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Tuesday, 5 December, 2000, 13:03 GMT
Taxing issues for Europe
Are taxes too high in Europe?
Are taxes too high on businesses in Europe?
By BBC News Online's Orla Ryan

Tax is always an emotive issue, and could prove one of the battleground issues at the Nice summit.

When European leaders meet in Nice they will discuss qualified majority voting - the passing of EC proposals without unanimous approval - in order to smooth the workings of a European Union.

In the field of tax policy, it is something that the UK and Ireland will be reluctant to agree to - - because it could mean losing control over the taxes that business and individuals pay.

Europe already has a degree of tax harmonisation - VAT rates are set within a certain minimum in order to make the single market more effective.

And there is debate on the questions of customs duties. The UK's heavy dependence on custom duties for alcohol and tobacco has meant a big increase in smuggling as individuals try to take advantage of lower prices elsewhere in the EU.

For two years, the immediate battleground has been the issue of a tax on savings across Europe to prevent tax evasion.

But the broader issue of high tax rates, and the damage they might do to the competitiveness of the economy, will also figure high on the agenda.

Compromise

The controversial European savings tax stems from a 1997 EU minister agreement.

This included a Code of Conduct for Business, to eliminate special tax regimes, which constitute harmful competition and a proposal for a directive on interest income from savings.

The immediate fear for the UK is that if a "withholding" tax on savings - meaning that tax will be deducted at source - the London-based eurobond market could be destroyed, leading to the loss of several thousand jobs in London.

A compromise does appear to have been reached on withholding tax. An agreement reached in late November would eventually see tax authorities throughout the EU sharing information on savings, with the aim of combating tax evasion.

However, for a seven-year transition period, countries, opposed to this swapping of information, will be able to impose a withholding tax on income from savings instead.

But even this fragile agreement is endangered by Switzerland's reluctance to sacrifice its banking secrecy. Even though it is not a member of the EU, if Switzerland stands firm, it is an obvious destination for European funds, who want to avoid the glare of openness, thus minimising the effect of the new legislation.

Whatever the outcome of this particular spat, the difficulties and delay in reaching agreement across Europe, has heightened questions about whether individual countries should retain a veto.

Scared multinationals?

What influences where multi national companies decide to set up business?

When it comes to multi-national companies setting up business in Murope , many argue that location is strongly influenced by corporate tax rates.

EU Corporate Tax Rates
Austria: 34%
Belgium: 40%
Denmark: 34%
Finland: 28%
France: 40%
Germany: 42%-51%
Greece: 35%-40%
Ireland: 20%
Italy: 19%-37%
Netherlands: 35%
Portugal: 37.4%
Spain: 35%
Sweden: 28%
UK: 30%
source: IFS
The UK has long boasted that it has the lowest corporate tax rates in Europe at 30%, making it more attractive for businesses to invest there.

But for many years, Sweden has enjoyed corporate tax rates of 28% while Ireland, which currently enjoys a rate of 20%, will have a corporate tax rate of 12.5% in 2003.

Not surprisingly, in recent years Ireland has enjoyed heavy inward investment flows, propelling its current boom.

Some economists argue that it is not just the tax rates that determine how attractive an economy is to outward investors.

"The burden of a business is a function of corporate tax, irrecoverable VAT and what we in the UK call national insurance liability," Peter Cussons of PriceWaterhouseCoopers said.

The difference that makes between the UK and Belgium, is that a worker that costs 100 in both countries, costs 112 in the UK and 130 in Belgium.

Tax competition

Many European countries are acting to cut corporate taxes, trying to dispel the view that Europe, as the continent of high taxes, is a less attractive place to put your money than Japan or the US.

For the EU, as a whole, revenues from taxes on corporate income have increased over the last 20 years.

Corporate taxe rates may have fallen, but not only are more companies profitable, but more companies pay these taxes.

These taxes aren't the only charges which determine where businesses set up their home. National insurance also plays a role.

One fear is that if corporate taxes fall, taxes on workers will rise. Workers are seen as intrinsically less mobile than international capital.

For companies within the eurozone and adhering to the rules of the stability pact, the ability to raise or lower taxes is one of the few tools they have left to play with.

Interest rates are already controlled by the European Central Bank.

Indeed, eurozone countries already have to keep to budgetary targets, keeping their deficits under control as part of the stability pact.

It was the fears that this could lead to reduced welfare benefits that have led to growing scepticism about joining the euro in the high-spending Scandinavian countries of Denmark and Sweden.

So far, the tax debate has been confined to taxes on goods and services, and company profits.

Any attempt to harmonise personal tax rates could lead to a wider political rebellion against the EU project as a whole.


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