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Algirdas Šemeta

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

"Transparency, competitiveness and innovative financing: Key Features of Taxation in the global governance"

International Tax Conference

Stockholm, 16 June 2011


It is a great honour to me to open this Conference on the effect on taxation of a "new world order".

Since 2009, the crisis has been a rude awakening but we are drawing the right lessons from it. What are those lessons?

First: our people, our economies and our societies are open, global and interconnected. This is not only a fact but also an essential element of our global welfare and development. Our citizens expect that we adapt our governance in such a way that they get the benefits but at the same time are protected from adverse consequences.

Second: Although we endorse the market economy, we have to admit that we may have overlooked the need for stronger regulation to mitigate the negative impact of market forces.

This is true at global level. That is why the Europe Union took the initiative of establishing together with our American friends the G20 process at the level of Heads of State and Government. It is also true within the Union itself. Faced with the crisis, we have made progress and there is today a greater awareness of the need for more coordinated and more coherent European action.

The effect of this "new world order" on taxation is obvious. International tax cooperation has regained momentum and there is agreement that the principles of good governance in the tax area should be promoted globally. At the same time, our businesses are active across borders and tax policy should create a better business environment to ensure their competitiveness. Finally, tax reforms are seen as a key ingredient of our wider strategy on growth and jobs.

Today I would like to share with you some of my views in those three main areas.

First, let me say a few words on international tax cooperation.

In an increasingly interconnected global economy, and with the emergence of new economic partners, unilateral tax solutions are futile. Coordinated approaches are the best way forward to prevent non-cooperative tax jurisdictions from undermining efforts to secure the conditions for sustainable growth.

The European Union has a long standing policy of tackling tax evasion, fraud and harmful tax competition. Our good governance strategy is based on three key elements: transparency of tax systems, exchange of information between tax administrations and fair tax competition.

Within the EU, we have achieved significant steps in several areas. Administrative cooperation, an improved recovery process, the taxation of savings and the ongoing fight against harmful tax practices are clear achievements for EU tax policy.

Beyond the EU, we promote the principles of good governance in the tax area by including specific provisions to this effect in agreements with our third country partners. This is a key element of the fair and transparent relationships that we aim to develop, notably with emerging powers.

We also aim, together with other international partners, to assist developing counties in building capacity in their own tax administrations and in designing efficient tax systems.

I had recently the opportunity to discuss this issue with my colleagues from the African Union Commission, who identified tax cooperation as an essential element in their endeavour to consolidate an African internal market.

Since 2008, one feature of the "new world order" is the acceptance of the need for a better regulatory framework and global governance. The G20 is concentrating on putting in place global rules to prevent future excesses and abuse.

In this context, the OECD has achieved considerable progress on transparency and exchange of information. The recent meeting in Bermuda of the Global Forum has demonstrated very clearly the value of an inclusive cooperative approach at international level based on peer reviews.

I also welcome the fact that the G20 will consider a report on the link between the work on non-cooperative jurisdictions and development at its November 2011 summit.

I believe further efforts are needed. Tax fraud and tax evasion shift the tax burden from dishonest to honest taxpayers. Furthermore, it encourages governments to introduce countermeasures with a risk of overkill, and these undermine regular business investment and create distortions of competition.

We should not only continue to join forces globally to promote good governance. We also have to agree amongst 27, to implement joint and collective measures towards un-cooperative and un-transparent jurisdiction. These measures should aim at protecting revenues while at the same time reducing avoiding supplementary burdens for companies operating and investing abroad.

At this stage I would like to say a few words on the US Foreign Account Tax Compliance Act (FATCA). Although I share the objective of transparency and exchange of information, I believe this should not lead to a disproportionate compliance and penalty burden for the financial industry.

I share the concerns of EU financial institutions on FATCA. This is why I raised this point with the US authorities in Washington already last year. I am happy that US authorities have agreed to engage in a dialogue on this issue, which is fully supported by our Member States.

When it comes to relationships between two strategic partners like the US and the EU, I believe that we can find alternatives that would ensure the provision of all necessary information on taxpayers at a lesser cost.

To conclude, I am convinced that the EU should continue to put all its weight in the balance for better global governance, including in the tax field where individual solutions are simply bound to fail.

Let me now turn to my second theme, related to the contribution of tax policy to growth and competitiveness.

The Single Market remains the nucleus and the core economic driving force of the European Union. It constitutes our most effective means of responding to the current economic crisis.

Its growth potential has not yet been fully exploited, despite the progress made since it was created in 1992. Obstacles remain, notably in the tax field, and these prevent businesses from operating easily across borders.

Currently, companies spend a lot of time and money on complying with 27 different corporate tax systems in the Single Market. This is a strong impediment to their development.

As a response to these problems, the Commission proposed earlier this year an EU-wide corporate taxation scheme, usually known as the "CCCTB".

These common rules for computing the tax base would be optional and could apply both to companies that are tax resident in the EU and to EU-located branches of third-country companies.

