EU Taxation Unit 1: Introduction ESC Dijon- Pole Finance Arvind Ashta Unions of States Taxation EU Taxation ESC-Dijon- Pole Finance – EU Tax – A. Ashta

War and the need for a Union  40 million deaths 20 million Russians, 6 million Jews 46 million displaced 20% to 50% of population disappeared No law and order The Need for a Union ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Advantages of uniting Military Economic Political ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Forms of Unions Trade With Barriers Free Trade Area: no internal taxes Customs Union: Same customs duty Economic Union Confederalism Federalism Unitary State: one tax ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Chronology of European Integration The Treaties: EEC 1957 The EC: merged executive 1965 Common external Tariff 1968 EC gets own resources 1975 Internal tariffs abolished 1977 EU 1993 ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Theories of checks and balances A.      Separation of Power B.       Alternation of Power C.       Federal Division of Power ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Features of Federalism Vertical Separation Horizontal Differentiation Legal Autonomy Financial Federalsim Vertical Control Redistribution Integration Vertical Participation Horizontal ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Taxation Compulsory Transfer To government ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Compulsory Levies Taxation Social Security ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Direct/Indirect Tax Distinction: Direct Tax: you pay directly to government Indirect Tax: you pay to someone who pays to government Direct taxes Usually redistributive Indirect taxes Poorer countries have low taxing capacities Considered more neutral by some Degressive/regressive by others ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Taxes Influence Corporate Policy The investment decision (to invest abroad) Based on deductibility of foreign losses Dividend policy Depends on taxes on dividends and capital gains Financial policy Debt is tax deductible Thin capitalization rules Employment policy By varying VAT By changing employers’ social security charges ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The State is a business: Before Financing Votes Security of business Security of Employment Individuals Enterprises ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The State is a business: Later Security of Financing STATE Votes Security of Employment Individuals Enterprises ESC-Dijon- Pole Finance – EU Tax – A. Ashta

The States needed to merge Financing STATE Votes Security of business (harmonization of markets) Security of Employment Individuals Enterprises ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Harmful Tax competition Attract foreign enterprise only on basis of lower taxes Lower taxes on international companies vis-à-vis national companies Special regimes for insurance, holdings, coordination centres, banks ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta OECD and cartel type networks Controlling inter-governmental competition Government A B C OECD ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Harmful tax competition OECD Report ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Harmful tax competition in EU EU Primarolo Report ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Tax Competition ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Tax evasion: profiting from diversity 1. Intra-group manipulations Goods: transfer accounting between related companies Services: Royalties: level may vary common R & D: contributions to expense may vary, not necessarily with benefit common service centers: coordination, distribution Financing Loans: varying interest rates Thin capitalization Write-offs of debts of loss-making subsidiaries Guarantees given free ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Mechanisms of tax evasion 2. Holding company regimes Holding in State with no/low taxes on holdings Requires dividends to be received without having been taxed in other States 3. Base companies (société écran) Paper companies in tax-havens with a view to transfer profits there Profit gets taxed if eventually distributed but not if reinvested If distributed to States with Double Tax avoidance treaties ESC-Dijon- Pole Finance – EU Tax – A. Ashta

Mechanisms of corporate tax evasion 4. Treaty shopping (société relais) Invest in India through Madagascar company 5. Captive companies Self-Insurance companies Group Finance companies Coordination centers ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta Tax fraud This requires creating artificial entries in books of accounts High penalties ESC-Dijon- Pole Finance – EU Tax – A. Ashta

ESC-Dijon- Pole Finance – EU Tax – A. Ashta European Legal System EU Sources of European Law EU sources National sources Infra-national sources Enforcement of EU Law Member States EU Law Localities ESC-Dijon- Pole Finance – EU Tax – A. Ashta