7. Taxation

In order to ensure the functioning of the common and the internal market certain rules on taxation should be regulated under the Community rules. However it should be underlined that taxation is of the symbols of national sovereignty. Taking into account these two aspect the Member States have found an interesting solution. First, the indirect taxation is under the Community rules, and in these cases Unanimity is required for the adoption of decisions, secondly the direct taxation policy remains for the Member States.

In the internal market the differences between national tax systems are becoming more visible and are having an even greater influence on decisions regarding capital allocation, establishment.

In the field of indirect taxation progress has been made since 1993 with the introduction of the new excise duty system and the intra-Community Value Added Tax system involving the abolition of tax and customs frontiers and customs inspections at Member States' borders.

For direct taxation there are no specific provision in the Treaty, however, in direct taxation practice of the Member States a number of EC principles should be kept. It should be in line with the free movement of goods, persons, services and capital, therefore, all kind of discrimination on the basis of nationality of the citizens or businesses or on the basis of the origin of a service should be eliminated and the right of establishment of people and enterprises should be respected.

The legal basis for indirect taxation is in Articles 90 and 93 of the Treaty establishing the European Community. In line with these provisions no Member State shall impose, directly or indirectly on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products. Furthermore they shall not impose on the products of other Member State any internal taxation of such nature as to afford indirect protection to other products. As it was mentioned the rules on indirect taxation are subject to the Unanimity rule and have always been governed by the Subsidiarity principle: their aim is to harmonise national systems of indirect taxation , not to standardise them. In other words, their aim is to ensure that national systems are not only mutually compatible, but also comply with the objectives of the EC Treaty.

The harmonisation have concentrated on two major taxes: valued added tax (VAT) and Excise duties. .

VAT system

VAT system was intended to replace the production and consumption taxes which had had been to this point, applied by the Member States, which hampered trade. The Directive 77/388/EEC on the Sixth VAT Directive contains detailed rules.

The aim of the Directive was to eliminate tax frontiers. The system for the payment of VAT is based on a distinction between sales between taxable persons, sales to individuals and sales to traders not subject to or exempt from VAT. The single administrative document for firms has been replaced by regular returns which they have to submit. Duty free sales for private customers in ports and airports were abolished on June 30, 1999 on travel inside the Community.

The EU long term objective is to establish an origin-based Community VAT system, which needs further actions. However in the case of private individuals, consumers, the rules applies that VAT is to paid at the place of consumption or purchase. The only exception to that rule is the purchase of a new motor vehicle, where the tax is to be paid in country of registration.

In the common VAT system Member States apply a standard rate of VAT of at least 15% and have the option of applying one or two reduced rates (which must not be below 5%) solely to certain goods or services of a cultural or social nature. The temporary retention of existing zero rates and super-reduced rates (i.e. below 5%) is authorised.

Legislative measures were also adopted introducing special schemes for certain goods or services, for example for second-hand goods, works of art, antiques and collectors' items, gold transaction, travel agencies, services supplied by electronic means.

As regards trade with third countries, imports are still subject to customs declaration requirements and are taxed on importation. (See under the Customs Union chapter.)

Excise duty

The other indirect tax measure which is harmonised is the excise duty. The principle of the excise duty system is the taxation in the country of consumption.

Products subject to excise duty are defined in the acquis. The arrangements apply to alcoholic beverages, manufactured tobacco and mineral oils, and allow goods to be moved with suspension of excise duty and without checks at intra-Community frontiers. Excise duty is paid when the product is released for home use and at the rate in force in the Member State of consumption.

The European Union has also adopted the structure of excise duty on mineral oils in 2003 by creating a genuine Community framework for the taxation of energy products and electricity .

As a general measure several initiatives have been launched to combat fraud on VAT and Excise duties. The aim is to encourage closer cooperation between Member State authorities and to provide training for national officials aimed at familiarising them with different types of fraud and developing prevention, detection and investigation methods based on risk analysis.

Exercise: Taxation