Tax policy Issuesin andthe challenges EU IN-DEPTH ANALYSIS EPRS | European Parliamentary Research Service Author: Cécile Remeur Members' Research Service February 2015 — PE 549.001 EN This publication presents the main issues and challenges relevant to tax policy in the European Union. It illustrates a number of recent actions and deliberations in the tax field, but does not aim to provide an exhaustive catalogue of taxation measures. It also sets out a range of references on EU taxation provisions and literature. c PE 549.001 ISBN 978-92-823-6595-3 doi: 10.2861/249007 QA-02-15-137-EN-N Original manuscript, in English, completed in February 2015. Disclaimer The content of this document is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. It is addressed to the Members and staff of the EP for their parliamentary work. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. © European Union, 2015. Photo credits: © alexmillos / Shutterstock.com [email protected] http://www.eprs.ep.parl.union.eu (intranet) http://www.europarl.europa.eu/thinktank (internet) http://epthinktank.eu (blog) Tax policy in the EU Page 1 of 29 EXECUTIVE SUMMARY The current EU taxation framework leaves Member States free to decide on their tax systems provided they comply with European Union (EU) rules. Those rules are adopted unanimously by the Council. The development of EU tax provisions is linked with the completion and proper functioning of the single market, with indirect taxes addressed earlier and more in-depth than direct taxes. Taxation provides revenues for national budgets emanating from national taxes, local taxes and social contributions which are levied on consumption, labour or capital. Taxes have complex impacts and as such have consequences for multiple policies, mainly applied in the EU context to support the proper functioning of the single market. For example, in competition policy, state aid provisions also apply to direct business taxation. National tax systems face stronger competition as a result of the globalisation of the economy. Tax competition favours certain taxpayers to the detriment of others, and the same holds true for Member States when they compete on taxation to attract economic activity or tax revenue. Digitalisation creates new business models and affects the economy as a whole. Globalisation and digitalisation both trigger a need to update and adapt tax systems. They offer the opportunity to modernise tax systems generally considered as complex and consequently having the side effect of creating undesirable potential for avoidance and evasion. This contradicts the overriding objective to set favourable conditions for growth and equity. In the context of consolidation of public finance, tax policy is used to provide budget revenues and to frame social and economic policies. Tax restructuring must serve to stimulate growth, in particular by altering the way the tax burden is split between labour and consumption, and preferring tax-base broadening over raising tax rates. In keeping with the aim of making taxation fair, effective and conducive to growth, tax systems face the challenge of improving tax compliance, which will contribute to recuperating lost resources. Fighting tax evasion and tax fraud, and the related opacity and secrecy, requires actions at EU and international level. These aim to increase transparency, which can contribute to reducing the available space for such behaviour. In particular, enhanced exchange of information constitutes a step forward in fighting against tax fraud and evasion. Tackling harmful tax competition and aggressive tax planning is a major aim of cooperation at EU level, in particular in business taxation, where the objective is to reduce the number of loopholes stemming from the complex array of rules, assessment bases and rates which may apply to a single firm. Cooperation is also developing in the international arena, in particular through OECD work on taxation in conjunction with the G20. Tax policy in the EU Page 2 of 29 TABLE OF CONTENTS 1. Introduction................................................................................................................... 4 2. Taxation in the EU.......................................................................................................... 4 2.1. Taxation in perspective .......................................................................................... 4 2.1.1. How the EU has been involved in tax matters ............................................................. 4 2.1.2. Main EU provisions relevant to tax policy.................................................................... 5 2.1.3. Actors and acts in tax policy......................................................................................... 6 2.1.4. Direct and indirect taxes .............................................................................................. 6 2.2. Taxation in the economy........................................................................................ 7 2.2.1. Tax-GDP ratio ............................................................................................................... 7 2.2.2. National taxes, local taxes and social contributions .................................................... 8 2.2.3. Major types of taxes: direct, indirect and social contributions ................................... 9 2.2.4. Breakdown by economic function ............................................................................... 9 2.3. Taxation and other policy objectives ................................................................... 10 2.3.1. Internal market .......................................................................................................... 10 2.3.2. Competition policies .................................................................................................. 10 2.3.3. As a tool for particular policy objectives.................................................................... 11 3. Present context of taxation ......................................................................................... 13 3.1. Tax competition and digitalisation ....................................................................... 13 3.1.1. Tax competition ......................................................................................................... 13 3.1.2. Digitalisation............................................................................................................... 15 3.2. Taxation, consolidation and growth..................................................................... 16 3.2.1. Taxation design objectives ......................................................................................... 16 3.2.2. Growth-oriented changes in tax structure................................................................. 17 3.2.3. In perspective............................................................................................................. 18 4. Challenges for EU taxation policy................................................................................ 18 4.1. Fair taxation and recuperation of lost resources ................................................. 19 4.1.1. Framing taxation: fair taxation................................................................................... 19 4.1.2. Lost resources ............................................................................................................ 19 4.2. Combating tax fraud and evasion......................................................................... 20 4.2.1. Tax fraud and tax evasion .......................................................................................... 20 4.2.2. At EU level .................................................................................................................. 21 4.2.3. At international level.................................................................................................. 22 4.3. Reducing tax avoidance........................................................................................ 23 4.3.1. Cooperation................................................................................................................ 23 4.3.2. Closing tax loopholes ................................................................................................. 24 5. Outlook ........................................................................................................................ 26 6. Main references........................................................................................................... 28 Tax policy in the EU Page 3 of 29 List of main acronyms used AEOI: automatic exchange of information BEPS: base erosion profit shifting CCCTB: common consolidated corporate tax base CIP: corporate income tax ECOFIN: Economic and Financial Affairs Council ESA95: European System of Accounts 1995 FTT: financial transaction tax OECD: Organisation for Economic Co-operation and Development PIT: personal income tax PSD: parent subsidiary directive SSC: Social Security Contributions TAXUD: Directorate-General for Taxation and Customs VAT: value added tax Tax policy in the EU Page 4 of 29 1. Introduction Profound changes in tax systems have resulted from globalisation and digitalisation of the economy, which