Michal Radvan EU Tax Policy vs. National Sovereignty of Member States Michal Radvan

Aim of the Contribution Level of tax harmonization Taxes to be harmonized 2

Tax harmonization One of the most discussed issues in EU Proponents point to the need for uniform rules in connection with the growth of international trade (increasing number and importance of multinational companies and their subsidiaries, the movement of capital and people - residents of one country working in another country). This leads to a conflict of individual tax systems that have been around for decades or even centuries built primarily with regard to national traditions, economic status, political and social developments and also taking into account the natural conditions, religion, etc. Advocates of national interest: fiscal policy should remain the full responsibility of individual EU Member States - a loss of competitive advantage especially in CEE countries

Tax harmonization mechanism to remove tax provisions that either create obstacles to the functioning of the internal market or distort competition purpose of achieving tax harmonization is not uniform tax system, but rather approach and harmonization of the various tax systems

Phases of harmonization process Select the tax to be harmonized, Harmonize the tax base, or other structural components (tax subject) Harmonize the tax rate (not always, tax rate can be a tool of competition for member states)

Tax harmonization in EU tool leading to the ultimate objective of creating a single market. Important obstacles to the single market are: the tax burden on the free movement of persons and especially corporates and on the free cross-border movement of goods, services, capital and revenues, different tax treatment of domestic and imported goods and services, substantial differences between national tax legislation, which lead to market distortions, difference in tax treatment between residents and non-residents, and domestic and foreign investments and incomes (in particular the double taxation of incomes from sources outside the country) Tax harmonization is not just a goal - a final state, but the process itself.

Tax harmonization as a process Positive harmonization - the process of approximation of national tax systems through the implementation of the EU directives, regulations and other legislative instruments; the result (assuming the proper implementation of the directives into national legislation) is where all states have the same rules Negative harmonization - the result of the activities of the European Court of Justice, where national jurisdictions - tax systems taking steps based on the tax case law of the Court; does not create the same rules for all Member States, as the case law is focused only on Member State which is a party in proceedings; ECJ case law, however, may be a good interpretive guide

Negatives of harmonization Higher tax rates Slower economic growth Does not prevent the excessive expansion of the public sector It interferes with national sovereignty of member countries May jeopardize the revenue of public budgets The loss of fiscal autonomy of member states

Income tax harmonization Stagnation of the harmonization process Exchange of information Avoidance of double taxation The fight against tax havens

Start Good conditions - in all countries, there were personal income tax and corporate income tax (excluding Italy) Emphasis on corporate taxes (remove barriers of the common market functioning, mobility of capital, labor immobility)

Sad facts Limiting fiscal sovereignty - the unwillingness The unanimous adoption of directives Differences in accounting systems (tax vs. Anglo- Saxon) Differences in structural components - social aspects (children, disability - from tax base or tax), rate (bands, progressivity), application of losses, investment incentives, depreciation Luxembourg - 17 zones The only rate - BLR, LAT, LTH, ROM, SVK Denmark - up to 59% Romania - 10%

4 possibilities Taxation in the home country - optional taxation in each country or just in home country Common Consolidated Tax Base - based on choice (CCCTB) European corporate tax - for large multinational companies, at EU level, uniform rate Mandatory harmonized tax base - mandatory, even for companies operating in only one Member State

Common Consolidated Tax Base The only rules within the EU for the determination of the tax base, which would subsequently be divided into subsidiaries and the national tax rate is to be applied Transparent effective rate and fair tax competition Removing obstacles to cross-border mergers Reduce costs Elimination of problems with transfer pricing Losses in one country and gain in another country - tax neutrality Not for non-european small companies

Taxation in the home country The tax base of all companies in the group would be set as a consolidated tax base under the laws of the State of management, then divided by the subsidiaries and the national tax rate should be applied For small companies Effective and cheap It is not harmonization, but rather the possibility for competition

The Merge Directive The main consequence is the possibility of deferral of tax liability that arises from capital gains in case of merger or division of a company, transfer of assets or exchange of shares The aim is to prevent the taxation of profit, which may arise during the merger because of the difference between the value of the transferred assets and liabilities and their accountings amounts

The Parent-Subsidiary Directive The aim of the Directive is to eliminate the double taxation of corporate profits paid by group companies resident in a Member State to the parent company located in another Member State. At least, parent company can deduct the tax paid by the daughter in another country from the tax base.

