1. Unit 2: Distribution of Taxes Arvind Ashta ESC Dijon- Pole Finance
EU Taxation
Unit 2: Distribution of Taxes
Arvind Ashta
ESC Dijon- Pole Finance
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

2. The Distribution of Taxes in EU
Division of taxes (differentiation)
EU Taxes
State Taxes
Vertical control of taxes (integration)
Other Issues
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

3. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
EU’s Resources
Customs Duty
Agricultural levies
Contribution of 1% VAT
Contribution based on Member States GDP
Others
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

4. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
States’ Resources
Direct Taxes
Corporate Income Tax
Personal Income Taxes
Indirect Taxes
VAT
Excise Duty
Taxes on petrol
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

5. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Horizontal Division
Diversity
Indirect taxes, example VAT rates
Direct taxes, example PIT rates
Boundaries
Taxation limited to residents or
Taxation limited to local income
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

6. The level of levies varies between countries
Diversity
About 50% in Scandinavia
46% in France
A little over 30% in Ireland
Reasons
Level of development
Social preference for State interventionism v. liberalism
Globalization
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

7. The composition of levies varies
In Denmark, welfare paid by taxes
In France, social security is separate from tax
Source: OECD
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

8. Diversity of corporate taxes
Rates Vary between countries
28% in Finland & Sweden
40% in Germany and Belgium
Source Euro-Info Center 2001
Progressive in Ireland, Luxembourg, UK
Base may vary
Germany taxes differentially retained earnings and distributed profits
Capital gains
UK and Ireland tax capital gains of companies separately
Other EU countries include this in corporate tax base
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

9. Diversity of corporate taxes
Deductible expenses
Genuine business expenses deductible
Personal expenses not allowed
Eg. France: hunting, yachts, personal boats
Depreciation techniques
Some on Diminishing Balance Method
Others on Straight Line Method (Italy, Holland, Austria)
Some mixed: Germany, Belgium, France (DBM followed by SLM)
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

10. Vertical control of taxes
We will see ion the following slides
Vertical control
Stability Pact
Harmonization of taxes attempted
Differential tax treatment allowed
Horizontal control
No tax on Cross border movement
No discrimination on imports from Member States
Internal taxes, export reimbursements
State aid
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

11. EU’s case for harmonizing corporate taxes
Reducing fiscal barriers between States
Double taxation avoidance
Avoidance of discrimination
Reducing artificial attractions for capital
Harmful tax competition
To achieve import or export neutrality for capital
Reducing costs for trans-European enterprises
Administrative difficulties with multiple systems
Risk with multiple systems
Higher risk for not understanding complex legalities
(But) Lower political risk through diversification
Limiting scope for fraud and evasion (efficiency)
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

12. Harmonization of taxes
Harmonization of Indirect Taxes allowed (Art 93)
to extent necessary
Unanimity required
May adopt « provisions » (regulation or directive)
Harmonization of direct taxes difficult (Art. 94)
No control over direct taxes
Have to bring it within article 94
Only directives allowed (not regulations)
Implies a lot of derogations and different applications
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

13. Why harmonization is difficult
Budgetary situation in each country
They want to control fiscal policy
Competition between member states
They want to attract enterprises
Ideological differences
Economic liberalism or Socialism
Fear that capital will flee out of EU
Complexity of taxation in each country
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

14. Indirect Intervention by EU in direct taxes
90/434: mergers (capital gains)
90/435: parent-subsidiary (dividends)
90/436: Arbitration for cross-border disputes (transfer pricing)
Creation of Sociétas Europaea (SE)
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

15. Differential treatment of Residence, Source
Discrimination allowed on basis of
Place of residence
Place where capital placed
But no arbitrariness
Is Income Taxed?
Investment
in home
Country
in source
country
Resident
Yes
Maybe
Non-resident No
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

16. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Customs Union
No customs duties between Members
(art. 25)
Common tariff wall (art .26)
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

17. Internal taxation and discrimination
No discrimination against imports from Member-States (art. 90)
Difference between a customs duty and an internal tax
Internal Tax is allowed
But should not discriminate
Case law is not always clear
Note: Even EFTA countries have similar positions (AELA court refused Iceland a 10.5% lower VAT on books in Icelandic)
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

18. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
State Aid
State aid incompatible if distortions
State aid not to discriminate
Aid which is allowed
Social objectives, but applicable to all products
Natural disasters
Regions of FRG affected by division
Aid which may be allowed
Poor regions or high unemployment
Project of common European interest
Economic activities or areas
Culture and heritage
Others
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

19. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Other Issues
Avoiding unethical fiscal competition
No point eroding the tax-base
Example: VAT at origin legislation
Code of conduct for business Taxation
Prevention of tax evasion and avoidance
Non-discrimination among EU residents
But Exit taxes allowed to conserve coherence of system
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

20. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Code of Good Conduct
Approved in 1997
Waited on agreement on taxation of savings (2003)
Avoid harmful tax competition
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

21. Financing Social Security
France introduced a tax to fill medical deficit
On Pharmaceuticals’ turnover
Deduction allowed
For R & D expenses in France
ECJ: found it discriminates (C-254/97)
Against foreign controlled pharmaceuticals which did their research abroad
Deductions reimbursed
Levy new tax 1.2% on 1999 sales to compensate
Exoneration for enterprises with sales < 100 Million FF
Conseil d’Etat said OK
Note: 26/44 French exonerated: 6/50 non-French exonerated
Has ECJ’s ruling been effectively effaced
ESC-Dijon- Pole Finance – EU Tax – A. Ashta