In June the European Commission issued an infringement procedure against Spain regarding violations in its rules governing the right to deduct VAT on imports. This was the second request for the country to remove the infringement. The Commission claims that Spanish legislation is in breach of the EU VAT directive. Spain has two months to amend its national provisions. If it fails to do so, the Commission may decide to refer the matter to the European Court of Justice (ECJ).

This is the fourth infringement procedure Spain has received this year. In the last three years the country has been issued with 19 altogether, 11 of which remain unresolved and it has been referred to the ECJ five times. The Spanish tax authorities try to be compliant but "they are prepared to battle if they think it's worth it," says Joan Hortala, a tax partner in the Spanish law firm Cuatrecasas.

Spain is not the only member state being scrutinised by the Commission on tax issues. All 27 countries have at least one unresolved infringement procedure against them. Some countries are doing better than others. Slovenia has just one concerning discrimination in the taxation of dividends and interests paid to foreign pension funds. Neighbouring Hungary has six. The Commission says, Slovenia has adopted changes to its corporate income tax act which are now being assessed to establish whether the infringement has been resolved or not.

When countries join the EU they do so with the knowledge that they must adhere to EU law. On occasion this means altering their national legislation. Some countries have had more than five decades to get the process of abiding by EU law correct. Other countries have had just one year. Yet every member state infringes EU law to some extent in all areas of taxation. Three areas with the highest number of infringement procedures are VAT, state aid and dividends. Member states have to juggle implementing legislation that benefits their citizens with legislation laid down by the EU. So the question is: do member states take their EU responsibilities seriously enough or has the EU gone too far with the number of laws it imposes on its members?

An effective process

The executive branch of the EU as the commission drafts proposals for new European laws, which it presents to the European Parliament and the Council of the EU, the main decision-making body of the EU. It manages the day-to-day business of implementing EU policies and the spending of EU funds and is responsible for ensuring that Community law is applied correctly.

The Commission has the power to issue infringement procedures when member states are not complying with EU law. The Commission either acts on its own initiative or in response to a complaint. Article 226 of the treaty establishing the European Community states, the Commission has the power to bring any matter not fulfilling the treaty to the ECJ if a member state does not comply with the Commission's opinion in a given time period.

The Commission policy maintains that its "monitoring of the application of Community tax law has recently moved from a rather reactive to a more pro-active infringement policy in general." There are between 230 and 250 outstanding infringement cases concerning direct tax and only a small amount of these will go to court. On a yearly basis, in direct taxation only, 10 to 20 cases are referred to the ECJ. At the end of 2007, out of the 226 infringement cases still live, 118 were related to indirect taxes.

The majority of infringement cases are never made public. Matters are only publicised at the second stage of the process when the Commission issues a reasoned opinion. This allows member states an additional two months within which to amend any infringement before the matter goes to the ECJ.

EU tax infringement since 2005 by country
Italy	31
Spain	24
France	22
Germany	21
Portugal	21
Belgium	18
Greece	15
Poland	14
Ireland	13
UK	12
Finland	10
Netherlands	10
Sweden	10
Luxembourg	9
Austria	7
Hungary	7
Czech Republic	6
Denmark	6
Malta	6
Romania	3
Slovakia	3
Latvia	2
Lithuania	2
Bulgaria	1
Cyprus	1
Estonia	1
Slovenia	1
	276
Source: European Commission

Infringement procedures are an important instrument. "They make the EU more competitive," says Simone Ruiz, an adviser from Business Europe, the Confederation of European Business. "Without them the competitiveness of the external market would be at stake."

"Infringement procedures are effective," says Bert Zuijdendorp, the head of the Commission's unit controlling the application of direct taxation legislation. "In many instances we're able to resolve issues at a relatively early stage."

But member states deal with the Commission in their own way. Some adhere to its requests immediately, changing national legislation to align it with EU law immediately. Others do not react immediately and on some occasions leave it up to the ECJ to make a final decision.

New members of the team

The EU's more recent recruits tend to react quicker to requests by the Commission than the older members. "It's like if you join a new club," says Angela Rosca, managing partner of Romanian advisory firm, TaxHouse. "You're not sure of the rules and you don't want be kicked out." The Romanian government reacts quickly to infringement procedures, she says. "There was quite a political battle for us to get in the EU so we don't want to be kicked out."

Libor Fryzek, head of tax at Ernst & Young in the Czech Republic, says that countries newer to the EU probably worked hard for a number of years to meet the strict criteria. "Psychologically, they are happier to comply," he says.

Cyprus, which joined the EU in 2004, has just one outstanding infringement procedure. Slovakia, which joined at the same time, has two.

But it is not as simple as categorising the newer member states as being compliant and the older member states as not. The Czech Republic, a 2004 entrant, has six proceedings against it. "Some of the newer member states have very competitive tax systems," says Ruiz. "Even though Estonia's tax system is simple, it's competitive. Estonia's business world would not think highly of infringement procedures changing it," she says. Despite this, Estonia, which also joined in 2004, only has one outstanding procedure pending.

Lithuania, which joined the EU in 2004, is good at implementing EU law. It only has two outstanding infringement procedures pending. "The ministry of finance tends to be very quick and systematic when it comes to EU infringements," says Kestutis Lisauskas, a tax partner at Ernst & Young in Lithuania. "As soon as they are notified they usually start analysing and proposing relevant changes first to the government then to the parliament." Being a small country makes a difference. "Poland for instance can afford not to make all the changes the Commission requests straightaway," he says. "Lithuania however is a net recipient of aid from the EU. If you overstep the mark, you risk losing the aid. Every net recipient of aid is easier to control than net contributor."

