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Algirdas Šemeta

EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud

"EU Tax and Regulatory Trends"

KPMG Global Tax Summit

Prague, 29 September 2010

Madam/Mister Chair,

Ladies and Gentlemen,

I am very pleased and honoured to have been invited to the annual KPMG tax Summit and share views on the European Tax policy with so many experts.

Certainly one of the main reasons behind the success of your Tax Summit is its focus on issues that are timely and relevant both in the policy agenda and in the business world. Governments are facing an unprecedented fiscal consolidation effort; businesses are struggling to restore their balance sheets: it is true that tax authorities and practitioners are under pressure.

In 2008 and 2009, we have witnessed the worst global economic downturn since the 1929 Great Depression. Though the recent Commission's forecasts reflect that economic growth in the EU should pick up to 1.7% in 2010, the crisis has left deep strains in the Member States. The EU average debt to GDP ratio has jumped from about 60% to about 80% in the last two years.

Putting Europe back on the road to prosperity will require considerable fiscal consolidation and budgetary adjustments at national level as well as joint efforts at European level. I am convinced that European taxation policy has an important role to play in this process.

Your forum today is a good opportunity for me to present the Commission's forthcoming initiatives in the field of taxation and to highlight the three pillars of my tax agenda: the quality of taxation in the context of reinforced economic coordination, the contribution of tax policy to sustainable growth and the good governance in the tax area.

Quality of taxation

Let me first say a few words on the importance of the "quality of taxation".

In the design of ambitious fiscal consolidation programmes, nobody questions the relevance of the quality of expenditure for growth. However, considering the quality of tax revenue is equally important.

Today the Member States are facing fundamental questions in the reform of their tax systems. How to shape taxation to encourage employment and investment? How to support a greener, more knowledge-based economy?

Each Member State has the right to decide on its own approach. However, I am convinced that 27 unilateral and uncoordinated approaches is not the most efficient way forward. EU coordination is crucial and the Commission has a significant role to play.

The assessment of the current tax systems should tackle the distortions that could have potentially contributed to the creation of a crisis-prone economic environment. This might eventually result in changing certain provisions such as tax treatment of debt compared to equity, tax deductibility of interest, or inefficient reductions, exceptions or exemptions – the so-called tax expenditure - which are not economically justified and may no longer meet their original objective.

More radical reform aimed at shifting tax structures in a desirable way could also be considered. A good tax system should create the right incentives for investment in research, development and innovation as well as education and training. It has to encourage domestic entrepreneurship and attract foreign productive capital. In other words, it should lay the groundwork for sustainable growth.

While there is only weak evidence that the level of taxation affects economic performance, the links between the structure of tax systems and growth rest on stronger foundations. In this respect, the economic literature has shown that consumption taxes, property taxes and environmental taxes are the most growth-friendly, although they have potential equity implications.

In the context of the exit strategy, I am working on an analysis to detect, in various tax areas, the best practices and general guidelines for tax systems that promote growth. Based on this analysis, I intend to examine the scope of possible coordinated pro-growth tax reforms with the Member States.

Given the current policy debate, I am also assessing the issue of the contribution of the financial sector to the costs of the crisis. The political debate on this issue is controversial, reflecting also the similar state of the academic debate.

In October, I will propose a Communication on taxation of the financial sector. Two options are being discussed: the Financial Transaction Tax, which targets transactions, and the Financial Activities Tax, which targets the sum of profits and remunerations in the financial sector. Both options have pros and cons which should be carefully assessed before coming to definitive conclusions.

Taxation for sustainable growth

Let me now turn to the second pillar of my agenda: the contribution of Tax policy to Europe 2020 and its sustainable growth strategy. As underlined in Professor Monti’s recent report, a strong, stable EU economy relies on a strong, fully functioning Internal Market.

Too many tax obstacles still exist in the single market. I am convinced that we can improve taxation to make it cheaper and easier for businesses to operate across borders and to invest throughout the EU.

One of my main priorities is to reduce compliance costs and administrative burdens. I believe that we need to eliminate tax costs that create "bottlenecks" and restrict cash flow which is the lifeblood for business. We also need to ensure that tax systems facilitate investment in productive activity and especially in SMEs.

I will therefore focus my attention on the following areas:

  • First, common consolidated corporate tax base. By creating common EU rules for cross-border businesses, we could eliminate costly mismatches between national systems and significantly reduce compliance costs for enterprises operating in more than one Member State. To be effective, the CCCTB should be available to all of companies: it would relieve multinational enterprises of the effects of certain tax obstacles and SMEs would incur less compliance costs if they decided to expand commercially into another Member State. As tax professionals, you have been involved in the long technical preparation of this file over the last years. A final stakeholder conference will take place in October. I think it is now time to formalise our views and I intend to put forward a formal proposal next year.

