Creating a joint tax system across the EU is arguably central to an effective single market. It is needed to make a level playing field for businesses and to encourage EU citizens to move between member states. Yet member states have resisted giving up their control of one of the most important powers of a sovereign government, fearing tax harmonisation. As a result, efforts to co-ordinate taxes have been slow and controversial.
The EU first became involved in members’ tax policy in 1967, when it was decided that all member states should adopt a system of value added tax (VAT) as part of the programme to create a single market. The 1985 Cockfield Report encouraged further steps to cover all indirect taxation (tax that is automatically added to a good or service’s price). In 1991, a unified excise duty was adopted and in 1992 a standard base of VAT rates of above 15% was set across the EU.
While this created some integration in the sale of goods, to have a real single market all countries would have to have a similar rate of business tax – effectively creating a European tax system with similar rates in all countries. This has not been introduced. The 1997 Code of Conduct on business tax tried to encourage integration by calling on countries not to compete with each other to have lower tax rates, but it is not binding. Some member states resent efforts by growing European economies such as Ireland to attract businesses by cutting business taxes. Yet these states argue that they need lower taxes to bring their economies in line with the European average.
What is the EU’s role in taxation?
The EU does not have the power to collect taxes; this power rests with member states. It only has powers over indirect tax and members still have a veto on tax issues. The European Court of Justice (ECJ) uses its power to forbid taxes that go against the principle of the single market. Some of the money raised through VAT goes into the EU budget.
Attempts to control direct taxation policy (taxes on wealth or income) have been limited to encouraging tax co-ordination and trying to stamp out harmful tax practices. The European Commission often takes big businesses to the European Court of Justice if it suspects they are dodging tax through legal loopholes or deals with individual governments.
There were fears the Lisbon Treaty (2007) would enable tax harmonisation across the EU; misgivings about EU-wide taxation were a significant factor in Ireland’s rejection of the Lisbon Treaty in the 2008 referendum. Efforts to encourage Irish voters to accept the treaty in a second referendum in 2009 included a promise not to move towards EU-wide taxes.
In April 2011 the Commission proposed a kind of tax on CO2 emissions. It also proposed a common method for calculating corporate tax. In September 2011 Commission President José Manuel Barroso presented a plan to create a new EU-wide financial transactions tax by 2014. The financial transactions tax was designed to make the banks shoulder a share of the burden of rebuilding Europe’s economy post-crisis. After negotiations on the details broke down in December 2014, France and Austria brought the nine eurozone partners back to the table in early 2015 with a compromise proposal to unblock negotiations for those 11 to go ahead using a system called enhanced cooperation, which lets willing EU members integrate more than the whole EU. However agreement on the details was still not reached so there is no agreement. If the tax is passed, Britain may challenge it in the European Court of Justice if it unfairly affects UK banking.