Dr. Badar Alam Iqbal
September 2001
Columbia International Affairs Online
During the last more than 30 years, the European Commission has been debating the ‘ifs and buts’ of the needed policy of ‘harmonisation’ of tax rates in European Union at the personal (income tax) and corporate firms (corporate tax) levels. In January 2001, the European Commission (EC) has again retreated its stand in respect of its one of the most controversial issues of ‘harmonisation’ of tax structure in the existing 15 EU member countries.
The European Union has disparities of alarming nature in regard to tax rates on individuals and the existing tax rates on income of the individuals are based on the degree of prosperity, mentality and expectations of the persons living in 15 member countries of the Union from their existing tax system. It is also true that all these states have wider political ramifications for the ruling parties. Now these days a right sense is prevailed upon on the minds of European politicians who are now looking for a face saving exit out of the controversial policy. Added to this, apart from psychological and social issues, there are wider disparities in individual incomes resulting into disparities in terms of ‘national wealth’ of 15 member countries of the Union. According to the EU’s Internal Market and Tax commissioner,’ the EU Commission would hence focus on constraints encountered by individuals and businesses in EU market which the biggest market in the world’.
The existing tax scene in the 15 EU nations is becoming more complicated by the EU’s proposed expansion as within a decade i.e. by the end of 2010 or 2020 the EU would have nearly 25 to 30 nations as its member from the former communist ruled ruled regions of the Europe, who have languished in poverty . Since the fall of the former USSR during the year 1989 the communist ruled nations have engaged themselves in the process of restructuring their economies (close door economies to market-oriented economies) to confirm with the principles of ‘free market’ economy, multi-party democracy and governance base on ‘rule of law’.
The Nice summit of EU government leaders in December 2000 failed to identify pragmatic policy options to streamline taxation rates and system relating to income levels of the persons living 15 member states. The Nice summit was also failed to convince members of the EU to agree upon on a more qualified majority voting on tax issues, since the present system is much more handicapped by individual members’ veto power.
German, France and Italy have already embarked upon a major tax reform exercise since January 1998 to reform their cumbersome and heavy income tax regime. German taxes are the among the highest in the developed world. For German employees, there is also an additional burden of social security costs, which amounts to nearly 80 per cent of the employee wage costs. This coupled with Germany’s generous sick pay policies translated into the average worker being out of work for 22 days each year, in addition to official and paid holidays of three to four weeks.
The generous social security payments for the unemployed discourage many jobless persons from searching for new jobs. An average German tax payer is the highest and therefore, tax evasion has becoming a growing problem. High income earners in Germany pay nearly 53 per cent as a tax.
Now let us turn to an another vital component of present discussion i.e. taxing global business both at developed and developing world levels. Therefore, Part II will analyse the emerging trends in taxing global business.
The European Union countries or EU offers a single largest market of nearly 370 million persons or consumers. This region alone is considered as having one of the world’s highest purchasing power and this is also backed by EURO (European Single Currency) originated in January 1999. Since December 1998, EU is trying hard to initiate the process of evolving and ultimately adopting a common rate of corporate taxation to remove ‘harmful tax competition’ among the existing 15 member states. This means the future then looked inviting with prospects of a single currency (now has been issued) and a standard pan-European tax regime. In an unprecedented move, the Finance Ministers of EU member states have also adopting a ‘code of conduct on corporate taxation’.
Apart from the members nations aiming to standardise taxation regime of corporate firms, individual states agreed to refrain from competing with fellow 15 member states by offering attracting tax breaks to investors in specific sectors or regions. Similarly, due to nearly 80 per cent of the employee wage costs, many instances have come up wherein companies have started shifting their manufacturing base outside Germany.
German politicians are endeavouring to reserve this negative trend by creating a new environment of ‘wealth creation’ by reducing and rationalising tax burden on German firms. German corporate tax is by far the highest in any developed country, which according to an international firm of accountants amounts to 58.9 per cent of the undistributed profits.