CONTEXT
ROLE OF GERMANY
THE TAXES CONSIDERED
GRAND THEMES OF THE EUROPEAN DIALOGUE
ECONOMIC CRISIS AND TAX POLICY
1. Adoption of Financial Transaction Tax by part of the European Union only
2. Taxation of Savings
3. Company Taxation Proposal on a Common Consolidated Tax Base
1. VAT Reverse charge
2. Conclusions
The economic and political turbulence within the EU in recent years has thrown into sharp relief the divergences of views within and between countries about the real origins of the turbulence and the reasons for it. But there has been one powerful common factor. It is unanimity in believing that the best way to secure defences against a repetition of events in the future is to engage in structural reforms. Furthermore, those reforms should concentrate primarily, though not solely, on questions of public finance management. The reforms should take the shape of a series of rules of behavior, supported by mechanisms permitting sanctions for non-compliance to be effective, and by resources sufficient to provide support for rule consistent behavior in those cases where countries need support. Countries differ with regard to the specific nature and content of those reforms, and governments have taken, and continue to take, divergent positions on the crucial issue of which sections of society should bear the burden of reforms. While national political frameworks certainly provide one of the “battle grounds” on which the struggles take place, it is the policy making forums of the EU which offer the terrain of conflict where divergences among countries can be best observed.
This essay concentrates on various key issues of taxation as they are being played out on the EU stage. It does so in order to highlight the contradictions and pressures confronting Germany, the undisputed leading actor on the stage. Most other EU countries appear to consider that the “German model” (not often defined, but presumed to revolve around three primary elements, all of which have been some years in existence, namely monetary stability, social partnership, and labor market flexibility) is the one to follow, and appear also to believe that Germany’s position in EU reform processes seeks to create rules and institutions in the EU which will facilitate the replication of those elements across the EU panorama. In adopting this focus, we are taking a 2013 snapshot of a process which, in one form or another, has been going on for a long time and is likely to continue way into the future.
We shall argue that, despite the EU preoccupation with “internal affairs” of the EU, hardly any of the taxation matters under scrutiny can be resolved within a strictly EU context. What is done within the Union must be consistent with obligations already entered into, and continually evolving, in the broader international setting. During its various enlargements, the EU has at times given the impression that it was somehow becoming a world unto itself, especially with regard to economic matters. But that was a delusion, and the external developments cannot be regarded as secondary. On the world stage, Germany too is not a particularly large country as measured by population, it is not rich in natural resources, and for all of its economic prowess, it has not exhibited notable rates of economic growth since the golden years of the 1950s and 1960s. The present situation is therefore delicate since all European eyes are on a country more aware of its limitations than are its neighbors.
CONTEXT
Chancellor Merkel has stated that “the challenge of this generation” is to make the qualitative leap of achieving fiscal union in the EU. If this were to happen, it would be a further, and critical, phase in the time honored European process of making progress in response to situations where unity is placed under severe stress. Earlier generations of European leaders had geopolitical and geo-economic visions of great depth. But to realize them, they (perhaps with the exception of the De Gaulle Adenauer drive to cement Franco-German relations) tended to bide their time until difficult general conditions, or dramatic events, permitted broad alliances for major change to be created. Now seems to be another such “rubicon moment”. This moment, however, is in our view unique because the dramatic events of the present period take place in a global setting far removed from the Western centered past.
The balance of economic and political power in the world has shifted dramatically since the fall of the Berlin Wall. Prior to that time, cases of rapid economic development in poorer countries were regularly labeled “economic miracles”, and were held to occur mainly in Asia. In the 1990s, and above all in China, the industry driven growth made EU and USA notable essentially as consumption centers, with their production role eroded as cheap imports hit their markets. As Korea and Japan were replaced in economic discourse by China and, to a lesser degree, India, several years passed by in which the EU seemed to be unaware that its role as consumption center depended on its own ability to finance that consumption. Ultimately, consumption can only be sustained if the region has a competitive structure of production which feeds income. While the EU was busy preaching to others about what to do, it largely omitted to act itself.
What has happened now is that large swathes of the region are not competitive, either within or without of the EU, at the prevailing exchange rate of the Euro. The region has lost not only competitiveness but also, for the first time in at least 500 years, it is faced with a crisis of power erosion on the global scale. Instead of the whole being greater than the sum of the parts, the construct exhibits the opposite. This situation, and the process which has led to it, is especially galling for the leading countries in the EU. So either the weak elements of the Union are strengthened, primarily through serious steps taken by the Union to ensure that deviant policies are no longer pursued, or the nature of the whole has to be altered. The discussions about fiscal unity go to the heart of this dilemma.
The events of recent years have demonstrated that the creation of the Euro, while successfully managed technically at the outset, was never accompanied by the game changing steps of fiscal harmonization which would help to prevent economically weaker members from financing consumption driven booms through borrowing. With the onset of the global financial crisis, the radical differences of macroeconomic approach within the Euro bloc have been exposed. Since devaluations against other Eurozone (EZ) members are no longer a resort for countries which have been losing competitiveness, and policy paralysis appears to have overtaken governments in a startlingly large set of EZ countries, the maintenance of consumption and welfare standards was financed by external borrowing. As long as most countries could borrow internationally (on the government bond market) on more or less the same conditions as the EZ leader (Germany), things seemed superficially alright. But once this was no longer possible, and the “spread” became a familiar term, the fiscal strains became too great. And so a kind of “shifting quid pro quo” has come about. Weak countries can be bailed out, but only on the condition that new institutional and policy arrangements are put in place which can greatly diminish the possibility that such a situation could recur in the future.
ROLE OF GERMANY
The key protagonist in this drama is Germany. It is the only large country with the means to redress the situation. It is also the country which has preached and largely practiced the sober approach to economic management .The Bundesbank was established in 1957, the same year as the Treaty of Rome, and from the outset stated strongly that its central task was to ensure the strength and stability of the Deutsch Mark. This meant, among other things, that it would raise interest rates whenever it considered price stability to be under threat. Given that interest rates affect the overall level of economic activity, the Bundesbank was, from the outset, telling the Government that its own fiscal policy would have to be shaped in this light. (It is this which makes the independence of the Bundesbank so critical). Now the route to achieving stability is seen as one which ensures that the single currency is buttressed by fiscal measures which go a large part of the way towards creating a euro zone where all members follow essentially the same approach to taxation. The fiscal architecture should, under this approach, be very similar in all countries, while the levels set for the main taxes should likewise be compatible. By the same token, all EU members (not just EZ members) should follow the same rules with regard to conclusion of tax arrangements with third parties. In short, monetary union dramatically narrowed national policy options in the monetary field. Measures towards fiscal harmonization will strongly constrain the possibility for national governments to do with the swings of tax measures what they can no longer with the roundabouts of monetary measures.
