Creating a tax framework for eEurope (20 May 2001)

Introduction

The profound changes in our economy that are taking place resist any NASDAQ turmoil or the fall of the dot.gones. The 1929 crisis was anything but the end of industrialisation. The evolution toward new business models and a new economic paradigm cannot be stopped by the expected failure of hazardous business models. E-business is here to stay because it solves issues enterprises have. The same will be true for eEurope insofar as it improves our life as citizens, including as taxpayers, business or individuals. While there is an exhaustive eEurope plan, there is no such thing for taxation. Although in some instances, EU intervention in this field could – if well done – benefit businesses across all Member States and the EU economy as a whole.

The full realisation of eEurope needs an appropriate tax framework. However dreaming of an ideal tax framework is not sufficient. The How has now become as big an issue as the What.

Agreeing on the what is not enough

Before looking at tax issues from a technical standpoint, it is necessary to make clear policy choices.

For instance, refusing both tax harmonisation and tax competition might be difficult; there is a point in time where Member States who reject one of these two roads will be bound to accept the other. Similarly reaching the ambitious goals set by the Lisbon Council will ask for heavy investment, both private and public.

Private investment needs a simple, predictable, encouraging and non-distortive tax framework. Public investment calls for an efficient tax system providing the necessary resources to invest in people and infrastructures. A failure on this front will affect all of us as a network society is only as strong as the number of citizens participating to the network.

There is in fact a need to revisit the classical tax approach to what makes the ground of a knowledge economy; that includes e.g. intangibles, research and development and first of all knowledge. The new economy worker, as envisaged by the eEurope action plan, must have the ability to adapt to new circumstances, to create, to generate and use information rather than to store it.

On the long term competitiveness of business will rely even more heavily on public investment in general education. This also calls for the reopening of a number of wider tax policy debates e.g. who has the right to tax what on global markets, what should be the total tax burden and its apportionment between labour and capital, or between financial capital and intellectual capital.

There is also a lot to say or to wish on tax incentives in view of improving computer equipment or skills. Special attention should be devoted to the case of companies, for instance, granting computer training, providing laptops or Internet access to staff, as Internet is still more used in the office than at home.

In terms of general principles, no one has seriously supported the view that a tax system should be non-neutral, inefficient, uncertain, complex, and unfair. Thus the OECD Governments managed to agree on a set of general principles without too much difficulty. Unfortunately, interpreting or implementing these principles is likely to remain a different story because of two unwritten rules that should be kept in mind when discussing tax policy.

The first rule is concerned with legislation and states that the devil is often in the details. The second rule looks at practice and acknowledges that reality can sometimes differ from statements.

Invoicing provides an enlightening illustration. In the aftermath of the SLIM exercise, it was widely agreed that the rules for invoicing needed to be modernised. PricewaterhouseCoopers was asked by the Commission to carry out an extensive study on the conditions for invoicin g in the EU and to issue a series of recommendations in this respect .

On 17 November 2000, the European Commission introduced a draft directive that one could have expected to be welcomed by most Member States.

This directive simplifying invoicing has not yet been adopted, although no one says that invoicing in Europe should be unharmonised so to fragment the Single Market, complex so to prohibit automation, outdated so to inhibit modernisation of the supply chain of EU businesses.

As a result, companies as well as administrations continue to suffer extra-costs.

Basic elements such as the list of mandatory requirements to be mentioned on an invoice or the rules related to the storage of invoices are apparently posing problems that are serious enough to delay agreement. Regarding the security of electronic invoices, the only Member States with real experience in the field of Internet invoicing are happy to live with invoices sent as straightforward e-mail attachments without any further technology requirements. However other Member States, who lack such relevant experience, tend nonetheless to impose more stringent conditions. The risk is that the adoption of electronic invoicing is delayed or even prevented.

The private sector made its voice heard in this debate. In a white paper dated 19 March 2001 , the European e-business Tax Group (EeTG), a group of leading European-based businesses , warned that, although a number of its earlier recommendations on electronic invoicing had been taken into consideration, the draft Directive does not go far enough and called on the European Commission and Member State to improve and adopt urgently the draft Directive. It said that unless the draft Directive is amended costs savings will not be realised and governments as well as businesses will lose out. If agreement cannot be reached on such a basic issue, because of the weakness of the Member States’ commitment and the lack of a suitable decision making process, one can be pessimistic on further developments of EU policy.

The How is of the essence

The case of invoicing discussed above provides one more illustration of the inadequacy of the rule of unanimity when it comes to making decisions. In that perspective the Nice Treaty is no good news. Such matters, that have more to do with day-to-day business and administration, will remain subject to the same tough battles as so-called fiscal sovereignty.

Governments, citizens and businesses are embarked on the same ship. They can all equally benefit from the e-economy. Creating a policy framework for eEurope calls for a challenging new mix of leadership, vision, trust, expertise, agility, innovation, experiments and pragmatism. Diversity and inclusive dialogue are the only true vehicles down that road.

There are private sector’s initiatives that tend to respond to the challenge. The work of the European e-business Tax Group (EeTG) provides a good example. The EeTG is a group of leading European-based businesses which have come together to develop practical proposals for the future VAT treatment of e-business. The genuine value of the group lies in the deepness of its expertise, its focus on practicalities and its commitment to constructively and openly dialogue with all stakeholders. The group has already contributed a significant business perspective on the technicalities at stake . The EeTG looks forward to continuing its work with the European Commission, national governments and administrations and other stakeholders in order to achieve clarity and fairness in e-business taxation. To maximise its efforts, the EeTG has asked PricewaterhouseCoopers to support and manage its work as secretariat and to provide further research and project management for its activities.

In response to these developments PricewaterhouseCoopers is setting up a specialised team, Policy Advisory Services, to serve all stakeholders who want to understand and proactively manage change in tax and legal policies. This new service ambitions to respond to clients’ needs for strategic advise, project management and specialised communication expertise in this field. It also aims at helping governmental and international organisations understand and adapt to current changes and develop policy frameworks that enable all their citizens to reap the opportunities of the e-economy.

For eEurope’s policymaking, there is no other path to success than cooperation. But the Agora of the digital era is urgently needed.

, Director with PricewaterhouseCoopers leading the efforts of the Policy Advisory Services Team

For an in-depth analysis, see The European Policy Centre Challenge Europe:

Making a Reality of e-Europe.