EU Tax Policy vs. National Sovereignty of Member States

Michal RadvanMichal Radvan

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Aim of the Contribution Level of tax harmonization Taxes to be harmonized

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Tax harmonization One of the most discussed issues in EU Proponents point to the need for uniform rules in

connection with the growth of international trade (increasing number and importance of multinational companies and their subsidiaries, the movement of capital and people - residents of one country working in another country). This leads to a conflict of individual tax systems that have been around for decades or even centuries built primarily with regard to national traditions, economic status, political and social developments and also taking into account the natural conditions, religion, etc.

Advocates of national interest: fiscal policy should remain the full responsibility of individual EU Member States - a loss of competitive advantage especially in CEE countries

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Tax harmonization mechanism to remove tax provisions that either

create obstacles to the functioning of the internal market or distort competition

purpose of achieving tax harmonization is not uniform tax system, but rather approach and harmonization of the various tax systems

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Phases of harmonization process Select the tax to be harmonized, Harmonize the tax base, or other structural

components (tax subject) Harmonize the tax rate (not always, tax rate

can be a tool of competition for member states)

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Tax harmonization in EU tool leading to the ultimate objective of creating a single

market. Important obstacles to the single market are: the tax burden on the free movement of persons and

especially corporates and on the free cross-border movement of goods, services, capital and revenues,

different tax treatment of domestic and imported goods and services,

substantial differences between national tax legislation, which lead to market distortions,

difference in tax treatment between residents and non-residents, and domestic and foreign investments and incomes (in particular the double taxation of incomes from sources outside the country)

Tax harmonization is not just a goal - a final state, but the process itself.

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Tax harmonization as a process Positive harmonization - the process of approximation of

national tax systems through the implementation of the EU directives, regulations and other legislative instruments; the result (assuming the proper implementation of the directives into national legislation) is where all states have the same rules

Negative harmonization - the result of the activities of the European Court of Justice, where national jurisdictions - tax systems taking steps based on the tax case law of the Court; does not create the same rules for all Member States, as the case law is focused only on Member State which is a party in proceedings; ECJ case law, however, may be a good interpretive guide

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Negatives of harmonization Higher tax rates Slower economic growth Does not prevent the excessive expansion of

the public sector It interferes with national sovereignty of

member countries May jeopardize the revenue of public budgets The loss of fiscal autonomy of member states

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Income tax harmonizationIncome tax harmonization Stagnation of the harmonization process Exchange of information Avoidance of double taxation The fight against tax havens

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Start Good conditions - in all countries, there were

personal income tax and corporate income tax (excluding Italy)

Emphasis on corporate taxes (remove barriers of the common market functioning, mobility of capital, labor immobility)

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Sad facts Limiting fiscal sovereignty - the unwillingness The unanimous adoption of directives Differences in accounting systems (tax vs.

Anglo-Saxon) Differences in structural components - social

aspects (children, disability - from tax base or tax), rate (bands, progressivity), application of losses, investment incentives, depreciation

Luxembourg - 17 zones The only rate - BLR, LAT, LTH, ROM, SVK Denmark - up to 59% Romania - 10%

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4 possibilities Taxation in the home country - optional taxation

in each country or just in home country Common Consolidated Tax Base - based on

choice (CCCTB) European corporate tax - for large multinational

companies, at EU level, uniform rate Mandatory harmonized tax base - mandatory,

even for companies operating in only one Member State

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Common Consolidated Tax Base The only rules within the EU for the determination of the

tax base, which would subsequently be divided into subsidiaries and the national tax rate is to be applied

Transparent effective rate and fair tax competition Removing obstacles to cross-border mergers Reduce costs Elimination of problems with transfer pricing Losses in one country and gain in another country - tax

neutrality

Not for non-european small companies

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Taxation in the home country The tax base of all companies in the group

would be set as a consolidated tax base under the laws of the State of management, then divided by the subsidiaries and the national tax rate should be applied

For small companies Effective and cheap It is not harmonization, but rather the possibility

for competition

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The Merge Directive

The main consequence is the possibility of deferral of tax liability that arises from capital gains in case of merger or division of a company, transfer of assets or exchange of shares

The aim is to prevent the taxation of profit, which may arise during the merger because of the difference between the value of the transferred assets and liabilities and their accountings amounts

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The Parent-Subsidiary Directive

The aim of the Directive is to eliminate the double taxation of corporate profits paid by group companies resident in a Member State to the parent company located in another Member State. At least, parent company can deduct the tax paid by the daughter in another country from the tax base.