At present, we are still but part of the way along this formidable road. For some time, the EU has been concerned with complex negotiations over key parts of the fiscal architecture. This essay examines a core set of taxes that are currently being negotiated, and looks specifically at the position which Germany is taking in the negotiations. Given that Germany claims to promote a single, EU wide approach to taxation, we should expect that it will consistently aim for all countries to adopt the same taxation methods and that it will not itself engage in, or tolerate from others, behavior which deviates from the single system. Our examination focuses on four key taxes, namely the financial transactions tax (FTT – traditionally known as the Tobin tax); the taxation of savings; the VAT; and company taxation. It finds that Germany’s actual behavior does not correspond to that of a consistent drive towards a single approach by all. In so doing, Germany often runs into conflict not only with other EU Member States (MS) but also with the European Commission (EC). Instead of creating a level playing field, it continues to accept, condone, and even on occasion build itself, a field which is uneven, albeit in a way which is different from the present situation.
Why is this the case? There could be several reasons. First, the present state of affairs may be just the expression of a negotiating strategy, not the end result which the country hopes to achieve. Second, Germany might recognize that in fact some exceptions from a fully unified approach will have to be tolerated, at least for a while. Third, to talk of Germany as a single entity, where all groups share the same objectives, is of course an abstraction.
The EU’s largest country, alongside its federal structure, has also for many years been the scene for a struggle not only over the nature of European union but also about the desirability (and attendant responsibilities) of Germany’s position as the dominant protagonist. From convinced sceptics about the Euro, such as Theo Sarrazin, to more nuanced critics, including previous heads of the Bundesbank (Hans Juergen Tietmayer was in fact the actual President of the Bundesbank when he expressed his misgivings about the creation of the Euro at the end of the 1990s), as well as a previous representative of Germany on the governing council of the European Central Bank, there has always been a current of opinion which is uneasy about the willingness and ability of some other countries to adopt and implement the kinds of macro policies which need to go with a single currency. There are profound divergences in the country about what the “real value” of a unified Europe is to Germany, and therefore over the price, financial and political, which the country should be prepared to pay. Hence the positions taken in EU internal discussions by German authorities at any one time cannot be readily separated from ongoing important debates inside the country itself. We will review the possible weight of these arguments after analyzing what is actually happening with respect to the four kinds of taxes mentioned above.
THE TAXES CONSIDERED
The four taxes are significantly different from each other, both in nature and purpose. The FTT, though first proposed by Professor Tobin several decades ago, has only achieved real prominence in the present period of ongoing financial turbulence. The strong sentiment that the sheer volume and volatility of international financial transactions represents a systemic threat, has given a readiness to examine seriously the prospects for instituting and implementing an FTT. With this limited history, neither Germany nor any other EU member could be accused of behavior deviating from a common approach. Moreover, only 11 MS (including Germany) have so far indicated clear support for the principle of the FTT.
Numerous important issues of concept and detail remain on the negotiating table. Those details, however, have impacts not only in economic terms but also with regard to power and influence, in Europe and elsewhere. The staggering volume of financial transactions today ensures that entities in all countries will be affected by the tax. But a few will be far more affected than others. The city of London has always been the main center of finance in Europe, and it also has immense influence on government decision making in the UK. It does not wish to lose its pivotal position, and thus exerts constant pressure on the UK government to limit the size of any FTT, to shape the way it is levied, and above all to ensure that what is classified as a financial transaction for tax purposes is defined in a constrained way. A fiscal struggle is nearly always a political struggle, and the FTT is no exception.
The taxation of savings is the one tax of the four which involves non EU countries in a very significant way. This is because there has long been significant tax evasion practiced by individuals and entities resident in EU countries, and carried out through illicit transfers of money to accounts held in foreign countries. Already in 2003 the EU set out a directive which underlined the importance of transparency of information, and thus of information sharing, in this domain, and effectively established the principle that any agreements with third countries regarding tax liable funds held by EU residents in those countries should require that the identities of such residents be revealed.
The key third country in this regard is Switzerland, long associated with the notion of bank secrecy and known to be the destination of many of the funds which have evaded taxes. In recent years Switzerland has come under considerable criticism, on political as well as economic grounds, for its behavior. In response to the criticism, changes have been made in particular cases. More generally, however, Switzerland has also proposed what are known as “Rubik Agreements”. In essence, they offer to transfer back to the countries whose residents hold accounts in Switzerland monies stemming from retroactive levies on the capital held in those accounts, and part of the future interest proceeds of those funds. While this does mean that the EU countries affected would receive some additional revenue, it does not answer the requirement of transparency about the identities of account holders. Simply put, EU countries get some revenue, nothing prevents new evasions, and Switzerland remains a haven of bank secrecy.
Austria and the UK have in fact made such agreements with Switzerland, in contravention of the 2003 directive. The EC has referred their behavior to the European Court of Justice (ECJ), and the matter is due to be heard there in 2013. Germany negotiated a draft Rubik which, had it been ratified in Germany, would put it also in contravention. At end November 2012, however, the Bundesrat rejected the draft. Nevertheless, it is clear that Germany was ready to deviate from the directive.
With regard to VAT, and leaving aside the debates in several countries about whether to raise VAT rates for particular goods and services, the current discussions at the EU level are more to do with how the tax is levied and who actually pays the VAT amounts to the fiscal authorities. Till now, the method of levy has been for all VAT registered entities, including independent professionals, to keep records of the VAT payments they have made on their professionally necessary purchases of goods and services, to do the same on their sales of goods and services, and then pay any positive difference (meaning excess of VAT receipts added to their bills over VAT payments on bills submitted by suppliers) to the fiscal authorities – in the event that an entity paid more than it received, it would receive a credit that could be offset against future VAT transactions.
What is under consideration now, and is firmly supported by Germany, is a system where effectively the whole payment and collection would be done through the final producer in a value added chain. The proposal applies particularly to certain complex goods, such as microelectronic products. This would, in principle, generate significant savings in the collection process and somewhat simplify the record keeping of entities operating along the value chain. The complication, however, is that value chains today are highly international in scope. Small EU countries generally do not house the “last link in the chain”. Hence a simplified collection process would necessitate a redistribution mechanism to ensure that small entities in other countries could receive anything owing to them, and of course that their governments would receive the amounts they should. This kind of approach, while it does have arguments in its favor, also opens up the tax redistribution mechanism to risks of inadequate receipt by smaller countries. Hence the method presently advocated by Germany could be interpreted as divisive rather than encouraging unity.
