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Algirdas Šemeta

Commissioner responsible for Taxation

The Role of taxation in the economic re-growth

Deutsch - Austrian-Swiss Tax Congress

Vienna, March 18, 2011

Ladies and Gentlemen,

Thank you for the invitation to address the German Austrian Swiss Tax-Kongress and exchange views on EU Tax Policy 2020. This is a welcome occasion to discuss with an assembly of Tax practitioners in an open and forward looking way.

Tax is back at the top of the political agenda. In Europe and globally, policy makers are increasingly devoting their attention to tax issues. Today, I would like to frame my intervention around three main questions:

  • Firstly, as we are learning the lessons of this crisis, how do we take account of the macroeconomic dimension of taxation as part of the enhanced economic governance in the EU?

  • Secondly, how can taxation contribute to boosting economic growth and the confidence of European citizens and businesses?

  • Thirdly, in the midst of fiscal consolidation, how can we assist Member States in raising the revenue they need to ensure fiscal sustainability?

Quality of tax systems

First let me emphasise that the quality and robustness of each Member State's tax system matters to all the others.

A good tax system should ensure sustainable revenues and have a positive effect on growth and jobs. It also has to be resistant to economic fluctuations and cannot rely too much on tax bases that are very cyclical or known to be prone to bubbles. The tax structure should provide the right incentives for employment, innovation and long-term investment. Economic literature points to less tax on labour and more on consumption and green taxes.

However, economic theory is one thing. Putting it into practice is a real challenge. Our Member States have gained valuable experiences with, for example, green taxes and consumption taxation. It is essential to learn from each other and exchange best practices.

The Heads of State and Governments of the Euro Area last week agreed on a Pact for the Euro. It clearly highlights tax policy coordination as an element of stronger economic policy coordination in the Euro area to support fiscal consolidation and economic growth. In this context, the Member States commit to engage in structured discussions on tax policy issues. This way we can all ensure exchange of best practices, and find ways of avoiding harmful competition and fighting against fraud and tax evasion.

On the path towards consolidation, we also have to reflect on new and innovative tax bases. In this context, the debate on the taxation of the financial sector is intense. The Commission has three objectives in this field:

  • to make sure that the financial sector is making a fair contribution to public finances;

  • to seek a double dividend in the way that any tax we put forward raises substantial revenues and helps to ensure greater stability of financial markets, without undermining EU competitiveness;

  • And to avoid that a patchwork of divergent national financial sector taxes creates new obstacles to the Single Market.

You most probably already know that we are preparing an Impact Assessment following the Commission Communication from last October. It will assess various options both in terms of tax scheme (Financial Transaction Tax and Financial Activity Tax) and of territorial scope (implementation at global and EU level).

By this summer, based on this analysis, the Commission will outline appropriate policy proposals.

Single Market

For my second question, on how to boost growth and confidence let me turn to the Tax dimension of the Single Market.

Today, there are still too many tax obstacles which make cross-border activities too cumbersome or too expensive. This is also a handicap to attract foreign investors towards productive direct investments. What can we do?

First, I want to tackle the tax obstacles within the Single market. Last December we adopted a Communication identifying ways to fight tax obstacles for Citizens. In the coming weeks, the Commission will propose a strategy on cross-border double taxation for businesses. In addition, we will come with a proposal to further reduce risks of double taxation on payment of interest and royalties in the EU.

Second, we are examining the VAT system to see how it can be brought up-to-date. With the Green Paper on the future of VAT, we have launched a wide-scale debate on the evaluation of the current system and the best way forward. Your input to this process is very welcome. I find it very important to involve all stakeholders and the wider public in the preparatory stage. On this basis, the Commission will define its future policy in the VAT area before the end of 2011.

My third initiative concerns green taxation. As sustainable growth is a key pillar of the Europe 2020 strategy, I believe that it is high time to pursue a "green" taxation agenda. The revision of the Energy Taxation is a central part of this.

The issue is not about introducing new taxes, but about restructuring the system. It should be adapted to be brought in line with our objectives in terms of climate change and energy efficiency.

