This article is part of our special report Tatra Summit: Europe’s competitiveness in a global economy.
States need to be prepared and equipped to tax what cannot be seen, but also to increase the fairness and effectiveness of the collection of tax revenues, a panel of experts has agreed.
The Focus Group ‘Smart taxation in a fast-changing economy’, a side event of GLOBSEC Tatra Summit, focused on what are we looking for in taxation and how to achieve that in a rapidly evolving environment.
For George Pitsilis, president of the Intra-European Organisation of Tax Administrations (IOTA), taxation needs to respect the principles of effectiveness, fairness, transparency, promotion of economic growth and promoting compliance.
Efficiency and predictability
Inefficiencies in the tax systems are measured in billions in the EU. More specifically, €140 billion in VAT gap, €50 billion lost in tax evasion in direct taxation and another 10 billion of foregone revenue in excise on tobacco, said Grzegorz Poniatowski, vice-president of the Center for Social and Economic Research.
He explained that quite a few economic motions can be studied on the excise tax on tobacco. When talking about the efficiency of tobacco taxation, two case studies should be kept in mind, he said.
First, Poland sharply raised taxes on tobacco products in 2012, 2013 and 2014, which apparently led to a decrease in revenue and growth of illicit trade. Consumers of cheap products switched largely to illicit trade and consumers of expensive products shifted to the so-called mid-market.
“The behaviour of consumers really needs to be kept in mind,” Poniatowski said.
Something similar – sharply raised taxes on cigarettes between 2002 and 2005, followed by lower than expected revenues – happened in Germany.
Then, in 2010, Germany introduced an excise calendar of gradually increasing rates, which was predictable and linked to inflation, explained Polish expert.
“Then, the revenue was higher than expected. All economic actors make their decisions based on the prediction of the future. The tax policies need to be predictable,” he argued.
At the EU level, there is an ongoing debate about the revision of excise rules on tobacco. Under discussion are minimum excise duty and treatment of novel tobacco products.
National realities, namely economic, social and borders with third countries, should be taken into account, believes Donato Raponi, senior adviser at Deloitte Tax Europe. The European Commission is reflecting on the possibility to increase the minimum level rates of excise duties of tobacco.
According to Raponi, this happens especially under the pressure of some western countries, where the nominal prices of pack of cigarettes are much higher than in eastern parts of the EU.
“But if we take into account the purchasing power of the consumers in different countries, it appears that the prices are quite similar, not very different from those of other commodities,” Raponi said, adding that should the minimum rates increase, the eastern member states will be the most affected.
Raponi drew a parallel with proposed VAT changes. Today, with VAT, there is minimal standard rate and a limited list of goods and services to which the reduced rates can be applied by member states.
“Considering that the destination based principle is generally applied – taxation at the place of consumption – the Commission has proposed to give more flexibility to member states for fixing their national VAT rates,” the expert explains.
According to Raponi, the same reasoning could be applied for excise duties goods and especially for cigarettes taxation. “Indeed, the place of taxation for excise duties products is also the place of consumption and moreover the cross-borders shopping for the cigarettes is rather limited, only 4,5 % of the consumption,” he argues.
Fairness brings compliance
A general trend in taxation, as countries find themselves in need of more revenues, is shifting the tax burden to more reliable, meaning collectable sources like taxes on property and taxes on labour.
“This makes the system even less fair,” argued the governor of IOTA, George Pitsilis, who is also the governor of the Independent Authority for Public Revenue in Greece. “The accusation is that we only tax those that we can. There is nothing worse when your taxpayers believe that your tax system is unfair and not impartial.”
Pitsilis also raised the issue of taxation being largely based on voluntary compliance.
“The tax administrations can’t monitor every transaction, we need the people to pay and understand why they do it. We also need to be able to prove that we support legitimate businesses against unfair competitors. These principles are challenged today through globalisation and digitalisation,” Pitsilis stressed.
The biggest challenge related to the cross-border digital supply of goods and services is the lack of information. There are only a few possibilities to actually cross-check what has been declared, with sharing economy and house renting through platforms being a prime example.
Pitsilis´s advice? Tax administration needs to increase digital capacities and provide an environment for voluntary compliance.
As an example, in 2018, the Greek tax administration created a user-friendly platform for taxpayers to declare their listings. The revenue declared increased from 60 million euro in 2017 to 182 million in 2018. “We did nothing in the audit part, just offered a simple solution.”
Executive Secretary of the Intra-European Organisation of Tax Administrations, František Imrecze agree that there are transactions today that we do not see and this definitely needs to be addressed.
The residential principle in direct taxation is obsolete, he said and presented the examples of Spain, Norway, Finland and Denmark making use of new sophisticated systems scrapping the data from the internet.
“There are discussions on harmonisation and how much of regulation we should have. There are areas and businesses we overregulate and there are businesses we do not regulate at all or very weakly. The example is cryptocurrencies,” Imrecze pointed out.
“In many European countries, the cryptocurrency is defined as currency by legislation, in others, it is defined as an asset convertible to currency. How can we agree on taxing the cryptoworld if we have two different categories of the same thing?” he asked.
[Edited by Zoran Radosavljevic]