Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


by ,

November’14 Assessment of Commision’s Legal Action

Every month, the EU Commision starts dozens of legal actions against Member States for non-compliance with EU law. We evaluate the November crop of fiscally-related cases. While 2 such actions are generally a good idea, 4 are a bad idea, reducing EU citizens’ opportunities for an efficient and transparent government.

EU Commission publishes a monthly list of legal actions it is taking against Member States for allegedly not complying with EU law. There are three stages: 1) “Letter of Formal Notice” is sent. If not complied with, 2) “Reasoned Opinion” is sent. If again not complied with, 3) member state is referred to the European Court of Justice which eventually makes a ruling (after which one further warning may be issued and then penalties follow).
This list provides an opportunity to evaluate the pursued cases according to IREF’s Research Interest: whether the EU Commission’s action is a reinforcement of, or an impediment to, an EU citizen’s interest in efficient and transparent government.
We do not condone states failing their legal duty to fulfil EU regulations; we chastise bad regulations.

In November 2014, the EU Commission announced a packet of 6 “Referrals” to the ECJ and 32 final warnings a.k.a. of “Reasoned Opinions”. Interestingly, the announcement coincided exactly on the day with the announcement of a European Investment Fund whose goals we have shown to be impossible.
Below are our verdicts on fiscally relevant November actions.

Austria is referred to the ECJ because its railway carriers are not correctly displaying in the relevant accounts public funds paid as part of “public service obligations”.

Our verdict: “Public service” is often a mere façade which hides someone’s particular interest that is supported at the cost of everybody else. However, as long as it exists, recipients of such subsidies need to clearly show that it was only used for that particular purpose and not to cross-subsidise other activities for which no “public service” dimension was even suggested.

Spain is referred to the ECJ for alleged preferential treatment of local government debt. In the Basque country, an autonomous community in the north, there are three territorial entities with even further historical autonomy (Álava, Guipúzcoa and Vizcaya). Their own local authority bonds get better treatment in inheritance taxation than other government debt.

Our verdict: Inheritance taxation is bad per se. It discourages savings and therefore investment and growth. Governments then often try to arbitrarily re-incentivise investment, spending even more money. It falls disproportionately on small businesses, the flexible backbone of an economy. However, given that death tax exists, local authority should have the right to make its own bonds immune from such tax. Both the conditions of bond issue and inheritance tax rules are in the hands of the government, therefore no third party is affected. There is no human right to a standardised sovereign bond and the EU should not be creating one by this Referral. If Spain does not have a problem with its sub-division having its own tax laws, why should the EU?

The answer may been accidentally revealed in the wording of the Referral: “The difference in tax treatment discriminates against investments in public debt issued by other EU Member States or EEA States”. So the conditions of the small issue of Basque Country bonds are seen as too competitive for the large Member States trying to park their debt on the market. But given that EU is claims to be pro-competition everywhere, it should allow full competition also in issuance of public debt.

Ireland is referred to the ECJ over its “coloured fuel” policy. Many EU states allow their agriculture and fishery to pay lower fuel tax. Unremovable staining dyes must be added to such fuel to allow tax authorities to check that the untaxed fuel is not used outside agriculture and fishery. Ireland allows pleasure boats to also buy the coloured fuel. Boat operators then face problems in foreign waters when colour is discovered in their fuel tank, violating local ban on using untaxed fuel outside fishing vessels.

Our verdict: It is difficult to justify tax breaks, especially for a whole sector. However, tax breaks do exist in each Member State. If Ireland decides that pleasure boats can enjoy low-tax fuel just as fishermen do, perhaps in order to encourage tourism, it should be able to do so. After all, tourism industries tend to be beneficiaries of ample national tax breaks. Allowing pleasure boats into the lower tax regime also does not violate other countries’ tax policies. If motorists engage in border-hopping throughout EU for lower-taxed fuel, why not pleasure boaters? The only possible regulation here should be making sure that boat operators know that they are purchasing a dyed fuel which may get them in trouble with foreign tax authorities; and even that need not be so if different national tax collectors use different colours.

Romania is issued a Reasoned Opinion (final warning) over its treatment of business expense deductions. Currently, if you reside in Romania, you can subtract business expenses from your Romanian non-wage income and pay taxes only on net income. If you don’t personally reside in Romania, you cannot.

Our verdict: Deductions of expenses are a way of applying a corporate profit tax onto an individual: unlike under wages, costs are subtracted from income and only “profit” is taxed. Companies are already choosing their domicile irrespective of place of actual place of trade, and two companies on the same market segment therefore are subject to different income tax. Therefore, there is nothing unnatural about treating two individuals with different residences differently as to their non-wage income tax. In fact, a Commission-mandated equalisation may result in tax-dodging: Romanians may then start to formally establish their residence abroad and deduct even greater necessary travel expenses from their taxable Romanian income. (To clear any doubts, discriminating based purely on nationality would, of course, be wrong.)

France is issued a Reasoned Opinion (final warning) over its treatment of non-wage income. Currently, a French resident has her tax base arbitrarily increased by 25% unless she fulfils 2 conditions: 1) the income must be of French origin and 2) she must pay to Approved Management Centre or a certified auditor from France.

Our verdict: This is also about non-wage income, like the Romanian case above, but our verdict here is the opposite: The Commision is right, France should scrap this law. It blatantly shields from tax surcharge only those who pay “protection money” to a member of a guild of French-only certified accountants and those who only do business in France. This is clearly a protectionist measure violating free trade within EU. It gives French people a tax break for “buying French” and arbitrarily forces them to give employment to French accountants.

Share this article :

Related contents ...

The Northern Powerhouse

No Schwexit, at least for now.
New developments in the land of the fiscally federal.


Sugar taxation won't work and anway, there's a better way.

Subsidies: the real reason why foreigners cannot own land



Any message or comments?

Show Form

 css js

By continuing browsing our website, you agree with our cookies policy
C L O S E

Monthly newsletter
Receive our publications for free