European : Do we need them?

In the European Union, each member state is responsible for its system. Diferent national regimes help with , but can also lead to or unfair rules in the Single Market. That is why better coordination or even standardisation of taxes is debated. What tax regulations are there already in the Single Market? What would be the advantages and disadvantages of a European tax? And what reforms are being discussed in Europe? Why are taxes a European issue?

The member states in the EU deter- The EU must simultaneously estab- mine their tax regime. That is why lish fair competitive conditions in the individual types of taxes and tax the Single Market. National tax sys- Level playing feld rates difer. The corporate in tems may not distort competition, For the European Single Ireland is only 13 percent, for example, for example by providing unfair fs- Market to function properly, while in France, it is almost three times cal benefts for domestic companies. all must be subject to the higher at 34 percent and in Germany This is often referred to as a level same rules. It is hard to fnd it is 30 percent and thus clearly above playing feld. At the same time, the the right balance. Too much the EU average of 23 percent. European Commission must also take harmonisation will hurt care that member states are globally competition; too little will This tax competition inside the EU competitive. lead to unfair competitive has advantages and disadvantages. advantages. Therefore, Advocates of diferent tax rates argue National taxes are also used for f- the goal of creating the that it is especially important for nancing the EU budget. This occurs same con ditions for all smaller member states. Countries indirectly through member state may re sult in either more such as Ireland, with a smaller labour contributions. The European Trea- or less regulation. market, would be less attractive ties do not currently allow the EU than other locations without such an to levy taxes directly. However, this Brexit gap advantage. Critics fear by contrast rule could be amended with a view to The departure of the that excessive tax competition could reforming the complex EU fnancing United Kingdom from the lead to a downward spiral with lower system and closing the Brexit gap. EU will open up a gap in and lower tax rates, also known as a the EU budget, which is race to the bottom, where ultimately Even if taxes are solely a matter for estimated to be more companies proft and the availability member states, that could change in than ten billion euro a year. of public goods such as education future. At least two issues, the Single The budget must then may be jeopardised. Market and fnancing the EU budget, either be reduced or speak in favour of coor di nating na- fnanced differently. tional tax policies through European regulations.

“Member States cannot give tax benefts to selected “The EU Commission has understood that citizens fnd companies – this is illegal under EU state aid rules.” companies’ tax tricks to be very unfair. The patchwork arrangement of national tax codes to date is not com­ Margrethe Vestager, EU Commissioner for Competition on the Apple ruling by the European Commission patible with the Single Market in Europe.” on 30 August 2016 Sven Giegold, Greens/EFA group in European Parliament in reaction to a corporate introduced by the European Commission on 25 October 2016 What is the state of the EU tax debate?

The fght against tax evasion and/or Some areas of are already avoidance has been discussed time and coordinated, as for example with again. The LuxLeaks scandal in 2014 the EU Value-Added Tax Directive. EU Value-Added showed that more than 300 com panies It is designed to prevent competition Tax Directive used letter box frms in Luxembourg distortions among member states by According to this 2006 to shift profts to low tax countries and establishing a minimum rate of VAT. directive, VAT in EU mem- reduce their tax bills. Other EU coun- Furthermore, the EU has wanted (for ber states must be at least tries have also been criticised for such some time) to standardise corporate 15 percent. Furthermore, practices. tax rates in the Single Market. In au- countries may introduce tumn 2016, the Commission pres ented two reduced rates of at A ground-breaking decision was a draft proposal for a coordination least fve percent. Some made in the case of Apple. In 2016 the of corporate taxes designed to prevent goods and services may be European Commission, as the highest illegal tax breaks and simplify Single exempted from the tax and competition authority, decided that Market rules. others must be, such as the tax agreement between Apple and medical treatments. Ireland is illegal because it distorts New ideas for taxation are on the competition in the Single Market. table. In early 2017, an expert group Coordination of Apple had a tax rate of less than one headed by the former Italian Prime corporate taxes percent for many years. The Commis- Mi nister Mario Monti put forward The Common Consolidated sion decided that Ireland must de- proposals for fnancing the EU bud­ Base (CCCTB) mand repayment of illegal tax breaks get. It recommended that EU member is a proposal by the Euro- to the tune of 13 billion euro. states agree on taxes that contribute pean Commission and sets either to the functioning of the Single out that companies must Market or the achievement of EU comply with just one na- policy goals. Examples given were tional tax regime and not

taxes on corporate profts, fuels, CO2 28 different ones for deter- or electricity. The member states mining its tax base. would impose these taxes, with a portion of the revenue passed on to the EU.

