EU tax harmonisation issue concentrates British minds

It is five years since the prospect of tax harmonisation last loomed large over the European Union.

Then, back in 1992, the visionary Ruding report was produced – and promptly shelved, left to gather dust in a storeroom at the European Commission.

Prior to the report, and almost from the inception of the EU, draftsmen have been drawing up a series of directives designed to increase tax harmonisation.

Again, the documents have always ended up in storage.

A single market in tax, it seemed, was not desirable, let alone possible.

Now, however, the prospect of a pan-European tax system is back on the agenda after it emerged last week that France and Germany were secretly spearheading a plan to pool control of taxation and social security within the single currency area.

As usual, the confusion created by the reports means only one thing for the accountancy profession – more business in the short-term as worried clients seek clarification of the possible effects on their tax structures.

The longer-term threat, tax experts agree, is the elimination of the need for tax advisers on cross-border planning.

Tax harmonisation would appear the logical next step on from a single currency.

Coopers & Lybrand international tax partner Tony Hughes said: ‘Once there is a single currency, which is supposed to start in 1999, a head of steam will build to develop a common fiscal policy among members adopting the new currency.

‘There will be pressure for change by 2000, with potential reform by 2005.’

But most tax experts and politicians quickly condemned the leaked report as a ‘pipedream’, particularly with the need for unanimity among members states on changes to direct taxation.

From a macro-economic point of view, tax harmonisation is impossible for one simple reason. The UK’s tax take as a proportion of GDP is 39%, in Sweden it is 61% (see chart).

As Chantrey Vellacott’s head of economics, Maurice Fitzpatrick, put it: ‘You could not possibly have the same tax system where individual countries tax requirements are so different.’

Differences between the level of revenue collected from indirect and direct taxation between countries adds to the problem.

Looking at the nitty-gritty, however, there are a plethora of anomalies and tax quirks that have been developed by each country – take the UK’s VAT zero-rating on food as one example. Other nations choose to tax consumables while the UK’s political parties vie with each other to oppose taxing food.

As another expert said of the hypothetical unification: ‘It would be like the UK’s project to rewrite tax law 15 times over.’

Ernst & Young’s director of international tax, John Fairley, said previous efforts at even basic tax harmonisation had failed. He dismissed the latest proposals as purely conceptual: ‘If we can’t get our act together over basic things like withholding tax on interest payments between countries, it will be very difficult to come up with a common tax system,’ he said.

‘And if we can’t find a common approach on the single currency, which is such a big political issue at the moment, then the idea of a common tax system must be a long way off. I estimate it would be at least ten years after the single currency was introduced before we would see a single tax system.’

KPMG European tax senior manager David Evans added: ‘It would be very difficult to have a common tax system without an authoritative political body imposing it. It would require a massive degree of political will that just doesn’t exist at the moment.’

For once, there was widespread political agreement on the subject. All the major UK political parties set their stalls out clearly against the Franco-German proposals.

Chancellor of the Exchequer Kenneth Clarke declared tax policy was a matter for individual states, while both Labour and the Liberal Democrats proclaimed their ‘firm’ opposition to any attempts to control tax policy from Brussels.

Similar soundings were picked up from industry. E&Y’s Fairley said certain harmonisation steps, such as the ability to build tax-free cross-border joint ventures, were needed to assist multinationals.

But Institute of Directors’ taxation executive Richard Baron said integration would contribute ‘little or nothing’ to economic efficiency. Baron, who in Accountancy Age last week (News, page 3) stressed tax competition between member states was vital, said tax harmonisation would remove opportunities for member states to promote themselves to businesses and labour by offering low taxes.

Baron warned: ‘It would constrain participants in the integrated bloc to a single fiscal policy regardless of local needs. This would further tighten the straitjacket of the single monetary policy which EMU will impose.’

But the fact remains that the stated aim of the EU is greater harmonisation between member states. Some tax experts see an irresistible momentum building towards tax unification.

Price Waterhouse’s head of direct tax, John Whiting, said landmark legal cases concerning taxation are beginning to filter through the European courts. The Schumacher case ruled that a foreigner working in another country should not pay more tax than a resident doing the same job.

Whiting said: ‘The Commission is saying that there is an issue here, and even if the prospect of everyone paying the same rate of income tax is a long way off, it should be looking at the implications of these court cases.

‘Any current examination of the tax system would highlight idiosyncrasies and inconsistencies. It is inevitable that some smoothing out of European taxation will take place over the next ten years.’