Here comes the flood: choppy waters ahead for Commission’s Mr Taxman

Date: 12/09/02

In the third of a series of interviews with European Commission directors-general, business editor Peter Chapman asks Robert Verrue about his plans for EU taxation and customs policy.

ROBERT Verrue, new director-general of DG TAXUD, the grotesquely named tax and customs department, is like the mayor of one of the little towns on flood alert this summer.

He is in charge of a tiny backwater compared to the high-profile single market, competition and trade departments.

But the gritty 54-year-old Frenchman from the industrial town of Lille is busy preparing for a deluge of work in what could turn out to be one of the EU's toughest - and most important - jobs.

The man drafted in from the telecoms policy hot-seat must weather the storm when a dozen or so new members join the Union: many with porous Eastern borders and black market operators peddling counterfeit goods ranging from medicine to CDs.

'The calendar is set and the volume of work is coming,' says Verrue - and it is not just enlargement that is setting pulses racing at his new HQ in Brussels' Rue Montoyer.

Taxation policy is also about to hit the rapids after years in the doldrums.

The EU is pressing Switzerland to yield some of its cherished banking secrecy in a bid to clamp down on tax evasion.

And moves are afoot to get rid of tax distortions and obstacles between member states - notably on pensions and company tax. The fallout from 11 September also brings challenges. Verrue and his US counterparts are grappling with ways to balance the need for extra security at container ports with the need to keep trade flowing.

His department is also ushering in alcohol excise duties - an area where Verrue confesses he is not yet up to speed - and this week unveiled proposals intended to cut distortions in car registration tax. Efforts are also under way to launch computerised systems to boost surveillance of goods subject to excise duties.

Finally, Verrue says new tax and customs policy, such as controversial recent proposals on taxation of gas oil, must 'work towards a maximum degree of consistency between taxation and other policies such as sustainability'.

With all that to contend with, the sandbags are already being put in place to make sure the DG is not engulfed.

Infringements rethink.

Verrue says he hopes recent calls for more staff will be heeded by the Council of Ministers. If the promised reinforcements are in place then he sees no problems with manpower. 'We should be able to work under reasonable conditions,' he says.

But more controversially, Verrue plans to cut the time his officials spend on 'infringements' - the arduous process for ensuring member states follow the rules by applying laws correctly.

Verrue insists the new policy doesn't mean letting countries off the hook for serious transgressions. Instead it means targeting scarce resources on the vital cases so that the member states 'start thinking how to react and how to change things earlier than in the past'.

'This is simply because infringements are treated now in a more rigorous manner. This is what my colleagues and I did in my previous job and the results are there.'

He says he wants the new approach to rub off on candidate countries 'so that the learning curve is as short as possible'.

'It is not legally speaking the most convincing argument,' Verrue admits, but he insists it is necessary to avoid collapsing under the weight of 190-plus cases currently open against member states.

'What I'm trying to say is that we must of course be rigorous. It is a condition of our credibility...but at the same time we must find a way of having some kind of strategy of differentiation. All cases are significant. But some, [such as the treatment by UK customs of UK shoppers visiting the continent], are more significant than others.'

Pensions time bomb.

A huge growth in the number of people reaching retirement age means national tax barriers against pensions are unlikely to be a victim in the infringements shake-up.

Two years ago, to huge fanfare, the Commission said it would launch court cases against member states with tax rules that punish citizens who want to move around the member states during their working lives or when they retire.

Verrue says the results of a massive EU-wide study by his department reveal a picture of huge tax distortions on pensions. 'And I am trying to use an understatement.

'There are very big differences in the way pensions income is taxed and, in particular, what we look at is the case of non-nationals receiving pensions in another country than their country of origin.'

He is reluctant to point the finger at individual member states, yet. Will there eventually be legal action against errant member states?

'I do hope so. I am sure the Commissioner [Frits Bolkestein] will look at it with his usual determination.'

Saving the savings tax.

Verrue and his team are at the sharp end of calls by the EU's finance ministers last weekend to step up pressure on Switzerland over the savings tax.

The goal is to encourage the Swiss - and other third countries such as the US - to have in place an 'equivalent' system to the EU's own regime, at least where EU citizens and their money are concerned.

He hopes to reach a 'tentative deal' with Berne and in turn to get 'tentative backing with the Council of Ministers' by the end of the year.

But speaking ahead of last weekend's Ecofin, Verrue made no attempt to hide the huge difficulties of reaching a deal with the Swiss, who have a fiercely guarded tradition of banking secrecy and guard, not too surprisingly, vast amounts of undeclared EU money. 'There is a lot of work to do,' he says. 'We are working slowly - much too slowly from my perspective.'

There are four key issues to solve: the first focuses on how to establish the so-called 'retention tax' that the Swiss would have to levy on the interest of savings held by EU citizens.

A system would also have to be set up where EU citizens subject to this tax may volunteer to disclose it - if they already pay tax at home and want to reclaim it.