“It should no longer be about more money for the EU “One possibility is to use the subject of climate

budget, but rather about using the funds better.” protection and to increase the taxation of CO2 pollution rights in the EU, for example. This Jens Spahn, State Secretary in the German Federal Ministry of Finance revenue is based on European laws, but has in Die Welt in reaction to the Monti Report so far gone to member states.” on 12 January 2017 Günther Oettinger, EU Budget Commissioner in an interview with DER SPIEGEL on 21 June 2017 EUROPEAN TA XES

A look ahead

SCENARIO 1 SCENARIO 2 SCENARIO 3 Tax competition among Combination of national Far-reaching tax coordination EU countries and European taxes in the Single Market

In this scenario, all taxes continue to be set and collected by the In this scenario, the EU countries agree on further steps towards in- In this scenario, a foor is set for some or all taxes in the EU, but the member states with a minimum of coordination at EU level. This tegration and fnance the common budget largely through European responsibility for the tax system remains with the member states. allows for maximum tax competition in the Single Market. Struc­ taxes. For example, corporate profts may be subject to an EU tax. Three challenges must be addressed here: turally weak countries can attract companies with lower tax rates, The member states may impose extra taxes on companies located for example. Furthermore, diferent national preferences and historic in their country, but not below the common standard. That would First, EU countries are structurally diferent: Some fnance a majority fscal compromises remain in place: Member states which fnance pre vent a race to the bottom among EU countries and eliminate tax of their social security systems through tax revenues, while others

their pension and health insurance systems through taxes instead havens. Furthermore, a European tax on CO2 emissions ofers the handle this through diferent contributions. Coordination would there- of individual contributions can continue to do so. possibility of achieving EU objectives in climate protection and fore have to leave room for dissimilar systems. Second, the common simultaneously ensuring that no member state faces competitive tax rates would have to be adjusted over a period of time. If national The EU budget will be reformed without collecting common taxes. disadvantages. parliaments and the European Parliament were to decide jointly on This may happen, for example, by getting the member states to tax policy, it would be necessary to clarify responsibil ities. Third, agree upon funding it exclusively through revenues In a largely tax­fnanced EU, the European Commission and the Euro­ European tax reform is a great deal more complicated than national and contributions based on gross national income (GNI). pean Parliament have more policy leeway, but are also under greater tax reform. And the latter is already politically difcult to imple ment pressure to justify their income and expenditure priorities to European on account of the many conficts of interest, for example between This scenario, barring a few minor exceptions, comes closest to the citizens. Whether this will ever happen is questionable: So far most EU governments and companies or taxpayers and recipients of social status quo and would be suitable for an EU that confnes its activities countries are very sceptical about the idea of transferring competencies benefts. to areas in which the advantages of common rules are most obvious for fscal policy to the European level and thus giving up one of the last and uncontroversial. The diferent tax systems would also bring important privileges of the nation state. However, individual countries such as Germany and France could costs, however: on the one hand owing to the complexity of diferent conceivably move ahead and standardise certain tax rates. Such an rules that must be obeyed; on the other due to pos sible tax avoid- approach would be particularly sensible for taxing the digital sector ance, as witnessed in the LuxLeaks scandal. or for environmental taxes. Other EU countries could join in later. This would lead to bottom-up tax harmonisation in some areas.

