Taxes can either be direct (borne by the taxpayer) or indirect (collected by an intermediary, who in turn charges them on to the next contributor in the production chain or the final consumer).
EU countries have broad freedom to design their direct tax systems so as to meet their domestic policy objectives and requirements - provided they respect the principles of free movement of goods, persons, services and capital and the principle of non-discrimination.
Only a few legislative acts regarding direct taxation have been adopted, which is mainly due to the unanimity requirement for the adoption of such legislation.
In the area of company taxation, three directives have been adopted and one is under discussion:
- the Parent-Subsidiary Directive ensures that cross-border payments of dividends within the same group of companies established in different EU countries do not suffer economic double taxation;
- the Merger Directive aims at mitigating the negative tax consequences arising from cross-border business restructuring within the EU;
- the Interest-Royalties Directive provides for the elimination of double taxation of interest and royalties between associated companies which are resident in different EU countries, by exempting them from taxation in the state of source;
- the Common Consolidated Corporate Tax Base (CCCTB) Directive has been proposed by the European Commission on 16 March 2011. The Directive aims to overcome tax obstacles which hamper the functioning of the Single Market.
In addition to these directives, the Arbitration Convention addresses the problems of transfer pricing of goods, services and intangibles.
Other Commission initiatives
Recent Commission initiatives tend to promote greater coordination of EU countries' direct tax systems in order to remove the existing fiscal barriers hindering the smooth functioning of the single market.
The key principles of coordination in this field consist in:
- the elimination of discrimination and double taxation;
- the prevention of inadvertent non-taxation and abuse;
- the reduction of compliance costs associated with being subject to more than one tax system.
The aim of coordinating the non harmonised direct tax systems of the EU countries is to render them compatible not only with EU law but also with each other.
To date the Commission has launched specific coordination initiatives concerning the areas of exit taxation, tax treatment of cross-border losses for companies and groups, as well as the anti-abuse measures in the area of direct taxation - within the EU and in relation to non-EU countries.
Another initiative is the recommendation on withholding tax relief procedures, which concerns the procedures applied by EU countries to grant withholding tax relief on cross-border securities income.
Enforcing your rights
Anyone who considers to have been subject to discriminatory tax treatment, which is incompatible with EU law, may file a complaint with the European Commission.
If the complaint appears to be founded, the Commission may initiate infringement proceedings. However, such proceedings will only serve to remove the discriminatory features of the national legislation or practice in question.
Complaints, irrespective of the result of any Commission action, do not safeguard the rights of the complainants at national level. They should therefore make use of the national procedures for keeping their cases open.
Under the Treaty on the Functioning of the European Union, the EU has competence to harmonise indirect tax, including the tax base and rates, to avoid distortions in the EU market.
The EU has a common system of VAT. However, EU countries have a certain amount of flexibility including the setting of VAT rates.
The EU has harmonised the structure and established a number of minimum rates for excise duties - indirect taxes on the consumption or use of certain products - on alcohol, tobacco and energy.
The EU has developed a number of specific tax databases, which operate in conjunction with national customs and taxation services.
The Fiscalis 2013 programme helps tax administrations in EU countries implement and improve indirect taxation systems.
With a budget of €156.9 million for the period 2008-2013, the programme aims to make tax authorities more efficient through greater cooperation and to reduce administrative burdens on taxable persons and companies.
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