Tax Policies in the European Union 2018 Survey Taxation and Customs Union Europe Direct is a service to help you find answers to your questions about the European Union Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of the following information. Luxembourg: Publications Office of the European Union, 2018 Print ISBN 978-92-79-96692-7 ISSN 2529-6698 doi:10.2778/246886 KP-AE-18-001-EN-C PDF ISBN 978-92-79-96690-3 ISSN 2529-6701 doi:10.2778/770974 KP-AE-18-001-EN-N © European Union, 2018 Printed by the Publications Office in Luxembourg Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39). For any use or reproduction of photos or other material that is not under the EU copyright, permission must be sought directly from the copyright holders. Tax Policies in the European Union 2018 Survey 1 | P a g e 2 | P a g e Acknowledgements This report was prepared by DG TAXUD staff under the direction of Stephen Quest (Director-General, Taxation and Customs Union), Valère Moutarlier (Director, direct taxation, tax coordination, economic analysis and evaluation), Gaëtan Nicodème and Gaëlle Garnier (Head of Unit and Deputy Head of Unit, Economic analysis, impact assessment and evaluation). It was coordinated by Martin Becker and Melvin van Velthoven. Martin Becker, Antonella Caiumi, Philippe Demougin, Marco Federici, Manuel Godinho de Matos, Valeska Grönert, Scott Huxford, Jan Kock, Stephen Lawson, Konstantin Lozev, Milena Mathé, Ioanna Mitroyanni, Tanel Pütsep, Savino Ruà, Valeria Sperandeo, Clare Southworth, Astrid Van Mierlo, Melvin van Velthoven, and Sabina Yovcheva contributed to the report. Comments and suggestions by other services of the Commission are gratefully acknowledged. Comments on the report are welcome and can be sent to: Gaëtan Nicodème European Commission Directorate-General Taxation and Customs Union Directorate for Direct taxation, Tax Coordination, Economic Analysis and Evaluation Office SPA3 6/017 B-1049 Brussels e-mail: Functional Mailbox [email protected] Cover: © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Etienne Ansotte 3 | P a g e 4 | P a g e Foreword The European Union (EU) continues to make progress towards a sustainable recovery, with a return to robust economic growth and employment rates reaching record highs in some Member States. In the last year, the social dimension of the EU has continued to rise up the agenda. With the Social Pillar now integrated into the European Semester process, it is important that we consider how taxation can help to tackle challenges related to inequality and social mobility. At the same time, the new global context and recent developments in international taxation have led to renewed concerns about our competitiveness. Therefore ensuring efficient taxation systems that are conducive to investment and employment also remains a key, without engaging in harmful competition. The need to tackle tax abuse and ensure a level playing field remains high on the agenda for citizens and politicians alike. If we are to make real progress on improving the fairness and efficiency of tax systems in the EU, we must also look further forward. We are faced with transformative trends that will have profound implications for taxation, as well as many other policy areas. These include digitalisation and technological developments, as well as changes in the nature of globalisation, demographic change and important environmental challenges. We are making important progress on tackling some of the most pressing challenges related to digitalisation, but also need to reflect on the longer term impacts of these changes on our tax systems. In light of the on-going reflections on the Future of the EU, we should also consider the role of taxation in this wider debate. The 2018 edition of the "Tax policies in the European Union Survey" presents an indicator-based analysis of the design and performance of the tax systems in the EU. New developments in this year's edition include a summary of important business taxation reforms in third countries, an analysis on taxation as an environmental policy instrument, a focus on the implications of new forms of work for labour taxation, the influence of the overall tax mix on progressivity, and the Commission’s proposal for the taxation of the digital economy. Ultimately, it continues to put forward and substantiate the tax policy priorities for the next European Semester cycle. This report provides reference points and insight to measure the progress that we will accomplish together to make taxation in Europe fairer and more efficient. I am sure that this report will provide policy makers across Europe with clear insights into challenges that lie ahead and with an excellent evidence base for action. Stephen Quest Director-General Directorate General for Taxation and Customs Union 5 | P a g e Contents Acknowledgements ............................................................................................................................................................................... 3 Foreword ..................................................................................................................................................................................................... 5 Executive Summary ........................................................................................................................................................................... 11 1. General principles for fair & efficient tax systems .................................................................................... 13 1.1 Recent trends in taxation ....................................................................................................................................................... 14 1.2 What makes a fair and efficient tax system? ............................................................................................................ 19 1.2.1 Stimulating investment and growth ................................................................................................................. 20 1.2.2 Developing a more employment-friendly environment ......................................................................... 21 1.2.3 Correcting inequalities and promoting social mobility ........................................................................... 21 1.2.4 Fighting against tax fraud, evasion and avoidance ................................................................................. 22 2. National tax systems performance ........................................................................................................................... 23 2.1 Encouraging investment ......................................................................................................................................................... 23 2.1.1 Effective tax rates ....................................................................................................................................................... 24 2.1.2 Debt-bias in corporate taxation ........................................................................................................................... 25 2.1.3 R&D tax incentives ...................................................................................................................................................... 28 Box 2.1: International Business Taxation Developments ................................................................................... 32 2.1.4 Environmental investment ...................................................................................................................................... 34 Box 2.2 Taxation as an environmental policy instrument: Focus on Waste and Resources .......... 36 2.1.5 Increasing tax certainty ............................................................................................................................................ 37 2.1.6 Improving the tax administration ....................................................................................................................... 39 2.2 Supporting job creation and employment .................................................................................................................... 43 2.2.1 Overall tax burden on labour ................................................................................................................................ 44 2.2.2 Tax burden on low income earners ................................................................................................................... 46 2.2.3 Tax burden on second earners ............................................................................................................................. 49 Box 2.3: Emerging forms of work and implications for taxation: Zoom on digital platform work ......................................................................................................................................................................................................... 51 2.2.4: Scope to shift taxes away from labour .........................................................................................................