"How can the co-ordination of taxation policies improve European competitiveness"
Speech at the European Commission Representation in Finland 27 March 2006, 9.30 am The contribution of taxation and customs policies to the Lisbon Strategy (Introduction) I am honoured to have been invited to address this distinguished audience. And I am especially pleased that I will have the opportunity to engage in a discussion with you following my initial remarks. I would like to start by trying to identify the real problems which the European Union faces today. One set of problems relates to the international economic environment in which the EU has to operate. Today we are living in a global environment. This means that there is increasing competition and rivalry between the Union and other economic and political power centres. These include traditional competitors such as the US and Japan, but also new and growing competitors such as China (just think of the textile issue), Russia, India and the Far East in general. The second group of problems relates to common international challenges like climate change. Protection of our environment is not something which Europe can achieve on its own. Equally, developed countries cannot isolate themselves from poverty, famine and epidemics in the third world, or international terrorism. After 11 September 2001, many in Europe believed that this was a problem for the US. But after Madrid and London, nobody shares this view 1 anymore, and it is evident that it is a global problem which we have to address, in an adequate way. I am convinced, without exaggerating, that the European Union has, an enormous responsibility not only for its own future, but also for the future of the world and of mankind. In order to play its global role, however, the EU must solve its own burning internal problems like the low growth rate, the high rate of unemployment, the low level of competitiveness, and safety and security challenges. It is evident that without boosting its economy, without providing more and better jobs, without seriously addressing environmental challenges, the European Union cannot deliver prosperity, solidarity and security, which are the strategic goals set by the Barroso Commission and approved by the European Council and the European Parliament. But how to do this? How to deliver these strategic goals? The answer is the re-launch of the Lisbon Strategy of 2000. We have decided not to refer to it anymore as the Lisbon Strategy because I don’t think this says anything to ordinary people. Instead, we refer to it as the strategy for growth, jobs and competitiveness. These are mid-term goals but I would rather call them instruments to reach the strategic goals of maintaining the European social model and safeguarding the environment. To provide the means to finance the sustainability of our development, we need a higher rate of growth, more jobs and a higher level of competitiveness. All the Community policies, including taxation and customs policy, should be aimed at implementing these objectives. 2 I should therefore like to focus my intervention on the contribution of taxation and customs policies to this Strategy. Meeting the objectives of growth, competitiveness and jobs implies ensuring that Europe is made a more attractive place in which to invest and work; promoting knowledge and innovation; and shaping policies that allow European businesses to create more and better jobs. The new partnership approach between the Member States and the Community institutions has provided a clear allocation of responsibilities for the implementation of the revised strategy, focused now on growth and jobs. While the Commission presented a Community Lisbon Programme with key actions to be delivered at the Community level, Member States have submitted their National Reform Programmes. The Commission has noticed with satisfaction that the Finnish National Reform Programme identifies and responds to most of the main challenges facing Finland. It is coherent and sets out ambitious yet achievable objectives and a range of concrete and appropriate policy measures to build on the recent successes of the Finnish economy. The Commission welcomes especially Finland’s ambitious R&D investment target of 4% by 2010. The move towards stronger specialisation of research and a wider application of innovation, in particular in the service sector, can contribute beneficially to the entire Finnish economy. This is in entirely in line with the four priority actions agreed by the last Spring European Council to be implemented by the end of 2007, namely: 3 • investing more in knowledge and innovation; • unlocking companies’ potential, particularly for SMEs; • creating more and better-quality jobs; and, finally, • achieving an efficient, integrated energy market. In the Commission's view, all our policies – and therefore also taxation and customs policies – have to contribute to the renewed Lisbon Strategy. This is why it adopted in October 2005 a Communication highlighting how taxation and customs policies contribute to the attainment of the Lisbon objectives. Taxation and customs policies can contribute to raising the efficiency of our economies and the competitiveness of our companies. They can also generate more competition in the markets, boost trade and support knowledge and innovation. Tax barriers –such as double taxation, tax costs involved in business restructuring and, in general, any tax measure which induces preferences for firms to invest and operate domestically rather than in another Member State- results in costs that constrain potential economic activity. Such tax barriers can be considered comparable to technical barriers whose removal can induce liberalisation effects. Moreover, generally compliance costs constitute a pure deadweight loss, as they correspond to directly unproductive and recurrent activities. The removal of such obstacles would allow businesses to make sounder economic choices that are based on the productivity of factors and are less distorted by the