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Tax Harmony – What is the true intent?

The tax harmonisation story has taken another twist in the tortuous road to establish the true intent of the parties involved. We have already reported the expressed intent of the German minister Oskar Lafontaine to harmonise taxes. We now hear that Yves-Thibault de Silguy, the commissioner in charge of the single currency, has apparently now reaffirmed that the long term objective is to equalise taxes across the EU.



However, despite all of this Mario Monti, the EU tax commissioner, stated in a speech in London that he opposed the idea of minimum corporate taxes. He did, however, state that it would be easier to resist full harmonisation if Britain complied in the full implementation of the recently proposed measures to avoid “harmful tax competition” (minimum withholding taxes in particular). Clearly the threat of full harmonisation is likely to be heavily used to gain smaller victories on specific measures aimed at ending “harmful” tax competition.



Some early signs of how seriously Britain takes the threats of full harmonisation, and the much vaguer threats of having “less influence” if they don`t become part of the whole process, have just become evident with the reported closeness of some government ministers to agreeing to greater co-ordination between members states over tax incentives given to particular industries. Examples of potential “sufferers” in the UK would be film and shipbuilding industries.



Despite this and the report of EU finance ministers on a code of conduct to stamp out harmful tax competition, it seems that there is still resolve at the highest level to resist minimum corporation tax rates accruing on Europe. The government does however seem prepared to accept the proposals for a minimum rate of withholding tax on interest with the exception of that emerging from eurobonds.



COMMENT



This is not the place to look at the potential political and economic motivation behind calls for harmonisation. However, it has to be said that clearly there are vastly different cultures, social security and welfare structures to try to reconcile. If one accepts this, it is clear that different forces will be at work when it comes to shaping the philosophy of tax policy. Across the EU there are a vast range of these philosophies, from high tax/ high benefit to low tax/ low benefit as in the UK. Add to this mix the vastly differing state pensions exposure, where the extent of the UK problem is much less than that of the rest of Europe (given its much greater private pension funding) and you see vastly different,possibly irreconcilable, differences.



This space should most definitely be watched.


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