Growth  Pact  (SGP)  Approved  in 
1997  and  reformed  in  2005,  the  SGP  clarifies  the 
provisions  of  the  Maastricht  Treaty  regarding  the 
surveillance  of  Member  States' budgetary  policies 
and  the  monitoring  of  budget  deficits  during  the 
third phase of the EMU. The SGP consists of two 
Council  Regulations  setting  out  legally  binding 
provisions 
the  European 
Institutions  and  the  Member  States  and  two 
Resolutions  of  the  Amsterdam  European  Council 
in (June  1997).  See  also  Excessive  Deficit 
Procedure.

to  be  followed  by 

Stability  programmes  Medium-term  budgetary 
strategies  presented  by  those  Member  States  that 
have  already  adopted  the  euro.  They  are  updated 
annually,  according  to  the  provisions  of  the 
Stability  and  Growth  Pact.  See  also  Convergence 
programmes.

Statutory tax rate on corporate income Taxation 
of corporate income is not only conducted through 
CIT (corporate income tax), but, in some Member 
States,  also  through  surcharges  or  even  additional 
taxes levied on tax bases that are similar, but often 
not  identical, to  the  CIT.  In  order  to  take  these 
features into account, the simple CIT rate has been
adjusted  for  comparison  purposes.  If  several  rates 
exist,  only  the  ‘basic’ (non-targeted)  top  rate  is 
presented;  existing  surcharges  and  averages  of 
local taxes are added to the standard rate.

Tax elasticity  A parameter measuring the relative 
change  in  tax  revenues  with  respect  to  a  relative 
change  in  GDP.  Tax  elasticity  is  an  input  to 
budgetary sensitivity.

Tax expenditure Public expenditure implemented 
through  the  tax  system  by  way  of  a  special  tax 
concession — such as an exclusion, an exemption, 
an  allowance,  a  credit,  a  preferential  rate  or  tax 

Glossary

109

European Commission

Tax reforms in EU Member States

deferral  — that  results  in  reduced  tax  liability  for 
certain subsets of taxpayers.

Tax  gaps  Measure  used  in  the  assessment  of  the 
sustainability of public finances. They measure the 
difference  between  the  current tax  ratio  and  the 
constant tax ratio over a given projection period to 
achieve a predetermined level of debt at the end of 
that projection period.

Tax  smoothing  The  idea  that  tax  rates  should  be 
kept  stable  in  order  to  minimise  the  distortionary 
effects of taxation, while leaving it up to automatic 
stabilisers to smooth the economic cycle. It is also 
referred  to  as  neutral  discretionary  fiscal  policy. 
See also cyclical component of fiscal policy.

Tax wedge  Difference between the  wage costs of 
an  average  worker  for  his/her  employer  and  the 
amount  of  net  income  that  the  worker  receives  in 
return.  That difference  is  represented  by  taxes, 
including  personal  income  taxes  and  compulsory 
social security contributions.

Unemployment trap Measure for the disincentive 
to  return  to  employment  from  unemployment.  It 
measures the part of the additional gross wage that

is taxed away when a person returns to work from 
unemployment. It takes into account the reduction 
in  benefits  payments  following  the  return  to  the 
labour  market,  as  well  as  higher  taxes  and 
employee social security contributions.

VAT revenue ratio (VRR) The VRR is defined as 
the  actual  VAT  revenue 
the  ratio  between 
collected and the revenue  that  would  theoretically 
be  raised  if  VAT  was  applied  at  the  standard  rate 
to  all  final  consumption.  In  theory,  the  closer  the 
VAT  system  of  a  country  is  to  the  ‘pure’ VAT 
regime  (i.e.  where  all  consumption  is  taxed  at  a 
uniform  rate),  the  closer  its  VRR  is  to  1.  A  low 
VRR  can  indicate  a  reduction  of  the  tax  base  due 
to large exemptions or reduced rates (‘policy gap’) 
or a failure to collect all tax as a result of fraud, for 
instance (‘collection gap’).

VAT  ‘collection  gap’ The  VAT  gap  is  the 
difference  between  accrued  VAT receipts  and  the 
theoretical net VAT liability for the economy as a 
whole  given  the country's  VAT  system.  The 
theoretical  net liability is estimated by identifying 
the  categories  of  expenditure  that  give  rise  to 
irrecoverable  VAT  and  combining  these  with 
appropriate VAT rates.

