Tax review runs into a brick wall

Date: 10/10/1996

By Tim Jones

FUNDAMENTAL disagreements between finance ministries over taxation have set back Internal Market Commissioner Mario Monti's plans to instigate a thoroughgoing review of the EU's fiscal systems.

A group of ministers' personal representatives which has been meeting since June to hammer out a “new approach to taxation policy” has failed to bridge the yawning philosophical gaps between member states.

The last meeting of the high-level group on taxation this week left Monti bereft of reforming guidelines as he begins drawing up a paper for the next EU summit in Dublin on 13-14 December.

“No government's position has moved,” said a group member. “The Commissioner can take what he likes out of the conclusions of the group, but there are great divisions between member states about areas where they think they will lose their fiscal sovereignty.”

Monti's push for a new job-generating tax system for the EU was to be one of the 'big ideas' of Jacques Santer's Commission, combining its long-running campaign for improved competitiveness with the kind of coordinated tax-setting which would protect the single market.

In a report to finance ministers when they met in Verona during April, Monti presented a detailed case for shifting the burden of tax in the EU away from static factors of production - such as labour and fixed investment - and on to capital and pollutants.

With the abolition of controls on the movement of capital across borders, governments have tended to cut taxes on portfolio investment to act as a magnet for savings from other member states. They have compensated for the lost revenue by increasing taxes on labour by more than 20&percent; over the past 15 years.

In meetings of the high-level group, Monti restated his case for a common taxation system that would stabilise revenues and bring an end to the “tax competition” between member states which has eroded the fiscal base of European economies.

Many representatives bought the analysis but rejected the prescriptions. “I would say his arguments were so intellectually developed that most countries could do nothing else except agree with them,” said one.

However, at this point, the British and Irish deputies parted company with the rest of the group, reiterating their long-held positions that any joint attempt to shift the tax burden from labour to capital or carbon fuels would be a drastic erosion of fiscal sovereignty. Both countries benefit hugely from inward investment attracted by low capital taxes.

At the other end of the spectrum, Belgium continued to take the most militant stand in favour of harmonisation, arguing that member states had already lost their fiscal sovereignty when it came to capital or corporate tax.

Every year, Belgium's high taxes on interest income prompt savers to make bank deposits and investments in other countries. The Belgian representative came forward with a proposal for a code of conduct for taxation policy. Signatories would be morally bound to identify those categories of taxed goods or services which were so mobile that true sovereignty no longer existed and coordinate agreements aimed at avoiding double taxation and the erosion of their tax base.

Belgium's general approach was supported by the Netherlands, Italy and Sweden. But without British or Irish backing, tax changes, which require unanimity, stand no chance of adoption.

The French and German representatives found themselves somewhere between the two groups, with the latter in particular favouring minimum rates of tax on the savings income of non-residents, but unwilling to countenance other forms of harmonisation.

From this, Monti will put together a formal proposal on direct taxation which is due to be discussed by the full Commission on 22 October, and presented to finance ministers on 11 November.