Europe's Tax Policies Under Fire

Are EU countries harming the region's competitiveness by failing to coordinate their tax regimes?

In an interview with EUobserver, Mr Kovacs said he understands the sensitivity of the tax policy for national governments but he thinks they "have often prejudiced feelings that any kind of harmonisation and tax policy coordination infringe on their sovereignty in the area, which is not true."

"On the global market, I don't think you can go too far just referring to tax sovereignty. In the global market, competitiveness counts. This is my argument for some harmonisation in the tax area."

While the EU is far ahead in creating a common system of indirect taxes - such as agreed minimum VAT rates – outright controversy is sparked by any hint of harmonising direct taxes.

Mr Kovacs' plan to introduce a common company tax base in 2008 is likely to see the rhetoric reach new heights. He is aiming to set rules on what share of businesses' profits are taxed, taking special tax breaks and exemptions into account.

While strongly favoured by Germany and France as a way to simplify rules for cross-border businesses, it is even more passionately rejected by countries such as the UK and Ireland who fear it would be the first step towards harmonising tax rates.

Ireland and Irish commissioner under fire

Irish commissioner Charlie McCreevy, in charge of the internal market, is among the soundest critics of the idea with the Hungarian commissioner accusing him of simply pushing the national line.

"When I'm speaking for the harmonisation of the tax base I'm not representing Hungarian interest but the community interest. Mr McCreevy is representing the national interest of Ireland.

"But it is the council [member states' body in the EU structure] where national interest is to be represented by the ministry of finance. Mr McCreevy is no longer the minister of finance of Ireland. He used to be but now he is the member of European Commission who should represent the community interests."

Ireland's push against the common tax base also sparked an angry reaction by German finance minister Peter Steinbruck at this week's council in Luxembourg as he accused Dublin of forging unfair tax competition while making good use of EU's structural funds in the past, according to insiders.

The comment echoed complaints in 2004 by the then French finance minister and current president Nicolas Sarkozy that the EU should not provide common funds to the new member states that had introduced lower than average tax rates, aiming to attract foreign investment.

But the tax commissioner thinks "it is not a fair argument" and despite "emotional debate in Luxembourg" this week, he is sure nobody wants to use it again.

"Tax competition in the EU is not bad by definition. Fair tax competition is acceptable and even useful as it can force governments to provide better use of the taxpayers' money."

Mr Kovacs explained that by unfair competition he means the tax rules either favouring foreign companies so as to boost the capital investment or preferential treatment to national firms, as both are against the EU's treaty.

He went on to say that member states automatically assume the commission wants to harmonise company taxes when in reality it only wants to harmonise the calculation of the tax base.

But the fear of outright harmonisation is not the only argument against the common tax base scheme used by its opponents.

The Baltic countries and Slovakia are concerned the common EU tax base would be narrower and with more exemptions than their simple systems - seen as actually providing states with more cash from taxes which makes it possible to lower the tax rates.

Moreover, several countries are concerned the new EU tax base would be just the 28th system to join the other 27 - as firms would be free to choose whether to join it if they plan cross-border activities or just remain part of their previous national tax base.

Mr Kovacs admits, "Yes, it would be a bit more complicated for the countries but it would have many more advantages so the balance is very much in favour of the tax base," he argued.

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