  • Second, I will examine how best the VAT system could be reviewed with the objective of creating a more favourable environment for business and a more robust system for the Member States. The current VAT system suffers from numerous shortcomings, including a high level of administrative burdens for businesses and susceptibility to tax fraud. A Green Paper will be published later this year to launch a wide-scale debate on the evaluation of the current system and the preferable ways forward for the future. It will be followed by an intense consultation phase. I would very much welcome your input in this process. In 2011, a Commission Communication should set out priorities for the evolution of the VAT system.

  • Third, I want to tackle the issue of double taxation in the Single market. After the recent public consultation on double taxation it is now clear that citizens and businesses face double taxation problems in several areas: conflicts regarding tax residence; categorisation of income; treatment of venture capital funds investing across borders; divergent taxation of pensions; complicated procedures for claiming tax relief and difficulties in dealing with foreign tax authorities. It is now time to act. Later this year, I will propose a communication identifying ways to tackle tax problems that EU citizens face when they cross borders to work or live or when they purchase properties or invest abroad. It will be followed next year with specific proposals to address cross-border problems in specific fields like inheritance taxes, withholding taxes or more generally double taxation of income and capital.

  • Finally, sustainable growth being part of Europe 2020 strategy, I believe that it is high time to pursue a "green" taxation agenda. The revision of the Energy Taxation Directive is a central part of this. The way energy is taxed at the moment is no longer appropriate. The current Energy Taxation Directive actually creates incentives for more polluting products. Moreover, the Emission Trading Scheme (ETS) covers only 50% of the CO2 emissions. I will propose to review the current directive. This review will not introduce a new tax but it will restructure energy taxation so as to meet high priority goals of climate change, energy efficiency and fair competition. It will also provide the Member States with a welcome opportunity to make their overall tax system not only "greener" but also to make it foster growth and employment.

Good governance in the tax area

Let me finish by highlighting the third pillar of my agenda: good governance in the tax area. In times of economic difficulty, it is more important than ever to maintain the Member States' ability to collect their revenues. Tax fraud and tax evasion deprive treasuries of billions of Euros each year to the detriment of taxpayers.

To this end, the EU must step up its fight against tax fraud and evasion, and continue to lead the campaign for good governance by promoting the principles of transparency, tax information exchange, and fair tax competition both within the EU and beyond.

Within the EU, the Commission has already put forward ambitious proposals to improve the existing instruments for administrative cooperation between tax administrations. A proposal to improve assistance in the recovery of tax claims was adopted earlier this year and a proposal to improve exchange of information is pending in the Council. Once adopted, this proposal will mean that bank secrecy can no longer be invoked to refuse administrative assistance.

The Commission has also made a proposal to amend the existing EU Savings Directive with a view to extending the scope of the directive to financial instruments not covered by the current Directive and providing for measures to avoid circumvention of the Directive by using untaxed entities.

The good governance package is currently under discussion in the Council. Negotiations are difficult. However, I am working closely with the Belgian Presidency to try to reach agreement on these files.

We are also continuing our efforts to promote good governance beyond the borders of the EU. Negotiations for the inclusion of good governance principles in tax matters in relevant EU agreements with third countries are underway. I also launched actions to encourage and support developing countries in the adoption and implementation of international standards in the tax area with a Communication on "Tax and Development" in April this year.

Finally, we are very active on the issue of harmful tax competition both with the EU Member States and in our relations with non-EU countries.

The EU has successfully developed and implemented internal standards in the form of the Code of Conduct for business taxation over the past decade. Our commitment towards good governance in the tax area beyond the borders of the EU is illustrated by the recent initiative to promote the principles of the Code in third countries. The Commission has started discussions with Switzerland and Liechtenstein with a view to encouraging them to adopt and apply those principles.

For the future, I am convinced that we have to maintain the pressure in the fight against harmful tax competition. Promoting investment in order to raise tax revenues is a sensible policy as part of fiscal consolidation programmes. But coordination at EU level should prevent domestic revenue raising from undermining other Member States.

Extending the Code of Conduct to third countries is therefore not enough: we should also allow ourselves to re-examine the scope of the Code of Conduct itself and consider whether it is still fit to achieve its original aims and goals given recent economic developments.

I will have the opportunity to discuss this issue, among others, in the Tax Policy Group which I re-launched as a forum for political discussion with personal representatives of European Finance Ministers.

Ladies and Gentlemen,

I have spelled out the three pillars of my EU tax agenda. I believe that there is a new momentum in EU tax matters, fuelled by the wider recognition that we cannot reach our objectives by maintaining the status quo or by acting in isolation.

If we harness this momentum, I am convinced that the Member States will be able to implement quality taxation that is fair to citizens and businesses.

I thank you for your attention and I wish you a fruitful and successful conference.

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