Tax Harmonisation v Tax Competition

1
Tax Harmonisation v Tax Competition

• EU Tax Law Indirect Taxes
• Toby OReilly

pwc
2
Indirect Taxes

• Customs duties
• Value Added Tax
• Excise duties
• Energy and environmental taxes
• Vehicle taxation

3
Indirect Tax Harmonisation

• Treaty of Rome 1957
• 4 fundamental freedoms necessary to establish a
  Common Market movement of people, goods, capital
  and the freedom to supply services
• Customs
• The Community is based on a Customs Union
• duties on trade between Member States Abolished
• Common Customs Tariff
• VAT
• The Treaty specifically provides for
  harmonisation of indirect taxes necessary for the
  internal market
• 1st and 2nd VAT Directives (1967) commit
  Community to establishing a common system of VAT
• 6th VAT Directive (1977) designed to harmonise
  tax base

4
VAT Harmonisation the definitive system
(1987)

• Taxation at place of origin
• Deduction by the buyer
• Harmonisation of tax rates
• Redistribution of VAT receipts between Member
  States
• Only 2 kinds of supply
• - Inside the Community (domestic and
  intra-Community)
• - Outside the community

5
VAT Harmonisation the transitional system

• Introduced with Single Market and removal of
  physical borders (1 January 1993)
• Taxation at place of supply (destination)
• Complex rules 27 different rules for place of
  supply
• Different treatment of intraCommunity and
  domestic supplies
• Susceptible to fraud
• Should have been replaced by definitive system by
  31 December 1996

6
VAT current EU harmonisation strategy

• Simplification and modernization of current rules
  (e.g. codification of 6th VAT Directive)
• More uniform application of current rules
• Closer administrative co-operation between Member
  States tax authorities
• Definitive system remains long term goal

7
VAT rates

• Standard rates vary significantly
• - Minimum 15
• - Maximum 25
• - Average approximately 19
• Reduced rates vary significantly
• - minimum 5
• - highest 17
• - use of reduced rates is optional

8
VAT rates is there intra-Community
competition?

• Scope for competition is limited
• Services
• Internet service providers certain companies
  have relocated to Member States with the lowest
  VAT rates (Madeira)
• Not many services have suppliers location as
  place of supply
• Goods
• Individuals can travel to shop cross border in
  Member States with lower VAT rates
• Distance sales rules
• Special rules for New Means of Transport

9
VAT other opportunities for
intra-Community competition

• General derogations, right and options in 6th VAT
  Directive
• Examples
• - Option to tax real estate
• - Option to tax certain financial services
• - Group VAT registration
• - Excess input VAT immediate refund v carry
  forward
• - VAT bad debt relief

10
VAT - what does this mean for the Baltics
after accession?

• Current EU VAT strategy will increase
  harmonisation of current transitional VAT
  system
• Member States set own VAT rates and keep own VAT
  receipts
• - Re-evaluation of reduced rates and
  derogations(2004 at the earliest)
• European Commission will take a proactive
  approach to non-compliance with harmonisation
  measures
• Long term definitive VAT system?
• - Harmonisation of rates
• - Harmonisation of VAT collection and control
  procedures
• - Redistribution of VAT receipts

11
Customs - opportunities for intra-Community
competition?

• Community Customs Code is a framework huge
  variations in implementation
• Culture and attitude of customs authorities to
  facilitating business and trade
• Implementation of economic customs procedures
• - e.g. warehousing, Inward Processing Relief
• Cash flow matters
• - shortening the supply chain
• - delay VAT on imports
• European Commission proposing further
  harmonisation

12
Energy and Environmental Taxation

• Slow progress European Commission has made
  detailed proposals and recommendations that are
  still waiting to be adopted
• European Commission regards tax as a crucial
  instrument in meeting Kyoto Protocol targets for
  reduced greenhouse gas emissions
• Energy tax proposals include
• - Extending excise (currently to mineral oil
  products) to other energy resources, e.g. coal,
  electricity and natural gas
• - Increasing minimum excise rates on energy
  products
• Environmental tax policy is underpinned by
  principle of no increase in overall tax burden

13
Cars - EU Taxation Strategy (September 2002)

• Passengers car registration taxes cause
  significant obstacles and distortions to free
  movement of cars within the Single Market
• EC recommends
• - Reduction and abolition of registration taxes
  and replacement by annual road taxes and fuel
  taxes
• - Some approximation of annual road taxes
• - Environmental objectives (Kyoto Protocol) -
  link level of taxation to CO2 emissions
• Currently only recommendations but could become
  legislation

14
Some final observations

• Indirect taxes continue to distort operation of
  and competition in the Single Market greater EU
  harmonisation in the future
• Greater harmonisation of energy and environmental
  taxes to achieve policy objectives movement to
  taxing bads instead of goods
• Think now about how you/your Government is
  implementing EU indirect tax legislation