influence of certain extra costs. This would lead to an increase in the output of the economies of Member States and, depending on the conditions of the relevant product markets and the actual behaviour of firms, 4 downward pressures on costs and prices. This, in turn, would result in welfare gains. Taxation policy can also have a proactive role in boosting knowledge and innovation for growth. Research and development as well as the general business environment can benefit from targeted fiscal measures. Effective action to protect intellectual property rights via a strategy against counterfeiting is also necessary if investment in research and development is to be encouraged. In the current international business environment, simple, predictable and cost- effective formalities for the cross-border movement of goods will also increase economic growth. *** (The European agenda for taxation and customs policies) I would now like to talk about some of the priorities which are on the European agenda in terms of taxation and customs policies and which aim at improving European competitiveness. (Corporate taxation) In the area of corporate taxation, the European agenda includes both comprehensive and targeted policy measures to address the problems arising from the coexistence of 25 different tax systems in the EU. 5 Comprehensive solutions, such as the Home State Taxation pilot project and the Common Consolidated Corporate Tax Base proposals, aim at eliminating simultaneously most of the tax obstacles faced by EU firms when operating in our internal market. Targeted measures, which address specific tax problems, are foreseen in order to eliminate specific tax obstacles thus simplifying the tax environment and creating a level playing field, for example in the field of transfer pricing and cross-border relief. 6 (Commission Tax proposals) (Home State Taxation pilot project) Taking first the Comprehensive tax solutions, in December last year, the Commission adopted a Communication that presents a possible solution to the compliance costs and other company tax difficulties that Small and Medium Sized Enterprises (SMEs) face when doing business across borders. This is the Home State Taxation pilot project, whereby Member States could allow SMEs to compute their company tax profits according to the tax rules of the Home State of the parent company or head office. An SME wishing to establish a subsidiary or branch in another Member State would as a result be able to use the familiar tax rules of its Home State when calculating its taxable profits. The "Home State Taxation" system would be voluntary for both Member States and companies and would run for a five-year pilot phase. It is important to underline that the proposal for Home State Taxation relies on one of the main principles of the internal market, that is "mutual recognition" and that no harmonisation of national law is involved. The Home State Taxation scheme would not mean taxation in the Home State only. It would simply mean that an SME's profit would be calculated in accordance with the rules of the Home State. The profit thus calculated would be apportioned among the countries where the SME is active according to a specific formula. Each participating Member State would then tax at its own corporate tax rate its share of the global profit. 7 The Communication on Home State Taxation is now on the table of the Council. I hope that Member States will examine this idea with an open mind. There is indeed ample evidence suggesting that SMEs are particularly hit by tax obstacles and that they face much higher compliance costs than large multinationals. At the same time, SMEs are crucial for growth and employment. We therefore urgently need policy actions such as the Home State Taxation pilot project which has the advantage that it can be implemented bilaterally between Member States without requiring any time consuming harmonisation at the European level. (Common Consolidated Corporate Tax Base) Another comprehensive and much more ambitious measure in the field of corporate taxation is the Common Consolidated Corporate Tax Base (CCCTB). The Commission intends to carry out the necessary preparatory work towards a Common Consolidated Corporate Tax Base during the next three years in order to present a Community legislative measure by 2008. The introduction of a Common Consolidated Corporate Tax Base would mean offering EU firms the possibility of reducing the costs related to the coexistence of different national tax systems by being able to compute their aggregate profits in the EU internal market according to a single set of EU tax rules. A Common Consolidated Corporate Tax Base would permit the reduction of compliance costs, the cross-border offsetting of losses and would solve the current tax problems linked to cross-border activities and restructuring of groups of companies. 8 As it is the case for Home State Taxation, the global profit should be apportioned among the countries where the firm is active. A method for sharing the consolidated tax base between Member States so that each State could apply its own tax rate to its share of the consolidated base would have to be agreed. This method should lead to a simpler and more transparent corporate tax system in the EU. Each Member State will then apply its own rate to its share of profit. The Commission does not therefore intend to propose a harmonised corporate income tax rate. (Transfer Pricing) As I said earlier, the EU tax strategy also includes targeted measures aiming at solving specific tax problems. A considerable source of difficulty for EU firms operating across national borders in the EU is the management of transfer pricing. For this reason the Commission established in 2002 the EU Joint Transfer Pricing Forum, which consists of tax experts from Member States' administrations and from the business world. The purpose of this Forum is to find pragmatic solutions to the high compliance costs and the double taxation that often arise in the case of cross-border inter- group transactions. These problems occur because of disagreements between companies and tax administrations, as well as between national tax administrations, on the pricing of the transactions. Bringing together all parties concerned in this way to discuss the issues at stake has already led to better common approaches. 