EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud
"Competitive Tax Policy and Tax Competition in the EU"
2nd Taxation Forum of Diario Economico/OTOC
Porto, 27 October 2011
Ladies and gentlemen,
I am honoured to have been invited to address this distinguished audience today.
We live in turbulent and uncertain times. The financial and economic crisis requires leadership and inventive actions – in tax policy as much as any other area. Tax policy can support fiscal consolidation and economic growth, for which we struggle nowadays in Europe. The question is, how can we get the most from our tax policies to enable them to do this.
First, tax systems should be structured in such a way that they support a sustainable growth. In particular, they should boost the creation of a favourable business environment in the Single market. The competitiveness of our businesses should be preserved and our capacity to attract new investments enhanced.
Second, the choice made by Member States to support their much needed consolidation efforts cannot be put at risk by harmful tax competition in the European Union. Member States should not develop unfair tax practices towards one another. Also, the search for investment should not lead to over taxation of less mobile bases, such as labour.
Today, let me share some thoughts with you on the positive and negative effects of tax competition in the EU and the possible policy responses.
Tax systems for sustainable growth
I believe a tax system is competitive when it contributes to making the economy of a country more attractive for investment. It is clear that the tax burden is only one element when determining the competitiveness of a country.
Stability, safety, infrastructure and a high level of education are sometimes even more important. Tax revenues are needed to maintain those other elements at a competitive level. The competitiveness of a tax system cannot, therefore, only be assessed by rates, incentives or even by reference to the overall tax burden.
The current economic challenges call for a tax policy that gives priority to growth-friendly sources of taxation. The situation also calls for tax systems which are simple and easy to operate, in order to reduce compliance costs for businesses.
It is necessary to focus primarily on the quality of the tax system, in order to have a tax policy that really contributes to a competitive economy. The quality can be measured in terms of efficiency and neutrality.
Efficiency implies that a tax should be easy to understand, collect and monitor. It should not involve a high administrative burden and should not include scope for evasion or fraud.
Neutrality can be measured at various levels. But, in essence, it means that a tax should distort as little as possible between various types of investment decisions, economic activities and types of income.
A tax system is composed of various different taxes, both direct and indirect. Therefore, we have to consider not only the mix of taxes but also the way in which each of them is structured. This determines the overall quality of the tax system.
Obviously, there will always be a trade-off between efficiency and neutrality on the one hand and policy goals on the other.
For example, higher taxes on consumption of alcohol or on polluting cars may negatively affect both the efficiency and neutrality of the tax concerned. However, this may be justified by higher valued concerns for public health and the environment. I am convinced that a continuous consideration of these worthwhile principles when engaging in tax reforms will ultimately contribute to a competitive tax system.
How do we contribute to creating competitive tax systems at EU level?
First, with proposals to ensure a level playing field in the Single market. This will allow Member States to find room for possible tax shifts from labour taxation to other tax bases. Notably, this is the case with the revision of the Energy tax directive and the taxation of the financial transactions.
Second, by fostering a better business environment for those operating in the Single market. Reducing red tape and compliance costs are at the heart of the proposal for a common consolidated corporate tax base and of the forthcoming new VAT strategy.
Finally, we contribute to the competitiveness of tax systems with our fight against double taxation. This is a serious concern and a source of costly legal uncertainty for taxpayers.
Tax competition in the EU
Let me now turn to the issue of tax competition in the EU.
Tax competition is about countries competing to offer the most attractive tax environment for mobile economic activities like businesses and capital. This will enable the country in question to collect the tax revenues related to these activities.
Tax competition can take place via comprehensive measures, such as a general reduction of the corporate income tax rate, or by targeted measures. An example could be a special tax incentive for R&D activities.
As I mentioned, tax competition targets mobile economic activities. Therefore, the operation of domestic tax systems of the Member States is increasingly challenged by the functioning of the single market and the wider globalisation process. In the long term, fiscal competition of this kind may erode their revenue raising capacity. Their ability to pursue social and redistribution policies at the national level may also be at risk.
Addressing this underlying tension between market integration and tax sovereignty is one of the main challenges for a coherent EU tax policy.
On one hand, tax competition, to some extent, serves the healthy purpose of putting pressure on governments to keep spending under control. It can also lead Member States to improve the attractiveness of their tax systems by increasing efficiency. For example, by reducing red tape and by making tax administrations more service-minded.
