Sharon's speech to the Brussels Tax Forum (March 2012)

March 5, 2012 11:37 AM

Commissioner Šemeta,

Ladies and Gentlemen,

First I would like to thank you, Commissioner Šemeta, for inviting me again to the Brussels Tax Forum of 2012. This event has become an important forum for public and private sector to discuss current and future trends in EU taxation policy. When it comes to tax, the Commission and the Parliament are often on the same side.

Before turning to today´s topic, allow me to share with you some thoughts about the past year, which has been a substantial year for EU tax policy. Over the past 12 months, you Commissioner and your team in DG TAXUD have delivered a record number of long-awaited proposals. So much so we have almost run out of demands! We have the proposal for a Common Consolidated Corporate Tax Base (CCCTB), the revision of the Energy Tax Directive (ETD), the proposal for a Financial Transaction tax (FTT), and the Green Paper and the subsequent Strategy paper on the Future of VAT.

In the European Parliament, we have not yet finished our deliberations on these dossiers, but I can already state the EP's broad support of your ambitious proposals because they respond to demands the Parliament has voiced for years. They are important contributions to the topic we are discussing today, a "Tax Policy under a Common Currency" - and also have relevance beyond our common currency area.

On the Energy Tax Directive, we have just established our position in the ECON Committee voting last week (29 Feb), and I trust the compromises we have found form a solid base for the further deliberations in the Council. For this reason I commend them to the Council and the Danish Presidency.

On CCCTB and FTT, we will soon finalise our position in ECON, too with votes scheduled for 20/21 March and 25 April, and again I believe our work will provide useful input to the Danish Presidency to progress on these files in Council.

On the Future of VAT, we as Parliament are happy to see that you have taken on board in your Strategy paper several suggestions from our own-initiative report in response to the Green Paper. We refrained of issuing yet another own-initiative report commenting on the Strategy Paper - which we welcome - but we are looking forward with interest to your subsequent legislative proposals on VAT.

We also supported with our recent report your proposal on Administrative cooperation on excise duties, and assure you of our continued support for your and the Danish Presidency's efforts to push for an agreement in Council on the revision of the Savings Directive, which has been blocked for over 3 years - and by far too long now. It is to Parliament's eyes now part of the vital response to the economic crisis as well as a harmonising measure. We also took a dim view of individual arrangements by Member States to make private deals with 3rd countries - we understand the expediency of collecting taxes but negotiation by the whole EU should not be undermined.

Looking at your work programme for 2012 - which is justifiably lighter than your previous one (which of course is not the case for the ECON committee given our wide remit) - I am pleased to observe that you plan several more proposals in line with past requests from Parliament; notably legislative proposals to tackle certain cases of aggressive VAT fraud - always of interest to me as I authored the report in the last Parliament pushing the agenda on this and other tax fraud and evasion matters - the VAT treatment of public authorities and the exemptions for certain activities in the public interest, several measures against double taxation of citizens and businesses in the Single Market, and finally your planned Communication on improving good governance in the tax area ("tax havens, uncooperative jurisdictions and aggressive tax planning").

In the same context, on tackling double non-taxation for fairer and more robust tax systems, I am also happy that you took on board a request from myself and the European Parliament and recently launched a public consultation on factual examples and possible ways to tackle double non-taxation cases. Indeed it is undesirable that in the EU Internal Market some taxpayers usually companies are able to avail themselves of double non-taxation on their cross-border activity as this gives those taxpayers both a competitive advantage compared to other taxpayers who are subject to full taxation, and also reduces contribution to tax from the corporate sector pushing burden onto individuals.

This is something I feel very strongly about to the extent that I have my own campaign 'Own-Up, Pay-Up', which calls for multinational companies operating in the developing world to pay their fair share of tax and to be open about the payments they make to governments. Moves for country by country and project by project reporting - in company law and accounting - not of course in your remit, Commissioner, also have to be seen in the light of fairness and revenue.

***

So now let me touch upon the main topic of our conference today: Tax Policy under a Common Currency.

Past Brussels Tax Fora focused on concrete legislative initiatives, including financial sector taxation or energy taxation, but with most of these now underway, I am pleased that we can turn this year to a more macroeconomic topic, looking at tax policy in a broader economic context. Maybe for reasons we would prefer not to be experiencing, tax policy is now also at the centre of the European project:

After the end of the Second World War, the European Community was established as an immediate response to the traumatising events to bring peace and stability to the (Western) European continent. Over the years, the European Community pursued further European integration with, among other tings, the establishment of the Single Market, a Common Agricultural Policy, a regional policy which aims to ensure comparable living standards across Europe in all regions, and more recently the monetary union for at least 17 Member States. To many it seems logical that after many steps of European integration some form of closer coordination in tax policy is at least inevitable, if not desirable. The eurozone crisis has accelerated this, although in the macroeconomic sense what has to be considered is the overall 'tax and spend' policy.

I see that the sessions of the programme today and tomorrow address the right questions:

There is much said at the moment about 'Fiscal union' but as I have just said both sides need to be looked at and it is a subject very close to national prerogatives. Along with the budget and employment committees we held a two day meeting last week with representatives (mainly chairs) from the budget and finance committees of the national parliaments, and there are strong views about national maintenance of budgetary choices even if the tax/spend sum has to be controlled.

