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László Kovács

European Commissioner for Taxation and Customs

Tax harmonisation versus tax competition in Europe

Conference « Tax harmonisation and legal uncertainty in Central and Eastern Europe » organised by the Austrian Chamber of Professional Accountants and Tax Advisors
Vienna, October 20, 2005


Ladies and gentlemen,

It is an honour and a pleasure for me to introduce today's discussion on "Tax harmonisation versus tax competition".

This is a difficult but stimulating subject. It encompasses quite technical issues as well as very interesting political elements.

I should like to divide my intervention into three parts.

  • First, I will say a few words about tax competition and, in particular, about harmful tax competition. This will allow me to talk about current efforts in the EU and in the international arena to promote minimum international tax standards.
  • Second, I will examine the issue of tax harmonisation. In so doing, I will distinguish the various instruments for cooperation in the tax field in the EU. I will demonstrate how tax harmonisation is but one response to the challenges that we face in Europe. Other forms of cooperation or coordination of tax policies are also increasingly important.
  • Last, I will mention our ongoing work related to the Lisbon agenda. The Commission will probably adopt a Communication on the contribution of EU tax and customs policies to the Lisbon agenda in the coming days. I would therefore like to take this opportunity to present some of the main elements of that Communication.

Let me start with tax competition.

1. Tax competition


  • As you know, there has been a wave of tax reforms in Member States in recent years. As a result, a clear decrease in nominal corporate tax rates can be observed as a long term trend in EU countries. This decrease has accelerated with the accession of the new Member States.
  • However, the decrease in nominal rates has been partly compensated by a broadening of the tax bases and corporation tax revenues have until recently remained relatively stable.
  • There clearly is tax competition in the EU, and the corporate taxation area is but one example of this. The question is whether this tax competition is desirable or not and whether there should be a coordinated response against this phenomenon.
  • In order to answer to this question, I think it is useful to distinguish between acceptable tax practices, that is, "fair" tax competition; unacceptable practices, that is, "harmful" tax competition; and last, the "grey area" of tax competition, that is, tax practices which are problematic, which could be harmful, and which could require action in the future.

Fair tax competition

  • Within the EU, there is one largely undisputed form of fair tax competition, and that is competition bearing on the overall level of taxation of Member States.
  • It is up to governments to offer the best value for money to domestic and foreign investments and to design tax systems best suited to the preferences of their voters. In so doing, they may choose to offer a broad array of public goods and services or to leave more room to the private sector.
  • An overall high tax burden may not necessarily be a deterrent to productive investment. For example, a high-tax country may have an excellent education system and first-class infrastructure and public services. On the other hand an overall low tax burden may not necessarily attract productive investment if, say, education, infrastructure and public services are poorly developed.
  • To illustrate this point, let me remind you that Finland remains the most competitive economy in the world and tops the rankings for the third consecutive year in The Global Competitiveness Report 2005-2006, released by the World Economic Forum. The US is in second position, followed by Sweden and Denmark. According to the Director of the Forum's Global Competitiveness Programme, "The Nordic countries share a number of characteristics that make them extremely competitive, such as very healthy macroeconomic environments and public institutions that are highly transparent and efficient". None of the Nordic countries can be called "low tax" countries.

Harmful tax competition

  • Competition based on the overall tax burden is generally seen as fair. But EU Member States have agreed that tax competition is harmful and unacceptable when it is aimed at attracting foreign tax bases, while protecting the national tax base with some "ring-fencing" mechanism. Similarly, opaque tax regimes or specific ad hoc arrangements with certain taxpayers are considered harmful.
  • The main argument is that this "beggar-thy-neighbour" type of tax competition leads to a global and undesired loss of revenues for governments, even if some smaller jurisdictions win in the short term.
  • In addition, such tax competition may imply a distortion of tax structures towards immobile tax bases and have negative consequences on employment in some countries.
  • In practice, the Community's efforts to tackle harmful tax practices in recent years have been focused on business taxation and on the savings income taxation of individuals. The EU's Code of Conduct for Business taxation and the Savings Directive are very important achievements that are well known. I will therefore not dwell on them today.