9 On the basis of the work of the Forum, the Commission has proposed two "Codes of Conduct", one concerning the effective implementation of the EU Arbitration Convention and the other proposing a common approach to transfer pricing documentation. These Codes are so-called "soft law" instruments. They are not legally binding but all Member States have signed up to the first Code and I hope that they will agree to the second Code very soon. The Forum will continue its work in 2006. It will, in particular, focus on alternative procedures for dispute avoidance and resolution, including Advance Pricing Agreements and prior consultation. It will also look at interest and penalties relating to transfer pricing adjustments. (Cross-border loss relief) Another example of an area where co-ordination of tax policies at the EU level appears necessary is that of tax relief for cross-border losses. The lack of cross- border relief tends to impact on business decisions by inciting companies either to invest domestically or to make cross-border investments only in larger Member States. This is because in those situations there is a greater likelihood that the companies would have a tax base against which losses could be set off. Following technical discussions with Member States, after the Marks and Spencer judgement, the Commission intends, to present a Communication on this issue in the coming months. 10 (VAT) Cross-border economic activities in the EU are also confronted with VAT measures that act as barriers to trade and investment. The Commission has named as a particular priority in this regard the simplification of compliance obligations relating to intra-Community activities and has presented a number of measures to modernize and simplify the VAT environment. In particular, in order to simplify VAT compliance, the Commission presented a proposal to the Council and Parliament in October 2004 for a "one-stop VAT shop". This would allow traders to fulfil all their VAT obligations for their EU wide activities in the Member State in which they are established and this in an electronic manner. Unhindered access to the Internal Market is essential to create the elements for growth. The one-stop VAT shop would be just one step towards facilitating such access. Another Commission proposal relating to VAT that is on the Council's table concerns changing the place of taxation of services supplied from business-to- business and from business-to-consumers. The proposals would ensure better that services are taxed at the place of consumption. Having business customers account for VAT on services they receive from another country will, together with the one-stop VAT shop, ensure that VAT rules are simpler to apply and fairer. 11 After prolonged negotiations, the Council recently agreed upon the prolongation of the experiment of reduced VAT rates on labour-intensive services until 2010. I believe that Finland will now start to participate in this experiment. For its part, the Commission will present by mid-2007 an overall assessment of the impact of reduced rates notably in terms of job creation, economic growth and the proper functioning of the internal market, based on a study carried out by an independent economic think-tank. (Environmental taxation) Indirect taxation can also be used to promote the sustainable use of resources. There are two main examples that can be mentioned in this respect: the Energy Tax Directive and the introduction of a CO2 element in the tax base of passenger car taxes. With respect to the Energy tax Directive, I would like to stress that the original Commission proposal on this subject was much more ambitious than the text finally adopted and contained an obligatory provision for Member States to offset additional tax revenues gained through increased energy taxes, by lowering taxes on labour. In the end the final text at least contains a recommendation for Member States not to increase the overall tax burden and to use the Directive with the aim of modernising their tax systems and making them more eco friendly. However I would like, during the course of my mandate to re-visit this issue and to assess what adjustments could be made to the energy tax framework in order to reinforce the role which energy taxes can play in directing the behaviour of both consumers and producers and to orient investments. 12 With respect to the introduction of a CO2 element in the tax base of both registration and annual circulation taxes, included in the recent Commission proposal on passenger car related taxes, I would like to emphasize that this is expected to act as a powerful incentive for both the consumers to purchase cheaper and more CO2-efficient cars, and thus contribute significantly moving towards the Community target of 120g CO2 per km, and for the car industry to use modern technology and produce more environmentally-friendly cars in order to be able to sell on a highly competitive market. (R&D) I would like now to say a few words about tax incentives for R&D and innovation. Fiscal measures are increasingly popular instruments among Member States to promote research and innovation. The Report of the Independent Expert Group on R&D and Innovation appointed following the Hampton Court Summit and chaired by Esko AHO, Former Prime Minister of Finland, recommended a European coordinated approach for the design, the implementation and the evaluation of R&D tax incentives. The Commission will issue a communication in the next months proposing a common framework relating to R&D tax incentives. This Communication will: set out the constraints of Community law, and try to identify best practices. 