Finally, I would like to say a few words about the proposal for a Common Consolidated Corporate tax base - the CCCTB - that the Commission adopted this week. This is a big step to deepen the Single Market. Currently, businesses have to deal with as many tax administrations and as many tax rules as the number of countries they operate in. They spend a lot of time and money justifying that their transfer prices are valued at arm's length. They cannot offset their losses against their profit and suffer over taxation.

The CCCTB creates one common set of rules and allows consolidation of tax bases throughout the EU. As a result, costly mismatches between national systems will disappear, and compliance costs for enterprises operating in more than one Member State will drop. According to our estimates, the CCCTB will save more than 1 billion Euro per year for businesses in terms of compliance cost and more than 1 billion Euro thanks to consolidation. Moreover, it will reduce the cost of setting up a subsidiary in another Member State by two thirds. This will allow SMEs to expand their activity across borders. It will also make the EU an even more attractive place for foreign investors.

The proposal of the Commission will now be followed by an active and timely negotiation process in the Council. In view of the great interest in this proposal, I am sure that the current and incoming Presidencies will invest time and effort in this important file.

Tax competition, tax fraud and avoidance

My third question was about the ongoing fiscal consolidation and the need for Member States to preserve their legitimate tax base and revenue. This is all about tax competition, tax fraud, and tax evasion.

The EU has an established policy to tackle harmful tax competition and tax avoidance both in the EU and at international level.

Tax competition is accepted – and may even be a good thing - as long as it does not endanger the capacity of Member States to collect the revenue they would fairly expect. The Code of Conduct on business taxation is our tool to ensure that this principle is respected. It is a soft law instrument: in a peer review process, Member States examine their potentially harmful tax measures.

While we may all agree on the general principles of this policy, discussions are often slowed down at the technical level. There is a need to find a renewed support at the political level. I am of the opinion that we need to extend the scope of the Code and find tools to tackle "double non taxation", what we call mismatches.

There is also an external dimension to the Code of Conduct. Following the mandate given by the ECOFIN Council, the Commission is developing constructive discussions on how to extend the principles of the Code of Conduct to our very close neighbours, Switzerland and Liechtenstein.

On the fight against fraud and evasion, we already achieved a lot through a series of initiatives.

In the VAT area, we have set up EUROFISC, a multilateral early warning mechanism for combating fraud. In the direct tax area we are progressing on better administrative cooperation.

The ECOFIN Council has agreed last December on the Directive on Administrative Cooperation in the field of taxation. As a result, bank secrecy will no longer be a reason to refuse cross-border cooperation. This agreement also provides for a dynamic approach to EU multilateral automatic exchange of information that will initially apply to five categories of revenues.

More, of course, is ahead of us. Let me emphasise here that, in this period of intense consolidation efforts for our Member States, no margin of manoeuvre exists in this field. Transparency and trust is the standard: no one can steel tax base or tax revenue from its neighbour. Where can we make progress?

VAT fraud continues to be an important problem. The forthcoming VAT strategy will concentrate on finding a fraud proof system.

The ECOFIN Council should quickly find an agreement on the improvement of the Savings Taxation in Europe, to address loopholes of the current system. Progress on anti-fraud and tax cooperation agreements with Liechtenstein, Andorra, Monaco, San Marino and Switzerland are also needed urgently. This would provide for a comprehensive and coordinated EU approach aimed at ensuring tax transparency and fighting tax evasion.

Finally, at global level, in negotiations of EU agreements with third countries, we must pursue our fight for more tax transparency and exchange of information as well as fairer tax competition.

Ladies and Gentlemen,

To conclude, let me say a few words on the EU tax governance. 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.

Closer coordination of tax systems and smarter taxation are crucial for EU recovery and growth. To secure the smooth functioning of the Single Market, this coordination should involve all 27 Member States.

To create space for debate on tax policy at political level, I have re-launched the Tax Policy Group. In this group of personal representative of the Finance Ministers, we discuss EU tax coordination on a regular basis and at political level.

I am sure that this forum will help us to progress towards tax policies which better contribute to fiscal consolidation, improve the effectiveness of national strategies and cater for sustainable growth.

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