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Co-ordinating Member States' direct tax systems
The initiatives announced in this Communication aim to promote greater co-ordination of the Member States' direct tax systems in order to remove fiscal barriers and to eliminate discrimination and double taxation at a European Union (EU) level. The aim of co-ordinating the unharmonised direct tax systems of the Member States is to render them compatible with Community law and European Court of Justice case law. Two of the initiatives concern the specific areas of exit taxation and offsetting of cross-border losses for companies and groups.
Communication of 19 December 2006 from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Co-ordinating Member States' direct tax systems in the Internal Market [COM(2006) 823 final - Not published in the Official Journal].
The European Commission announces a series of initiatives intended to promote better co-ordination of the national direct tax systems in the Union. The aim is to ensure that national tax systems comply with Community law and interact coherently with each other. The initiatives seek to eliminate discrimination and double taxation for the benefit of individuals and businesses, while simultaneously helping to combat tax evasion and to preserve the tax base.
The main objectives of a coherent and co-ordinated tax approach are to:
- Eliminate discrimination and double taxation,
- Prevent unintended non-taxation and evasion, and
- Reduce the compliance costs associated with being subject to more than one tax system.
In addition to this Communication, the Commission has adopted two other communications, the first concerning offsetting of cross-border losses, and the second concerning exit taxation. These are the first two concrete examples of specific areas in which a co-ordinated approach could prove to be beneficial.
Under Community law Member States are largely free to design their direct tax systems so as to meet their domestic policy objectives and requirements. However, national tax rules designed solely or primarily with the domestic situation in mind may give rise to incoherent tax treatment when applied in a cross-border context. An individual or corporate taxpayer in a cross-border situation may suffer discrimination or double taxation or may face additional costs through having to comply with several different rules.
The sharp increase in litigation by taxpayers in national courts and the European Court of Justice over the last few years highlights the need for improved co-operation and better co-ordination between Member States.
The purpose of this Commission initiative is to promote solutions to the common problems posed by the interaction of multiple tax systems in the context of the Internal Market. By coming forward with this initiative, the European Commission demonstrates its willingness to assist Member States in developing the principles for co-ordinated solutions and in improving the practical arrangements for administrative co-operation.
This Commission initiative does not seek to replace existing national tax systems with a uniform Community system. It seeks, above all, to improve co-operation between the Member States and the co-ordination of their respective legislations in order to ensure the smooth functioning of the twenty-seven different national systems in the context of the Internal Market.
In addition to the specific areas covered by the two accompanying communications, this Communication also identifies other areas of direct taxation (withholding taxes, anti-avoidance measures, inheritance taxes, etc.) where the Commission considers there is a need for a co-ordinated approach.
Co-ordination and harmonisation of the corporate tax base
This initiative for the co-ordination of fiscal systems complements the Commission's ongoing legislative initiatives in the direct tax area. The Commission believes that the only systematic means of addressing the underlying tax obstacles which exist for companies operating in more than one Member State is to allow multinational groups to be taxed for all of their activities in the EU on a common consolidated corporate tax base. The Commission has announced its intention to present a comprehensive legislative proposal for such a Common Consolidated Corporate Tax Base (CCCTB) in 2008. However, the CCCTB will only apply to companies which are eligible and opt for it. There is still a more general need to ensure better co-ordination of national fiscal systems for the benefit of individuals and companies, and to prevent the erosion of Member States' tax bases.
POSSIBLE AREAS FOR CO-ORDINATION BETWEEN MEMBER STATES
In conjunction with this Communication, the Commission has published two communications in the specific areas of exit taxation and offsetting of cross-border losses for companies and groups.
The area of exit taxation concerns, in particular, tax on the transfer of assets to another jurisdiction in another Member State. In the communication on exit taxation, which concerns the taxation of individuals and companies, the Commission sets out proposals for the manner in which the Member States could co-ordinate their action in order to eliminate discrimination or double taxation.
Offsetting cross-border losses
Where cross-border losses are not offset for companies and groups, their profits and losses risk being allocated across different jurisdictions. If this occurs, offsetting of the losses sustained by the companies and groups is restricted to profits earned in the Member State in which the investment was made. Consequently, the groups and companies risk paying tax on a base which is greater than their total EU-wide profit. This situation also leads to a reduction in competitiveness, and it is for this reason that the Commission proposes a co-ordinated approach by Member States in this area.
- Further information is available on the European Commission Taxation and Customs Union DG website