FACT The corporate tax rate has fallen FACT The tax burden is distributed very differently FACT The public sector has an important fnancing substantially in the EU in the EU member states role in some EU countries # 1 Corporate tax rates in percent # 2 Share of total in percent, 2014 # 3 Taxes and social security contributions as a percentage of GDP in 2015

2001 2016 Labour Consumption Capital 20–30%

>30–40% Bulgaria

Ireland >40% 16 Cyprus 23 Latvia

Lithuania 57 53 44 Romania 27 Slovenia 24 44 Czech Republic 34 Poland Estonia Germany France 29 47 Croatia 29 Finland 13 24 United Kingdom 24 35 38 Hungary 33 50 Denmark 28 47 40 59 Slovakia 39 34 26 Sweden 32 44 Spain 39 48 Netherlands 37 Italy Sweden 28 Austria 43 38 Greece 10 Luxembourg 22 29 Portugal Germany 50 44 37 34 Italy 40 40 Belgium 34 France 33 Malta 35 0 5 10 15 20 25 30 35 40 45 Slovenia Ireland

In almost all EU countries, the corporate tax rate has fallen in recent years. While the EU average The greatest differences in the EU are in taxing labour, which makes up half of the tax revenue The importance of the public sector varies from member state to member state: In Ireland, taxes was still above 30 percent in 2001, it declined to 22.5 percent in 2016. The differences between on average. Consumption taxes are particularly important in smaller and new member states and social security contributions to the state make up only a quarter of gross domestic product the member states have become somewhat larger in the meantime. On average, the corporate tax and make up just under 30 percent in the EU on average. Capital contributes about one-ffth of (GDP); in France they make up almost half. There, and in the Scandinavian countries or Belgium, rate in 2001 varied by just under six percentage points; in 2016 it was seven percentage points. the tax revenue on average in the EU. the public sector spends a lot on social security systems, health and education. Since the intro- duction of the euro, there has been no signifcant alignment of revenue and expenditures between Source: European Commission 2016. Source: European Commission 2016. the member countries.

Source: Eurostat 2017.

“Setting common tax rules in the EU is just as difcult as the introduction of the euro. But we will not get around a tax coordination, for example with lower limits, forever in the Single Market. Until then, a bottom-up harmonisation in selected areas appears to be the best strategy.”

Dr. Anna auf dem Brinke The author is a Research Fellow at the Jacques Delors Institut – Berlin. www.strengthentheeuro.eu In the publication series “Europa briefng”, the Bertelsmann Stiftung and the Jacques Delors Institut – Berlin cover key topics of European politics and present possible scenarios: What is the problem? What might happen next? And what can politics do now?

You will fnd all the publications from the joint project here: www.strengthentheeuro.eu

Project team Imprint

Prof. Dr. Henrik Enderlein Heidi Marleen Kuhlmann © 2017 Bertelsmann Stiftung Director, Project Manager European Politics and Jacques Delors Institut – Berlin Jacques Delors Institut – Berlin, and Communication, Vice President and Professor Jacques Delors Institut – Berlin Bertelsmann Stiftung of Political Economy, Carl-Bertelsmann-Straße 256 Hertie School of Governance Max Emanuel Mannweiler 33311 Gütersloh, Germany Project Manager European Politics Tel. +49 5241 81-81183 Joachim Fritz-Vannahme and Communication, www.bertelsmann-stiftung.de Director, Jacques Delors Institut – Berlin “Europe’s Future” programme, Jacques Delors Institut – Berlin Bertelsmann Stiftung Katharina Späth Pariser Platz 6 Project Manager, 10117 Berlin, Germany Dr. Anna auf dem Brinke, Author “Europe’s Future” programme, Tel. +49 30 467 260 -905 Research Fellow, Bertelsmann Stiftung www.delorsinstitut.de Jacques Delors Institut – Berlin Philipp Ständer Translation Sabine Feige Research Fellow, ETC Europe scrl, Brussels Project Assistant, Jacques Delors Institut – Berlin “Europe’s Future” programme, Edit Bertelsmann Stiftung David Gow, Edinburgh

Dr. Katharina Gnath Design Senior Project Manager, ressourcenmangel “Europe’s Future” programme, an der Panke GmbH, Berlin Bertelsmann Stiftung Production Jörg Haas, Author druck.haus rihn gmbh, Blomberg Research Fellow, Jacques Delors Institut – Berlin Persons responsible according to the German Press Law Prof. Dr. Henrik Enderlein, Joachim Fritz-Vannahme