Putting Fairness at the Heart of our Tax Systems

Taxation has been a crucial policy in addressing the extreme economic crisis we have faced in Europe. And it is just as pivotal in the recovery period.

While the primary role of taxation is to raise revenues – much needed during this period – it certainly isn't the only role. The impact that tax policies also have on wider economic and social objectives is immense. And in the context of our deeper economic governance and coordination, the EU has promoted tax reforms that support growth, competitiveness and, crucially, fairness. In fact, we have reached a point where fairness has become a fundamental principle, without which the legitimacy of taxation is severely compromised.  

The economic crisis provided the fuel to stoke this fire, both in the EU and internationally. Understandably, when ordinary citizens were being asked to bear the brunt of higher taxes and deeper spending cuts, often at huge personal expense, they expected balanced burden-sharing and a fair approach. Political action for fairer tax systems, where everyone pays their share, was not an option – it was urgent. It was crucial for social acceptance of our economic model, as well as for sustainable public revenues.

The campaign to clamp down on tax evasion and aggressive tax planning has been central to the drive towards greater fairness. According to one study, an estimated €1trillion a year is lost in the EU due to evasion – equivalent to the GDP of Spain. The VAT gap alone amounted to €193 billion in 2011. Not only are such figures impossible to justify to austerity-hit citizens, but they highlight how much revenue can be reclaimed with more efficient, more effective and more targeted tax collection.

The European Union has always been a strong proponent of good governance in taxation. We were the first block in the world to automatically exchange information between tax authorities and we have had a Code of Conduct in place to harness harmful tax competition for over 15 years. However, with the challenges of the crisis, high-profile cases of corporate tax dodging and mounting tensions between Member States over tax competition, we had to up our game.

In 2012, the European Commission presented an ambitious Action Plan Against Tax Fraud and Evasion, setting out 30 different measures to combat these problems, and recommendations to tackle tax havens and aggressive tax planning. I am proud to say that this was the ignition for what subsequently became a global movement towards greater tax transparency and fairer tax competition.

Since then, we have seen good progress in the fight against tax evaders and corporate tax avoiders. In the EU, the Savings Directive was adopted in March 2014, after six years of deadlock on the file. Together with another proposal I put forward, which should be adopted before the end of the year, this will ensure that automatic exchange of information will be applied in its widest form in Europe.

On the VAT side, we have put new tools in place to tackle large-scale fraud. A Quick Reaction Mechanism, for example, allows Member States to respond more swiftly and efficiently to complex fraud schemes, such as carrousel fraud, thereby reducing potential financial losses.

Fair tax competition – whether between Member States themselves or between companies – has been another key area in our tax evasion campaign. National measures that encourage tax shopping or seek to steal the tax base of neighbours are unacceptable in the EU. Likewise, smaller and less ‘well advised’ businesses should not be at a disadvantage compared to their tax-avoiding competitors. Nor should they have to compensate for the aggressive tax planning of some companies, by carrying a higher tax burden. Therefore the Commission has used every tool at its disposal - including state aid rules and the Code of Conduct on Business Taxation – to ensure that Member States play fair amongst themselves. And we have worked to tighten up EU tax legislation – namely the Parent-Subsidiary Directive – against aggressive tax planning. This will close loopholes, bridge national mismatches and basically block off opportunities for corporate tax avoidance, which are currently being exploited.

Furthermore, new political impetus has also built up around the proposal I put forward for a Common Consolidated Corporate Tax Base (CCCTB). This initiative was originally conceived to simplify life for businesses and improve the tax environment for companies in the EU. By creating a single European tax base, the CCCTB reduces the administrative burden, compliance costs and legal uncertainties that businesses in the EU face in dealing with 28 different national systems for determining their taxable profits. However, it is now also recognised as a potentially powerful tool against tax avoidance – offering a double dividend in terms of results. By eliminating the need for transfer pricing, the CCCTB would render many aggressive tax planning schemes entirely redundant.