110

Statistical annex

Table A.1:

Total taxes (including social security contributions) and tax structure, % of GDP, 2000-2010, EU-27

Structure by type of tax
Indirect taxes

VAT
Excise duties and consumption taxes
Other taxes on products (incl. import duties)
Other taxes on production

Direct taxes

Personal income
Corporate income
Other

Social contributions

Employers´
Employees´
Self- and non-employed

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

13.7
7.0
3.0
1.7
2.0
14.1
9.8
3.1
1.1
12.7
7.2
4.1
1.4

13.4
6.9
2.9
1.6
2.0
13.6
9.6
2.9
1.1
12.6
7.2
4.0
1.4

13.3
6.8
3.0
1.6
2.0
13.1
9.4
2.6
1.1
12.5
7.2
3.9
1.4

13.3
6.8
3.0
1.6
2.0
12.9
9.2
2.4
1.3
12.7
7.3
3.9
1.4

13.3
6.8
2.9
1.7
2.0
12.8
8.9
2.7
1.2
12.6
7.2
3.9
1.5

13.4
6.9
2.8
1.7
2.0
13.2
9.1
2.9
1.2
12.5
7.2
3.8
1.5

13.5
7.0
2.7
1.8
2.0
13.7
9.2
3.3
1.2
12.4
7.1
3.8
1.5

13.5
7.0
2.6
1.8
2.0
13.9
9.4
3.3
1.2
12.2
7.1
3.7
1.4

13.1
6.9
2.6
1.6
2.0
13.8
9.4
3.0
1.3
12.5
7.2
3.8
1.5

12.9
6.7
2.6
1.5
2.1
12.8
9.3
2.2
1.2
12.9
7.4
3.9
1.6

13.2
7.0
2.7
1.5
2.0
12.6
9.1
2.4
1.2
12.7
7.3
3.8
1.5

Total taxes (including SSC)

40.4

39.5

38.8

38.8

38.7

39.0

39.5

39.4

39.3

38.4

38.4

Structure by economic function

Consumption

Labour

Employed

          Paid by employers
          Paid by employees

Non-employed

Capital

Capital and business income
           Income of corporations
           Income of households
           Income of self-employed (incl. SSC)

Stocks of capital / wealth

11.4

11.1

11.1

11.1

11.1

11.1

11.1

11.0

10.8

10.7

11.0

20.2
18.6
7.8
10.9
1.6

8.9
6.1
3.2
0.9
2.1
2.8

20.1
18.5
7.8
10.7
1.6

8.4
5.7
2.9
0.7
2.0
2.7

19.8
18.2
7.7
10.5
1.6

8.0
5.3
2.7
0.7
1.9
2.7

19.8
18.2
7.9
10.4
1.6

8.0
5.3
2.6
0.7
2.0
2.7

19.5
17.9
7.8
10.1
1.6

8.2
5.4
2.8
0.7
1.9
2.8

19.5
17.8
7.7
10.1
1.6

8.5
5.7
3.0
0.8
1.9
2.8

19.3
17.7
7.7
10.1
1.6

9.2
6.3
3.4
0.9
2.0
2.9

19.2
17.7
7.7
10.0
1.5

9.3
6.5
3.4
0.9
2.1
2.9

19.6
18.1
7.9
10.2
1.5

8.9
6.1
3.1
0.9
2.1
2.8

20.0
18.4
8.0
10.3
1.6

7.8
5.2
2.3
0.8
2.1
2.6

19.6
18.1
8.0
10.1
1.5

7.8
5.3
2.4
0.8
2.0
2.5

Note: GDP-weighted EU-27 averages. Totals may be affected by rounding.
Source: Commission services.

