Putting fairness at the heart of our tax systems Algirdas Šemeta is European Commissioner for Taxation, Customs, Anti-fraud and Audit 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. How equitable a tax system is; how balanced the burden-sharing; how even the playing field is when it comes to tax competition. These are now all yardsticks for assessing the overall effectiveness of tax policy. 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 an urgency. 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. An estimated €1 trillion a year is lost in the EU due to evasion, according to one study – 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 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. It was time for a fundamental review of our tax policies, laws and attitudes, to ensure that we were doing everything we possibly could to clamp down on tax evaders and those who encourage them. 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. Essentially, member states are now fully committed to helping each other collect taxes from those who might try to hide their revenues abroad. 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 reduce 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 Lichtenstein – on new tax agreements that would ensure the highest tax transparency. Many positive signals have already come from these discussions – which only started in the last few months – and I expect to be able to present a very positive outcome to our member states before the end of this year. 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. It should create a fresh approach to concepts such as permanent establishment, transfer pricing and criteria for source taxation, which better reflect our modern economy and help rise to the challenges that it poses. 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 change the entire landscape for tax evaders. Fairness has been accepted as the fundamental guiding force. What is important now is that it translates into real action. We must strike while the iron is hot, and deliver on all our commitments with sustained ambition. While speaking of ambition, I can move to another major project at EU-level which has fairness at its very core. The Financial Transaction Tax 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 2/3 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 ever 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 ever 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. The third pillar in my mission to inject greater fairness into EU taxation over these past years is tied into the EU's new economic governance structure, which was developed in direct response to the challenges thrown up by the economic crisis. Taxation is a key pillar in what is known as the European Semester, through which country specific recommendations are issued to member states on how they can better orientate their public finances and other policy measures towards smart, sustainable and inclusive growth. This has been an important framework for raising the potential of taxation beyond mere revenue-collection. The Commission has used it to direct member states towards more growth-friendly tax policies, which facilitate business, encourage investment and support wider social objectives. We have also advised member states to focus on the distributional effects of their reforms and their impact on the social groups that are most at risk. Protecting the weakest and safeguarding the ability to pay principle is not just politics to please the citizens. There is increasing evidence that preventing socio-economic inequality from rising too high has benefits for all. So fair makes economic sense too. The message seems to be getting through, slowly but surely. From our analysis of the tax reforms being undertaken across the EU, we see that things are gradually moving in the right direction. For example, we see a trend towards greater tax progressivity in many member states, and targeted measures to protect vulnerable groups. However, tax reform is not an overnight process, nor one that can be done and dusted and then left aside. The Commission will continue to press member states to further improve the quality of their national tax systems, and to ensure that fairness is kept at the forefront of their mind when developing their tax measures. As I approach the end of my mandate at 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 seen commitments, initiatives and decisions that 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% committed to making this taxation fair and effective, it will at least gain greater popular acceptance.

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Taxation has never been a word that strikes joy into the hearts of our citizens. But if we can show that we are 100% committed to making this taxation fair and effective, it will at least gain greater popular acceptance

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