The Savings Directive The aim is to prevent tax evasion to individuals who derive interest income from other Member States Not applicable to payment of dividend

The Interest and Royalties Directive It introduces a unified system of taxation of interest income and royalties between related parties, if they are paid over national borders

Conclusion It is very likely that there will not be any deepen fiscal harmonization in the field of direct taxation in the near future Member States have no will to give up more of their sovereign power There must be unanimous agreement of all Member States in case of adoption of tax issues

VAT harmonization Almost finished with the exemption of tax rates

Start 2 systems of indirect taxation France: VAT - a general consumption tax, imposed on the added value Other countries: cumulative cascade system of turnover tax - a tax imposed on the gross value of production; the number of production stages affects the size of the resulting tax; this system causes distortion of the market environment, as the tax burden is increased in proportion to the length of the production / distribution chain; it is necessary for manufacturers to integrate; does not cover services (lawnmower vs. gardening services)

VAT VAT is the only way The principle of the country of destination, as the principle of the country of origin assumes a uniform rate

Directive no. 77/388/EEC (6th Directive) Basic rules Rules for tax base Territory Subjects Rates – basic 15%, reduces 5% Amended by directive no. 2006/112/EC (7th. Dir.)

Conclusion Structural harmonization is completed, there is a single system of indirect taxation Incomplete issue of tax rates harmonization (interference with national interests, instrument of fiscal policy, the budget revenue, unwillingness to enforce the implementation of the EC Directives, national traditions) US various sales tax in each country, do not cause market distortions The minimum amount of the reduced rate is not respected It maintains the principle of the country of destination, as the country of origin principle would require tax rate unification, but this has proven very effective

Excise taxes harmonization fiscal plans, political aspects, regulation of consumption, permanent consumption, luxury, harmfulness Harmonized: tobacco and tobacco products, alcoholic beverages (spirits, beer, wine), mineral oils, energy Non-harmonized: cars, fur products, guns, playing cards, roulette, etc.

Harmonization process Very advanced Efforts to unify rates (favoring domestic producers is limited, resp. impossible) resulted in at least minimum rates It relies on spontaneous harmonization process - a country with high rates will have to reduce rates to the level in other countries The principle of the country of destination (country of origin is impossible with respect to different rates)

Directive 72/43/EEC System od excise taxes (mineral oils, tobacco, spirit, beer, wine) abolish other excise taxes, except taxes that do not need border controls or additional costs of international trade

Directive 92/12/EEC Horizontal directive Single Customs Tariff to identify the product admits other indirect taxes such as for environmental reasons - eg taxation of waste (Sweden, Denmark), emissions (Italy, Lithuania), fertilizers (Sweden, Denmark) and air transport (UK, France) Replaced by Directive 2008/118/EC

Structural directives Tax bases

Directive on the rates approximation Minimal rates

Conclusion Structural harmonization is completed, there is a single system of indirect taxation Incomplete issue of harmonization of tax rates (national interests, instrument of fiscal policy, the budget revenue, unwillingness to enforce the implementation of the EC Directives, national traditions) The principle of the country of destination maintains, as the country of origin principle would require tax rates unification (hard to determine where purchased goods was made), but this has proven very effective

Taxes on motor vehicles Not in USA Europe, Japan Registration tax (to be abolished) Regular tax – ones in EU, eco tax? Fuel tax, Vignettes, Toll systems