For the first time, and also in response to the request from the Euro Plus pact, the Commission has to include in this year's Annual Growth Survey a new annex on growth-friendly tax policies in Member States and better tax coordination in the EU. The Survey calls for differentiated growth-friendly fiscal consolidation and suggests on the revenue side growth-friendly tax policies and better coordination in the EU as well as

(a) broadening the tax base of certain taxes (eg. limit the use of reduced VAT rates);

(b) shifting taxation from labour towards other areas which are less detrimental to growth (eg. consumption, environmental and high value wealth taxation);

(c) phasing out environmentally harmful tax subsidies and rethinking the structure of environmental taxation;

(d) limiting incentives for increasing the level corporate and household debt financing;

(e) improving the efficiency of tax collection and tackling tax evasion; and (f) reinforcing measures to encourage moves from informal or undeclared work to regular employment, broadening the tax base, a shift from labour taxation to less growth impeding taxation (consumption, environmental, wealth), and increasing the efficiency of tax collection.

The annex highlights the importance of tax coordination for tackling obstacles to cross-border activities in the Internal Market, that currently stem from uncoordinated tax policies of Member States. I have already mentioned double non-taxation as well as double taxation. Now is certainly the time to tackle mismatches between national tax provisions that may act as barriers and prevent citizens and businesses from fully reaping the benefits of the integrated market.

The report rightly states that taxation is particularly important in the current economic context in which Member States need to speed up their consolidation efforts. Although the current focus of austerity measures seems to be on the expenditure side, with Member States imposing major cuts in public investments and social welfare, they have to consider revenue-raising measures, in order to preserve and stimulate a still fragile European economic growth. Better tax coordination at the EU-level has a role to play in this context as it can be beneficial both for addressing common challenges and achieving national policy goals.

Now the question is: how can Member States effectively collect and probably raise taxes in the most growth-friendly, efficient and least distortive way?

One measure would be to critically examine and reduce the current plethora of tax expenditures ("niches fiscales") in EU Member States. As a reminder, according to the OECD, tax expenditures - apart from being a phrase designed to confuse the ordinary person - is defined as "provisions of tax law, regulation or practices that reduce or postpone revenue for a comparatively narrow population of taxpayers relative to a benchmark tax". There are over 700 tax expenditures in some Member States, exceeding 11% of their GDP. Those figures are even biased downwards, since they do not include the local government level for which no data are available.

Tax expenditures - I hate the phrase, to spend what was never there! - can be considered as a reflection of a tax system which, in order to compensate for the existence of high marginal tax rates, multiplies exemptions, allowances and specific taxes for certain categories of agents and activities, therefore amplifying distortions and increasing the complexity of the tax system. The tradition of state intervention in some Member States in the allocation of resources may also account for the multiplication of tax expenditures, which have been used by almost all governments.

They pose a risk, not only to the soundness of the budgetary framework, but also to the sustainability of public finances:

- Their budgetary cost is often largely underestimated and projections regarding their budgetary impact are often biased downwards;

- Their effectiveness in terms of fulfilling the desired goal of economic policy is not assessed against specified criteria;

- Their substitutability with public expenditures has allowed public authorities to bypass existing spending rules; by doing so, well-identified and controllable expenditures were substituted by tax expenditures, less transparent, less predictable and less controllable;

- The multiplication of tax expenditures increases compliance costs, especially for SMEs, and the tax collection costs; both SMEs and households need to invest substantial resources in order to understand the system.

Therefore tax expenditures should be made subject to the same scrutiny as public expenditures. At the European level, more attention should be dedicated to the surveillance of tax expenditures, since the tightening of expenditure rules (on which a clear focus was put by the Commission over the past few years) can give incentives for the development of tax expenditures in order to circumvent those rules.

***

Last year, at my speech at the Brussels Tax Forum I quoted Sir Winston Churchill with his words "there is no such thing as a good tax". Now, one year later I have perhaps to modify that view and put this quote into context: We face the need of financing European economies, but this should be done in the most efficient and effective ways. But how to decide on the best way forward? As politicians turn to economists, we are faced with Blinder's Law: Economists only rarely agree and where they do, they are not much followed by politicians (and vice versa).

However, a few points worth mentioning from an OECD study of 2009 on 'Economic growth and the role of taxation policy' (p. 44, paragraphs 165-166):

1. The effect of taxation on growth has frequently been demonstrated to be considerable.

2. A move from income taxation to consumption taxation will raise the rate of growth

3. Corporate taxation affects innovation and hence must affect the optimal amount of research and development. Personal income taxation reduces the returns to education so must reduce the accumulation of human capital.

So, the Commission proposals on Energy Taxation as well as on CCCTB and initiatives on VAT go thus in the right direction of shifting away from tax that harms growth, and better coordination. This follows recent successful examples in several EU Member States:Germanyin 2007 increased its standard VAT rate from 16% to 19%, while lowering social security contributions on labour income by 2 %-points, which is interesting, as there were some compaints of unfair competition on labour costs, certainly a coordination issue. The Baltic states have taken similar measures, andHungaryandItalyfollow the same path in the context of the economic reform programmes.

The missing links are still broadening the tax base and increasing the efficiency of tax collection. The ECON committee looks forward to see the work of the Commission on these fields during 2012 - taking into account the certainly very useful results of this event!

Commissioner Šemeta,

Ladies and Gentlemen,

I thank you for your attention and look forward to our discussions.

ENDS

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