Frits Bolkestein Won't Let The Belgians Increase EU Taxation

by Ulrika Lomas, Tax-News.com, Brussels

08 May 2001

Belgian Finance Minister Didier Reynaud's call last week for the EU to be able to levy taxes directly on the downtrodden citizenry of Europe is absolutely in the mainstream of the UE's 'slash and burn' centralisers and harmonisers, and is a harbinger of what is to come during the Belgian presidency that starts in July.

It caused apoplexy among eurosceptic market liberals across the EU and in the candidate countries for enlargement (no, they're not quite all without shouting distance of the Adam Smith Institute's Westminster headquarters). But they probably needn't worry.

We have just survived the presidency of the arch-taxing Colbertian fiends of Paris, who were faced down at the Nice summit by the UK and others over the extension of qualified majority voting to aspects of taxation (the Holy Grail for the taxers and harmonisers), and the Swedish presidency seems to be going along merrily without major tax worries - and this from the most highly taxed nation in the world.

Then there is Frits Bolkestein, Commissioner for Taxation and the Internal Market, who is as close to a market liberal as it's possible for a Brussels luminary to get. In a profile in this week's Economist, he is quoted as saying: 'I don't want to harmonise corporate or income tax rates in any way. The Irish, as far as I'm concerned, are safe in their insistence on a 12.5% corporate tax rate.'

He set out his stall very clearly in a little-noticed speech to a Dutch institute devoted to European studies earlier this year.

'First, taxation levels tend to be high. Compared to the US and Japan, effective levels of taxation on labour are particularly high. According to a recent OECD publication, tax as a percentage of GDP was 29.7% in the USA and 28.8% in Japan in 1997. The EU weighted average for 1997 was 42.5%! While in overall terms high taxes may not be a deterrent to foreign investment if combined with a high level of provision of public service, high taxes on labour can certainly drive jobs away.

'Second, if private individuals and businesses are to be able to work and operate freely in the Internal Market, tax obstacles to such activity must be eliminated.

'Third, with EMU, differences in national tax systems are becoming increasingly evident and are therefore having an increasing influence on economic decisions concerning, for example, investment, saving, employment and consumption.

'Finally, there is the increasing globalisation of economies. Improvements in communication and transport, and above all the rise of the Internet, are creating great new opportunities for businesses but also complex challenges for taxation systems. It is becoming increasingly easy to evade tax by moving mobile capital to low tax jurisdictions or tax havens. The Internet raises new questions about where goods, services and profits can be taxed. New technology, such as encryption, can make it easier to keep financial transactions secret. These are concerns not just for EU countries - intensive discussions are taking place at the OECD also on these issues.'

Mr Bolkestein went on to deny that he was a party to the OECD's attack on low-tax jurisdictions, although saying that the EU's co-ordinated appproach to 'harmful tax practices' had been 'helpful' at the OECD:

'The particular focus, at least in the direct tax area, on safeguarding tax revenues has often been criticised as representing a cartel of tax administrations and Finance Ministers, assisted by the European Commission. This is not so - I, for one, would like to see a decline in the average tax burden in the EU! But it is hardly surprising that the current primary concern of Member States is to protect their tax revenues. The erosion of revenues through harmful tax competition imposes yet another restriction on Member States' ability to reform their tax systems and fund public expenditure as they choose.

'In the discussions which led to the agreement on the outline of a tax package in December 1997, the position of Member States was perfectly clear. They acknowledged that tax competition between countries can be healthy. But they were strongly in favour of eliminating the worst forms of harmful tax competition so as to protect their tax revenues. They also acknowledged the need to tackle tax obstacles to cross-border activity within the Internal Market. But they were clearly not prepared to give their full attention to the elimination of such obstacles as long as they feared tax erosion. In other words they are not prepared to work on the elimination of double taxation as long as there is a high risk of unfairly low or no taxation.

'Furthermore, there was a concern that certain corporate tax regimes in Member States, by providing for different rates without objective justification, constituted infringements of state aid rules. It was therefore in the interest of some Member States to agree on a Code of Conduct with a period of grace to roll back harmful measures. The less attractive alternative was to wait for the Court of Justice to condemn the measures on the basis of the State Aid rules and require their immediate elimination. Another important factor which contributed to the decision on the tax package was that the OECD had also begun to look at harmful tax competition. I think that all EU Member States found that the co-ordinated approach established within the EU was helpful when it came to discussing the subject at the OECD.

'As you will recall, the tax package consists of three elements. In addition to the Code of Conduct for business taxation, there is a proposal for a Directive concerning the taxation of savings income of individuals, and a proposed Directive to eliminate withholding taxes on interest and royalty payments between associated companies. You probably know that no agreement on the second element could be reached as hoped at the European Council in Helsinki in December last. At present, discussions are continuing in a High Level Group of representatives of Member States and the Commission. The Group is required to reach conclusions by the June 2000 European Council. The outcome of the tax package is unclear at present. Nevertheless, I remain confident in Member States' continued strong willingness to tackle harmful tax competition at an EU level.

