The Commission’s policy with regard to taxation is an integral part of its comprehensive strategy to create more growth and jobs in the EU and to boost the competitiveness of EU companies. We want to make Europe a more attractive place to invest and work by promoting knowledge and innovation. We concentrate on the improvement of a more favourable tax environment so that business and citizens can benefit from the full potential of the internal market.

Attracting investment can be done in many ways and taxation plays a part in this. At the same time, taxation touches the heart of the functioning of the Member States, i.e. their national budgets: they need to be able to raise the correct amount of tax so that, for instance, a cohesive and fair social infrastructure can be paid for.

Within this framework, our taxation policy aims at addressing the concerns of taxpayers operating within the Internal Market by focusing on the elimination of tax obstacles. Such tax obstacles refer to, for instance, compliance costs due to the need to comply with a multiplicity of different rules, lack of cross-border relief of losses, disputes on transfer pricing issues, etc. Due to these obstacles, companies willing to operate across border are at a disadvantage compared to companies operating in a domestic context, which is referred to in the economic literature as home bias.

At the end of December 2006, the Commission launched a new strategy with regard to direct taxation. This initiative is directed at co-ordinating and improving the performance of existing national direct tax systems by rendering these systems compatible with the Treaty and with each other. The Commission is proposing to work together with Member States and other stakeholders, where appropriate, to ensure that taxpayers will better benefit from the freedoms provided by the Treaty.

Cross-border loss relief
Cross-border loss relief provides the first example of specific areas where Member States could benefit from a co-ordinated approach.

Loss relief is a major obstacle for international companies: a lack of cross-border relief of losses may lead to (economic) double-taxation. In most Member States, domestic losses may be set-off against other profits in the same Member State. However, there is only limited availability for such relief for losses incurred in other Member States. This creates a barrier to entering other markets, distorts business decisions within the internal market and therefore undermines the international competitiveness of European companies. Companies could refrain from investing in other Member States for the simple reason that losses from domestic investments are immediately taken into account, whereas losses incurred in another Member State are excluded from such relief.

In the Marks&Spencer judgement[1], the European Court of Justice already intervened in this debate when it obliged, under certain conditions, the Member State of a parent company to grant relief for definitive losses of a subsidiary established in another Member State.

Following this judgement, the Commission suggests ways in which Member States may allow the cross-border relief of losses which are sustained either:

Transfer pricing
Another major tax obstacle for international companies is the existence within the EU of different transfer pricing rules for associated companies.

When associated companies trade across borders, they are obliged to use the market price for tax purposes. Indeed, using another price could result in a transfer of the tax base from one country to another. However, it is not always easy for the companies or tax administrations to determine this price. For this reason, Member States have defined specific rules to determine the transfer price. These rules may differ between Member States and may therefore lead to inconsistencies in the internal market and additional administrative burdens on taxpayers, where the taxpayer may be taxed twice on the same income – so called double taxation.

The Commission has been very active in dealing with transfer pricing issues. In cooperation with a group of experts from the private sector and tax administrations (the Joint Transfer Pricing Forum), we have already implemented two Codes of Conduct and have just made a proposal for guidelines to avoid transfer pricing disputes among tax administrations and taxpayers by promoting the use of Advance Pricing Agreements within the EU.

Although these Codes of Conduct are not binding instruments for Member States, Member States have committed themselves to respect them and I can say that the two Codes of Conduct have already proved their efficiency.

The first broad area looked at by the Forum was dispute resolution. The provisions of the Code on the convention for the elimination of double taxation (the “Arbitration Convention”) aim to ensure that it would operate more efficiently and that the resolution of transfer pricing disputes should be achieved within three years of the request being submitted, unless the taxpayers concerned grant an extension.

The second broad area within double taxation being looked at by the Forum is dispute avoidance. In February 2007 the Commission proposed EU guidelines for Advance Pricing Agreements (APAs) between taxpayers and tax administrations. APAs are very effective tools for dispute avoidance. These guidelines encourage the use of APAs in order to improve legal certainty for taxpayers.

In addition, in July 2006 the Council adopted a Code of Conduct on documentation requirements related to transfer pricing. Documentation requirements are a real burden for taxpayers but of great importance for tax administrations. The code sets out, for example, a practical limit on the level of standard documentation requirements that Member States can impose as part of their domestic laws.

A comprehensive solution: EU Common Tax Base
Besides these targeted measures, companies could be interested in a more comprehensive solution. Therefore, the Commission works on the details of a Common Consolidated Corporate Tax Base (CCCTB). The CCCTB will enable companies operating in the Internal Market who opt to use it to follow the same rules for calculating their tax base across the EU, rather than in accordance with up to the existing 27 systems, thereby improving efficiency and reducing compliance costs. Tax authorities would then distribute the taxable base according pre-determined criteria.

The CCCTB will eliminate existing intra-community transfer price difficulties and will allow a cross-border loss offsetting. This will contribute to improve EU companies’ efficiency, improve their competitiveness and significantly reduce their compliance costs and general administrative burdens.

Given that the CCCTB project does not include any action on tax rates, it would not undermine national sovereignty but would create a more transparent and simpler tax environment for companies.

VAT one-stop-shop
With regard to VAT, tax obstacles are not as significant as in the corporate tax area given that rules are harmonised at EU level.

However, companies trading in several Member States, thus liable to pay VAT in several countries still face administrative burdens in each of those Member States.

In 2005 the Commission made a proposal for a one-stop-shop scheme. The discussions with the Member States are still ongoing. The proposed scheme would remove the current obligation on traders supplying goods or services across borders to lodge VAT returns in every Member State in which they operate.

Under this one-stop scheme, companies would have the option to submit their VAT returns electronically to the tax authorities of the Member State where they are established; the information on the VAT returns would be transmitted automatically to the Member States of consumption (where the tax would be due); payment of VAT would be made directly to the Member States of consumption.

In addition, the proposal would allow a trader to present a request, via the tax administration where he is established, for a VAT refund relating to goods or services on which he has paid VAT in other Member States. Making the current refund procedure electronic should mean less work in the future for the refunding Member States and consequently the Commission also proposes that the processing time for requests be reduced from 6 to 3 months.

My objective: removing all tax obstacles to cross border activities
I have given here a short overview of our priorities on tax policy. The Commission believes that there is no need for an across the board harmonisation of Member States’ tax systems. From an EU perspective, according to the subsidiarity principle, Member States are free to implement the tax system they wish according to their economic and social objectives, provided that the tax system respects Community law.

However, we put all our efforts into removing the existing tax obstacles that companies face when they operate in several Member States. I am convinced that this will increase the competitiveness of EU companies and create more jobs and growth in the EU.

[1] Marks & Spencer plc v David Halsey (Her Majesty’s Inspector of Taxes); Judgment of the European Court of Justice in Case C-446/03, 13 December 2005.