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Tuesday, December 1, 1998 Published at 12:26 GMT


Business: The Economy

Taxing Europe

Will Europe push up our tax rates?

The row over the harmonisation of tax rates in the European Union has led to much confusion over what exactly is being proposed, and what is likely to be accepted. In this special report BBC News Online attempts to shed some light on the controversy.

Tax rates overall do vary across Europe - but not by as much as in the rest of the world. In the UK, for example, taxes make up 38% of the total economy, as opposed to 45% in Europe as a whole.

Taxes are generally higher in Europe than in the USA or Japan, where the private sector provides more services like health care and old age pensions.

European single currency
Different types of taxes

There are three main types of taxation: taxes on personal income, taxes on businesses, and taxes on goods and services (VAT). At the present it is only taxes on businesses and goods and services that are being debated, although some critics of Europe are worried that ultimately personal taxation could drawn into the harmonisation debate.

The top rate of income tax, at 40%, is lower in Britain than in most of the rest of Europe.

Business taxes

There are concerns that the EU, led by Germany, wants to equalise the rate of corporation tax across Europe.

That would be to prevent countries trying to attract investment by lowering its corporate tax rates.

Ireland has been the most successful country in Europe in pursuing this strategy.

But the UK, which has just lowered its rate of corporation tax, believes that harmonising tax rates upwards could jeopardise jobs. Flexible labour markets, not high corporate taxes, it says, are the key to cutting unemployment.

One problem for companies is that the official rates of corporation tax actually mean very different things in different countries.

Differences in how to measure profits, and various tax breaks for investments, means that the actual rates are quite different from the published rates.

Swedish companies, for example, pay hardly any corporation tax because of the generous incentives for investment.

One measure of harmonisation that might be more likely to be adopted is to move towards a common definition of profits. But, given the differences in company accounting systems, even that is fraught with difficulties.

Tax breaks

Another area of concern is the specific tax incentives given to certain industries or certain regions in order to attract investment.

Under its competition law, the EU has already tried to limit the amount of state subsidy companies can receive.

Now there are also proposals to try and control the bidding by governments for foreign investment projects, which can involve hundreds of millions of pounds in tax sweeteners.

Such subsidies are also being considered by other international bodies such as the Organisation for Economic Cooperation and Development (OECD), made up of the world's industrialised countries.

It is likely that some limits may be placed on such tax competition.

That could affect tax breaks to the UK film industry.

Tax evasion

There is growing concern in countries like Germany that rich individuals can set up bank accounts in other EU countries in order to avoid tax.

To stop the use of such tax havens, the EU Commission has proposed that there should be a standard 20% rate of tax levied on all such accounts by non-resident individuals.

This is the area where the most concrete work has gone on since February.

The UK, which receives a substantial amount of inward investment in the City, would prefer to deal with this matter by greater exchange of information, and disclosure, rather than a withholding tax.

There is a particular concern that the wholesale financial markets, which sell things like government bonds, could be adversely affected by such a tax.

VAT

The EU has maintained that as part of the single market, there have to be limits on the amount of VAT to be charged by different countries.

Otherwise countries could attract business by lowering rates on certain goods.

The same logic has led the EU to move towards the abolition of duty-free goods.

These limits prevented the UK from lowering the rate of VAT on fuel to zero.

But there are no current plans to challenge the UK's exemption of food, children's clothing, books and newspapers, and public transport from VAT. Some other EU countries do levy VAT on these goods.

Even more unlikely would be the extension of VAT to house purchase, replacing stamp duty.





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