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Unformatted text preview: EU TAX HARMONIZATION EU Aad van Mourik CONTENTS CONTENTS s Indirect tax harmonisation: • economics • EU record and achievements s Direct tax harmonisation: • economics • EU record and achievements TAX HARMONIZATION: ECONOMICS ECONOMICS Objectives of tax harmonisation: removing tax disparities to the point removing where they no longer distort the allocation of resources allocation Why remove distortions? Why Absence of distortions guarantees Absence efficient allocation of resources s Absence of distortions requires that Absence international tax rules are based on economic neutrality of decisions with respect to relative effective tax burdens at home and abroad at s What kind of distortions? What s General distortions: lleave international pattern of production, consumption eave and trade unaffected and result in neutrality of the tax systems systems s Specific distortions: result in artificial adjustments to natural comparative result advantages and result in specialisation according to comparative disadvantage comparative • Specific distortions are the objective of tax Specific harmonisation harmonisation Remove all distortions? Remove Not all specific distortions should be Not eliminated: eliminated: • they can be a deliberate choice of society they (equity considerations) (equity • it depends on their importance • iit depends on the desired level of t integration Efficiency and indirect taxes Efficiency Two tax principles are possible: Two • destination principle • origin principle • (restricted origin) Which system is preferable on efficiency grounds? grounds? Neutrality: requires that countries specialise requires according to comparative advantage. according Example - VAT tax Example flexible exchange rates s uniform taxes s country A has compar. adv. for good X s country B has compar. adv. for good Y s tax in A: 50% s tax in B: 20% s DESTINATION TAXES DESTINATION destination taxes do not affect A's destination comparative advantage comparative s imported goods are taxed equally imported compared to domestically produced goods goods s => no impact on trade & exchange => rates rates ORIGIN TAXES ORIGIN s s s s all goods produced domestically (X and Y) are taxed all equally, hence no effect on comparative costs equally, price of good X in A will go up compared to price of X price in country B => exports A go down in price imports in A will go up compared to price of X in price country B => imports A will go up country A's Balance of Payments will deteriorate => A's exchange rate of A will depreciate with 1.2/1.5 exchange Conclusion Origin & Destination taxes origin and destination taxes are origin economically equivalent economically + s changeover from one system to the changeover other will be neutral other s When does equivalence break down? When s s s s Non-uniform taxes: i.e. system will no longer be Non-uniform neutral and it becomes impossible to simultaneously optimize trade and production optimize Exchange rates may not adjust: trade is not the only Exchange factor determining exchange rates. factor Fixed in stead of flexible exchange rates (destination taxes are still neutral under fixed rates) With non-equivalence: With s a choice between efficiency in exchange and choice efficiency in production must be made: efficiency • origin taxes preserve efficiency in exchange • destination taxes preserve efficiency in production s s s s preferential taxes (e.g. exemption for non-tradeables) preferential causes distortion of trade patterns causes destination taxes are still neutral under fixed rates origin taxes work as revaluation and result in Balance origin of Payments deficit in country A of under fixed rates, origin taxes cause administrative under distortions as well (over-underinvocing) distortions IN SUMMARY: VAT TAXES IN Destination taxes preserve productive Destination efficiency efficiency s Origin taxes are easier to administer, Origin certainly in internal markets without border controls (cross-border shopping) border s Policy makers should normally aim for Policy productive efficiency, i.e. destination taxes taxes s VAT tax harmonization in the EU VAT Rome Treaty: • contained a separate chapter on tax contained provisions, which dealt with indirect taxes only. • Art. 99 "the harmonization of legislation Art. concerning turnover taxes, excise duties and other forms of indirect taxation" is a principal objective of the Community principal Early beginnings, types of taxes Early Excise or selective consumption taxes Excise in all MS in s Two types of general sales tax in use: s • Single-stage taxes • Multi-stage taxes Single stage taxes Single Found in 3 varieties: • manufacturer sales taxes (levied on sales manufacturer from manufacturers to wholesalers); from • wholesale taxes (levied on sales from wholesale wholesalers to retailers); wholesalers • retail sales taxes (levied on sales from retail retailers to consumers). retailers Multi-stage taxes Multi-stage Found in 2 varieties: • VAT taxes, in which case deductions are VAT made for taxes paid at earlier stages of production; production; • cascade taxes, in which these deductions cascade are usually not permitted and in which every stage of production is subjected to the tax the History of EU indirect tax harmonisation History s 1962 Neumark report: • recommended the introduction of a recommended common VAT system in the Community. • recommended restricted origin principle s 1967: two directives: • harmonised sales taxes on the VAT model • all MS came under obligation to adopt VAT all by 1970 by History of EU indirect tax harmonisation History (continued) s 1970s: • Sixth directive: laid down the tax base (i.e. Sixth collection of goods and services) 1977 collection • Community taxation based on destination Community principle principle • Border-tax adjustments were part of the Border-tax system system History of EU indirect tax harmonisation History (continued) s Single European Act (1987): • necessitated other