On the corporate tax issue, the discussions, which in fact date back several years, refer to a Common Consolidated Corporate Tax Base (CCCTB). The idea is intended to simplify the process of preparing tax reports for companies operating in more than one EU MS. At present, such firms are required to file accounts in each country where they operate. Since countries generally have different tax architectures and systems, the process of account preparation is complex and time consuming. The introduction of a CCCTB would allow each entity to put forward a single, EU wide set of accounts, obviously incorporating offsetting any losses in some countries against overall profits. The end result would in effect be to establish a single EU corporate tax liability for a company. The profit and tax liability statement would be filed in the country where the so called “EU top holding” of the firm (for simplicity, think of that as the main EU base of the firm) is located. The actual profits would be taxed by each country, according to its own corporate tax rates, on the basis of the share of the profits attributable to operations in each country.
So what is proposed at the EU level is a single set of rules for establishing the accounts, and the consolidation of accounts across the EU. The rationale, as originally set out by the EC some 10 years ago, and still maintained, is to cut fiscal compliance costs both for existing businesses and indeed for new investments. Expected impact studies carried out by leading financial audit companies have suggested that potential savings for companies could add up to a few billion Euros.
The principle of CCCTB has in fact been strongly opposed, mainly by UK and Ireland, while reservations have been expressed by several other MS, including Sweden. At root, these reservations appear to be driven by a suspicion that, although the proposal does not say that there should be any harmonization of corporate tax rates, the real aim is to go down what is seen as a slippery path to corporate tax harmonization. That path is seen, especially by Ireland, as the death knell of the long term successful policy of industrial development supported, among other things, by a favorable corporate tax regime.
What has happened on CCCTB? Germany continues to play its part in the EU Working Group and to push for the idea. But at the bilateral level, this time with France, it is actively exploring the possibility of harmonizing corporate tax rates between the two countries. In effect, this step, in addition to making an agreement outside the overall EU framework, actually jumps the gun. It leaps straight to the tax rate move which is the real worry of the opposition countries.
GRAND THEMES OF THE EUROPEAN DIALOGUE
The detailed evidence on these various ongoing fiscal debates will be examined in the case studies of the following sections. But prior to that, and prior to assessing the consequences of Germany’s behavior, which appears at present to involve more destabilizing than stabilizing actions in the EU context, it is helpful to situate things in a series of ongoing themes in the European dialogues.
Different Speeds for the European Motor
January 2013 was the 40th anniversary of the first enlargement of the (then) European Common Market – it was the time when UK, Denmark and Ireland became members. Already then the first serious strains started to appear, especially with UK reticence to engage seriously in a process of deepening economic and political Union. Over these past four decades, a theme which has constantly recurred, and in various guises, has been that of “two speed Europe”, meaning situations where a core group of MS go ahead with more radical changes in policies and institutions, while others proceed more slowly (though in the case of the UK, even the direction of change, not merely the speed, often seems to be different).
In practice, there have rarely been moments when two speeds actually occurred, although of course the formation of the EZ itself can be considered one such moment. The threat of multi speeds, however, has frequently been there. Now seems to be such a time, and Germany’s tax behavior shows several signs of that. While in the past, the results of these tension ridden times have often been to register at least a degree of progress (if not the maximum degree) while keeping everyone on board, the possible consequences of the two speed menace right now are not so clear. Why? There are two key reasons.
The first is that measures which seem to constrain national freedom of fiscal manoeuvre highlight very strongly the eternal issue of national sovereignty. One thing is to form a customs union, quite another is to head in the direction of a single tax authority for all MS. Admittedly, the present discussions are a long way away from that, and few talk openly about it. But the specter is there. The second relates to the broader international economic context in which the EU operates today.
It can be argued that, over the past 60 years, the EU has held a fairly good position in the international competitive struggle. Since political influence is generally closely correlated with economic strength, no real worries appeared on this score. But in the exceptionally dynamic economic situation today, the competitiveness of EU countries is under severe scrutiny. In a nutshell, the ability of most EZ MS to stem the erosion of their international economic positions seems strictly limited. Germany appears to be the only significant country with the will and ability to keep pace, and even for Germany the pressure is on. Hence efficiency improving measures of all kinds, not only fiscal, are perceived by Germany as urgent matters, especially because time is required before impacts are felt. The costs of the fast movers adjusting to the speed of the slow movers are high.
Does One size Fit All?
The second “grand theme” in the European theatre is: how far is it possible to go with a unitary approach, that of “one size fits all”? Once EU membership began to expand on the large scale, a phase which effectively started at the beginning of the 1980s, and has seen four enlargements over the past 30 years with a further step coming in 2013 with the admission of Croatia, the Union has been a kind of “Pareto principle in practice”. The famous theoretician of Lausanne posited that welfare improvements could be registered if at least some gained and nobody lost as a result of a policy move. To guarantee the second requirement (the no loser notion), practical policy normally requires that a working compensation mechanism be in operation. This is what the EU has traditionally done, primarily through its regional and structural funds (a pay-off process accepted by all).
Successful pay – off schemes, however, cost money. Right through EU history, the money has been available. Today, however, it is becoming pretty scarce. When the pay-offs run out, something has to give: either the policy changes are not made, or they are made and the attendant frictions place the structures under great strain. Today the EU is faced with the pay-off trade-off: put differently, is it worth forcing through the one size fits all, or should only those who are willing stay in the game adopt it?
The EU in the World
The third, and arguably the most important of the grand themes, is that of the EU’s image in the world. It has perceived itself, and sought to project the image of, a bastion of social welfare and a huge factor for peace ( the 2012 award of the Nobel prize for peace to the EU ought to have been celebrated as a crowning achievement, but was not, given the circumstances). Since the main MS had always been situated somehow “in between” the USA and the USSR, the idea that they were following a different path, in social and military terms, was appealing. But this sheen has now worn thin.
It turns out that this too is a path which can only be pursued at a price, and somehow a number of MS which may actually want to stay on this path are no longer able to afford it. The crux of the arguments over economic matters, of which taxation is crucial, is to do with the preservation of the means through which the reality can continue to match the image. It was the famous Sicilian writer, Giuseppe di Lampedusa, who spelled out the subtle paradox that in life it is often necessary to change things in order that they remain the same. The EU is today confronted with the “Lampedusa Lesson” – the issue is: can the EU learn it?