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The Savings Directive

The aim is to prevent tax evasion to individuals who derive interest income from other Member States

Not applicable to payment of dividend

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The Interest and Royalties Directive

It introduces a unified system of taxation of interest income and royalties between related parties, if they are paid over national borders

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Conclusion It is very likely that there will not be any deepen

fiscal harmonization in the field of direct taxation in the near future

Member States have no will to give up more of their sovereign power

There must be unanimous agreement of all Member States in case of adoption of tax issues

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VAT harmonization Almost finished with the exemption of tax rates

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Start 2 systems of indirect taxation

France: VAT - a general consumption tax, imposed on the added value

Other countries: cumulative cascade system of turnover tax - a tax imposed on the gross value of production; the number of production stages affects the size of the resulting tax; this system causes distortion of the market environment, as the tax burden is increased in proportion to the length of the production / distribution chain; it is necessary for manufacturers to integrate; does not cover services (lawnmower vs. gardening services)

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VAT VAT is the only way The principle of the country of destination, as

the principle of the country of origin assumes a uniform rate

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Directive no. 77/388/EEC (6th Directive) Basic rules Rules for tax base Territory Subjects Rates – basic 15%, reduces 5%

Amended by directive no. 2006/112/EC (7th. Dir.)

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Conclusion Structural harmonization is completed, there is a single

system of indirect taxation Incomplete issue of tax rates harmonization (interference

with national interests, instrument of fiscal policy, the budget revenue, unwillingness to enforce the implementation of the EC Directives, national traditions)

US various sales tax in each country, do not cause market distortions

The minimum amount of the reduced rate is not respected

It maintains the principle of the country of destination, as the country of origin principle would require tax rate unification, but this has proven very effective

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Excise taxes harmonization fiscal plans, political aspects, regulation of

consumption, permanent consumption, luxury, harmfulness

Harmonized: tobacco and tobacco products, alcoholic beverages (spirits, beer, wine), mineral oils, energy

Non-harmonized: cars, fur products, guns, playing cards, roulette, etc.

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Harmonization process Very advanced Efforts to unify rates (favoring domestic

producers is limited, resp. impossible) resulted in at least minimum rates

It relies on spontaneous harmonization process - a country with high rates will have to reduce rates to the level in other countries

The principle of the country of destination (country of origin is impossible with respect to different rates)

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Directive 72/43/EEC System od excise taxes (mineral oils, tobacco, spirit,

beer, wine) abolish other excise taxes, except taxes that do

not need border controls or additional costs of international trade

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Directive 92/12/EEC Horizontal directive Single Customs Tariff to identify the product admits other indirect taxes such as for

environmental reasons - eg taxation of waste (Sweden, Denmark), emissions (Italy, Lithuania), fertilizers (Sweden, Denmark) and air transport (UK, France)

Replaced by Directive 2008/118/EC

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Structural directives Tax bases

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Directive on the rates approximation Minimal rates

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Conclusion Structural harmonization is completed, there is a single

system of indirect taxation Incomplete issue of harmonization of tax rates (national

interests, instrument of fiscal policy, the budget revenue, unwillingness to enforce the implementation of the EC Directives, national traditions)

The principle of the country of destination maintains, as the country of origin principle would require tax rates unification (hard to determine where purchased goods was made), but this has proven very effective

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Taxes on motor vehicles Not in USA Europe, Japan

Registration tax (to be abolished) Regular tax – ones in EU, eco tax? Fuel tax, Vignettes, Toll systems

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„Eurovignette“ Directive For all vehicles above 3,5 tons modifies somewhat broader than only toll (performance

fee) and the user (time) fee generally controls the regular tax on motor vehicles requirement to collect tax only in the Member State in

which the vehicle is registered minimum tax rate tolls and time-based charges may be levied only for the

use of multi-lane highways or roads for motor vehicles for the use of bridges, tunnels and mountain passes

maximum rates for tolls and time-based charges

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Interoperability Directive the obligation to use in the implementation of

toll systems only satellite technology, GSM, or microwave

Preferred mobile technology GSM and GPS satellite due to their intended use within the system Galileo

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Other taxes Tax on Air tickets? Property tax (tax on immovables) – is there any

need to unify? Transfer taxes (on sales, gift tax, inheritance

tax)

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Thank you for your attention