However, tax competition also has negative effects and can present, in the EU, a disturbing asymmetry. The liberalisation of financial markets and the expansion of the single market allow companies to pursue strategies of tax minimisation. This is achieved both by choosing the most convenient taxation area for planned activities and by benefitting from mismatches between two tax systems.
Collectively, these trends have reduced the overall tax burden for internationally active businesses. To maintain the general level of tax revenues, the burden of taxation within the EU Member States has progressively shifted. It has moved from more mobile tax bases, like capital income and corporate income, towards less mobile tax bases, notably labour.
Over the past two decades, almost all Member States decreased their statutory corporate tax rates. The EU-15 average went from close to 50% in 1985 to slightly less than 30%. The average for the twelve countries that joined the Union in 2004 and 2007 is about 10 percentage points lower.
As a result, international tax competition may imply an overall revenue loss for all jurisdictions. It negatively affects their long term ability to collect revenue to fund social programmes. Furthermore, tax minimisation and tax evasion by international businesses also have repercussions for the internal fairness of the tax systems.
What can be done in terms of policy responses to such trends? In this field it is important to distinguish between fair and harmful tax competition.
Member States can modify the structure of their tax systems by reducing general tax rates for business and capital income. In this case, such decisions can be qualified as "fair tax competition".
This phenomenon requires little action at EU level, given the principle of tax sovereignty for Member States in the area of direct taxation. The harmonisation of tax rates is not an objective of ours. Nevertheless, there is certainly scope for exploring measures of tax coordination at EU level to reduce distortions or incentives for tax avoidance.
But we have also witnessed practices involving other types of tax competition, that I would refer to as harmful. The relevant elements for the identification of harmful tax measures are non-discrimination, transparency and substance.
First, the principle of non discrimination basically disqualifies tax measures that exclusively benefit non-resident investors or transactions with non-residents.
Second, the principle of transparency primarily requires that tax measures must be embedded in the publicly accessible legislative framework. But transparency also implies that one Member State should assist in collecting the information needed by another Member State to enforce its general tax rules. Such information must be exchanged not just on request, but spontaneously. Exchange of information reduces the scope for tax evasion and increases the scope for effectively countering double non-taxation that arises as a result of mismatches.
Finally, Member States should refrain from applying a lower level of taxation to activities that do not have any real economic presence or substance.
In the EU, these principles to identify harmful tax measures are embedded in the Code of Conduct for business taxation. This tax coordination tool has proven effective up to now. I believe, though, that it has to be pushed further to tackle new and more sophisticated practices.
Tax competition does not stop at the borders of the EU. Following a decision by the Code of Conduct Group and an invitation by the ECOFIN Council, my services are currently having discussions with both Switzerland and Liechtenstein to address mutual concerns.
The Commission strives to include provisions underlining the principles of good governance in the tax area in agreements between the EU and third countries.
Ladies and gentlemen,
Let me now finish with some concluding remarks.
Tax competition between Member States can be productive, to the extent that Member States benefit from each others' best practices. It can contribute to developing simpler, more transparent growth-oriented tax systems which maintain re-distributional capacities.
I believe tax systems can be designed in a competitive way without engaging in harmful tax competition.
This can be achieved by respecting some general principles, to the extent feasible:
First, simplicity and efficiency: a broad base with lower rates is easier to manage and understand than a higher general rate with many complex incentives.
Second, provisions discriminating against either residents or non-residents must be eliminated. This would ensure the neutrality and fairness of the tax system.
Third, the administrative burden for potential investors should be reduced by simpler rules. Tax administrations should be attentive to taxpayers needs as much as possible, by adopting facilitation instruments like one stop shops.
Finally, investors should be offered certainty and stability by avoiding frequent amendments to tax laws.
By implementing, in a coordinated way, those principles in the European Union, the Single market will become attractive for long term, tangible investments. That type of investment brings much more economic benefit than highly mobile activities that are easily lured in, but that will also leave easily.
By focusing on a sound tax policy that enhances the quality of taxation and involves coordination and cooperation at EU level, a competitive tax system can be combined with a sustainable level of tax revenues.
This is particularly relevant in the current economic crisis, in which policies must both achieve fiscal consolidation and safeguard the fragile potential of economic growth.
I thank you for your attention and wish you fruitful discussions and new ideas during this important Conference.