The brief case studies which follow are therefore a microcosm (though by no means so micro) of the critical matters facing the EU process today. Germany is at the center, because it is the key country (whether it wanted the role or not), and the only entity genuinely capable of driving change in the unity direction. But it is a sign of the contradictions inherent in the process that it the positions it adopts in formal EU discussions are frequently belied by its unilateral behavior. There is a dance in Luxembourg which is performed around Easter in a small place called Echternacht, which has lent its name to the dance. The main movement in the dance entails going one step forward followed by two steps back. Germany wants to ensure that the Echternacht trap is not one into which the EU falls. To avoid it, all actors need to make the same movements. Until they do, or some break ranks and form their own troupe, the tensions will go on.
FISCAL POLICY IN CONTEXT: Theoretical and empirical work on the taxation-growth relationship
There is voluminous literature on the effects of taxes on the economy and its rate of growth. Briefly, in neo-classical economic growth models, taxation affects only the level of output but not the rate of growth, whereas endogenous growth models suggest that taxes may affect the long run rate of growth (Solow, 1956). In fact, when growth is endogenous taxation can influence the “factors” that determines the growth rate (Engen and Skinner, 1996).
Since the theoretical arguments have produced a wide range of views about the effect of taxation upon economic growth, it becomes paramount to consider the empirical evidence – and here, the conclusions are not quite as diverse. A number of studies (influenced by the neo-classical growth theories) have investigated the causal relationship between economic growth and taxation. Although there are some disagreements, the picture that emerges is that the effect of taxation, if there is any at all, is relatively minor (Koester and Kormendi, 1989; Plosser, 1992; Myles, 2000). As far as policy is concerned, the conclusion is reassuring since it removes the need to be overly concerned about growth effects when tax reforms are being planned. The empirical evidence can be interpreted as supporting the argument that the level of taxes is not that significant but the “structure of taxation is important”.
Several studies, influenced by the endogenous growth theories, have attempted to assess the impact of taxes on per capita income and growth at the macro-level. Several of them demonstrate significant negative relationship between the level of the tax/GDP ratio and the growth rate of the real GDP per capita, implying that the high tax rates reduce economic growth (e.g. King and Rebello, 1990; Baro, 1990; Easterly and Rebello, 1993; Slemrod, 1995; Agell, Englund and Sodersten, 1996; OECD, 1997; Karras, 1999; Bleaney, Gemmel and Kneller, 2001; Perotti, 2002).
Looking for an optimal tax system or assessing the quality of a tax system, two basic questions arise. The first is on the optimal level of taxation, while the second question is how a given level of taxation can be raised in the best way. At the current juncture of additional austerity and consolidation needs, these considerations could translate into the question on how to increase a tax system’s capacities to raise revenues, promote growth and employment, while sustaining redistributive and allocative functions. Particularly the first question has been the focus of a large number of studies (European Commission (2008a) and Myles (2009). The results of these studies, however, are rather inconclusive with respect to providing evidence that a high total level of taxation impacts negatively on economic growth.
However the issue of how a tax system can be designed optimally to be supportive to growth and employment given a certain level of tax revenues is very critical. As economic growth is usually considered as a precondition for the general improvement of living conditions, the focus of the discussion will be the effects of changes in the tax structure on GDP and long-term and sustainable growth. Findings indicate that corporate and personal income taxes are the most detrimental to growth, while consumption, environment and property taxes are least harmful. In particular, simulations indicate that smart consolidation of budgets – i.e. increasing the right taxes such as consumption taxes – might actually increase long term GDP.
The theory of optimal taxation has, for the past decades, been the reigning normative approach to taxation. During this period it has generated several useful insights about the relationships between assumptions about the set of tax instruments available to the government, the structure of the economy, and the objectives of tax policy. However, there are researchers who argue that in its current state optimal tax theory is incomplete as a guide to action concerning the application of tax policy. It is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist. Furthermore it is not give perfect answers for the optimal function of EU Tax system, consisting of 27 different (i.e Direct Taxation) national Tax systems. In the following Table 1 we can see the main characteristics of optimal Tax theory elements in the EU Tax system.
Table 1: Optimal Taxation in EU Perspective
Direct Taxes
Indirect Taxes
Decrease of direct taxes balances efficiency and equity
A broad VAT Tax, with limited application of reduced vat rates
Comprehensive company Tax limiting the Debt-equity bias
Limited exceptions under “social and economic justification”
Taxation of wealth
Environmental and “green” taxation
A broad tax base for PIT with limited exemptions
Emphasis on Tax harmonization in the EU Tax system,
Directives, Regulations, Implementing actions, ECJ.
Substantial shift from Direct taxes to Consumption taxes
Pragmatic Tax co-ordination in the EU Tax System
Application of Soft Law, ECJ
The effect that tax structures might have on growth does not stop at individual MS. Given the high integration of the EU single market, and the high mobility of certain factors, tax competition and tax evasion might influence policy makers’ decisions. In this context, in the conclusions of the Euro area heads of state of 11 March 2011 on the pact for the Euro, presented to the European Council of 24/25 March 2011, is stated that:
“Pragmatic coordination of tax policies is a necessary element of a stronger economic policy coordination in the Euro area to support fiscal consolidation and economic growth. In this context, Member States commit to engage in structured discussions on tax policy issues, notably to ensure the exchange of best practices, avoidance of harmful practices and proposals to fight against fraud and tax evasion.”
This important statement is absolutely in line with the need of further pragmatic tax co-ordination in order to stimulate and sustain growth in the EU and brings the future EU Tax Policy in line with the optimal Tax theory.
ECONOMIC CRISIS AND TAX POLICY
When the financial and economic crises hit Europe at the end of 2008, MS took coordinated action in the form of the European Economic Recovery Program (EERP) to stimulate aggregate demand in 2009 and to a lesser extent in 2010, and to limit the contraction in output. At the same time, the crisis strongly accentuated public finance problems, due to the recession-driven collapse in revenues, the tax shortfall generated by the sharp drop in asset prices, and the discretionary tax and expenditure measures taken to support the economy during the crisis.
Therefore, in 2010 and 2011, most MS tried to consolidate public finances, while at the same time improving their tax structure to make it more growth-friendly, where possible by shifting from direct to indirect taxation or by base broadening, in line with optimal tax theory. In 2011, 24 of the 27 MS received recommendations from the Council to take effective corrective action with the aim of bringing the deficit-to-GDP ratio below 3 %, country specific deadlines ranging from 2011 to 2015. The national policies presented in the Stability and Convergence Programs and National Reform Programs show that MS generally intend to raise taxes in 2012 and 2013, to complement the austerity measures on public spending.