system as destination necessitated taxes became unfeasible taxes • required in principle changeover to origin required tax system tax • abolition of three-rate system and abolition replacement by two-rate system replacement • final system to be determined in 1997 History of EU indirect tax harmonisation History (continued) s s Commission has submitted several "proposal Commission packages" packages" Example: Cockfield package 1987: • approximation of rates (14-20% and 5-9%) • clearing house system to guarantee that tax is allocated to clearing country in which the product is consumed. country s 1989 Madrid Council (ECOFIN): • origin taxation remains the midterm objective • for transitional period taxes will have to be levied by for destination country destination Present VAT system:1993Present s s s s s s sale of a product in the country of destination which results in sale VAT being charged VAT tax free allowances for minor commercial transactions (small tax postal consignments, temporary imports of vehicles) postal full VAT refund for exports to 3rd countries VAT collection on the basis of the firm's regular tax returns cooperation between Member States' tax authorities in the cooperation computerized network for exchanging information. computerized tax rates as from 1.1.93 • • • standard rate of VAT not lower than 15% option of a reduced rate not less than 5% some goods may be exempted from VAT taxation. s derogations continue apply particularly to used goods, work of derogations art, collectors' items and antiques, etc. EU direct tax harmonisation: Economics Economics s s Taxation of capital income For efficiency in internat. investments two For conditions must apply: conditions • the investment should be located in the area the where production costs are the lowest, i.e. where to invest? to • iinvestments must be done by the company that nvestments could produce at minimum costs, i.e. by the company that is the lowest-cost producer, i.e. who invests? invests? Two concepts of tax neutrality Two s Capital export neutrality - CEN • relates to “where”of investments s Capital import neutrality - CIN • relates to “who” invests CEN - definition CEN s s CEN exists when an investor is faced with the same CEN effective tax rate irrespective of the location of the investment investment iif tax rates between countries differ and companies f are investing in a low-tax country, even if production costs in that country are higher than in the high-tax country, there is no CEN country, CEN - An Example CEN Country Production costs Price Profit Profit tax After-tax profit A B 1000 1500 2000 2000 1000 500 800(80%) 100(20%) 200 400 CEN - An example (continued) CEN Absence of CEN when investments Absence take place in country B s Absence of CEN is a waste of Absence productive resources productive s Absence in CEN results in lower welfare s CEN established if both countries would CEN have same effective tax rate have s CIN - Definition CIN relates to “who” invests s whereas CEN concerns international whereas allocation of investments, CIN concerns international allocation of savings international s CIN exists when all operations in one CIN jurisdiction face the same effective tax rate (exchange efficiency) rate s CIN - An example CIN Firms selling in country C from country: A B Price without tax 100 110 Price with tax 120(20%) 110(0%) CIN - An example CIN In absence of tax: A firms would sell to In country C country s With tax: B firms will take over C’s With market market s For CIN to obtain: all companies must For face same effective tax rate, irrespective of their location/nationality irrespective s How to achieve CEN and CIN? How By choice of appropriate jurisdictional By principle: principle: • CEN: residence or world-wide principle • CIN: source or territorial principle When governments tax at source in capital importing country capital s s s s s s CEN can be obtained by operating tax “credit” system CEN system resident country deducts all foreign-paid taxes and resident (positive) difference must be paid to resident country (positive) companies have no incentive to take advantage of companies low taxes abroad low distortions still possible with tax rate in resident distortions country and resident government does not refund excess taxes paid abroad excess distortions also when profit repatriation is delayed difficulties in getting portfolio incomes declared When governments tax at source in capital importing country capital s s s CIN is in principle obtainable CIN can be approached when resident countries CIN exempt all foreign source income which is earned from capital exports from CIN may also not be approached when: • there are withholding taxes on dividens • there is a bias in favour of debt financing and against equity there financing financing Which: CEN or CIN? Which: s Achieving CEN and CIN simultaneously is only Achieving possible when: possible • all countries face same effective tax regime • and intercountry loss compensation is allowed s Desirability of achieving productive efficiency would Desirability support choice for CEN support Non-economic distortions caused by different corporate tax regimes different s Administrative distortions tax planning, collection and avoidance produce tax large tax administration industry large s Organization distortions change the way in which multinations organize themselves change (e.g. locate R&D in specific countries) (e.g. s Financial distortions change in financial structures of firms Direct tax harmonization: the EU record record No independent objective of EU s Legal basis: Art. 100 s • • • deals with tax harmonization in general when internal market is at stake ii.e. corporate tax harmonization has been .e. limited to removing distortions in the internal market internal • in practice limited achievements Early attempts at direct tax harmonization harmonization Focussed on harmonization of tax systems: • classical system: separation of corporate and personal separation income tax (double taxation) income • split-rate