Clash of beliefs in fight for tax harmonisation

Date: 10/10/1996

By Tim Jones

IT IS one of life's ironies that Union governments refuse so consistently to harmonise their taxation policies.

While proposals to set maximum rates of value added tax or provide for common energy taxes get nowhere in the Council of Ministers, member states seem happy to hand over much of their power to tax and spend to a new institution in the form of a Stability Council.

Governments suffer sleepless nights over unemployment, creating confidence pacts and setting up working groups to study the reasons for Europe's haemorrhaging of high-value jobs.

Yet the same governments levy their heaviest taxes and social security contributions on labour. The costs to an employer of hiring staff, particularly the young and unskilled, have never been higher.

Internal Market Commissioner Mario Monti is determined to put this right, but realises that overturning these contradictions in EU policy will be the longest of long games. It will be a battle of philosophies as well as the usual scrap over national interests.

This time the approach being taken by the Italian Commissioner, often criticised for being excessively cautious, could pay off.

Nobody, however forceful or driven by federalist ambitions, would be able to oblige member states to cede tax-raising powers without first winning a drawn-out battle of ideas.

For Monti, the first of many rounds is coming to an end with the final meeting of his high-level reflection group this week. Piecing together taxation policy from its conclusions will be arduous, since no country seems to have budged a centimetre.

Monti began his campaign at the informal meeting of EU finance ministers in Verona in April, presenting them with a 14-page discussion document setting out his proposals for an end to the kind of tax competition which, he believes, is eating away at the single market.

In their increasingly intensive search for tax income in a single market, EU member states are finding that they are competing more and more with each other, and with bordering countries, to attract Europeans' savings.

Tax evasion and avoidance are as old as tax itself, but with the lowering of national borders for capital, it has become much easier for companies and individuals to cut their tax bills by shifting their savings into other tax authorities.

Officially, all governments frown upon this. Yet several of them benefit from this competition. Where would Luxembourg be without the billions of ecu in German and Belgian savings? The City of London would be a fraction of its current size without money coming from the continent.

The difference now is that the regimes which are losing tax income to the low-tax authorities are becoming more vocal and are no longer prepared to turn a blind eye to evasion schemes. They are increasingly targeting legal loopholes which allow people to avoid tax.

The German government claims to have lost as much as 10 billion ecu in fiscal revenue because of tax evasion. When two senior bank executives were sentenced to jail terms for encouraging a Koblenz businessman to move 3 million ecu of his income out of Germany and into their Luxembourg branch, the news shocked the country.

In Belgium, where taxes are both extraordinarily high and relatively easy to avoid legally with the help of a skilful and expensive accountant, the question of evasion is becoming a very hot potato.

Kredietbank, the country's third largest bank, is under investigation for allegedly having 10 billion ecu in Belgian accounts in its Luxembourg subsidiary (see box below); and that is only one bank.

When national airline Sabena was going through a tough restructuring to ready it for partial privatisation, the board considered establishing a scheme to transfer the airline's heavy social security bill into Luxembourg. Only when Finance Minister Philippe Maystadt threatened to resign - fearing that this social security shopping might become so prevalent that the Belgian system would soon be bankrupt - did the government block the proposal.

Monti realises that too many questions are raised by this problem to allow it to be dealt with in a piecemeal manner. Policy-makers have to step back and take a long, hard look at taxation, employment and the single market and then establish some unshakeable principles.

In his paper and during meetings of his reflection group, the Commissioner has spelt out what he believes to be the crux of the matter: stabilising revenues by shifting tax levies from immobile factors of production such as labour and fixed investment and on to capital and the use of finite resources.

His analysis shows that, over the past decade, tax on capital throughout the EU has been cut in an attempt to attract investment in the new environment of free capital movement.

While this is natural and acceptable, it has been offset by raising the burden of tax on labour, which is harder to avoid. Between 1980 and 1993, the overall tax rate on labour in the EU has risen by 20&percent;, while falling by 10&percent; for self-employment and capital.

This in turn has fostered 'black economies' in every member state. In some countries, the black part of the economy is starting to outstrip the white. Taxes have lost their legitimacy and evasion has become a way of life.

Monti wanted the reflection group to consider whether a minimum rate of 'effective' taxation throughout the EU would put an end to tax competition. But while officials were happy to debate this issue, those sceptical about any form of harmonisation in direct taxation - led by the UK and Ireland - stuck firmly to their guns.

Luxembourg has declared that it is ready to move on its long-held opposition to harmonising the rates of taxation on interest from savings, but will only do so if other member states are prepared to discuss all other types of harmonisation.

For its part, Germany is only prepared to talk about harmonised savings taxation, with its Finance Minister Theo Waigel making it clear only last week that all other aspects of direct taxation should be dealt with at his desk in Bonn and not in Brussels.

Monti's task in the coming weeks will be to try to find some crumbs of harmonising comfort from these discussions. But one thing is quite clear: the road to a minimum rate of effective tax stretches far into the distance.