This article is part of our special report Tatra Summit: Europe’s competitiveness in a global economy.
Harmonisation of tax rates across the EU should be conducted cautiously, leaving member states the flexibility of setting rates in order not to jeopardise a healthy competition at the national level, says Grzegorz Poniatowski from the Polish think-tank Centre for Economic and Social Research.
Grzegorz Poniatowski is the director of fiscal policy studies at the Centre for Economic and Social Research (CASE) in Warsaw and the team leader of the Study to quantify and analyse the VAT gap in EU-28 member states.
He spoke to EURACTIV Slovakia’s editor in chief Zuzana Gabrižová during Tatra Summit, where he featured as an expert in the Focus Group on Smart Taxation in a Fast-Changing Global Economy.
The incoming European Commission has ambitious plans in the area of taxation. What is the state of play, do EU’s tax policies deliver? Are they conducive towards proclaimed priorities, be it climate, innovation or support for SMEs?
I would make a distinction between the adaptation that the tax systems will need to undergo in long-term and in the short term. In the short run, tax compliance will be of the highest priority. We are the authors of the VAT gap study. For many governments this is a very political debate, this is actually a foregone revenue, that can be used for investments or infrastructure.
In Poland, the additional revenues were used for social policies and spending. There is a lot of money in the system that can be retrieved by increasing efficiency. Trends are quite positive in this regards. The economy has been growing for years and also tax compliance was increasing.
But there are long-term problems that the tax system will need to face in the future, probably starting with climate change. Tax incidence on tobacco is the highest. But if you take in the relative terms carbon taxes are large part of the revenue of member states. It is around 150 billion euro. Even with optimistic plans regarding ETS system, there will be forgone revenues in the future and the tax system will need to address it. And also the general approach that we tax what we see. There are parts of the economy that are untaxed and digital economy is one of those.
How do you perceive the European Commission’s plans in the area of value-added tax (VAT)? There is the proposal on the definitive VAT system for business to business within the EU and the issue of the VAT rates.
Since 2015 we’ve in place what we call a mini one-stop-shop. This mini one-stop-shop should be extended into what we will call a definitive EU VAT system. This is something the European Commission was thinking of since 1967 – to introduce a system where you would not have a 0% rate intracommunity supply of goods. This created a hole in the system, which was exploited by fraudsters. If you have a product that at some point is untaxed, there is no exchange of information, it is very easy for the trader to go missing and for the tax not to be levied at all.
This was expected from the very beginning. We knew we needed a definitive system, where you have Polish authorities raising money to be transferred to Germany and the other way around. Everyone was optimistic one or two years ago, but now it seems that some countries are opposed. The main opposition is Germany. It will probably not take place, which is a pity.
The other thing is a proposal for more flexibility in VAT rates, but compared to the other one, is not a tremendous reform and is also likely to fail. The countries are not keen to be given more freedom. Currently, no country in the EU, not even Luxemburg, imposes a bottom VAT rate. Of course we have countries competing with rates to get consumers from other member states, but still in my view, in VAT we do not have such a problem of race to the bottom as we have in corporate income taxation or personal income taxation to a lesser extent.
There are still problems with VAT gaps in various member countries. VAT is, as a source of EU budget, a financial interest of the EU. Could the European Prosecutor’s Office (EPPO), soon to be established, help to close a gap in VAT in countries where it is particularly high?
Tax non-compliance has many components. We cannot close the VAT gap completely. You have errors, omissions, bankruptcies etc. However, it is possible to reduce the gap. If we concentrate on issues like fraud, evasion and avoidance there is a potential in decreasing forgone revenues.
There are three main aspects to increasing tax compliance. First, you may increase tax morale. There are countries with higher voluntary tax compliance but this is not something that could be quickly achieved. We know in which countries taxpayers are less keen on paying taxes. These countries are in our region, they are in southern Europe. You cannot change it from year to year. You can educate, you can provide good quality of public goods and create the system based on trust and enhance quality to the public sector, but this is a long process. The other element is sanctions. You may increase sanctions.
In Poland, this was one of the tools to increase tax compliance, for example, 25 years of imprisonment for tax fraud. Tax fraud is defined as something above one million Polish Zloty, which is approximately 2 250 000 euro. It seemed it had an effect. The most important aspect is the inevitability of sanctions. You want to control the exchange of information, be able to observe what taxpayers are doing. This is the aspect which needs to be prioritised if one wants to think of fast effects on tax compliance.
