28 November 2012

The 2013 Annual Growth Survey: Towards fair and competitive tax systems

Taxation is more than just a revenue raising instrument. Depending on how it is applied, it can be used to promote growth and competitiveness, boost employment and address specific social needs. Member States' should therefore harness this potential of taxation. (Includes Šemeta link.)

What does the 2013 Annual Growth Survey say on taxation?

This year's Annual Growth Survey is consistent with last year's, in terms of the guidance given for Member States' tax reforms. In addition, this year the Commission urges Member States to focus on increasing both the competitiveness and fairness of their tax systems, as these two principles determine the legitimacy of any tax system for the public.

Why does the Commission recommend broadening tax bases, and how can this be done?

Tax breaks, exemptions and hidden tax subsidies not only reduce national income, they also contribute to a more complex tax system, which creates burdens for businesses and compliance difficulties for taxpayers. Therefore broadening the tax base can also improve the overall efficiency of the tax system and ease life for companies. A yearly independent review on all tax exemptions and reduced VAT rates is recommended by the Commission to make sure that intended economic and social objectives are achieved. Very often, this does not seem to be the case.

The Financial Transactions Tax, which 11 Member States are currently keen to push forward through enhanced cooperation is another way for Member States to broaden their tax base without burdening ordinary citizens. One of the objectives of the FTT is to ensure that the financial sector makes a more equitable contribution to public finances.

How can tax systems support competitiveness?

The competitiveness of a tax system extends far beyond merely the tax rate. In fact, just as important are the cost and ease of compliance, the level of administrative burden, the transparency and stability of the system improving the business environment. Moreover, a competitive tax system is one that supports the modernisation of the economy. Dealing with the challenges of developing environmentally friendly taxation can help here, as can addressing the debt bias issue.

At EU level, the Commission is promoting a simpler, more efficient and more robust VAT system and has already initiated work to achieve this. The proposed common consolidated corporate tax base (CCCTB), could also considerably contribute to the competitiveness of Member States and of the EU as a whole. By providing harmonised and simplified rules for businesses tax returns, it would lower compliance costs by nearly €1 billion, reduce the administrative burden for cross-border businesses and ensure greater legal certainty. This, in turn, would create a more favourable environment for business and a more attractive market for investors.

What contributes to the fairness of a tax system?

A fair tax system is one in which everyone pays no more and no less than their share, everybody pays what they owe and the benefits of the tax are evenly redistributed. Among the ways that Member States can ensure fairer tax systems are by clamping down on tax evasion and avoidance, removing hidden tax subsidies which create competitive distortions, ensuring that social effects are taken into account, and rewarding desirable activities (e.g. rewarding work and enterprise, or environmentally-friendly behaviour). Fair taxation is an issue which also extends beyond national borders, to the extent that every Member State should be able to collect the tax revenues that it is due.

EU coordination in taxation ensures greater fairness by limiting non-taxation and abuse and preventing a "race to the bottom" approach which can curtail national reform efforts. It also allows Member States to draw on their strength in numbers when tackling common problems such as harmful tax competition from third countries.

Press release

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Speaking at the press conference, Commissioner Šemeta said he would be presenting a package of measures aimed at strengthening the common stance against tax evasion, tax havens and aggressive tax planning next week. He also hoped to see quick progress in authorising the financial transactions tax to move ahead under enhanced cooperation. "The FTT is the epitome of fair taxation, as it would ensure the financial sector makes an equitable contribution to public finances. 11 Member States are ready to move ahead with it. There is no good reason why they shouldn't be facilitated in doing so."

Full speech

© European Commission