111

European Commission

Tax reforms in EU Member States

Table A.2:

Total taxes (including social security contributions) and tax structure, % of GDP, 2000-2010, EA-17

Structure by type of tax
Indirect taxes

VAT
Excise duties and consumption taxes
Other taxes on products (incl. import duties)
Other taxes on production

Direct taxes

Personal income
Corporate income
Other

Social contributions

Employers´
Employees´
Self- and non-employed

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

13.5
7.0
2.7
1.7
2.1
13.0
9.1
3.0
0.9
14.5
8.2
4.6
1.8

13.2
6.8
2.7
1.7
2.1
12.6
8.9
2.8
0.9
14.3
8.1
4.5
1.7

13.2
6.7
2.7
1.7
2.1
12.2
8.7
2.6
0.9
14.3
8.2
4.4
1.7

13.2
6.6
2.7
1.7
2.1
12.0
8.5
2.4
1.1
14.5
8.2
4.4
1.8

13.2
6.6
2.6
1.8
2.1
11.9
8.3
2.6
1.0
14.3
8.1
4.3
1.8

13.3
6.8
2.5
1.9
2.1
12.0
8.4
2.8
0.9
14.2
8.1
4.3
1.8

13.4
6.8
2.5
2.0
2.1
12.6
8.5
3.2
0.9
14.1
8.0
4.2
1.8

13.3
6.9
2.4
1.9
2.1
12.9
8.7
3.3
0.9
13.9
8.0
4.2
1.7

12.9
6.8
2.3
1.7
2.1
12.7
8.9
2.9
0.9
14.1
8.1
4.2
1.8

12.8
6.6
2.4
1.6
2.1
12.0
8.9
2.0
1.0
14.5
8.3
4.3
1.9

12.9
6.9
2.4
1.6
2.0
11.8
8.7
2.2
0.9
14.3
8.2
4.3
1.9

Total taxes (including SSC)

40.9

40.0

39.5

39.5

39.2

39.4

40.0

40.0

39.6

39.0

38.9

Structure by economic function

Consumption

Labour

Employed

          Paid by employers
          Paid by employees

Non-employed

Capital

Capital and business income
           Income of corporations
           Income of households
           Income of self-employed (incl. SSC)

Stocks of capital / wealth

11.1

10.9

10.8

10.7

10.7

10.8

10.8

10.7

10.5

10.4

10.7

21.3
19.5
8.8
10.7
1.8

8.7
6.2
3.1
0.8
2.3
2.5

21.1
19.3
8.8
10.6
1.8

8.2
5.8
2.9
0.7
2.2
2.4

21.0
19.2
8.8
10.4
1.8

7.8
5.4
2.6
0.6
2.1
2.5

21.0
19.2
8.9
10.3
1.8

7.9
5.4
2.6
0.6
2.2
2.5

20.6
18.8
8.7
10.0
1.8

8.0
5.4
2.7
0.6
2.1
2.6

20.5
18.6
8.7
9.9
1.8

8.3
5.6
2.9
0.7
2.1
2.6

20.3
18.5
8.7
9.9
1.8

9.0
6.3
3.3
0.8
2.2
2.7

20.1
18.5
8.6
9.9
1.7

9.3
6.6
3.4
0.9
2.3
2.7

20.6
18.9
8.7
10.2
1.7

8.6
6.1
3.0
0.8
2.3
2.4

21.0
19.3
8.9
10.3
1.8

7.7
5.2
2.2
0.8
2.2
2.5

20.8
19.1
8.9
10.2
1.7

7.6
5.2
2.3
0.7
2.2
2.3

Note: GDP-weighted EA-17 averages. Totals may be affected by rounding.
Source: Commission services.

112

1. Statistical annex

Table A.3:

Development of implicit tax rates, in %

Implicit tax rate on labour

Implicit tax rate on consumption

Implicit tax rate on capital

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK

EU-27 average
GDP-weighted
arithmetic

EA-17 average
GDP-weighted
arithmetic

EU-25 average
GDP-weighted
arithmetic

1995
43.6
30.8
41.4
40.2
38.8
38.6
29.7
:
31.0
41.1
37.8
22.1
39.2
34.5
29.3
42.3
20.1
34.8
38.5
36.8
22.3
31.6
38.5
38.5
44.2
46.8
25.9

36.8
35.3

38.1
34.3

36.8
35.6

2000
43.6
38.1
41.2
41.0
39.1
37.8
28.5
34.5
30.5
41.9
41.8
21.6
36.7
41.2
29.9
41.4
21.8
35.0
40.1
33.6
22.3
33.6
37.6
36.3
44.0
46.8
25.9