13 This should help Member States to make optimal use of their tax systems to promote R&D expenditure. (Tax fraud) I must also point to the need to deal with the problem of fraud in order to enhance the environment for honest and legitimate operators. Fraudsters can undermine the competitiveness of legitimate traders as well as eroding the revenues of Member States both in the field of direct and indirect taxes. Therefore, this problem increasingly preoccupies Member States. I believe that in this context, the Commission has a valuable role to play in improving co-operation between Member States and providing fora in which tax authorities can enhance their knowledge and operational capacities. The Commission is currently preparing a new anti-fraud tax policy at European level. Instruments that could be considered include strengthening cooperation between national administrations; reducing obstacles to the effective exchange of information such as incomplete access to bank information; promoting negotiations with third countries to introduce provisions for exchanging information; further developing the use of intra-Community administrative cooperation tools; and improving basic tax legislation. I intend to present a Communication on this subject in the coming months. 14 (Creating a new Customs environment) The Customs Union was one of the first achievements of the EU. It was created nearly fourty years ago, as the embryo of the Single Market. But today, the Customs Union has to modernise itself to face the challenges of globalisation. Customs are under increasing pressure. The volumes of goods that are crossing the EU external borders increase rapidly. Companies expect faster and cheaper customs procedures to run their activities efficiently. At the same time, customs have to address the security and safety threats that the movements of goods may bring to our citizens and our environment. I’m thinking of terrorism, but also of counterfeiting. This explains why trade facilitation and security are the two pillars of the deep reform engaged by the Commission to modernise the European customs environment. It is accompanied by a new strategy against counterfeiting and piracy.. Let me start with the latter. According to studies carried out by the International Chamber of Commerce and the OECD, counterfeited products were responsible for the loss of 200 000 jobs in Europe. But no-one knows the "real" dimension of the "fake" problem. In 2003 the fake industry was estimated at around 450 billion dollars per year. This was before the recent surge in industrial production of fakes. The problem is growing significantly: in 1998, EU customs intercepted 10 million counterfeit goods at the Community's external border. Six years later, they seized more than 103 million goods, including 4.5 million fake foodstuffs. 15 This increasing threat to the safety of our citizens and the competitiveness of our companies, requires a strong response from all the actors involved, at all levels. This is why the Commission and the Member States have recently approved concrete measures to increase the protection that customs authorities can offer against piracy and counterfeiting. Reinforcing the partnership between customs and economic operators, and increasing international co-operation with countries outside the EU are essential to make a real difference in this area. As I said earlier, we have also engaged into a deep reform of the EU customs environment to meet the challenges of economic globalisation. The Commission is proposing to substantially review the Community Customs Code, which is the Bible of traders and border control authorities as regards trade in goods. The objective is 1) to simplify and streamline the customs procedures in order to facilitate trade and reduce compliance costs, 2) to adapt our procedures and controls to security requirements. Another pillar of the reform is to create a pan-European customs environment by inter-connecting the information technology systems of all EU companies and border control agencies. Traders will be able to deliver import and export- related information only once to customs authorities, through the Internet. That information will then be transmitted to the other authorities involved in the control of goods, including in another Member State. This will make e- Government a reality throughout Europe in the field of customs and trade. (Conclusion) A properly functioning Internal Market is in my view essential if the EU is to successfully promote competitiveness, growth and employment. And the more 16 the non-tax impediments to a smooth functioning of the Internal Market are removed, the more the remaining tax obstacles stand out. A number of actions in the revised Lisbon Strategy aim at making Europe a more attractive place to invest and work. These include initiatives to improve the tax and customs environment for economic activity. Taxation and customs policies can contribute to raising the efficiency of our economies and the competitiveness of our companies. They can also contribute to maintain the well-being of our citizens, and to protect our environment. As you have seen, we are pursuing rather pragmatic and well-targeted taxation and customs policies which imply closer co-operation and co-ordination among Member States. Only if Member States are prepared to cooperate with each other will they have the opportunity to increase the efficiency of our internal market while collectively regain the fiscal sovereignty they rightly aspire to maintain. Let's hope that the various proposals in the field of taxation and customs policies which are now on the table of the Council and of the European Parliament will be adopted in the near future. I am convinced that these proposals are not only for the common good of the EU, but also in the best interest of all its Member States and their citizens. I sincerely hope that beyond the technicalities, I have been able to convince you of the merits of a coordinated approach in the tax and customs area at EU level. 17 Thank you for your attention and I would be happy to answer any questions you may have. 18