While I do not expect final adoption of the CCCTB by the end of this political mandate, I do anticipate that it will continue to occupy a central place in the agenda of the next Tax Commissioner, as the answer to ensuring fairer corporate taxation amongst Member States.

Meanwhile, the EU has not limited its ambitions for fairer taxation and greater good governance to within its own borders. We have actively pushed for similar progress internationally too. We have embarked on negotiations with our closest neighbours – namely Switzerland, San Marino, Andorra, Monaco and Liechtenstein – on new tax agreements that would ensure the highest tax transparency. I have also personally visited major financial centres, such as Hong Kong and Singapore, to entice them to embrace the global transparency movement too.

More widely, the EU has also been integral to a major overhaul of international tax standards. We have used our experience and expertise in tax good governance matters to actively contribute to two ambitious projects steered by the OECD. The first is the move to make automatic information exchange the global standard of tax transparency. We are at the point now where around 40 countries – including the USA, China, Russia, Switzerland, and Singapore - have committed to automatically exchanging information between each other's tax authorities. Such a development would have been inconceivable even five years ago, and essentially sounds the death-knell for banking secrecy.

The second project aims to tackle Base Erosion and Profit Shifting (BEPS), by creating an international framework for curbing aggressive tax planning and ensuring that taxation better reflects where economic activity takes place. Given the globalised nature of corporate tax avoidance, this global approach is essential and should be highly effective when finalised.

Another major project at EU-level, which has fairness at its very core is the Financial Transaction Tax. The FTT is founded on the idea that every sector in society should make a fair contribution to the public purse – including the financial sector. As a result, it has the strong support of EU citizens, with over two thirds of those surveyed claiming to be strongly in favour of the FTT. 

This tax was first proposed by the Commission in 2011, and relatively quickly became the first EU tax initiative to move to ‘enhanced cooperation’. Under this process, 11 Member States threw off the shackles of unanimity, usually required for any tax decision at EU level. When agreement amongst the 28 Member States was proving unlikely, this smaller group decided to move ahead with a common FTT by themselves. Once they have reached a deal on the final details – which I hope to see before I leave office at the end of the year – these Member States will have the first regional financial transaction tax in the world.

The benefits of this are manifold. It will strengthen the Single Market by avoiding a patchwork of national taxes. It will ensure a more equitable input into public finances from financial institutions. And it will complement EU regulatory measures for financial stability. While the final FTT that the 11 Member States adopt is likely to be more cautious than what the Commission had originally proposed, it will nonetheless be a major achievement when it becomes a reality. And it will be an important signal to EU citizens that Member States can deliver on a tax initiative together which promotes fairness and responsibility. 

All in all, I believe that over the past few years we have seen a paradigm shift in taxation. Openness and cooperation are overthrowing secrecy and self-servitude. Major political commitments have been made, which will rebalance the entire landscape.

As I approach the end of my mandate as EU Tax Commissioner, I can say that I am proud of what has been achieved to push forward our goal of greater fairness in taxation. That is not to say, however, that I believe our work is done. Far from it. We have taken very important steps forward over the past five years, and have seen commitments, initiatives and decisions that have injected more fairness into our tax policy at national, EU and international level.

However, challenges still remain and work that has started must be completed. It is worth the effort. Taxation has never been a word that strikes joy into the hearts of our citizens. But if we can show that we are 100 per cent committed to making this taxation fair and effective, it will at least gain greater popular acceptance.

Algirdas Šemeta
Algirdas Šemeta is a Lithuanian economist and Member of the European Commission since July 2009. Initially, he served as Commissioner for Financial Programming and Budget, and from 2010, his portfolio covered Taxation, Customs, Audit, Anti-Fraud and Statistics (since 2012). Prior to joining the European Commission, he was Minister of Finance on two occasions, Director General of Statistics Lithuania, and. Secretary of the Lithuanian government. In 2012, International Tax Review named Algirdas Šemeta as the second most influential person in the world in international taxation.