Union tries harmonisation by stealth

Date: 18/02/1999

By Tim Jones

SEVEN years ago, the drive to align European tax rates and systems reached its high water-mark.

This will come as a great shock to the conspiracists who see nothing but 'Brussels' plots and stratagems to force common tax rates on income, company profits, energy use and sales onto their reluctant populations.

Nevertheless, it is true. When EU finance ministers agreed in 1992 to set a 15% minimum rate of value added tax as the centrepiece of what was laughably termed a 'transitional' regime, they set the seal on a quarter-century of crawling fiscal harmonisation.

In their Treaty of Rome in 1957, the six founding member states of the Union committed themselves to harmonise indirect taxes; in 1973, EU governments established VAT throughout the Community; and, 20 years later, they set minimum rates for excise duties on cigarettes, alcohol and mineral oils.

Everyone accepted that the single market could not work unless the VAT system was changed and rates aligned. Once the market was up and running in January 1993, the steam ran out. The transitional regime, which was meant to be replaced by a 'definitive'

version in January 1999, is still with us and there is not even a distant prospect that this will change.

The pre-internal-market euphoria which gripped the EU's chancellories and treasuries now faintly embarrasses them like the morning after a riotous party. Former finance ministers who now campaign against European integration can hardly believe what they did back in those heady days.

How else can the recent attempts to put the duty-free toothpaste back into the tube be explained? It is now forgotten that Irish Prime Minister Bertie Ahern - a vociferous opponent of abolishing duty-free sales - was one of the 12 finance ministers who signed the perk's death warrant seven years ago.

Since 1993, tax harmonisation has ground to a halt. A series of ambitious plans to systemize disparate schemes for taxing consumption of environmentally-unfriendly fuels, and income from interest and profits have generated acres of newsprint and excited tax nerds but have come to nothing - yet.

Without the benefit of litres of hindsight, it is impossible to say whether the change of tack initiated by Internal Market Commiss-ioner Mario Monti in April 1996 will turn out to have been a defining moment or yet another lost opportunity for the tax-harmonisers. But, from here, it looks like the former.

Monti's 'softening-up' approach to pooling tax policy began in Verona, where he gave finance ministers a carefully-argued presentation on what he called "harmful tax competition". His aim was to convince them of his intellectual case: that the arrival of open capital markets had forced governments to switch the tax burden from mobile to immobile factors of production, especially labour.

Once they were convinced that this process, if left unchecked, would erode the whole tax base and - instead of enriching a few member states, beggar everyone - he could then hit them later with concrete proposals to reverse the trend. Even anti-harmonisers were seduced.

The British and Irish authorities may have found the potential remedies - a shift in the tax burden from labour to energy use and capital income - hard to swallow, but they could not fault the analysis. The Italian economics professor relied on this niggling respect to get his proposals on to the negotiating table.

The effect was to soften them up for the Package to Tackle Harmful Tax Competition, which was eventually agreed by finance

ministers in December 1997. By taking a "global approach", this package addressed every member state's particular gripes.

Luxembourg, for example, which had opposed plans drawn up in 1989 for a

pan-EU 15% withholding tax on savings unless equivalent measures were taken against predatory corporate tax regimes, was offered just that. The package included a code of conduct for business taxation which would be policed by a monitoring group of top officials, to be appointed by the ministers themselves.

The French, Germans and Belgians, who had been clamouring for a common savings tax to stop their revenues leaking into the Grand Duchy and other havens, were offered a new proposal to replace the dead-in-the-water 1989-vintage plan.

The package did not need to genuflect before the treasured German, Austrian, Swedish and Dutch energy tax project since this had already been revived in a slimmed-down version nine months earlier.

Of course, the danger in pandering to everyone's desires was that compromises would never be made. Negotiations have moved at a snail's pace but they have at least, for the most part, moved.

When they took over the presidency of the EU last summer, Austrian ministers themselves tried to sell the package deal to their 14 Union counterparts. Since energy taxes had been bogged down for five years, savings taxes for nine and corporate taxes for 24, Vienna felt that only a deal encompassing all three could possibly win support.

In the run-up to the Vienna summit in December, Austrian Finance Minister Rudolf Edlinger put together a package deal. If the EU could agree to establish a framework for taxing energy use but set zero excise-duty rates for coal, gas and electricity and exempt household fuel, he could sell this to the British. London, in turn, could then compromise over its opposition to taxing capital income and isolate Luxembourg, which would be bought off by the code of conduct on business taxation.

In theory, the package deal worked. Tax negotiators talked but, within weeks of the Vienna summit, it became obvious that agreement would be impossible. Worse still for the Austrians, a meeting of finance ministers in early December actually widened the differences over energy taxation as the Spanish came out from under British coat-tails and declared their fundamental opposition to the plan.

Even the current German presidency's hopes of reaching a deal on savings taxation by May have been abandoned since Luxembourg Prime Minister Jean-Claude Juncker has to seek re-election a month later.

When it comes to Madrid's new hard line on energy taxation, Spanish officials are adamant that they are not bluffing. The German Greens' ambitions of pushing a plan to tax aviation fuel before taking it to the Organisation for Economic Cooperation and Development also looks doomed to failure.

Nobody is writing off the chances of a package deal next year, but diplomats believe a trade-off between a new savings tax system and an agreement to eliminate more than 50 predatory corporate tax breaks is more

likely than anything including energy levies. If they manage that, it will be the most significant harmonisation of tax systems since the single market opened for business.

Article forms part of a European Voice survey on taxation, p13-20.