Development of the tax mix over time in EU
As our earlier table shows, some literature (based mainly on elements of Optimal Tax Theory in developing the Tax mix) suggests shifts from taxes on labor and capital to consumption, environmental and property taxes in order to promote growth and employment. A look at the recent past in the EU-27 suggests that the shifts towards consumption taxes, considered to have a less distortionary impact on resource allocation, have been relatively limited so far. Empirical Results (EC,2011) indicate a faster increase in income tax receipts than consumption taxes (as a share of GDP). Consumption tax revenues have remained relatively stable, while income tax revenues to be affected more heavily.
Decision making in tax issues-the particularity of individual Member States
The basic legal tax provision for adopting tax legislation in the Council is article 113 and 115 of the consolidated version of the TEU and TFEU. According to the afore mentioned provision in article 113 the Council acting unanimously in accordance with special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonization of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonization is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition (Target: Harmonisation of indirect Taxation pursuing harmonization of Member States Tax rules/ application of unanimity). In addition according to article 115 the Council issues Directives for the approximation of such laws, regulations or administrative provisions of Member States as directly affect the establishment or functioning of the internal market.
Direct Tax legislation falls within the ambit of the aforementioned Article 115 of the TFEU. The clause stipulates that legal measures of approximation under that article shall be vested the legal form of the Directive.
Both articles 113 (Indirect Taxes) and 115 (Direct Taxes) respect and recognize the national competences, rights and obligations of individual Member States in Taxation applying a special legislative procedure for decision making in the Council by acting “unanimously”.
Hence, the role of individual Member States is crucial for decision making in the Council in Tax issues (One Member State one Vote-Unanimous Decisions). Any individual Member State is in equal footing with other Member States regarding voting in Tax issues in the Council, by having the right for “veto” any Commission’s proposal or by supporting others, based on national interests as well.
Methodology-Case studies
Here we are examining concrete cases of Council decision making on Tax issues by considering national positions of Member States. In particular we are very interested in examining in this context Germany’s positions in critical areas for EU integration such as the case of Financial Transaction Tax, the case of Taxation of Savings and the Case of Company taxation. These will help us to understand better the role of individual Member States in tax area (especially Germany’s) in today’s Europe.
1. Adoption of Financial Transaction Tax by part of the European Union only
On 28 September 2011, the Commission adopted a proposal (COM(2011) 594) for a Council Directive on a common system of financial transaction tax (FTT) and amending Directive 2008/7/EC (concerning application of indirect taxes on raising capittal). The legal basis for the proposed Council Directive was Article 113 TFEU, as the Commission proposed provisions for the harmonisation of legislation concerning the taxation of financial transactions to the extent necessary to ensure the proper functioning of the internal market for transactions in financial instruments and to avoid distortion of competition. This legal basis requires as said Council unanimity with a special legislative procedure, after consulting the European Parliament and the Economic and Social Committee.
The proposal aimed at harmonising legislation concerning indirect taxation on financial transactions, (needed to ensure the proper functioning of the internal market and to avoid distortion of competition across European Union, and) ensuring that financial institutions make a fair and substantial contribution to covering the costs of the recent crisis and creating a level playing field with other sectors from a taxation point of view, and
creating appropriate disincentives for transactions that do not enhance the efficiency of financial markets, thereby complementing regulatory measures to avoid future crises (thus to reduce speculative transactions across EU).
While already before the financial and economic crisis some MS had taxes only on some financial transactions in place, several others have decided or made known their intention to either introduce such a tax, broaden the scope of their existing FTT and/or increase the tax rates so as to ensure that financial institutions make a fair and
substantial contribution to covering the costs of the recent crisis, and for consolidating public budgets.
In addition the efficient functioning of the internal market in this area required actions intended to avoid distortion of competition considering to protect tax neutrality as well. This required actions in line with the need for tax harmonisation in the area of financial services taking into to account that in principle financial
services remain, generally, untaxed in todays Europe (exempted for technical reasons from VAT etc).
The Commission submitted a relevant proposal in 2011 for a Directive on a common system of FTT. That proposal set out the essential features of such a common system for a broad based FTT in the EU that aims at achieving these objectives, with out risking (or minimisin it) relocation of these kind of services.
The proposal were discussed in the meetings of the Council preparatory bodies, but failed to get the required unanimous support by Member States. Through the meetings one could cnclude that differences in Member States’ positions are substantial and that the principle of harmonised tax on financial transactions will not receive unanimous support within the Council in the foreseeable future.
It follows from the above that the objectives of a common system of FTT, as discussed in Council upon the Commission’s initial proposal, cannot be achived within a reasonable period by the Union as a whole. Based on this conclusion, eleven Member States so far (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia) have addressed formal requests to the Commission asking for enhanced cooperation between themselves in the area of the establishment of a common system of FTT (based on Commission’s proposal to the Council of September 2011).
The Commission responed to these requirements with a proposal for a Council Decision authorising enhanced cooperation in the area of FTT (November 2012).
Concerning legal basis of this proposal Article 20 TEU provides for the enhanced cooperation between Member States in circumstances where unanimity cannot be achieved. Enhanced cooperation shall, under the terms of Article 20 itself, “aim to fulfill the objectives of the Union, protect its interests and reinforce its integration process”.
The provisions of the Treaty on the Functioning of the European Union, in particular Articles 326 and 327 TFEU, provide further requirements which enhanced cooperation must satisfy. Article 326 TFEU provides that the cooperation “shall not undermine the internal market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them”. Article 327 TFEU provides that “any enhanced cooperation shall respect the competences rights and obligations of those Member States which do not participate in it”.
Thus it was important to proceed by following some basic principles, based on the optimal Tax theory, concerning the mechanisms by which the FTT should be adopted. It seems that multilateral cooperation was needed (not application at national level to avoid “jurisdictional shopping”), a sort of harmonization (development of “equivalent measures by international economic organisations”) to be effective and a clear-cut model for prioritizing the global social priorities for financing by using the revenues raised by the FTT.
In addition there are economic arguments for exempting certain types of transactions and traders from the tax. One must be very careful on taxing financial intermediaries, regardless from their economic contribution. Thus, it is worth distinguishing between types of traders (i.e: speculators and investors) and their contribution to financing international trade in goods and services taking into account that Tobin tax also taxes currency and financial transactions made to finance international trade in goods and services. It is recognised the enhanced co-operation for the application of FTT
In the case of FTT Germany was amongst the first MS to support the initiative for an enhanced co-operation, bringing actually “politically” onboard in the Ecofin Council the other participating Member States. However, there was no pressure, from Germany, for developing a clear cut model for prioritizing the global social priorities (at least at EU level) for financing by using the potential revenues raised by FTT.
