Tax Harmonisation in the EU

Source: Ms Laura Denooz¸ PKF Malta

European countries are now faced with the urgency to harmonize taxation within the European Union.   The struggle to face a stiff increase in international competition was topped up by the current economic crisis affecting Europe¸ especially countries like Greece¸ Portugal¸ Spain¸ Ireland and Italy.  This ongoing crisis exposed a number of fundamental problems and revealed certain weaknesses in the European scheme.

This huge competition incites legislators to reduce the progressiveness of their tax schemes leading to an imbalance amongst nations and the creation of tax havens. This results in an erosion of the tax base and in an increase in inequalities within Europe.  A solution to this lack of cohesion could be a common European approach advocated by the Europe 2020 strategy but it won’t be easy to put in place this harmonization.

First¸ there are 27 different tax systems in Europe. Indeed each Member State has its own policy concerning taxation and this leads to divergences between EU members. All these divergences tend to encourage competition between European countries and create obstacles to a smooth functioning of the internal market.  Moreover as far as taxation in EU is concerned¸ all decisions concerning the passing of new legislation are generally taken unanimously. This procedure restrains the possibility of a tax harmonisation in Europe.

During the last decades¸ some proposals were launched to harmonize the European tax system but with little success.

As far as taxation is concerned¸ there are two main pillars: indirect and direct taxation. These two pillars need to be synchronized at the European level. Two recent measures go in this direction: VAT grouping and the CCCTB (Common Consolidated Corporate Tax Base).

In terms of the principle of the ‘four freedoms’ which means that goods¸ services¸ capital and persons have the right to move freely within the Internal Market¸ companies are exposed to different tax schemes.

The single European Act poses the principle of tax neutrality in intra-community trade but taxation could hinder this principle. For instance if one country applies a reduced VAT rate to attract consumers¸ it will be discriminatory for others EU countries.  To prevent this risk¸ Member States decided to try to harmonise their indirect taxation.

Nevertheless¸ harmonisation doesn’t mean standardisation. Each European country has its own VAT rate.  Each country has a VAT rate of at least 15% and one or two reduced VAT rates of at least 5%. These reduced VAT rates are applicable to some products or activities which have a social or cultural nature like foodstuffs¸ pharmaceutical products¸ books and museums.

Some measures were implemented by the European Commission with regard to the willpower of Europe to increase the competitiveness of its Member states.  One of them was the concept of VAT grouping. The statutory basis for VAT grouping is article 11 of Directive 2006/112/EC which gives the criteria to be filled in by EU Member states who desire to introduce VAT grouping in their legislation.

This optional system aims at improving the attractiveness of European countries thanks to the creation of centres of excellence offering back-office services such as accounting¸ invoicing¸ IT services¸ credit management etc.   These centres of excellence play an important role for international companies as they promote an i