As a result, groups of companies would be able to apply a single set of tax rules across the Union. They would no longer have to comply with burdensome transfer pricing requirements and, in addition, cross-border loss relief would be available.

This would eliminate the current over-taxation of EU groups and reduce the tax compliance costs for companies. A cost currently amounting to 2 billion a year could be removed for European Businesses.

The CCCTB would particularly encourage SMEs to benefit from the Single Market. The new scheme would reduce by two thirds the tax related expenditure involved in establishing a new subsidiary in another Member State.

In these difficult budgetary times it is important to stress that the CCCTB should not affect the tax revenues of Member States or impose an unnecessary administrative burden on tax administrations. Nor would it affect tax rates.

Fair competition on tax rates is to be encouraged. Member States should continue to be able to consider both their market competitiveness and budgetary needs in fixing their tax rates.

I am pleased that the Confederation of Swedish Enterprise has welcomed the proposal. In the midst of the current complex negotiation process, I would welcome your continued public support to ensure that CCCTB becomes a reality.

Beyond corporate taxation, other actions are envisaged to make the Single Market a more attractive place in which to do business:

  • First, our European VAT system is too open to fraud and too costly: VAT compliance costs on business in 2009 amounted to nearly EUR 70 billion. On the basis of a wide public consultation which has already triggered almost 2000 contributions, we will define policy orientations for a future VAT strategy later this year.
    As I have already made clear, I believe that an increased level of harmonisation in this field will provide legal certainty for businesses and secure revenue for Member States.

  • Second, double taxation is only partly addressed and resolved by action at Member States level. I am working on possible solutions such as, for example, a wider scope for the interest and royalties directive, improvements to the functioning of the Arbitration Convention on transfer pricing and a binding dispute resolution scheme in the EU.
    At this point I would like to stress that we are equally concerned about tackling cases of non-taxation in the EU which may arise due to mismatches between Member States' tax systems. We are currently studying how to address these.

  • Finally, the single market should not be fragmented by national initiatives to promote green growth. This is why the Commission has proposed an EU framework to restructure energy taxation. This would be a way to better reflect our climate change objectives and need for better energy efficiency.

Let me finish with my third -and final - point on the need to design tax systems supporting growth and jobs.

Besides the protection of tax revenues and the promotion of business competitiveness, other challenges are facing tax systems, both within the EU and outside.

Many countries will not be able to achieve the sizeable budgetary consolidation that they currently require solely by expenditure restraint or by combating tax fraud and evasion.

They will need also to look at the design of their tax systems. The proper design of a revenue system can be a key determinant of a strong employment and growth performance that also ensures fairness and social equity.

What we know from economic research is that consumption taxes tend to be less distortive for economic growth since they don't affect the rate of return on savings and are often levied on a broader base.

Against this background, shifting from income to consumption taxation may favour labour participation, investments and human capital accumulation.

Through the European Semester, the Commission invites the Member States to consider coordinated tax reforms in favour of growth and jobs.

Insufficient attention has so far been given to reducing the tax wedge on labour and the Commission is recommending to several Member States to shift taxation away from labour onto consumption and in support of green objectives.

It is worth noting that some of our current work could help Member States to improve the quality of their tax systems and define innovative, growth friendly ways to raise revenues.

First, the revised Energy Tax Directive provides opportunities to match environmental and economic targets. If EU Member States so choose, it would allow them to shift some of the tax burden away from labour towards taxation that promotes environmentally-friendly, energy-efficient behaviour.

Second, financial sector taxation is another area that the Commission is currently examining.

The various options that have been identified, such as taxing transactions or financial activities, and their possible territorial scope (EU or global) are being assessed. In this context, three objectives should be taken into consideration:

  • First, to ensure that the financial sector makes a fair contribution to public finances.

  • Second, to complement financial sector regulation by helping to prevent undesirable behaviour, without undermining EU competitiveness.

  • Third, to avoid a patchwork of divergent national financial sector taxes which could create new obstacles to the Single Market.

Our analysis will soon be finalised and the Commission will, by summer, identify the most appropriate way forward.

In this context, we still need to work hard and to innovate in finding the best way to fund our global goods and challenges.

The Commission will continue to promote the introduction of a Global Financial Transaction tax. I remain convinced that a FTT would be an appropriate option as a revenue raiser in particular to provide adequate financing for global policy goals.


Let me now conclude.

Today, tax is back at the top of the political agenda. In Europe, and in the world, policy makers are increasingly devoting their attention to tax issues.

Although intrinsically linked to sovereignty, tax policies cannot be developed in isolation. They are part of this "new world order" and resurface in the global debate. Sometimes as an element of a fair worldwide economic competition; sometimes in the painful consolidation process which most of our States are facing; and sometimes in the fight for more transparency and responsibility in global governance.

I strongly believe that the role of the European Union and of international institutions in promoting tax cooperation is more important than ever. Recent experience shows that such cooperation is much more effective than any unilateral action. It is the only way in which countries will be able to protect their revenues while promoting sustainable growth.

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

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