The establishment of an internal market is one of fundamental objectives of the Union as set out in Article 3(3) TEU. This objective would be furthered through a common system of FTT, since capital markets are now characterised by an important international dimension, and significant differences in taxation in this field would entail significant distortions of competition and would stand in the way of the establishment of a real internal market for the products covered.
The harmonization of legislation concerning different forms of indirect taxation in accordance with Article 113 TFEU serves “the establishment and functioning of the internal market” and “to avoid distortion of competition”.
The original Commission’s FTT proposal based on Article 113 TFEU aimed at addressing the above issues through reinforcing the EU integration process.
At the beginning of the enhanced cooperation-due to lack of necessary unanimity in the Council, the immediate benefits for the internal market would, only appear within the geographical reach of such cooperation, given that not all MS participate. However, as such cooperation remains open at any time to all Member States” (Article 20(1) second subparagraph TFEU, second sentence), its geographical reach will extend in the by Respecting the rights, competences and obligations of non-participating MS . However, there are some Counter arguments:
the terms of Article 20 TEU itself are not completely met because such an adoption of the proposed FTT Directive would not protect the interests of the EU or reinforce integration in all aspects. Rather, it would potentially harm both participating and non-participating MS.
the requirements of Article 326 TFEU are not completely met, principally because of the distortive effect on competition which the adoption of the proposed FTT Directive under enhanced co-operation would have, but also because it would amount to a barrier to trade between MS.
the requirements of Article 327 TFEU are not met because the territorial extent of the tests for an establishment of a financial institution does not respect non-participating MS competences and effectively forces a degree of participation in the proposed FTT Directive by such MS.
There are also concerns as to whether the adoption of the proposed FTT Directive under the enhanced co-operation would infringe Article 49 TFEU (freedom of establishment), Article 63 TFEU (freedom of movement of capital), and the Capital Duty Directive.
In the area of indirect taxation for the first time we see the application of enhanced co-operation in the Council breaking the rule of unanimity, putting aside national competences. This procedure might be asked to be applied for decision making for other critical proposals as well.
As an overall conclusion one could argue that MS supporting enhanced co-operation (i.e. Germany) in the area of FTT serve the idea of internal market. However, one could also argue that by insisting, in principle, for enhanced co-operation in indirect taxation at EU level are not in line with the optimal tax theory which absolutely favors tax harmonization by adoption of the Directive by all Member States. On decision making the results are ambiguous and unforeseeable breaking for the first time the rule of unanimity in indirect taxation.
2. Taxation of Savings
In 2008 the Commission submitted a proposal to amend the Council Directive 2003/48/EC on taxation of savings income in the form of interest payments, which aimed at removing inefficiencies and loopholes that facilitate tax fraud and evasion. To recall: the aim of Council Directive 2003/48/EC is to enable savings income in the form of interest payments made in one MS to beneficial owners who are individuals resident in another MS to be made subject to effective taxation in accordance with the laws of the latter. All MS (with the exception of Austria and Luxembourg) fulfill the requirements of the Directive by applying automatic exchange of information. However, according to article 10 of the Directive Austria and Luxembourg still apply a withholding tax (transitional period which must end when the issue of equal level playing field in exchange of information and application of equal measures by third countries will meet). During the discussions for the amending proposal in the Council substantial progress was achieved on the main issues, except for a few outstanding technical issues. However, Austria and Luxembourg were not ready to compromise for the final adoption of the directive before level playing field concerns were addressed.
In order to address the level playing field, the Commission presented a recommendation for a mandate to start negotiations with Switzerland and other third countries. The draft mandate contains the authorisation to the Commission to negotiate with the third countries the adoption of the measures, which are equivalent to the amendments of the Council Directive 2003/48/EC and also encompass an examination of “international developments”, as foreseen in the review clauses of the existing agreements.
All Member States, except for Luxembourg and Austria, could agree to the adoption of the mandate. Luxembourg and Austria do not agree insisting that the mandate should be strictly limited to negotiations with the third countries about the equivalent measures. All other Member States were of the view that the mandate shall at least include a provision allowing upgrading the current provision regarding exchange of information on request to the internationally agreed standard, in accordance with current bilateral practices of the Member States and of the relevant third countries. More specifically Austria and Luxembourg have indicated that they could agree to such an approach if Article 10 (2) of the Savings Taxation directive laying down the conditions for the end of the transitional period would be amended. Other Member States recalled that this would not be acceptable to them since it would amount to re-opening the overall agreement reached on the Savings Taxation directive when it was unanimously adopted.
The current difficulties in the negotiations of the amendments to the Savings taxation directive seems to be coming from the fears of Austria and Luxembourg that those amendments would bring an uneven playing field between the EU and the third countries, forcing them at the same time, as a prerequisite stated in the Directive 2003/48/EC, to abolish the transitional regime of applying withholding tax.
The negotiations and discussion the Council about the adoption of mandate have faced various important international developments, with ambiguous effects, and which emerged in the course of negotiations. These developments in fact on one hand generated further moves by the third countries towards enhanced exchange of information beyond current standards but one the other hand weakened, in many cases, EU tax co-ordination procedures and EU position as well as the possibility for an overall agreement on Savings in the Council.
More specifically various international developments could have an effect on the forthcoming negotiations and would be relevant for the position of the EU vis-à-vis its negotiating partners, such as: global acceptance of the OECD standard of the information exchange on request, recent Rubik agreements, requirements under the US FATCA legislation, broad interpretation taken by Switzerland of requests for information based on a common investor behavior, and developments in this area at the OECD level.
The ‘Rubik’ agreements signed by Switzerland with some Member States (Germany, United Kingdom, Austria) :
In general these agreements cover the Swiss-source income, currently outside the scope of the EU-Switzerland savings agreement. Specifically, the Rubik type double taxation deal signed in August 2011 between the German Government and the Swiss Government which was supposed to come into force (after ratification) in January 2013. The agreement introduced taxation at source of between 21% and 41% of savings deposited in Swiss Banks by German national, with Switzerland keeping the names of the account holders secret. Under the deal, the German Government would give up its attempts to buy stolen details of German nationals suspected of tax fraud, information that would have netted the German Tax office some € 10 billion (The opposition considers the deal is too lenient for fraudsters not approving it. On Friday 23 November, under pressure from opposition parties the upper house of the German parliament, the Bundesrat, rejected the Rubik type double taxation deal, asking for opening of renegotiations).