36.7
35.8

38.8
34.5

36.7
35.8

2010
42.5
24.4
39.0
34.8
37.4
37.0
26.1
31.3
33.0
41.0
42.6
27.0
32.5
31.7
32.0
39.4
21.7
36.9
40.5
30.1
23.4
27.4
35.0
32.0
39.3
39.0
25.7

36.0
33.4

38.1
34.0

36.1
34.0

1995
20.4
17.3
20.9
30.5
18.8
21.2
24.7
:
14.2
21.7
17.4
13.0
19.4
17.7
21.0
29.6
14.8
23.3
20.6
20.7
18.1
12.6
24.4
26.4
27.6
27.9
19.6

19.9
20.8

19.4
20.2

20.0
21.2

2000
21.8
18.5
18.8
33.4
19.2
19.5
25.5
16.5
15.8
21.1
17.8
12.6
18.7
18.0
23.0
27.2
15.6
23.8
22.2
17.8
18.2
17.0
23.3
21.7
28.5
26.3
18.9

20.0
20.8

19.7
20.3

20.0
21.0

2010
21.4
22.8
21.1
31.5
19.8
25.6
21.6
15.8
14.6
19.3
16.8
18.8
17.3
18.2
27.3
27.2
18.9
27.0
21.4
20.2
17.4
18.9
24.1
17.7
25.2
28.1
18.4

19.7
21.3

19.2
20.7

19.7
21.4

1995
25.5
:
22.4
29.9
21.3
:
:
:
:
32.2
27.3
18.0
20.5
12.7
:
14.9
:
21.0
26.6
20.9
21.5
:
13.3
35.0
31.1
19.9
34.3

:
:

25.7
22.8

26.6
22.5

2000
29.5
:
18.7
36.0
27.0
5.8
:
:
30.8
37.8
29.5
24.7
11.5
7.1
:
18.5
:
20.0
27.2
20.5
31.6
:
17.2
22.9
38.1
42.7
43.3

:
:

29.6
25.0

32.1
24.9

2010
29.5
:
16.7
:
20.7
9.1
14.0
16.5
:
37.2
34.9
31.1
7.4
6.8
:
17.5
:
12.5
24.1
20.5
30.7
:
22.5
15.9
28.4
34.9
:

:
:

27.5
23.7

28.8
23.3

Note: EU and EA averages are adjusted for missing data.
Source: Commission services.

113

European Commission

Tax reforms in EU Member States

Table A.4:

Statutory tax rates, in %

Top personal income tax rate

Adjusted top corporate income tax rate

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27 arithmetic
EA-17 arithmetic

1995
60.6
50.0
43.0
65.7
57.0
26.0
48.0
45.0
56.0
59.1
51.0
40.0
25.0
33.0
51.3
44.0
35.0
60.0
50.0
45.0
40.0
40.0
50.0
42.0
62.2
61.3
40.0
47.4
49.0

2000
60.6
40.0
32.0
62.9
53.8
26.0
44.0
45.0
48.0
59.0
45.9
40.0
25.0
33.0
47.2
44.0
35.0
60.0
50.0
40.0
40.0
40.0
50.0
42.0
54.0
51.5
40.0
44.8
47.1

2005
53.7
24.0
32.0
62.3
44.3
24.0
42.0
40.0
45.0
53.5
44.1
30.0
25.0
33.0
39.0
38.0
35.0
52.0
50.0
40.0
40.0
16.0
50.0
19.0
51.0
56.6
40.0
40.0
41.9

2010
53.7
10.0
15.0
55.4
47.5
21.0
41.0
49.0
43.0
45.8
45.2
30.0
26.0
15.0
39.0
40.6
35.0
52.0
50.0
32.0
45.9
16.0
41.0
19.0
49.0
56.6
50.0
37.9
41.6

2011
53.7
10.0
15.0
55.4
47.5
21.0
41.0
49.0
45.0
46.7
47.3
30.0
25.0
15.0
42.1
20.3
35.0
52.0
50.0
32.0
50.0
16.0
41.0
19.0
49.2
56.6
50.0
37.6
42.3

