Monti injects urgency into EU tax review

Date: 18/04/1996

By Tim Jones

SINGLE Market Commissioner Mario Monti is pressing finance ministers to waste no time in kicking off a comprehensive examination of tax in the EU.

Determined to seize the initiative in his campaign for an Union-wide job-generating tax policy, Monti will write to ministers next week asking them to move swiftly to establish a high-level reflection group charged with reporting back before the end of the year.

At their informal meeting in Verona last weekend, finance ministers agreed to Monti's proposal for a group of their personal representatives to take a look at the EU's taxation problems and possible solutions. But no firm timetable was set.

While they did this, virtually every member state made it clear that they would not budge from their long-standing opposition to taking taxation decisions by qualified majority vote.

But Monti believes that by standing back from detailed taxation proposals and examining the overall problems caused by tax competition between member states, the Commission could start to win over sceptical governments to its harmonisation crusade.

In his letter, Monti will propose that the group should only meet a handful of times before making recommendations.

The question of tax harmonisation is shaping into one of the 'big ideas' of Commission President Jacques Santer's team. While several Commissioners have fought hard for harmonised rates of indirect tax and the closure of loopholes that divert trade within the EU, a global view of the problems is only now being considered.

Monti hopes the reflection group's conclusions will give EU taxation policy the impetus it needs, not just to make the Union a fertile ground for jobs growth but also to get key tax proposals agreed.

These would include establishing a simpler value-added tax system based on the principle of payment in the country of origin and bringing excise duty rates closer together.

Competition between tax regimes is increasingly exercising the minds of finance ministers, particularly those whose country's tax revenues are seeping away at a time when budgets must be consolidated.

In Germany, where the government is thought to have lost 10 billion ecu in revenue through tax avoidance, fiscal competition between member states is a live issue.

The Commission argues that the failure of member states to agree meaningful minimum rates of excise duty has led to distortions of the single market, with, for example, UK residents systematically buying van-loads of beer in France and returning home to resell them at bargain prices.

According to Monti, a truly common taxation policy would seek to stabilise revenues and move away from imposing taxes on less mobile factors of production, such as labour, rather than highly-mobile capital.

Over the past ten years, taxes on capital have been cut right across the Union as member states have taken advantage of the abolition of exchange and capital controls to attract investment. This lost capital revenue has often been compensated by an increased burden of tax on labour, since this is harder to avoid. But this, in turn, has fostered the development of the 'black economy'.

Between 1980 and 1993, the overall tax rate on labour in the EU rose by 20&percent;, while falling by 10&percent; for self-employment and capital.

At the moment, Monti is making no specific proposals. “It was a very helpful discussion at Verona. It was well received and we want to use this willingness to discuss it further,” commented a Commission spokeswoman.

One idea the reflection group is likely to consider is whether a minimum rate of effective taxation throughout the EU would help kill off tax competition.

But this is unlikely to make much headway since, even in the atmosphere of good will at Verona, UK Chancellor of the Exchequer Kenneth Clarke asserted that tax competition could actually be a positive force in encouraging innovative markets in Europe.

A radical proposal from Belgian Finance Minister Philippe Maystadt to eliminate discriminatory tax treatment of non-residents by creating the idea of a 'Community resident' will also be considered.

The varied rates of withholding tax on savings income in the EU - ranging from zero to 30&percent; and often exempting non-resident savers - have caused major problems for Belgium and Germany in particular, who have lost tax revenues to Luxembourg and Switzerland.