Actually, Rubik type agreements weaken moves to strengthen the current lead transparency initiative for the application of automatic exchange of information, in taxation of Savings at EU level (adoption of the amending Directive and the mandate for negotiations with third countries) by the specific individual MS (i.e. Germany, UK and Austria). Summarizing the main loopholes in the Rubik model:
Weakens possibilities for adopting automatic exchange of information by third countries
Foundations, discretionary trusts and other ‘ownerless’ structures –standard tax evasion vehicles – are explicitly outside Rubik’s scope.
Insurance ‘wrappers.’ Are outside of scope while actually is the insurance company is the insurance company that is the beneficial owner. The legal beneficial owner is not identified as tax resident, so it is outside the scope of a Rubik deal.
Commercial companies. Only domiciliary companies falling under Swiss definitions are in scope – and that excludes any untaxed offshore company from somewhere like the Cayman Islands, for instance, where it can be pretended they have a ‘commercial’ purpose.
Foreign bank accounts, trustees. Assets moved from a bank’s Swiss subsidiary to a foreign subsidiary, are out of scope.
Fees, donations, loans, royalties. Rubik only includes investment gains on “profitable” assets.
Defer, Rubik allows to defer income until one changes tax residency.
It is well recognized that for the past years the EU has been pushing harder for Switzerland to automatically implement changes to European legislation, including savings having as an ultimate goal the “automatic exchange for information”. However Rubik agreement it is not in this line. It is well known that the Commission’s Legal Service considers that Germany, UK and Austria have overstepped their competences by signing these agreements, which protect anonymity and not automatic exchange of information, while its scope partly interferes with EU Directive on savings and the EU-Swiss agreement in this area. Actually, Austria and Luxembourg are demanding to be placed in equal footing with Swiss and have already used Rubik Agreement to strengthen their position in the Council not agreeing as mentioned before for the adoption of amending directive and negotiating mandate.
FATCA:
On March 18, 2010, a new law (commonly referred to as the “Foreign Account Tax Compliance Act” or “FATCA”), was introduced in the USA imposing, information reporting and withholding obligations on “foreign financial institutions” (FFI) for US citizens (account holders).
The main aim of FATCA is to increase the Internal Revenue Service’s ability to tackle tax evasion by US persons who use foreign financial institutions to shield their identities and US tax status from the US government (to confront weaknesses due mainly the absence of a look-through approach).
On 26 July 2012, the US Treasury released a Model Intergovernmental Agreement to improve tax compliance and to implement FATCA to be used by those countries that are interested in implementing FATCA through a government-to-government approach (FATCA partner). This Model Intergovernmental Agreement was developed by the US in close cooperation with the five EU MS (Germany, Spain, Italy, UK, France) which issued a joint statement on 8 February 2012 and the US refers to it as “Model 1”, to distinguish it from another cooperation framework developed with other countries. There are two versions of the Model 1 Agreement: a reciprocal version and a nonreciprocal version. Both versions establish a framework for reporting by financial institutions of certain information to their own tax authorities, followed by automatic provision of such information to the US on an annual basis. The obligations for financial institutions to report certain information about US persons to their local tax authorities would be implemented via a new domestic law of that country. The automatic provision of information by the FATCA partner country tax authorities to the US would be based on the information exchange provisions in double tax treaties (DTTs) or tax information exchange agreement (TIEA) between that country and the US. In addition, where the US Treasury and the IRS have determined that reciprocity is appropriate, the IRS would provide to the FATCA partner country, on an automatic basis, information regarding accounts held by residents of the FATCA partner country in US financial institutions. Although the amount of information that the US is initially prepared to provide to FATCA partners is not equivalent to what the US will receive from those partners, the US would commit to pursuing the adoption of regulations and legislation to achieve equivalent levels of reciprocal automatic information exchange. Both versions of the Model Agreement also seek to remove the legal problems that compliance with FATCA would raise for FFIs and to simplify the application of FATCA.
Moreover, under both versions, the US and the FATCA partner would commit to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting the terms of the Agreement to a common, global, model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions. Worth noting that Switzerland has announced its intention to engage in a FATCA model under which it will oblige its financial institutions to report directly to the US IRS and the Swiss authorities themselves will pass certain information to the US which may open the way for the US to identify non-compliant account holders.
The signature by MS of FATCA agreements with the US providing for government-to-government cooperation could have important implications for the EU administrative cooperation framework. This is because, under Article 19 of the new Directive on Administrative Cooperation, “where a Member State provides a wider cooperation to a third country than that provided for under this Directive, that Member State may not refuse to provide such wider cooperation to any other Member State wishing to enter into such mutual wider cooperation with that Member State”. It is possible that signing a FATCA bilateral agreement with the US would constitute the “wider cooperation provided to a third country” that triggers the obligation for the MS concerned to provide such wider cooperation to any other Member State wishing to reciprocate. This raises questions about the interaction of such arrangements with existing EU arrangements for automatic information exchange (the EU Savings Directive and the Directive on Administrative Cooperation) which have a narrower scope both in terms of income and financial intermediaries covered. It also implies the possible need for tax administrations to build electronic information systems capable of exchanging information with a much larger range of countries and for a much greater range of purposes.
However, FATCA agreements may present an opportunity for the EU to achieve greater cooperation with third countries in the field of automatic information exchange. Information requests about unnamed taxpayers: Against the backdrop of criminal investigations of Swiss banks and bankers by US authorities, Switzerland has apparently taken a broad interpretation of requests for information based on common investment behaviour.
Furthermore compliance costs linked to FATCA may be very high because it requires financial institutions to put into place specific due diligence/administrative programs, adapt their IT systems, to check many entities and investors, that may be very difficult to identify and to apply personal data protection rules applied at EU level. The costs to implement this system have to be proportionate to the benefits. This would require a proper cost-benefit analysis.
FATCA could also have an impact on the international capital market as, in the absence of proportionate measures, many EU financial institutions may not opt into the new system and may choose to move investments from the US market or not to offer their products/services to US investors.
The above indicate clearly a need for examining the implications for the coordination of MS positions on the use of existing IT reporting arrangements etc in relation to third countries and in particular for the purposes of FATCA. A multilateral approach, at EU level, would have from the beginning safeguard a minimum level of co-ordination responding to the need for finding workable solutions.
However, even in this case it appears that the 5 MS (Germany, UK, Italy, Spain, France) choice for bilateral negotiations and solutions have weakened from the beginning EU position in negotiations (for past and future negotiations).
3. Company Taxation-Proposal on a Common Consolidated Tax Base
The Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) was submitted by the European Commission on 16 March 2011, as a contribution to more growth friendly taxation advocated by the Europe 2020 strategy. It is one of major Commission’s initiatives in the area of Direct Taxation.