2012
53.7
10.0
15.0
55.4
47.5
21.0
41.0
49.0
52.0
46.8
47.3
38.5
25.0
15.0
41.3
20.3
35.0
52.0
50.0
32.0
49.0
16.0
41.0
19.0
49.0
56.6
50.0
38.1
43.1

1995
40.2
40.0
41.0
34.0
56.8
26.0
40.0
40.0
35.0
36.7
52.2
25.0
25.0
29.0
40.9
19.6
35.0
35.0
34.0
40.0
39.6
38.0
25.0
40.0
25.0
28.0
33.0
35.3
36.8

2000
40.2
32.5
31.0
32.0
51.6
26.0
24.0
40.0
35.0
37.8
41.3
29.0
25.0
24.0
37.5
19.6
35.0
35.0
34.0
30.0
35.2
25.0
25.0
29.0
29.0
28.0
30.0
31.9
34.4

2005
34.0
15.0
26.0
28.0
38.7
24.0
12.5
32.0
35.0
35.0
37.3
10.0
15.0
15.0
30.4
17.5
35.0
31.5
25.0
19.0
27.5
16.0
25.0
19.0
26.0
28.0
30.0
25.5
28.1

2010
34.0
10.0
19.0
25.0
29.8
21.0
12.5
34.0
30.0
34.4
31.4
10.0
15.0
15.0
28.6
20.6
35.0
25.5
25.0
19.0
29.0
16.0
20.0
19.0
26.0
26.3
28.0
23.7
26.2

2011
34.0
10.0
19.0
25.0
29.8
21.0
12.5
30.0
30.0
34.4
31.4
10.0
15.0
15.0
28.8
20.6
35.0
25.0
25.0
19.0
29.0
16.0
20.0
19.0
26.0
26.3
26.0
23.4
25.9

2012
34.0
10.0
19.0
25.0
29.8
21.0
12.5
30.0
30.0
36.1
31.4
10.0
15.0
15.0
28.8
20.6
35.0
25.0
25.0
19.0
31.5
16.0
20.0
19.0
24.5
26.3
24.0
23.5
26.1

Note: The top PIT rates reflect the statutory tax rate for the highest income bracket. The rates include surcharges, state and local taxes. Only the 'basic'
(non-targeted) top CIT rate is presented here. Existing surcharges and averages of local taxes are included. For details of the calculation of the top PIT
rates and CIT rates see European Commission (2012a).
Source: Commission services.

114

1. Statistical annex

Table A.5:

Energy tax revenues in relation to final energy consumption

Nominal

Real (2000 deflator)

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27 averages
GDP-weighted
base-weighted
EA-17 averages
GDP-weighted
base-weighted

2000
96.7
39.8
53.4
299.2
191.8
31.4
140.4
117.3
138.0
166.5
245.3
43.2
48.2
57.9
167.5
77.2
161.4
153.5
138.8
58.7
111.4
58.2
118.5
39.7
109.8
179.9
249.2

187.0
170.1

176.8
171.0

2008
114.9
107.6
132.0
317.5
203.8
104.0
174.5
126.1
147.9
173.5
232.6
137.8
92.2
101.6
210.2
121.4
176.0
224.8
166.8
127.6
173.4
80.1
167.7
100.7
124.2
220.8
220.3

190.3
183.0

186.8
184.2

2009
125.2
108.6
130.6
330.9
215.4
127.5
198.3
135.5
154.2
178.8
259.4
142.1
97.1
116.4
210.1
112.6
195.5
231.9
169.5
106.8
175.3
86.1
226.8
100.7
129.1
210.0
220.9

198.5
190.0

198.3
195.7

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27 averages
GDP-weighted
base-weighted
EA-17 averages
GDP-weighted
base-weighted

2000
96.7
39.8
53.4
299.2
191.8
31.4
140.4
117.3
138.0
166.5
245.3
43.2
48.2
57.9
167.5
77.2
161.4
153.5
138.8
58.7
111.4
58.2
118.5
39.7
109.8
179.9
249.2

187.0
170.1

176.8
171.0

2008
95.6
73.7
77.2
275.7
181.6
71.7
134.4
98.7
113.5
148.2
189.1
111.5
67.9
75.3
176.9
76.4
157.1
188.4
143.4
91.4
138.0
54.2
135.1
51.5
110.0
221.3
244.3

