European Commissioner for Taxation and Customs
Tax harmonisation versus tax competition in
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,
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
- 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
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
- 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.
- 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
- 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.
- 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
- 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
- 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.
- 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
- 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
- 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
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
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
- 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.
- 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
- 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
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.
thank you for your attention.