Updating the tax system: regions and cities support simplification and fair rules  

Fair taxation and investment towards a low-carbon, resource efficient and circular economy were the main topics discussed at the meeting of the Commission for Economic Policy (ECON) of the European Committee of the Regions (CoR) on 21 June. The meeting took place in Bucharest at the invitation of the head of the Romanian CoR delegation Robert Sorin Negoiţă (RO/PES), Mayor of Bucharest District 3.

Value added tax (VAT) is a major source of tax revenue in the European Union and raised around € 1 trillion in 2015 (7% of EU GDP). Despite many reforms, the VAT system has been unable to keep pace with the challenges of today's global, digital and mobile economy. This leads to a loss of € 150 billion of VAT revenue every year as well as high administrative burdens and compliance costs, especially for SMEs and micro-businesses.

"Fragmentation and complexity of the VAT system result in major compliance costs for businesses especially when working across borders. As many of these costs are fixed, rather than proportional to their turnover, small businesses bear proportionally an even higher burden. The European Commission's proposal is expected to reduce those costs by up to 18% per year. Additional support via an electronic portal to allow all businesses to keep track of different VAT systems and extending the scope for the Mini One Stop Shop would help to reduce the burden even further. Also, moving to a destination based tax system will reduce the risk of unfair competition and simplify cross boarder trading", said Paul Lindquist (SE/EPP), Commissioner of Stockholm County Council and rapporteur on the CoR opinion "Fair taxation package", which was adopted during the ECON meeting.

A special challenge to the current tax system is the digital economy. There are concerns that its increasing role will lead not only to a sharp fall in tax revenues, but also to a disparity in terms of taxation. Currently, companies with digital business models pay less than half the tax rate (average 9.5%) of businesses with traditional business models (average 23.2%). This happens partly due to built-in incentives by some governments for digital companies, partly because taxes are collected in the country where the company is registered and not where it carries out its actual economic activities. The input of the debate held during the meeting will feed into an own opinion drawn up by Jean-Luc Vanraes (BE/ALDE) to be presented to the ECON members on 23 October.

The local and regional leaders further exchanged views on how to finance sustainable growth. Cities and regions have broad competences and financial responsibilities in the fields of infrastructure, transport and housing, which are vital for establishing a greener and more sustainable economy. However, the European Commission's "Action Plan: Financing Sustainable Growth", does not consider public investment even though regional land local authorities are also significant issuers of green bonds. Tilo Gundlack (DE/PES), Member of the Landtag of Mecklenburg-Western Pomerania, will present a first draft opinion reflecting the views on cities and regions on 23 October.

Background:

The current VAT system dates from 1993 and was intended to be a transitional system. It is fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud. In the VAT Action Plan of 2016 the European Commission outlined a new VAT area which aims to broadly overhaul current rules. The new rules would establish a definitive VAT regime based on the principle of taxation in the Member States of destination. The current proposals are the final steps in the overhaul of VAT rules, with the creation of a single EU VAT area.

Many countries believe that a new tax framework is also needed to cover digital business models. The European Commission is working closely with the OECD to support the development of an international solution. In parallel to the international discussion the EC is proposing two solutions at EU level: firstly, the so-called digital service tax (DST) aimed at digital activities that currently escape tax altogether in the EU, and secondly, a long-term solution to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users.

Contact:

Carmen Schmidle
Tel. +32 (0)2 282 2366
Mobile: +32 (0)494 735 787
carmen.schmidle@cor.europa.eu