Completing the single market jigsaw

Date: 13/06/1996

TAX is regarded by many in Brussels as something of a dirty word. For not only does it swallow up a huge slice of Belgian salaries, it also causes some of the EU's most bitter disputes.

Despite years of negotiation, member states have failed to put in place one of the crucial pieces of the single market jigsaw - a harmonised tax system.

As one commentator put it: “If monetary union is the icing on Europe's economic cake, then a single fiscal policy is the flour.”

The absence of a single system causes countless problems - ranging from double taxation of incomes to fraud and unfair competition - for European firms trying to take advantage of the internal market by expanding their cross-border activities.

“Businesses have gone global, but tax systems remain national,” explains Hanns Glatz of Daimler Benz. “And because there are 15 different tax jurisdictions in Europe, companies are penalised for doing business in other member states.”

That is not, however, due to any lack of effort by the Commission, which has churned out proposals in the past only to come under fire from all sides.

Rather the problem can be blamed on EU member states. While they agree in theory on the need for a single tax system, they refuse to concede the fiscal ground needed to create such a system.

Tax proposals must be adopted unanimously by ministers and the Commission's draft directives more often than not suffer a tragic fate when they reach the Council.

Like characters in a Kafka novel, they wander from country to country, from meeting to meeting, without ever reaching their destination.

The proposal calling for a ban on tobacco advertising is a classic example of this. It has been the subject of heated debate between member states for almost a decade, but is no closer to becoming part of the Community's acquis communautaire.

On other fronts, however, some progress has been made. Former Taxation Commissioner Christiane Scrivener managed to get agreement on the introduction of a temporary VAT regime in 1993 - a kind of half-way house on the road to full harmonisation.

But, although she was considered an adept politician, most onlookers felt Scrivener lacked the intellectual prowess needed for the job.

Mario Monti's appointment as her successor was therefore welcomed by the business world. A former lecturer in economics, he had an academic record which could not be faulted.

But if his credentials were good, his mastery of the political skills needed to make progress in this most sensitive of areas is questioned by some disappointed industry chiefs.

“Name one thing he has done since his arrival - except to fire his director-general (Peter Wilmott)?” challenges one.

His grumble - and it is one echoed by other business leaders - is that the Italian professor is long on ideas, but short on proposals.

It is a charge which is hard to refute. For in terms of concrete plans for EU measures, Monti has little to show for his first year and a half in office. In this highly contentious area, Monti's tenure got off to an inauspicious start. The long-awaited review of the Union's excise duty system, due at the end of 1994, came out nine months late.

When it reached Cabinet level, the document contained three proposals, calling for changes in the structure of duties imposed on cigarettes, increases in the minimum rate on mineral oils and a rise in the duties imposed on alcohol.

This immediately sparked a bitter internal dispute, according to sources close to the talks, with Cabinets anxious to defend national interests refusing to countenance Monti's proposals.

That the Commissioners' staff (who pledge allegiance to Europe) should fight their country's corner is not surprising in itself.

The departure of Jacques Delors, a dedicated European with a strong style of leadership, from the Commission presidency left a large gap which seems to have been filled with nationalist sentiment.

What is perhaps more surprising is the fact that Monti - or at least his Cabinet - failed to fend off opposition to the three proposals, withdrawing them with a humility which opponents say is the Commissioner's trademark.

Plans for a definitive VAT regime based on the country of origin principle are also running behind schedule. Due to come into force on 1 January 1997, the new regime is unlikely to be up and running before 1998 as the Commission's tax division has yet to come forward with a proposal.

Instead, Monti has embarked on a wide-ranging consultation process. His aim is to take account of everyone's views before drafting the necessary legislation.

That is to put the cart before the horse, say his critics, who would rather see Monti put something in the Council's ring and let the fighting begin.

“What is the point in dotting the i's and crossing the t's of a text which is going to be ripped to shreds in the Council anyway?” asks one.

“In seeking a consensus before proposing things, Monti is trying to usurp the Council's role - and it will not work. The Commission simply does not have the resources to act as the arbiter of national interests.”

Harsh words. And, according to Monti supporters, entirely undeserved. They, and the Commissioner, paint an entirely different picture of the professor's work over the past two years.

Defending his change in approach, Monti points out that little progress was made by his predecessors - and not because of a dearth of proposals.

“Eighteen tax proposals are on the table in the Council at the moment, and 30 more have been withdrawn. So I think it is simplistic to suppose that by increasing the output rate of proposals, one will also increase the chances of success,” he says. “What is the point in endlessly producing proposals simply to appease the Commission's conscience?”

Faced with a stalemate in the Council, Monti's supporters believe he had little choice but to change tack.

In a report sent to an informal meeting of EU finance ministers in Verona two months ago, Monti outlined the arguments for a common fiscal policy, namely that it would help stabilise governments' tax revenues and promote jobs.

That back-to-basics approach could well do the trick or at least help to - if there is anything which will persuade finance ministers to adopt proposals, it is talk of money and jobs.

The intention is to extract a political commitment to tax harmonisation from member states (similar to the one secured by Delors for the 1 January 1993 deadline for the introduction of the single market), making it difficult for them to later reject directives aimed at achieving that goal.

“This should raise the stakes,” explains the Commissioner.

At Verona, finance ministers agreed to set up a high-level group of national officials - which will meet for the first time on 24 June - to discuss tax issues and point the way forward.

By involving ministers to such an extent, Monti hopes to ease the passage of subsequent proposals for legislation.

One of the ideas likely to be considered by the group is that of combining of tax proposals into larger packages.

“If the way to gain advance is by adopting a more global approach, if we will have a greater chance of success by pegging together proposals, then certainly that is a possibility,” says Monti.

So, while many are understandably becoming increasingly impatient about the lack of concrete action, they may find it was worth the wait.

The proof of that pudding will be in the eating.

Much depends on Monti's ability to bring forward proposals and then steer them through the EU institutions. The jury is still out on whether he can demonstrate the political skills required to do so.