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EU Taxation

EU Taxation. Unit 2: Distribution of Taxes Arvind Ashta ESC Dijon- Pole Finance. The Distribution of Taxes in EU. Division of taxes (differentiation) EU Taxes State Taxes Vertical control of taxes (integration) Other Issues. EU’s Resources. Customs Duty Agricultural levies

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EU Taxation

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  1. 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. 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. 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. 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 • Unanimity required • 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 ESC-Dijon- Pole Finance – EU Tax – A. Ashta

  16. 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. State Aid • State aid incompatible if distortions • State aid not to discriminate • Aid whichisallowed • 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. 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 • 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. 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

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