168.4
160.0

157.2
154.9

2009
105.2
73.3
80.7
283.2
191.8
88.7
159.7
105.4
119.7
153.6
210.9
114.8
69.6
82.6
175.0
76.2
171.4
195.3
144.9
91.9
143.0
64.7
183.5
49.6
112.5
228.3
270.2

179.3
170.9

167.3
165.1

Note: Nominal: EUR per tonne of oil equivalent; Real: EUR per tonne of equivalent, deflated with cumulative % change in final demand deflator
(2000 = 100). 2009 are provisional data.
Source: Commission services.

115

European Commission

Tax reforms in EU Member States

Table A.6:

The composition of tax wedge in 2011, single average income worker

Income tax plus employees' and employers' social security
contributions (as % of labour costs, 2011)

Annual change 2011/10 (in percentage points)

Country

BE
BG*
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY**
LV*
LT*
LU
HU
MT*
NL
AT
PL
PT
RO*
SI
SK
FI
SE
UK
EU-27 weighted average
EU-17 weighted average

Tax wedge
(1)
55.5
32.5
42.5
38.4
49.8
40.1
26.8
38.0
39.9
49.4
47.6
13.9
44.2
40.7
36.0
49.4
22.4
37.8
48.4
34.3
39.0
44.3
42.5
38.9
42.7
42.8
32.5
43.7
46.4

Income tax
(2)
21.7
7.4
8.9
28.0
15.9
12.5
13.5
3.0
12.0
10.0
16.1
2.1
14.9
10.1
13.3
13.6
8.5
14.5
11.9
5.9
10.9
9.3
9.6
7.5
18.5
13.6
14.1
13.7
13.8

Employee SSC Employer SSC

(3)
10.8
11.0
8.2
10.7
17.4
2.1
3.6
12.8
4.9
9.6
7.2
5.9
7.3
6.9
11.7
13.6
6.9
14.0
14.0
15.5
8.9
12.8
19.0
10.6
5.8
5.3
8.5
10.7
11.2

(4)
23.1
15.5
25.4
0.0
16.5
25.6
9.7
22.2
23.0
29.7
24.3
5.9
19.4
23.8
11.0
22.2
6.9
9.2
22.6
12.9
19.2
22.3
13.9
20.8
18.4
23.9
9.9
19.3
21.4

Tax wedge
(1)
0.2
-1.3
0.4
0.1
0.6
0.1
0.9
-0.2
0.1
0.0
0.4
---
-0.8
-0.9
1.7
2.8
-0.5
-0.3
0.2
0.1
1.4
2.0
0.0
1.0
0.2
0.0
-0.1
0.3
0.3

Income tax
(2)
0.0
0.1
0.4
0.1
0.0
0.1
3.8
-0.8
0.1
0.0
0.4
---
-0.8
-5.5
0.3
2.4
-0.3
-0.1
0.2
0.1
1.4
-0.2
0.0
1.0
0.1
0.0
-0.6
0.1
0.2

Employee SSC Employer SSC

(3)
0.0
0.2
0.0
0.0
0.3
0.0
-2.9
0.3
0.0
0.0
0.0
---
0.0
4.6
0.7
0.4
-0.1
0.0
0.0
0.0
0.0
0.5
0.0
0.0
0.0
0.0
0.3
0.1
0.0

(4)
0.1
-1.6
0.0
0.0
0.3
0.0
0.0
0.3
0.0
0.0
0.0
---
0.0
0.0
0.6
0.0
-0.1
-0.2
0.0
0.0
0.0
1.7
0.0
0.0
0.1
0.0
0.2
0.1
0.1

Note: *Data for non-OECD-EU countries (BG, LV, LT, MT and RO) are only available for 2010; ** CY data for 2007. For these countries, changes in
tax wedge refer to period 2009-2010 (for CY to period 2006-2007).
Source: Commission services.

