Unit 2: Distribution of Taxes Arvind Ashta ESC Dijon- Pole Finance EU Taxation Unit 2: Distribution of Taxes Arvind Ashta ESC Dijon- Pole Finance ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The Distribution of Taxes in EU Division of taxes (differentiation) EU Taxes State Taxes Vertical control of taxes (integration) Other Issues ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta EU’s Resources Customs Duty Agricultural levies Contribution of 1% VAT Contribution based on Member States GDP Others ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta States’ Resources Direct Taxes Corporate Income Tax Personal Income Taxes Indirect Taxes VAT Excise Duty Taxes on petrol ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Horizontal Division Diversity Indirect taxes, example VAT rates Direct taxes, example PIT rates Boundaries Taxation limited to residents or Taxation limited to local income ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The level of levies varies between countries Diversity About 50% in Scandinavia 46% in France A little over 30% in Ireland Reasons Level of development Social preference for State interventionism v. liberalism Globalization ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The composition of levies varies In Denmark, welfare paid by taxes In France, social security is separate from tax Source: OECD ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Diversity of corporate taxes Rates Vary between countries 28% in Finland & Sweden 40% in Germany and Belgium Source Euro-Info Center 2001 Progressive in Ireland, Luxembourg, UK Base may vary Germany taxes differentially retained earnings and distributed profits Capital gains UK and Ireland tax capital gains of companies separately Other EU countries include this in corporate tax base ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Diversity of corporate taxes Deductible expenses Genuine business expenses deductible Personal expenses not allowed Eg. France: hunting, yachts, personal boats Depreciation techniques Some on Diminishing Balance Method Others on Straight Line Method (Italy, Holland, Austria) Some mixed: Germany, Belgium, France (DBM followed by SLM) ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Vertical control of taxes We will see ion the following slides Vertical control Stability Pact Harmonization of taxes attempted Differential tax treatment allowed Horizontal control No tax on Cross border movement No discrimination on imports from Member States Internal taxes, export reimbursements State aid ESC-Dijon- Pole Finance – EU Tax – A. Ashta

EU’s case for harmonizing corporate taxes Reducing fiscal barriers between States Double taxation avoidance Avoidance of discrimination Reducing artificial attractions for capital Harmful tax competition To achieve import or export neutrality for capital Reducing costs for trans-European enterprises Administrative difficulties with multiple systems Risk with multiple systems Higher risk for not understanding complex legalities (But) Lower political risk through diversification Limiting scope for fraud and evasion (efficiency) ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Harmonization of taxes Harmonization of Indirect Taxes allowed (Art 93) to extent necessary Unanimity required May adopt « provisions » (regulation or directive) Harmonization of direct taxes difficult (Art. 94) No control over direct taxes Have to bring it within article 94 Only directives allowed (not regulations) Implies a lot of derogations and different applications ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Why harmonization is difficult Budgetary situation in each country They want to control fiscal policy Competition between member states They want to attract enterprises Ideological differences Economic liberalism or Socialism Fear that capital will flee out of EU Complexity of taxation in each country ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Indirect Intervention by EU in direct taxes 90/434: mergers (capital gains) 90/435: parent-subsidiary (dividends) 90/436: Arbitration for cross-border disputes (transfer pricing) Creation of Sociétas Europaea (SE) ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Differential treatment of Residence, Source Discrimination allowed on basis of Place of residence Place where capital placed But no arbitrariness Is Income Taxed? Investment in home Country in source country Resident Yes Maybe Non-resident No ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Customs Union No customs duties between Members (art. 25) Common tariff wall (art .26) ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Internal taxation and discrimination No discrimination against imports from Member-States (art. 90) Difference between a customs duty and an internal tax Internal Tax is allowed But should not discriminate Case law is not always clear Note: Even EFTA countries have similar positions (AELA court refused Iceland a 10.5% lower VAT on books in Icelandic) ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta State Aid State aid incompatible if distortions State aid not to discriminate Aid which is allowed Social objectives, but applicable to all products Natural disasters Regions of FRG affected by division Aid which may be allowed Poor regions or high unemployment Project of common European interest Economic activities or areas Culture and heritage Others ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Other Issues Avoiding unethical fiscal competition No point eroding the tax-base Example: VAT at origin legislation Code of conduct for business Taxation Prevention of tax evasion and avoidance Non-discrimination among EU residents But Exit taxes allowed to conserve coherence of system ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Code of Good Conduct Approved in 1997 Waited on agreement on taxation of savings (2003) Avoid harmful tax competition ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Financing Social Security France introduced a tax to fill medical deficit On Pharmaceuticals’ turnover Deduction allowed For R & D expenses in France ECJ: found it discriminates (C-254/97) Against foreign controlled pharmaceuticals which did their research abroad Deductions reimbursed Levy new tax 1.2% on 1999 sales to compensate Exoneration for enterprises with sales < 100 Million FF Conseil d’Etat said OK Note: 26/44 French exonerated: 6/50 non-French exonerated Has ECJ’s ruling been effectively effaced ESC-Dijon- Pole Finance – EU Tax – A. Ashta