Debatable tax competition

  • Between harmful tax practices and competitive tax practices that are considered benign or fair, there is a large grey area. I believe that the European Union could be more pro-active in this domain.
  • One of the most debated matters in this area is undoubtedly bank secrecy and the reluctance of some jurisdictions to exchange tax information with other countries.
  • In the Commission's view, bank secrecy is acceptable as long as it does not stand in the way of proper exchange of information, particularly for purely tax purposes. The rights of honest citizens can be adequately protected without fully-fledged bank secrecy. In a world based on the rule of law, I firmly believe that international cooperation between administrations is necessary.
  • In fact, I note that there is no such thing as absolute bank secrecy. Even the countries with the most restrictive laws on bank secrecy, such as Liechtenstein and Switzerland, have agreed to lift their bank secrecy in some circumstances, for instance in cases of money laundering.
  • The core of the debate is not, therefore, whether it is acceptable to impose limitations on bank secrecy, but whether those limitations should also extend to tax related matters. In a time of increasingly integrated markets, exchange of information is also becoming increasingly important in the tax area. The limited access to bank information and the absence of effective exchange of information in some countries constitutes an anomaly, which will inevitably need to be rectified in the coming years.

So much for tax competition! Let me now turn to the issue of tax harmonisation and, more generally, to the various instruments of tax coordination in the EU.

2. Tax harmonisation

Tax harmonisation versus tax competition

  • Strangely, "tax competition" and "harmonisation" are sometimes treated as complete opposites. The title of the panel discussion – "Tax harmonisation versus tax competition" seems to somehow correspond with this approach.
  • However, as I just suggested, there are various forms of tax competition. And there are also many forms of co-operation. Harmonisation of tax rules is only one of these forms, probably the most extreme one. Harmonisation involves the adoption of common rules eliminating national differences.
  • Economists often stress that eliminating differences between Member States' tax regimes is not ideal when such differences are justified by objective factors. For instance, it makes perfect sense, from an economic point of view, for more remote countries to adopt favourable tax regimes to compensate for their remoteness. Furthermore, harmonisation is the most difficult form of cooperation to achieve when unanimity is required to take decisions.
  • For these reasons EU tax harmonisation efforts have focused on very specific areas where there were strong arguments for harmonising. This was particularly the case for indirect taxation of goods and services, where a degree of harmonisation was needed in order to complete the Internal Market and in particular to eliminate border controls.

Other instruments of cooperation in the tax area

  • A large part of our tax policies in the direct tax field are not aimed at harmonising Member States' tax rules. Rather, we try to ensure the coordination of tax policies. This means that we want to ensure that the Member States' tax systems are mutually compatible and that they respect the European Treaties.
  • Exchange of information and co-operation between tax administrations are measures that allow for such a coordination. They respect the sovereignty of co-operating countries while allowing them to apply to their taxpayers the tax rules that they consider appropriate. This is probably why most Member States have preferred to opt for information exchange rather than a withholding tax as a means of implementing the Savings Taxation Directive.
  • Speaking about exchange of information and administrative cooperation, I should like to inform you that the Commission intends to contact important financial centres outside Europe in the near future to see whether they are prepared to adopt measures equivalent to the Savings Directive. This would contribute to the proper taxation of the savings income of EU residents that is deposited in these countries.
  • The European Commission also supports the OECD work on harmful tax practices. This is designed to promote the use of minimum standards of transparency and exchange of information for tax purpose in OECD Member States and other financial centres.
  • Other forms of coordination, such as non-legislative measures, are becoming increasingly popular in some areas, for example in employment and social affairs. The idea is to agree on broad objectives, while leaving the Member States to decide on the best way of achieving the objectives.
  • These non-legislative approaches could also be utilised in taxation areas. We have already had a positive experience in this area with the Code of Conduct for Business Taxation and in the field of transfer pricing.

It is my firm conviction that Member States could achieve much better results in important areas such as tax fraud and tax avoidance by improving their coordination. In fact, the present lack of coordination of tax systems is an invitation to tax planning and tax avoidance, and the Treaty freedoms set strict limitations to national anti-avoidance measures. A closer cooperation could therefore facilitate a decrease in tax rates and a re-balancing of taxation in favour of growth and employment.

3. Taxation policy and the Lisbon strategy

It is clear from what I have said that problems related to harmful tax competition are complex and need to be tackled with various types of instruments.

Tax competition is not black or white. And EU tax policy does not just consist of tax harmonisation. We are faced with a number of issues and very different national perspectives on taxation in the EU. That is why EU policymakers must propose a pragmatic range of instruments if they want to obtain results.

In this perspective, I should now like to turn to the third part of my address and say a few words on the contribution of tax policy to the Lisbon strategy.


