Harmonising tax laws will prove difficult

The EU is keen to introduce EU-wide reforms, but is facing opposition from its member states at every turn

When Algirdas Šemeta took over as the European commissioner with responsibility for taxation and customs in 2009, few could have predicted how busy the dossier would prove. Yet while there was renewed interest in tax matters at the European Union level, the legislative process for approving tax matters remained as slow and tortuous as ever.

This is well illustrated by the European Commission’s proposal in 2011 to levy a small tax on certain financial transactions conducted in the EU.

The idea had been talked about for years. The Commission was galvanised into action by growing hostility towards the banking sector in the wake of the financial crisis. But the plan was torpedoed almost immediately by several member states, including the United Kingdom, which exercised its right of veto over tax matters.

Nonetheless, 11 member states are seeking to circumvent that veto by implementing the rules through the novel enhanced co-operation procedure, which would see the rule come into force only in those member states that sign up to the agreement.

So far progress has been slow. Federal elections in Germany in September interrupted the negotiations, and disagreements between member states over which financial transactions to tax have also loomed large.

France would not like the tax to apply to trades in derivatives, so as to remain in line with a law introduced in France, whereas Germany believes the scope should be wider. Greece would like the proceeds from the tax to be used for cohesion spending within the EU, while France envisages the money being used to fund international development work.

So although François Hollande, France’s president, and Angela Merkel, Germany’s chancellor, ended a Franco-German summit in Paris on 19 February with a restatement of their intention to have the tax in place by the European Parliament elections in May, few details of actual compromises have emerged.

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Last June the European Commission proposed new rules on the automatic exchange of tax information among member states and then, in November, on reforming the rules on the taxation of cross-border transfers between parent companies and their subsidiaries.

The proposal on sharing tax information exposes the difficulty the EU has to reform or even harmonise national laws relating to tax.

For despite repeated calls from the European Council for its adoption, the draft directive has been blocked by Austria and Luxembourg.

These two countries have made their approval conditional on the EU signing agreements that include similar rules with Switzerland, Liechtenstein, Andorra and others. But negotiations with these countries have been slow.

A boost to the tax agenda has come in the shape of the growing concern to reduce red tape for companies, expressed most vociferously at the national level by the UK and the Netherlands, and taken up by the Commission in its “regulatory fitness” agenda.

This has led to proposals seeking to make the collection of taxes more efficient. The Commission in October proposed harmonising tax returns for value-added tax (see below), following up on a proposal in 2011 to harmonise companies’ corporate tax filings.

The latter would take the radical step of allowing pan-EU companies to submit a single tax return, although they would still be subject to different levels of tax at the national level. But the Commission has yet to convince member states, which tend to guard jealously all aspects of national tax systems.

During the convention to draw up a constitutional treaty for the EU in 2003, the Commission proposed removing member states’ absolute unanimity over tax matters, although this was vigorously and successfully opposed by the UK.

The enhanced co-ordination being tested with the financial transaction tax could prove a model to make progress without constantly being held back by member states’ veto on unanimity, observed a Commission official.

There is also a chance that further integration of eurozone economies and their economic governance could make it easier to achieve greater fiscal harmonisation within the eurozone, in particular by using the enhanced co-operation procedure.

Yet the likelihood of this happening in the near future is slim. Several eurozone members, in particular Luxembourg, Austria and Slovakia, have featured among the staunchest opponents of the Commission’s proposals on tax matters.