Taxation in the EU

All EU member states must have sound public finances. The choice of expenditure priorities and the taxes to use to fund this spending are up to them, providing they are consistent with a single market and free movement of capital, i.e. they do not hamper cross-border investment. This leaves member states free to set the rate of tax on company profits and personal incomes, savings and capital gains. This national autonomy is underpinned by EU rules which require unanimity of all 25 member states for any decisions on tax matters.

However, where the single market, free movement of capital or individuals’ rights are being undermined by tax rules, the European Commission or those affected can seek remedy from the European Court of Justice, which has issued a number of landmark rulings on taxation matters.

The role of indirect taxes

A measure of uniformity in rules on value-added tax (VAT) and excise tax are essential if the single market is to function properly. Changes and differences in VAT or excise tax on petrol, drinks or cigarettes can very easily distort competition. Nevertheless, this leaves room for cultural differences, for example in the approach to taxing beer and wine, or for economic differences. A country with healthy public finances cannot be forced to tax for taxation’s sake. So, Luxembourg’s low excise duties offer bargains for motorists and shoppers from neighbouring countries or passing through.

Smart buyers can exploit tax differences across the EU to make large savings on a new car. However, these differences can also be an obstacle to buying the cheapest car available, and the European Commission is working on ironing them out in order to produce a true single market. It wants to see car tax systems re-structured and a common approach to taxing carbon dioxide emissions.

Minimum rates

Minimum tax rates for petrol, natural gas, electricity and coal are in the interest of fair competition and provide a tool for encouraging energy saving and the use of more environmentally friendly fuels. These arrangements are nevertheless flexible enough to accommodate special national circumstances.

There is EU-wide agreement on a minimum rate of 15% for VAT on most goods and services, but exceptions are possible. A higher standard rate is allowed within certain limits. So are lower rates, and exemptions for some items. Generally, these are restricted to goods and services not in competition with goods and services from another member state, like restaurant meals, or to the necessities of daily life, such as food and medicine. These exceptions are kept to a minimum wherever possible. The single market would be disrupted otherwise.

Fraud often takes advantage of the current complexity of a system built up piecemeal. Complexity also adds significantly to the cost of doing business and represents a real barrier to cross-border activities. So simplification and fighting abuses are priorities.

So is keeping up with advances in technology. The authors of the original VAT rules could not have envisaged that it would one day be possible to download computer software or take pay-per-view television from cyberspace. That first meant changing the rules to cover them. Then changes were introduced to make sure VAT was charged on e-purchases from outside the EU just as it is on any other import.

For the time being, we still pay VAT on our cross-border e-purchases within the EU at the rate charged in the country or purchase. That is an exception to the principle that VAT is levied in the country of consumption. When volumes of e-commerce were small, no one worried too much about this distortion in the distribution of the revenues. Now that cross-border e-trading is commonplace, another catch-up is under discussion to treat these transactions like our local shopping.

Company taxation that is fair for all

In the area of company tax, the EU has two goals: preventing harmful tax competition between member states and supporting the principle of free movement of capital. In the past, member states offered excessive tax incentives to attract foreign investment, sometimes at the expense of another EU country where the investment was economically more justified. Member states are now bound by a Code of Conduct to prevent this. They are phasing out harmful tax breaks inherited from the past.

There are also EU rules or codes of conduct to ensure, in all member states, comparable tax treatment of cross-border payments of interest, royalties and dividends to sister and parent companies and of cross-border intra-company sales of goods and services (so-called transfer prices). Work is going on to ensure that member states all take the same approach to taxing groups of companies. There is also discussion on having a common tax base, i.e. the rules applying to each type of transaction would be the same across the EU in order to prevent unfair competition However, actual tax rates would remain a matter for member states.

An equitable approach to savings and pensions

Personal taxation rules and rates are also matters for member states, unless the EU needs to step in to prevent discrimination against, or special benefit for anyone taking advantage of the opportunities of working or investing in another country. So the European Commission takes action to ensure that EU citizens are not deterred from working in other EU countries by problems with transfer and taxation of pension rights.

EU citizens can place their savings where they think they will get the best return. However, tax remains due in their country of residence. EU governments lose legitimate revenue if their residents do not declare interest income on savings held abroad. As a remedy, EU and some other European governments have been exchanging information on non-residents' savings since 1 July 2005. Austria, Belgium and Luxembourg, and some other European countries, are for the time being applying a withholding tax instead. They will transfer a large part of the revenue from that tax to the investors' home country, where it is actually due.

EU Taxation web links