Member states are implementing solutions like safety standard audit file which means that information from invoices is sent in electronic form to the tax authorities and this information is at the disposal of tax authorities. It really works. In Poland, the VAT gap fell from 25 % to 12-13 % in 2018, which was tremendous and it drives political change as it finances social expenditure.
Automatic exchange of information works. In excise, we have full control. There is the EMCS movement system, track and trace. If we are able to improve the exchange of information between member states, I am sure that the VAT gap could be diminished quite substantially.
Tax avoidance of companies is something the public is very concerned about. How would you asses the steps taken by the EU to mitigate the problem so far?
The crackdown on corporate income tax evasion has been the least effective. When you look at large companies and conglomerates you see that they are completely non-profitable. This is completely different when you look at the medium and small enterprises. Those that cannot shift their bases across countries. In terms of corporate taxation, it needs substantial reform.
During his hearing, the Commissioner-designate Paolo Gentiloni promised to revive the common corporate tax base (CCCTB) proposal, calling it “an absolute priority because we can’t continue with this internal competition among member states”. Can CCCTB help fighting tax evasion or aggressive tax practices? How?
To take any measures we need to have the same point of reference, which is the tax base. That is the first very important step, which of course some may be afraid of, not all. Some of the countries are afraid of the next steps, that it could be harmonisation or fixing rates. But this step needs to be taken, we need to know what the tax base is. The more actionable the tax-base, the better. Shifting base became easy and is at the core of profitability of large companies, all companies know how to do that. I am in favour of it and am looking with optimism to such a solution. Hopefully, it will be adopted.
Harmonisation is a word that usually sparks fear in the CEE region. Do you see why?
The question of harmonisation is a very important aspect that needs to be settled. Harmonisation doesn’t mean ‘equalisation’ but it should be considered as a tool to coordinate processes: harmonisation of the definitions and exchange of information. Second, we need to make sure that the internal market is working as well as possible and that there are incentives to compete and not the contrary. The rule of subsidiarity of the EU needs to be kept in mind.
Harmonisation of the tax rates across the EU could increase the scale of illicit trade and harm competition. There would be many cons of harmonising rates, the pros would not prevail. One of the costs would be an increase in the volume of illicit trade. I have seen how illicit trade developed in reaction to quite sudden changes in tax policies. One needs to think of limitations when deciding on tax rates
Another tax-related proposal is the so-called carbon border tax. Commissioner-designate Gentiloni said the EU should “move quickly” on that, even if there are legal and technical constraints. Is this feasible?
Observing the debate in Poland, which is the only country in the world which started the construction of a new coal plant, I am quite sure that this kind of solution will be opposed at the EU level and so far I am not looking forward with optimism to make it work. Climate change is a negative externality. The ETS is clearly not enough at the moment and does not generate enough revenue for member states to replace carbon tax. It’s very important to remember that all climate change policies, incentives, subsidies, they are expensive.
At the same time, member states will start to lose income from carbon taxes in the future. There is one puzzle, what to do to obtain income replacing the one that will forgo in the future without taxing the most vulnerable groups. If you have subsidies for solar panels, you give subsidies to wealthy people. You must keep in mind also the redistribution aspect of taxation.
There is a push for making these kinds of taxes, like the border carbon tax, own resources of the EU budget. Should this be done?
It is important that the tax, the revenues, are spent in a proper way, to mitigate climate change. Centralisation of this expenditure might be helpful in this regard. I am a fan of larger federalisation of the EU budget. US federal budget is 19 % of GDP, in the EU, it is 1 %. If you look at the actionable part of the budget it is very small.
EU has black and grey list of non-cooperative jurisdictions for tax purposes. There is a big discussion on whether this list represents the true situation and if the EU should not be more assertive. Just recently, the ECOFIN Council removed United Arab Emirates from the blacklist. Do this list and conditions attached serve the purpose?
One of the positive sides is that some countries are moving from black to grey, and some are removed altogether. This shows that it works, but that does not mean that the EU will not have to be more stringent in the future.
These decisions lie very much with the Council, that is member states. Taxation is one of the last areas where the decision in the EU is taken solely by unanimity. Should we move to qualified majority voting in taxation, as suggested by the Commission?
There is a bit of levy between the qualified majority and unanimity. With unanimity, it does not work. No serious reform can be implemented. With so many countries, it is impossible to have the so-called Pareto optimal situation. There will always be losers. We need to make sure, that everyone takes advantage of the changes that are implemented and everyone benefits similarly. We also need to make sure that the anti-EU rhetoric is not strengthened. It is very easy, to say the EU imposed something. It would be best to avoid veto but at the same time not to make the group that can block the decision not too small and not too large.
[Edited by Zoran Radosavljevic]