116

1. Statistical annex

Table A.7:

Standard and reduced VAT rates in the EU

Country VAT rate

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

BE

BG

CZ

DK

DE

EE

IE

EL

ES

FR

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

RO

SI

SK

FI

SE

UK

EU-27

(4.2)

(4)

(4)

(2.1)

(4)

(3)

(3)

Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard
Reduced
Standard

21
6/12
20
-
22
5
25
-
16
7
18
5
21
12.5
18
8
16
7
19.6
5.5
20
10
10
5
18
-
18
5
15
6/12
25
0/12
15
5
18
6
20
10
22
7
17
5/12
19
-
19
8
23
10
22
8/17
25
6/12
18
5

19.2

21
6/12
20
-
22
5
25
-
16
7
18
5
20
12.5
18
8
16
7
19.6
5.5
20
10
10
5
18
-
18
5/9
15
6/12
25
0/12
15
5
19
6
20
10
22
7
17
5/12
19
-
19
8
23
10
22
8/17
25
6/12
18
5

19.3

(4.3)

(4)

(4)

(2.1)

(4)

(3)

(3)

(4.3)

(4)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
-
22
5
25
-
16
7
18
5
21
12.5
18
8
16
7
19.6
5.5
20
10
13
5
18
-
18
5/9
15
6/12
25
0/12
15
5
19
6
20
10
22
7
19
5/12
19
-
20
8.5
23
10
22
8/17
25
6/12
18
5

19.5

21
6/12
20
-
22
5
25
-
16
7
18
5
21
13.5
18
8
16
7
19.6
5.5
20
10
15
5
18
9
18
5/9
15
6/12
25
0/12
15
5
19
6
20
10
22
7
19
5/12
19
-
20
8.5
20
14
22
8/17
25
6/12
18
5

19.5

(4.3)

(4)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
-
19
5
25
-
16
7
18
5
21
13.5
18
8
16
7
19.6
5.5
20
10
15
5
18
5
18
5/9
15
6/12
25
5/15
18
5
19
6
20
10
22
7
19
5/12
19
9
20
8.5
19
-
22
8/17
25
6/12
18
5

19.4

(4.4)

(4)

(4)

(2.1)

(4)

(3)

(3)

(4.8)

(4.5)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
-
19
5
25
-
16
7
18
5
21
13.5
19
9
16
7
19.6
5.5
20
10
15
5
18
5
18
5/9
15
6/12
25
5/15
18
5
19
6
20
10
22
7
21
5/12
19
9
20
8.5
19
-
22
8/17
25
6/12
18
5

19.6

(4.8)

(4.5)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
-
19
5
25
-
16
7
18
5
21
13.5
19
9
16
7
19.6
5.5
20
10
15
5/8
18
5
18
5/9
15
6/12
20
5/15
18
5
19
6
20
10
22
7
21
5/12
19
9
20
8.5
19
-
22
8/17
25
6/12
18
5

19.4

21
6/12
20
7
19
5
25
-
19
7
18
5
21
13.5
19
9
16
7
19.6
5.5
20
10
15
5/8
18
5
18
5/9
15
6/12
20
5
18
5
19
6
20
10
22
7
21
5/12
19
9
20
8.5
19
10
22
8/17
25
6/12
18
5

19.5

(4.8)

(4.5)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
7
19
9
25
-
19
7
18
5
21
13.5
19
9
16
7
19.6
5.5
20
10
15
5/8
18
5
18
5/9
15
6/12
20
5
18
5
19
6
20
10
22
7
20
5/12
19
9
20
8.5
19
10
22
8/17
25
6/12
18
5

19.4

(4.8)

(4.5)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
7
19
9
25
-
19
7
20
9
21.5
13.5
19
9
16
7
19.6
5.5
20
10
15
5/8
21
10
19
5/9
15
6/12
25
5/18
18
5
19
6
20
10
22
7
20
5/12
19
5/9
20
8.5
19
10
22
8/17
25
6/12
15
5

19.8

(4)

(4)

(2.1)

(4.8)

21
6/12
20
7
20
10
25
-
19
7
20
9
21
13.5
23
(4.5) 5.5/11
18
8
19.6
5.5
20
10
15
5/8
21
10
21
5/9
15
6/12
25
5/18
18
5
19
6
20
10
22
7
21
6/13
24
5/9
20
8.5
19
6/10
23
9/13
25
6/12
18
5

(3)

(3)

20.4

(4.8)