system: 2 tax rates for distributed and retained tax profits profits • tax credit or partial imputation: double taxation (partially) double avoided by imputing part of the corporate profit to personal tax liability of shareholders tax • full integration or full imputation: corporation is seen as corporation partnership between shareholders, corporation tax does not separately exist separately Proposals for tax harmonization Proposals 1963 Neumark report: split rate system s 1971 Van den Tempel report: classical 1971 system system s 1975 Commission: partial imputation 1975 system system s No decision taken so far s Commission 1975 proposals Commission s s s s s s Dealt with harmonization of corporate tax systems each Member State would have to apply a single rate of each corporate tax to profits, whether distributed or not of 45-55% corporate distributed dividends would confer a right to a tax credit on any distributed recipient resident in a Member State; recipient each Member State would have to fix a single rate of tax credit each attached to dividends distributed by its resident companies; attached the rate of tax credit could not be lower than 45 per cent or the higher than 55 per cent of the amount of corporation tax on a sum representing the distributed dividend increased by the tax; sum each Member State would have to impose a withholding tax of each 25 per cent on the dividends distributed by its companies, unless the name of the recipient would be known to the tax authorities authorities Commission 1975 proposals - ctd Commission Eurosclerosis made decisions on Eurosclerosis proposals impossible in 1975 proposals s Some MS feared increases in tax rates s 1975 proposals dealt with tax system 1975 and rates only, but left tax base untouched untouched s EP wanted harmonization of tax base s Other areas of Commission activity activity Removal of tax obstacles to cooperation between firms in different MS s Approximation of rules for the Approximation determination of taxable profits (tax base) base) s measures in relation to liberalization of measures capital movements capital s Removed tax obstacles to company co-operation company s Parent-subsidiary directive (90/434) Parent-subsidiary (90/434) • eliminates double taxation of dividends paid by subsidiary to eliminates parent parent s Merger directive (90/435) Merger (90/435) • capital gains realized in case of cross-border merger or capital disposition of assets will no longer be taxed at the time of the merger but when capital gains are collected => could contribute to formation of European firms contribute s Arbitration convention on transfer pricing (90/436) Arbitration (90/436) • lays down transfer pricing rules for MS tax administrations Pending Commission proposals Pending compensation of foreign losses compensation directive directive s interest and royalties directive s European company statute s taxation of savings (deal struck at Nice taxation summit 12/2000: 2010 info exchange between tax administrations, as of 2003 source tax of 15-20%) source s Harmonization of tax base and tax incentives tax s s s s s tax incentives frequently given through tax base harmonization of tax base would make it inappropriate for MS to harmonization grant tax incentives other than through tax credits and direct subsidies subsidies efforts to achieve harmonization of tax base have been efforts disappointing disappointing such rules would deal with treatment of depreciations, capital such gains, stocks, value judgements, overheads, etc and would apply to all companies, irregardless their legal form apply Commission never presented comprehensive proposal but Commission limited itself to proposals harmonizing parts of the tax base limited Measures in connection with liberalisation of capital movements liberalisation s s s taken within framework of internal market programme 1977: directive on mutual assistence by the tax 1977: authorities/ exchange of information to fight tax avoidance avoidance Commission proposal for a minimum common Commission withholding tax at a rate of 15% on interest received by Community residents on savings Ruding Committee - Recommendations Ruding s Measures aimed at elimination of double Measures taxation of cross-border income flows taxation • • • broaden scope of parent-subsidiary directive reduction of thresholds in parent-subsidiary directive withholding tax for shareholders other than parents of 30% withholding levied at the source levied • elimination of withholding tax levied by source countries on elimination interest and royalties interest • all MS would have to ratify arbitration convention asap • cross-border compensation of losses: parents should have cross-border possibility of offsetting subsidiary losses possibility Ruding Committee-RecommendationsRuding ctd s Measures relating to tax rates/base/system • rates: minimum of 30% - maximum of 40% • tax base: Commission would have to set minimum tax rules and standards rules • tax incentives: tax incentives through tax based tax should be replaced by direct subsidies and tax credits credits The "Monti Package" 1997 • • a code of conduct for business taxation; the elimination of distortions to the taxation of capital income (the minimum withholding tax on bank interest proposal); and measures to eliminate withholding taxes on cross-border interest and royalty payments between companies. • Code of of Conduct s Covers: • "those business tax measures which affect, or which may affect, the location of business activity in the Community in a significant way"; s and identified as • "potentially harmful those tax measures which provide for a significantly lower effective level of taxation, including zero taxation, than that which generally apply in the country in question". ...
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This note was uploaded on 03/23/2010 for the course FIN D0M09A taught by Professor Vanmourik during the Winter '10 term at Katholieke Universiteit Leuven.

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