Then the Commissioner returned to his own agenda, which has more to do with improving the situation of EU citizens than with any attempt to harmonise taxation per se:

'My perspective is simple. It is consistent not only with my position as Commissioner responsible both for taxation and the Internal Market, but also with my position as a Liberal politician for the past 20 years.

'On paper, the Treaty guarantees the four freedoms which determine the functioning of the Internal Market. Free movement of persons, goods, services and capital. In reality, we all know full well that those who wish to benefit from these rights encounter a range of tax obstacles. We see cases of discrimination, double taxation, excessive compliance costs due to complicated administrative procedures and problems of delays in tax refunds. It is exactly this gap between objective and reality that I want to close as much as possible during the next five years as Commissioner.

'Some of the clearest examples of barriers to the free movement of persons and the free provision of services lie in the field of supplementary pensions. From my time with Shell I have personal experience of the difficulties caused in this area by the incompatibility of Member States' taxation systems. First, Member States often do not allow tax relief for contributions to pension schemes in other countries. This creates difficulties in particular for individuals who commence their working life and start contributing to a pension fund in one Member State and subsequently move to work in another State. And if such an employee cannot continue to contribute to his old pension scheme, or transfer his accumulated pension entitlements to the pension scheme connected to his employment in the second Member State, he might even lose those accumulated pension entitlements!

'Then there is the problem that Member States differ in how they tax pensions. Some give tax relief for pension contributions and then later tax pension payments. Others do not give tax relief for pension contributions but, in exchange, do not tax pension payments. This can lead to unacceptable situations of either double taxation or double exemption for individuals who work in one State and retire to another.

'To avoid these taxation difficulties, companies operating in more than one Member State are frequently forced to set up pension arrangements in each State where they have employees. To give you an example from the oil industry, British Petroleum has estimated that it could save 40 million € if it could develop a “pan-European” scheme. I cannot judge how precise this estimate is but at least it gives you an idea of the scale of the problem and how important the issue could be for the competitiveness of European industry.

'To complete the picture I would like to give you some examples of tax obstacles in the VAT and excises areas. Say there is a small Dutch enterprise which decides to explore the markets in neighbouring states. If this enterprise is to obtain a refund of the VAT which it has paid on expenses incurred during its exploration of neighbouring markets, it will be necessary for it to submit a claim in each of the Member States which it has visited. If it finds clients in these Member States, it will probably have to find a tax adviser to be sure of the tax rules, the VAT rates applicable to its activities and to be sure of benefiting from any available derogations and exemptions. Finally, if the sales which it makes are taxable outside of the Netherlands, it will have to obtain a VAT number in each of the other Member States where it performs a taxable activity. It will even have to designate a fiscal representative in some of them, which will involve high costs. You will appreciate that this would discourage many enterprises from cross-border activity. As the Commissioner responsible for both taxation and the Internal Market, I cannot be satisfied with such a situation.

'Turning to other areas of indirect taxation, you have, for example, the problem with registration taxes for cars. If you buy a new car here in the Netherlands, you will pay such a tax. But then if you move to live and work in another Member State and apply for number plates, in 11 Member States you are going to be asked to pay another "registration tax". And there is no system of refunds or relief! And there is also the fact that manufacturers in many cases charge higher prices before tax in countries, such as the United Kingdom, where there are lower taxes on car purchase!'

Mr Bolkestein then outlined his plans, saying that he didn't see how the much-desired move to origin-based VAT would be possible, and that he would re-evaluate the bogged-down 1996 directive:

'Against this background, I intend to re-evaluate the 1996 Commission programme. In my view a pragmatic strategy is needed based on three main objectives. These objectives should be: (i) simplification and more uniform application of existing rules to facilitate cross-border trade; (ii) modernisation to take account of recent commercial and technological developments; and (iii) the re-enforcement of administrative co-operation to protect the existing system against fraud. I have recently had a first discussion on this subject with Member States and I am pleased to say that they are supportive of this new approach.

Mr Bolkestein's described plans to use changes in taxation primarily in the interests of improving the cross-border operation of the single market, both for firms and for individuals. Noting that it had proved very difficult to get taxation measures through the Council, he emphasised that much of what he hoped to achieve would be through voluntary co-operation and agreements.

Then he reverted to the 'Code of Conduct' committee:

'I am sure that you are all aware that the Group which was established to assess the measures in Member States which fall within the scope of the Code of Conduct - the "Primarolo Group" - presented a report to Finance Ministers in November 1999. The Group’s conclusions that certain tax measures are harmful does not mean that they must all be abolished in their entirety. Many of the "harmful regimes" may simply need some refinement to ensure that the rules are seen to be open and transparent or that they comply with internationally accepted principles. Holding company regimes, for example, are necessary features of the tax systems of open economies. The only concern is to ensure that they do not result in income avoiding tax altogether - income that has benefited from a harmful tax regime in another country should not also benefit from the holding company regime. The roll-back or amendment procedure under the Code of Conduct has not yet been agreed.'

Reading between the lines, therefore, Mr Bolkestein got as close as he could to saying that there is going to be no harmonising or centralising of tax on his watch; and it's evident that for him, permissible tax competition has a very much wider definition than it does for Didier Reynaud and his ilk!

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