„Eurovignette“ Directive For all vehicles above 3,5 tons modifies somewhat broader than only toll (performance fee) and the user (time) fee generally controls the regular tax on motor vehicles requirement to collect tax only in the Member State in which the vehicle is registered minimum tax rate tolls and time-based charges may be levied only for the use of multi-lane highways or roads for motor vehicles for the use of bridges, tunnels and mountain passes maximum rates for tolls and time-based charges

Interoperability Directive the obligation to use in the implementation of toll systems only satellite technology, GSM, or microwave Preferred mobile technology GSM and GPS satellite due to their intended use within the system Galileo

Other taxes Tax on Air tickets? Property tax (tax on immovables) – is there any need to unify? Transfer taxes (on sales, gift tax, inheritance tax)

Local vs. State Taxes municipalities (not only in the Czech Republic) have enough legal competences and sufficient privileges to influence their local taxes revenue? 36

Challenges for our region From central planning to markets => new public finance system From State hegemony to local self government Local self governments need stable and predictable financing To provide mandated services and duties Continued urbanization puts more strain on urban infrastructure European integration encourages local gov’ts Growing role of subnational governments and their financing 37

State Taxes More stable Definite income VAT, PIT and CIT, Excises 38

Economic Autonomy of Municipalities Article 8 Czech Constitution: There is a self- government of the self-government units Article 101(3) Czech Constitution: Self-government units are public corporations with the right to own property and the right to manage with their budget.

Economic Autonomy and ECLSG Rules from European Charter of Local Self-Government: Local communities have right fot their own incomes. Part of these incomes are local taxes. Local self-government can set up these taxes. State must discuss the amount of money send to the municipalities. The last two are not valid for the Czech Republic!!! We have no legal act on local taxes!!!

Own Tax Incomes of the Municipalities Real estate tax: cca 5 % Local fees and administrative fees: cca 4 %

Other Tax Incomes of the Municipalities VAT: 35 % Personal Income Tax from dependent activity: 19 % Personal Income Tax from business: 8 % Corporate Income Tax without tax paid by municipalities: 15 % Corporate Income Tax paid by municipalities: 12 %

43 Local Taxes in General one of the most important revenues of local budgets suitable instrument for local self-government units to influence the revenue according to the needs of municipalities, regions, etc. self-government units have usually rights to impose or abolish local taxes, they can set the tax base and the tax rate, create exemptions and other correction components to adopt, change, or abolish local law is usually much easier and quicker than to do the same with legal acts at the national level

Local Taxes ??? Personal income taxes (shared or surcharge) Corporate income taxes (shared) User charges Business registration taxes Visitor taxes Property taxes Gross receipt and turnover taxes Transfer taxes Registration fees Local excise and sales taxes Local wage taxes Building permits, planning permissions etc. Dog taxes Other 44

Local Tax by Radvan a financial levy, determined to municipal budget that can be influenced (talking about tax base, tax rates or one of the correction elements) by the municipality; it is not crucial whether the taxpayer obtains from the municipality any consideration or if it is a regular or a single levy – local taxes include the tax in the strict sense, so the charges (fees) the catalogue of local taxes in the Czech Republic includes tax on immovable property and local charges 45

Property tax Most widespread form of local revenue is property tax Significance of property tax (% GDP) varies widely: LV - 1.4%, PL - 1.2%, LT - 0.5%, EST %, SVK - 0.4%, RO - 0,6%, H - 0.3%, CZ %, BG %, SLO - 0.2%, SRB - 0.3% Significance of property tax (% local revenues) varies widely: PL %, RO - 11%, CZ, H - 2.1%, EST - 2.7%, BG - 2.8% Wide variation in tax bases, rates, relief, billing, collection, enforcement 46

Tax on immovable property municipalities in the Czech Republic can influence tax in two ways: exemptions exemption of real estate attached by natural disaster exemption of agricultural lands possibilities to apply or change coefficients that can influence the tax rate location rent municipal coefficient local coefficient 47