The aim of the proposal is two-fold:
-to establish a common EU system for the calculation of the corporate tax base, which would exist in parallel to the national systems of the Member States and would be optional for companies to opt-in;
-to allow for consolidation of profits and losses of the groups of companies that have opted-in to the system.
The principle of CCCTB has in fact been strongly opposed, mainly by UK and Ireland, while reservations have been expressed by several other M-S based on complexity and difficulties caused in application of the proposed provisions. As we already said, these reservations appear to be driven by a suspicion that, although the proposal does not say that there should be any harmonization of corporate tax rates, the real aim is to go down what is seen as a path to corporate tax harmonization, by applying at a later stage most probably an enhanced co-operation procedure in case unanimity is not possible. That path is seen, especially by Ireland, as the death knell of the long term successful policy of industrial development supported, among other things, by a favorable corporate tax regime.
The discussions in the Council Preparatory Bodies are still on-going. It appears that further work is needed at the technical level, before a decision or agreement can be reached (which in fact is considered difficult to be achieved .
Furthermore, France and Germany politically agreed on taking steps towards a convergence between the French and the German business tax systems in an effort to respond to the challenges created by the financial crisis. A working group of tax officials from both countries analyzed the French and German business tax systems and identified several key areas in which convergence of the tax systems would be recommended. The Green Book outlines the current thinking on potential measures of convergence in the following areas:
• Group taxation;
• Taxation of dividends;
• Thin capitalization;
• Offsetting of losses;
• Depreciation and amortization;
• Taxation of partnerships; and
• Corporate income tax rates.
Actually the French-German initiative aims, in principal, to promote the harmonization of business tax matters in the EU and to support the Common Consolidated Corporate Tax Base (CCCTB) project, promoted by the European Commission to strengthen the economic integration in the EU. In fact Germany and France are sending out a clear message about trying making the single market more efficient and the euro zone more competitive. It is envisaged that the proposals will be implemented step-by-step from 2013 onwards. It appears that the German government will use the convergence project to amend areas of the law where a need for reform already has been identified (largely revenue-raising measures are planned). For France, convergence is seen as an opportunity to rethink the corporate income tax base and shift from a small base-high rate to a broad base-lower rate environment, while reviewing objectives assigned to some of the main tax instruments included in the French Tax Code. If carried out as envisaged, the French-German convergence program will be a further step towards a harmonization of business tax systems by Europe and ultimately should help to promote the CCCTB.
However, even that one cannot question the goal for tax harmonization incorporated in the Green Paper, these political statements for individual solutions on technical issues like thin capitalization and anti-abuse rules, depreciation and amortization, tax losses offset, consolidation etc while the discussions in the Council are ongoing ultimately may not help to promote the CCCTB to MS which currently are opposing main elements in the proposal.
Finally, these sort of bilateral agreement weaken efforts for tax coordination at EU level, proposing in advance individual solutions for specific problems (i.e tax treatment of dividends, amortization rules etc), which according to optimal tax theory could and should fall under co-ordination at EU Level.
1. VAT Reverse charge
The person liable for the payment of VAT according to Article 193 of Directive 2006/112/EC is the taxable person supplying the goods. However, based on article 395(1) of Directive 2006/112/EC Germany and other MS (Austria, Italy, United Kingdom etc) have asked- and granted- for derogation from article 193 for trade of certain products. The purpose of the derogations requested is to place that liability on the taxable person to whom the supplies are made, but only under certain conditions and only in relation to particular products (i.e mobile telephones and integrated circuit devices).
It is true that a significant number of traders in particular products, (mobile telephones, integrated circuit devices etc), evade paying VAT to the tax authorities after selling their products. Their customers, however, are entitled to a tax deduction as they are in possession of a valid invoice. In the most aggressive cases of such tax evasion the same goods are, via a ‘carousel’ scheme, supplied several times without payment of VAT to the tax authorities, an appointment “missing trader”. By designating the person to whom the goods are supplied as the person liable for the payment of the whole VAT in such cases, the derogation would eliminate the opportunity to engage in that form of tax evasion. It would not affect the amount of VAT due at the final stage.
One must admit that the measure is proportionate to the objectives pursued since it is not intended to apply generally, but only to specific groups of products, where there is a high risk of tax evasion and where the scale of tax evasion has resulted in considerable tax losses. Moreover, the use of a reverse charge mechanism implies less risk of shifting of fraud towards the retail trade of the products in question, as mobile phones are generally supplied by large phone companies and as the measure is applicable to integrated circuits in a state prior to integration into end-user products.
Indeed, this derogation is granted only for certain period because it cannot be established with certainty that the objectives of the measure will be achieved nor can the impact of the measure on the functioning of the VAT systems within those MS who apply it, or in other MS, be gauged in advance.
In fact Germany mainly is keeping the pressure in the Council for a general application in the VAT area of the reverse charge mechanism as a measure to fight fraud in VAT area, which in one hand is abolishing the fundamental functioning principle of the EU VAT system (thus the principle of “fractioned payment” of VAT-payment of VAT due at each stage of the production chain) contains many dangerous elements for the proper functioning of the European VAT system- and for many MS-, while at the same time is not favoring the application of the “joint and several liability principle” in intra-community transactions, a principle which does not distort the character of the harmonized VAT system helping in fighting of VAT fraud (carousel type fraud) (according to this principle in case of fraud in intra community transactions both the person supplying the goods and the person to whom the supplies are made are responsible for paying VAT in cases where one of them is participating in carousel fraud etc). In fact, Germany opposed the measured of Joint and several liability proposed by Commission in 2008 in its proposal for a Council Directive on the common system of VAT regarding evasion linked to importation and other cross border transactions (COM (2008) 805 final 11.12.2008). This measure intended to impose a joint and several liability on the taxable person making the intra-Community supply, for the VAT due on the intra-Community acquisition of these goods in another Member State, in which he is not established, when he did not or not timely submit a recapitulative statement or when this recapitulative statement did not contain the relevant information.
2. Conclusions
Based on the case studies there are many ambiguities in Germany’s behavior. In most tax files Germany is acting as destabilizer rather than in favor of tax co-ordination and harmonization in Internal Market. We have seen that in critical taxation files which could serve the purpose for a growth friendly tax shift and mix, Germany’s position-in fact- did not-so far help the decision making process in the Council favoring rather individual solutions than coordinating and harmonising actions. This in its turn weakens EU efforts in developing and applying coordinating actions in tax area, which could further assist growth friendly policies to be applied.
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