EUROPA - Gateway to the European Union
Your national government decides how much tax you pay – not the European Union. What the EU does is ensure that national tax rules are consistent with the Union’s overarching goals of job creation and that they do not give businesses from one country an unfair advantage over their competitors in another country. EU tax policy is about upholding the principles of the single market and free movement of capital.
Common rules on petrol tax are there to ensure trade is fair.
Governments raise tax to finance their expenditure. Different member states have different spending priorities and the EU does not stand in the way of those priorities providing member states stay within reasonable spending limits. If they overspend and go into too much debt, they could jeopardize the economic growth of other EU countries. However, providing they are prudent in their economic policy, they have considerable discretion on how to spend their money and, therefore, what taxes to raise to fund their spending.
It is our governments, therefore, which set tax rates on company profits and personal incomes, savings and capital gains. The EU as a whole merely keeps an eye on these decisions to see they are fair to the EU as a whole. It pays particular attention to company taxation because of a risk that taxes could create obstacles to the smooth movement of goods, services and capital around the EU’s single market. Member countries are bound by a code of conduct to prevent them providing tax breaks which unfairly distort investment decisions, for example.
Value-added tax (VAT) rates are a partial exception and require a degree of EU involvement as they are fundamental to a properly functioning single market and fair competition across the EU. The EU has therefore set upper and lower limits on the VAT rates that can be charged.
This nevertheless leaves considerable leeway for national differences in VAT rates and the lower limit can even be breached in some circumstances. Exemptions can be allowed if a country so wishes, for example, for goods and services not in competition with goods and services from another EU member, or for the necessities of daily life, such as food and medicine.
Moreover, VAT rules and rates respect the EU principle that decisions on tax matters can only be taken if all countries are in unanimous agreement. This rule safeguards national autonomy.
Income taxes are decided by national governments.
Changes and differences in excise tax on petrol, drinks or cigarettes can very easily distort competition across EU borders. This is why they too are subject to some common rules. Nevertheless, they leave plenty of room for cultural differences. That is one reason why beer and wine prices vary so widely from one EU country to the next. Economic differences are another. A country with healthy public finances cannot be forced to tax for taxation’s sake. So, Luxembourg’s low excise duties offer bargains for motorists and shoppers from neighbouring countries or for those passing through.
It makes sense for the EU to have common rules on taxing energy products. This makes it possible for the EU to take a single approach to using them as incentives to energy efficiency, but again rules are flexible enough to accommodate special national circumstances.
Personal taxation rules and rates on the other hand are matters for individual EU governments, unless an individual’s cross-border rights are affected. So the European Commission has taken action to ensure that EU citizens are not deterred from working in other EU countries by problems linked to the transfer and taxation of their pensions and pension rights.
The EU also has a role in avoiding cross-border tax evasion. While EU citizens can place their savings where they think they will get the best return, they cannot use this as a means of avoiding paying tax. EU governments lose legitimate revenue if their residents do not declare interest income on savings held abroad.
EU countries and some other European governments have agreed to exchange information on non-residents' savings. The only exceptions are Austria, Belgium and Luxembourg and some other European countries, which for the time being impose a withholding tax instead. They then transfer a large part of the money to the home country of the saver. As this is a bulk payment, the individual saver’s anonymity is not breached, but the tax is still paid where it is due.