Exemption of Real Estate Attached by Natural Disaster by generally binding ordinance of the municipality fully or partly (as a percentage) real estates located within the area of the municipality and affected by a natural disaster for a period of up to five years exemption may be effective not only for the year of the disaster and for the following years, but even for one previous taxable period – retroactivity!!! ordinance must take effect no later than 31 March of the taxable period following the year when there was the disaster retroactivity could cause many problems in administration and for the taxpayers there are not many municipalities using this opportunity it is quite difficult to prove that the real estate was somehow affected by the disaster municipality usually needs more revenue to improve its property affected by the disaster 48

Exemption of Agricultural Lands arable lands, hop–gardens, vineyards, orchards and permanent grass growths by municipality’s generally binding ordinance cannot be applied to lands in a developed area and a built–up area of the municipality lands must be determined in the ordinance by the parcel number and the cadaster area must become valid no later than 1 October of the preceding taxable period and take effect no later than 1 January of the following taxable period used very rarely negative fiscal effects (high number of agricultural lands in villages) administratively-technical aspects (low number of these lands in cities) 49

Location Rent coefficient according to the number of inhabitants for development lands, residential buildings, other structures that provide facilities for residential buildings, flats and non– residential premises not used for the running of businesses and as garages multiplies the standard tax rate basic value of the coefficient is set in the act (between 1.0 and 4.5) municipalities have the right to increase (up to one level) or reduce (down to three levels) a basic coefficient by a generally binding ordinance must become valid no later than 1 October of the preceding taxable period and take effect no later than 1 January of the following taxable period 50

Municipal Coefficient for houses and family houses used for individual recreation, other structures that provide facilities for houses and family houses used for individual recreation, garages, structures for business activities, non–residential premises used for business activities and as garages municipalities have the right to set this coefficient by their generally binding ordinance for particular types of structures value of the coefficient is at 1.5 and it multiplies standard tax rate must become valid no later than 1 October of the preceding taxable period and take effect no later than 1 January of the following taxable period 51

Local Coefficient multiplies the tax duty of the taxpayer for particular kinds of lands, buildings, non–residential premises and flats at 2, 3, 4 or 5 by a generally binding ordinance for all real estates in their area, excluding agricultural lands must become valid no later than 1 October of the preceding taxable period and take effect no later than 1 January of the following taxable period only 7 % of municipalities in the Czech Republic are using this option political reasons some municipalities argue that they do not want to increase the tax for all real estate, especially residential one 52

Local Charges I every municipality has a possibility to levy local charges (local fees) by the generally binding ordinance catalogue set by Local Charges Act includes following local charges: dog charge charge for spa and recreation stay charge for using public places charge on entrance (admission) charge for housing capacity charge on communal waste charge for permission to enter selected places by motor vehicle charge on the evaluation of building land 53

Local Charges II list is comprehensive and the municipality cannot levy any other charge municipality can define conditions for levying, the charge rate, charge maturity, eventual exemptions, etc. the ordinance may not exceed the conditions defined by the Local Charges Act (for example absolute charge rate or the definition of taxpayer) no conditions when the ordinance must become valid and take effect, but especially for those charges with the taxable period of one calendar year (dogs and communal waste) I strongly recommend effectiveness to 1 January of the taxable period ordinances must not be retroactive 54

Conslusion local taxes in the Czech Republic have minor role in the self- government units financing real estate tax approx. 5 % local charges approx. 5 % very depends on number of inhabitants several possibilities for municipalities to influence their budget incomes through local taxes, but none options like that for regions local self-government units are dependent on the transfers of shared taxes (PIT, CIT, VAT) from central budget in drawing up their budgets I have to reject the hypothesis that municipalities in the Czech Republic have enough legal competences and sufficient privileges to influence their local taxes revenue shared taxes are the base for local budgeting PIT and richmen? 55

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