Thirdly comes the question of how the Swiss should handle requests for access to information from EU authorities in cases of suspected fraud.

'This raises very thorny questions,' says Verrue, because the Swiss and EU member states have different definitions of what constitutes tax fraud.

The Swiss would only supply information if their EU counterparts were investigating something illegal under their own legislation.

Lastly, says Verrue, is the question of being able to update any deal with the Swiss in the light of further work at international level - for example through the Organisation for Economic Cooperation and Development.

Unanimity is a handicap.

If persuading foreigners to play by its rules is almost impossible, the need for unanimity in the Council of Ministers in the tax field means getting the EU itself to agree laws can seem like a miracle.

All it takes is the British to get a whiff of tax harmonisation or tiny Luxembourg to refuse to play ball and everything has to be rewritten.

No surprise, then, that Verrue says there is a need for more qualified majority voting - where the majority prevails after the respective size of member states is taken into account. But he says this need not stop member states keeping some veto powers.

'Unanimity is a handicap. It seems to me that the argument for qualified majority in taxation is really strong for taxation matters having an important EU dimension.

'I think that we should distinguish between areas where taxation has an impact and where it does not.

Taxation of savings, for example, has a very strong EU dimension.

'Taxation of individual income? It is not for the EU to decide this.'

Business tax boost.

The painful reality of EU voting systems doesn't deter Verrue. Harmonisation of taxes may not be on the agenda.

But he is preparing to take-on sceptical member states following up a Commission pledge to make the EU's tax system easier and more efficient for business - the new theme for taxation policy.

'If corporate taxation is not sufficiently coordinated - I am not saying fully harmonised - there is a large impact on the conditions for entrepreneurs across the EU.'

It is no secret that the Commission wants to see a common corporate tax base for companies operating across the Union.

The long-term goal would make matters easier for all company accountants by setting out what should be taxed - if not the tax rate.

The policy paper, due before Christmas, will flesh out how such a common EU tax base would work in practice and how it could be made compatible with the new International Accounting Standards, which the Union has pledged to abide by from 2005. All that is for the longer term. But Verrue believes member states would warm to the idea far sooner if they try out the common corporate tax base on the recently approved 'European Company'.

He thinks this would transform it from an EU white elephant to a test-bed for the common tax base.

'The European Company doesn't have a common tax base [at the moment] and of course it's a great disadvantage. It makes it a bit contradictory.

'I would like to hear the counter argument to why we ever agreed to it with no single tax-treatment.'

Another plan would be to allow small firms to register with their home country for corporation taxation purposes.

'The cost of differentiated tax systems is particularly high for SMEs...if you are a small company in a high-tech growing sector you are quickly in a situation where you don't just do your business in just one member state.'

11 September.

The terrible events of 11 September also throw up policy challenges for Verrue - customs officials are on the front line in the battle against terrorism.

He hopes to clinch a deal by the end of the year with US customs on a common approach to checking the contents of container ships sailing between to and from America.

He says containers - that can hide bombs or weapons - have been earmarked as a potential security risk.

The key issue, he says, is to ensure that all container ports are subjected to uniform checks so that trade through the dozen or so EU ports - though inevitably hindered - is not distorted.

'We have to find a trade off between increased security and the efficiency of maritime transport operations.'

Telecoms nightmare.

The pressing workload means there is little time to look back at his previous life heading the Commission's information society DG, where he oversaw a huge modernisation of communications policy that enters into force next year - but also witnessed the bursting of the telecoms bubble.

Verrue insists this has little to do with the Commission's liberalisation policy nor the fresh round of reforms passed by member states and MEPs last December.

In fact, he remains optimistic about the future: 'If we manage to put this new framework in place the dynamics of the sector remain large. It is a growing sector not confronted with collapsing demand, even though conditions today are quite severe.'

A key requirement, he insists is for telecom regulators to work together at European level to ensure the new regime is evenly applied.

'They all have the same job to do over the next 8-10 months - why not discuss and agree how to do it?'

Verrue charts the current telecoms sector's troubles from the moment investors began to realise that business plans for third generation mobile services were overly optimistic - and that customers who clamoured for GSM mobiles might not do the same when '3G' was launched.

'Operators were too ambitious with their acquisitions, they underestimated the costs and risks of installing the new technology and they underestimated the potential competing technologies offering fast broadband internet.

And last, but not least, many paid huge sums for licences for 3G to greedy finance ministries. He sees the current round of industry consolidation 'lasting another year-and-a-half'.

'I hear more and more that in large EU member states there is room for four licence operators and a lot less for smaller countries. We have an indication there of what restructuring we will go through. Of course these are perfectly natural phenomena. They are preoccupying because of their magnitude.'

Though his conscience is clear, the licensing fiasco still rankles.

Phoning the day after the interview, Verrue adds that is the one big regret during his seven-year stint in charge of telecoms policy: 'I wish I had spoken out more loudly,' he confesses. He has now.

Interview with Robert Verrue, new Director-General of DG TAXUD - the tax and customs department.