(4)

(2.1)

(4)

(3)

(4.8)

(4)

(2.1)

(4)

(3)

(3)

21
6/12
20
9
20
10
25
-
19
7
20
9
21
13.5
23
6.5/13
18
8
19.6
5.5
20
10
15
5/8
22
12
21
5/9
15
6/12
25
5/18
18
5/7
19
6
20
10
23
5/8
23
6/13
24
5/9
20
8.5
20
10
23
9/13
25
6/12
20
5

20.7

(4)

(4)

(2.1)

21
6/12
20
9
20
14
25
-
19
7
20
9
23
(4.8) 13.5/9
23
6.5/13
18
8
19.6
5.5/7
21
10
17
5/8
22
12
21
5/9
15
6/12
27
5/18
18
5/7
19
6
20
10
23
5/8
23
6/13
24
5/9
20
8.5
20
10
23
9/13
25
6/12
20
5

(3)

21.0

Note: If two VAT rates were applicable during a year the one being in force for more than six months or introduced on 1 July is indicated in the table.
Super reduced rates (below 5 %) are shown in brackets. ES: Standard rate and reduced rate were increased as of September 2012 to 21% and 10%,
respectively. IT: Standard rate was increased in September 2011; CY: Standard rate was increased in March 2012; FI: Reduced 17 % rate was
decreased to 12 % on 1.10.2009. Standard rate as well as reduced rates were increased by one percentage point on 1.7.2010.
Source: Commission services.

117

European Commission

Tax reforms in EU Member States

Table A.8:

Measures of tax progressivity

Index of Progressivity 
(Single no ch 100% of
AW)

Index of Progressivity 
(Single no ch 167% of
AW)

Tax wedge 167% / 
67% (single no ch.)

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
Unweighted average:

EU-21/27
EA

0.24
NA
0.11
0.06
0.21
0.05
0.41
0.14
0.14
0.04
0.12
NA
NA
NA
0.30
0.28
NA
0.15
0.24
0.03
0.19
NA
0.15
0.09
0.25
0.09
0.11

0.16
---

Source: Commission services.

0.22
NA
0.07
0.20
-0.14
0.03
0.29
0.14
-0.10
0.13
0.19
NA
NA
NA
0.20
0.00
NA
0.13
-0.19
0.02
0.26
N/A
0.24
0.03
0.17
0.33
0.18

0.11
---

1.22
1.00
1.15
1.21
1.14
1.07
2.17
1.27
1.16
1.16
1.19
NA
1.03
1.08
1.50
1.21
1.47
1.25
1.18
1.05
1.34
1.05
1.23
1.16
1.31
1.25
1.27

1.19
1.18

118

EUROPEAN ECONOMY SERIES

Previous titles in the European Economy series can be accessed and downloaded

free of charge from the following address:

ec.europa.eu/economy_finance/publications/

2011

1-2011	 •	 European	Economic	Forecast	–	Spring	2011

2-2011	 •	 Labour	market	developments	–	2011

3-2011	 •	 Public	finances	in	EMU	–	2011

4-2011	 •	

The	2012	Ageing	Report:	Underlying	Assumptions	and	Projection	

						Methodologies	

5-2011	 •	

Tax	reforms	in	EU	Member	States	–	2011	–	Tax	policy	challenges	for

economic	growth	and		fiscal	sustainability	

6-2011	 •	 European	Economic	Forecast	–	Autumn	2011

2012

1-2012	 •	 European	Economic	Forecast	–	Spring	2012

2-2012	 •	

The	2012	Ageing	Report:	Economic	and	budgetary	projections	for	the		
27	EU	Member	States	(2010-2060)

3-2012  •	 Convergence	Report	2012

4-2012  •	 Public	finances	in	EMU	–	2012

5-2012	 •	 Labour	market	developments	in	Europe	–	2012

6-2012	 •	

Tax	reforms	in	EU	Member	States	–	2012	–	Tax	policy	challenges	for

economic	growth	and		fiscal	sustainability

 
 
 
 
  
 
 
 
 
 
 
 
	
		
	
	
		
	
European Commission 

European Economy – 6/2012 – Tax reforms in EU Member States 2012 - Tax policy challenges for 
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