  • The Commission has proposed a new direction for the Lisbon agenda. It wants to re-focus efforts on action to deliver growth and jobs, while maintaining the unique European social model and the EU's overall approach to sustainable development. We aim to ensure that future generations enjoy the same choices and opportunities that we have.
  • Taxation and customs policies have a significant role to play in this context. They can contribute to raising the efficiency of our economies and the competitiveness of our companies. They can generate more competition in the markets. They can boost trade and they can support knowledge and innovation.
  • The Commission is currently preparing a Communication that will present the key Community taxation and customs policy measures that would contribute to fulfilling the Lisbon strategy. The Communication will aim to cover actions aimed at deepening the internal market. It will also deal with initiatives to increase and improve investment in research and development and facilitate innovation and the sustainable use of resources. These initiatives would help to renew growth and therefore to create more and better jobs.
  • While not pre-judging the content of the Communication in advance of its adoption by the Commission, I will briefly discuss some of the tax areas that appear key to the Lisbon strategy.

Main initiatives

  • In 2001 the Commission launched the idea of creating a common consolidated corporate taxation base in the EU. We consider that if companies were allowed to apply a single EU-wide set of rules for company tax purposes, this would eliminate most of the current problems such as double taxation that they currently face when they do business across borders in the EU. It would also lead to a substantial reduction in compliance costs. The Commission is currently working with experts of Member States on this idea. The aim is to present a legislative measure within 3 to 4 years.
  • Let me be clear on the fact that this work only bears on tax bases and not on tax rates. A couple of weeks ago, there was an interesting public hearing in the European Parliament on corporate taxation. An economist, invited as an expert to the hearing, suggested that a difference of 6 to 8 percentage points in tax rates between Member States could be sustained in the long run simply due to differences in proximity to markets and transport costs. This points at the fact that harmonisation in that area would not seem desirable.
  • At the same time, the Commission is working on a number of more specific initiatives aiming at facilitating the life of businesses. I should like in particular to stress our work on transfer pricing. The Commission together with representatives of the Member States and business are working together in a Joint Transfer Pricing Forum to achieve a more uniform application of transfer pricing tax rules within the EU. Bringing together all parties concerned to discuss the issues at stake has led to better common approaches and will allow the identification of non-legislative solutions to practical problems. This should reduce compliance costs and prevent disputes between taxpayers and tax administrations.
  • In the VAT area, the Commission has named as a particular priority the simplification of compliance obligations relating to intra-Community activities. In this context, you may be aware that the Commission presented a proposal to the Council and Parliament last October for a one-stop shop system. This would allow a trader to fulfil all his VAT obligations, for his activities in other Member States where he does not have an establishment, in the Member State in which he is established. Unhindered access to the Internal Market is essential in creating the elements for growth. The one-stop-scheme is just one step towards facilitating access.
  • Also in the VAT field, there is a proposal on the change of the place of taxation for services supplied business-to-business and business-to-consumers to simplify life for traders and to ensure that the VAT accrues to the country where the service is enjoyed. While a great majority of Member States are in favour of this change, the unanimity rule for tax matters means that businesses cannot yet benefit from the proposed rules which would make the application of VAT to services simpler and fairer. I hope that the Council will adopt both these VAT proposals in the near future.
  • Enhancing the environment for honest and legitimate operators must be coupled with the suppression of the activities of fraudsters who can undermine the competitiveness of legitimate traders as well as eroding the revenues of Member States. That is why it is equally important for the Commission to help Member States in their efforts to combat tax fraud. I believe that the Commission has a valuable role to play in improving co-operation between Member States and providing fora in which tax authorities can enhance their knowledge and operational capacities.
  • Last, I would also like to express my conviction that EU taxation policy can play an important role in boosting knowledge and innovation for growth. An EU framework for Research and Development tax incentives would be particularly useful.


Ladies and gentlemen, it is now time for me to conclude.

  • In my address, I have highlighted some of the main trade-offs related to tax competition and international framework of co-operation that tax competition requires. We would ideally like to set up rules that lead to an efficient allocation of investment and tax bases while respecting the tax sovereignty of the EU Member States and limiting the compliance costs for taxpayers.
  • This may require a limited loss of formal tax sovereignty for co-operating countries. But this is in my view preferable to the substantive loss of tax sovereignty, which results de facto from inaction and policy changes imposed on governments by market forces.
  • I believe that there is a broad consensus on this approach in the EU. But there is less of a consensus on the ways of achieving a better functioning EU tax framework. This is due to the perceived impact of co-ordination on tax sovereignty and the economic performance of the Member States.
  • The discussions that will follow today will certainly underline differences in views concerning tax competition and tax harmonisation. But ultimately it is my firm conviction that a debate on taxation in Europe and beyond can only be productive if the underlying concerns of governments in terms of employment, tax revenues and equity are also duly taken into account.
  • In this context, and as I have tried to set out, the question is not of having either tax competition or tax harmonisation. The real issue is the right mix of policies needed to reach our common objectives in the EU.

I thank you for your attention.

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