Whither or wither the European Union Savings Tax Directive? A case study in the political economy of taxation

Date01 January 2004
Published date01 January 2004
Pages56-72
DOIhttps://doi.org/10.1108/13590790410809040
AuthorGeorge Peter Gilligan
Subject MatterAccounting & finance
Journal of Financial Crime Ð Vol. 11 No. 1
ANALYSIS
Whither or Wither the European Union Savings
Tax Directive? A Case Study in the Political
Economy of Taxation
George Peter Gilligan
INTRODUCTION
One of the more contentious issues within the
European Union (EU) in recent years has been how
member states should organise their taxation infra-
structures. At the time of writing this paper (March
2003), EU member states are negotiating (at
times quite ®ercely) the proposed European Union
Savings Tax Directive (EUSTD).
1
The EUSTD is
the latest in a series of initiatives with a EU-wide
focus on taxation since the issue of global taxation
within the EU was ®rst crystallised in a speci®c
form by the European Commission (EC) in 1996.
2
The struggles and disagreement that have plagued
these various initiatives since 1996 raise interesting
issues of legitimacy, equity and political economy
of taxation that are the focus of this paper.
3
One should not be surprised of course that taxation
issues should stir strong emotions, or indeed stimulate
the vocal contribution of vested interests, because not
only is taxation revenue the lifeblood of govern-
mental, and subsequently, numerous other organisa-
tional structures, but also taxation infrastructure is a
key determinant of both micro and macro economic
policy, and of the organisation of commerce itself,
within both the public and private sectors, and also
between them. Most people and organisations will
have a view on taxation: some may perceive it as a
necessary evil to allow society to function; others as
infringing upon the rights and property of the indivi-
dual or collective; and many will feel that they pay too
much in tax and/or have insucient in¯uence over
how their taxation monies are spent. Over the years
there have been many comments about the relative
legitimacy and certainty of taxation. For example:
`Taxation and representation are inseparable . . .
whatever is a man's own, is absolutely his
own; no man hath a right to take it from him
without his consent either expressed by himself
or representative.'
4
`But in this world nothing can be said to be certain,
except death and taxes.'
5
Both these statements were made in the mid-18th
century, a time when the American colonies success-
fully fought for independence from the English
Crown. A catchcry of that struggle for independence
was `taxation without representation is tyranny', epi-
tomised by the Boston Tea Party, when on 16th
December, 1773, American colonial patriots threw
hundreds of crates of tea from three English ships
into Boston Harbour.
6
Today in Europe, as elsewhere
in the world, there are con¯icting views on the rela-
tive legitimacy of many contemporary multilateral
regulatory initiatives, some of which are taxation-
driven.
7
Also, there is much less certainty that taxes
(especially the imposition of taxes upon savings or
income) are indeed as inevitable as Benjamin Franklin
might once have thought. There are a multitude of
reasons for this, but some of the more important
interlinking factors include: the mobility of capital,
people and other resources; the internationalisation
of the ®nance sector; increasing transnationalisation
of corporate entities and trusts; developments in
information technology; the emergence of oshore
®nance centres (OFCs); and the bank secrecy
regimes of various jurisdictions. The belief that some
of their citizens (both natural and legal) have been
avoiding their taxation obligations has prompted
some EU member states, most especially France and
Germany, to become more proactive in recent times
in creating regulatory initiatives that aim to restrict
the capability of their citizens to avoid these taxation
obligations. The EUSTD is a recent culmination of
some of these anti-tax avoidance eorts.
Page 56
Journal of Financial Crime
Vol.11, No. 1, 2003, pp. 56 ±72
#HenryStewart Publications
ISSN 1359-0790
THE EUSTD: ORIGINS AND
STRATEGIC TENSIONS WITHIN
THE EU
This section of the paper traces some of the signi®cant
milestones leading to the EUSTD. Although there
have been attempts amongst member states since
1989 to curb tax evasion, perhaps a more speci®c,
and for the purposes of this paper at least, more
appropriate starting point in tracing the EUSTD's
evolution is the informal Eco®n
8
meeting at
Verona, Italy in April 1996 when:
` . . . the Commission proposed a new and compre-
hensive ``global'' view of direct taxation policy.
This was to ensure that taxation policies were
better geared towards achieving important Union
objectives, such as promoting growth and employ-
ment and completing the single market, while at the
same time protecting tax bases against harmful tax
competition.
Finance ministers welcomed the Commission
paper ``Taxation in the European Union'' and
agreed on the need to consider these issues in a
high-level discussion group.'
9
The core aims of the Eco®n taxation package were:
stabilisation of member states' tax revenues; smooth
functioning of the Single Market; and promoting
employment.
10
The underlying philosophy of the
1996 document which has fed through to the
EUSTD of 2003 is that:
` . . . repeated failure to achieve progress in tax co-
ordination . . . has gradually brought a real loss of
®scal sovereignty by each member state in favour
of the markets, through tax erosion.'
11
It is this clash between national ®scal sovereignty
and market power (some critics of the EU and Euro-
pean Commission (EC) might say market choice)
that is the core issue of political economy regarding
EU-wide taxation policy initiatives. Following the
meeting in Verona in April 1996, a high-level
group, to be know n as the Taxa tion Policy Group
(TPG), was formed, chaired by the EC and compris-
ing representatives of EU member states' ®nance min-
isters. The TPG met several times to progress the
proposals of the Verona Eco®n meeting. However,
the TPG experienced diculty because of the signi®-
cant dierences that existed (and indeed still exist)
between various member states regarding the
coordination of taxation policy in general, and
notions of harmful tax competition in particular.
These dierences were acknowledged by the EC in
November 1997 when it launched its package to
tackle harmful tax competition:
`Some member states have made it clear that they
looked for a more ambitious package, but exten-
sive debate within the Council and the TPG has
shown that, at present, this is not attainable given
the initial reluctance of others to consider any
move towards tax co-ordination.'
12
That some member states (almost de®nitely
Austria and Luxembourg, and perhaps others) were
reluctant initially to consider any move towards tax
coordination is a clear indication of how dicult a
task faced the EC and prime movers such as France
in pushing for tax coordination reform. The progress
to date regarding the EUSTD indicates how resolute
the latter have been in pursuing this goal in the face of
intense opposition from certain other member states.
The November 1997 package had three core ele-
ments: a code of conduct for business taxation;
measures to eliminate distortions to the taxation of
capital income; and measures to eliminate withhold-
ing taxes on cross-border interest and royalty pay-
ments between companies.
13
The EC was pleased
that there was `a widely shared desire on the part of
member states to make signi®cant progress in the
area of the taxation of capital income from savings',
but noted that `substantial diculties' persisted.
14
That there should be disagreement about these
issues is unsurprising because the proposals have
implications for the ®nancial services sectors of EU
member states. Also, regulatory innovation within
the EU cannot blind itself to the pragmatic realities
of a highly competitive global ®nancial sector, in
which jurisdictions, ®nancial institutions and ®nance
centres continually strive to maintain or increase
their market share. Tax regimes and other systems
of regulation are elements of the competition
between dierent jurisdictions to attract capital.
This economic, and simultaneously, political, impera-
tive is a major driver in the construction of systems
of regulation that are sensitive to the requirements
of investment capital. As such, it is a major
justi®cation for promoting regulatory reform, and
indeed as will be seen below for various EU
member states, for resisting regulatory reform. This
social utility of regulation, or indeed of non-
regulation, is acknowledged in the literature on
Page 57
Whither or Wither the European Union Savings Tax Directive?

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