Commission recommends indirect tax reform for EU’s largest economies

In April, member states submitted their plans for sound public finances and reforms and measures to make progress towards sustainable and inclusive growth, including tax policy among many other areas.

The Commission has now assessed these programmes and has come forward with country-specific recommendations.

In general, the Commission wants to see a shift in taxation away from labour and instead targeted towards environmentally-harmful practices, consumption and real estate.

“While a number of member states have significantly increased consumption taxes and started to reverse the decline in environmental taxation, there is no evidence of an overall reduction in labour taxation,” the Commission found. “Some efforts are being made and should be pursued to eliminate tax exemptions and subsidies, as well as reduced rates, for instance for VAT.”

The removal of exemptions forms a common theme in the Commission’s country-specific recommendations.

While the Spanish tax-to-GDP ratio is among the lowest in the EU, the Commission believes the efficiency of the tax system can be improved by increasing the share of more growth-friendly indirect taxes.

“In particular, there is scope for broadening the VAT tax base by reviewing the wide application of exemptions and reduced rates,” the Commission said.

The Commission applauds France’s decision to introduce a social VAT. However this measure is now in doubt after Francois Hollande won the presidential election. In any case, the Commission believes the focus of the reform is too narrow.

The report also finds that France has the second lowest share of environmental taxation in the EU in tax revenues, “which indicates ample room for increasing such taxes”.

“Lastly, no specific measures have been taken to assess the efficiency of some reduced rates in achieving their employment or social objectives (in particular for reduced VAT rates),” the report states.

In the UK, the Commision says that the potential revenue contribution from a more efficient tax system, stemming from a review of the VAT rate structure, remains underexploited.

In Italy, the Commission recommends taking measures to “reduce the scope of tax exemptions, allowances and VAT reduced rates and simplify the tax code”.

Portugal’s 2012 budget wins a favourable assessment for reducing tax exemptions, increasing the number of goods and services taxed at the standard VAT rate, increasing excise taxes and enhancing efforts to fight tax evasion and fraud.

Taxpayers, who are often concerned by the compliance burden caused by too many exemptions, will welcome the Commission’s efforts to encourage member states to simplify their VAT systems and make them more efficient.

The European Council is expected to formally adopt the country-specific recommendations by early July. Where recommendations are not acted on within the given time-frame, policy warnings can be issued.

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