Poland joined the EU in 2004. It has had more than 20 notifications from the Commission so far, says Malgorzata Sobonska, a partner at the Polish tax advisory firm MDDP. "It's too early to give such a judgement but based on the started procedures, it could be said that the Polish government treats the notifications seriously," she says.

Fryzek says three groups have emerged in the EU. The old, long-standing members of the EU; the original 15 including Belgium, France and Germany which tend to have a longer list of open procedures. Relatively small countries such as Lithuania and Malta which have few procedures open. And mid-sized countries such as the Czech Republic and Hungary which have five or six open.

When the newer member states' joined the EU, the Commission looked carefully at their legislation. "On the whole any infringements were eliminated at that stage," says Zuijdendorp. This is one reason why the older member states have more open infringement procedures than the newer member states.

Old players

France, Germany, Italy and the Benelux countries have been EU members since 1957 when the EU existed in the form of the European Economic Community (EEC).

The legislation of the older member states often needs upgrading. "Their directives were implemented a long time ago so they could well be out of date," Rosca says.

Germany has 21 outstanding infringement procedures pending. "When it comes to EU tax matters, the German ministry of finance is very reluctant," says Lars Rehfeld from Deloitte in Germany. German tax law contains a lot of regulations which conflict with EU law. Every year a professor lists the regulations that do not comply. "This year the list was 15 pages long," says Rehfeld.

"Germany never changes legislation just from reasoned opinions. It only makes changes if the infringement gets as far as the ECJ and if it gets a negative reaction from the court. I don't know of one case that hasn't got a judgement from the ECJ," he says. "Germany waits as long as possible to change legislation as this gives them time and time is money."

Italy has 31 infringement procedures still outstanding. Geography can affect how compliant member states tend to be. "Italy feels a long way away from Belgium," says Paolo Giacometti, a partner at Italian law firm Chiomenti Studio Legale. Countries such as the Netherlands and Luxembourg are geographically much closer to the Commission in Belgium. "They feel the direct impact of the Commission. People they know work there," says Giacometti.

EU tax infringements by tax types since 2005
Indirect taxation	66
State aid	52
Dividends	37
Administrative	26
Car taxation	14
Excise duties	14
Royalties	7
Energy	6
Non-residence	5
Personal taxation	5
Anti-discrimination	4
Capital gains	4
Charities	4
Maritime taxation	4
Capital duties	3
Pensions	3
Company capital	2
Foreign banks	2
Holding companies	2
Lotteries	2
Tax exemptions	2
Tax incentives	2
Amnesty	1
Anti-abuse	1
Cross border losses	1
Foreign investment	1
Foundations	1
Manufacturing	1
Offshore companies	1
Partnerships	1
R&D	1
Transport	1
Source: European Commission

Portugal joined the EU in 1986 and has about 20 cases pending. It is considered to be a good student according to Paulo Nuncio, a tax lawyer at Garrigues in Lisbon, but tax issues are now more highly debated than they used to be. "There has been a cultural change. Now there are more challenges to Commission decisions as well as domestic tax situations," he says.

"In some instances Portugal amends legislation quickly. In other situations they adopt the strategy of wait and see. The latter is used in more problematic cases. Some sectors of society react against EU provisions on the argument of sovereignty," Nuncio says.

The UK joined the EU in 1973 and tries to play by the rules. "Generally speaking we try to be good Europeans," says Greg Sinfield, a tax partner at UK law firm, Lovells.

The UK Treasury echoes this sentiment. The country aims to maintain a good relationship with the Commission says a Treasury spokesperson. "We take all infringement action seriously, and fully investigate and respond to the Commission's requests within the deadline given," she adds. But the UK still has 12 infringements outstanding.

A senior tax manager of a Dutch global consumer lifestyle company says whether or not member states agree with the Commission and amend their legislation has a lot to do with culture and understanding or acceptance of the higher power of the EU. He believes it is a political issue. "If a change in legislation is made and has an impact on a country, it suggests that Brussels was right all along. This is part of the emotional factor of why some countries deny or put off changes." In the Netherlands, he says, the EU is regarded as a higher entity. Infringement procedures are taken very seriously and are usually dealt with straightaway.

Giacometti says: "Countries have to decide whether to acknowledge the EU as a power above their national government."

Older members of the EU are more familiar with EU law than newer members and have more experience dealing with the Commission. "More established members are more ready to take the Commission on," Hortala says. "They're not prepared to accept any Commission statement just because it comes from the Commission."

Interpreting EU law

None of the member states adheres stringently to EU law. Even when countries try to comply, difficulties arise when it comes to implementing legislation. "The member states interpret EU legislation in their own way," Ruiz says. "And some may know perfectly well that they have not implemented the intended interpretation."

Tax advisers keep an eye on open procedures, says Fryzek. They need to know what is going on and what may change in the immediate future so they can advise clients accordingly. "In certain cases you can use EU law as a reason to deviate from national legislation," Fryzek says. "If you want to take an aggressive position, you can argue you are following EU law."

"But the implementation of directives isn't an easy task," says Lisauskas. "Sometimes you can overlook things by mistake."

"If the goal of the EU is harmonisation, it's not happening," says Hortala. "Just to be compliant doesn't mean all member states apply the same legislation."

The ECJ ruled that German thin capitalisation rules were not compliant with EU law. The Spanish rules were similar to Germany's so Spain also amended its legislation to be compliant. Spain and Germany's thin capitalisation rules are now different. But both comply with EU legislation.

A report by Business Europe on the obstacles to the European internal market in the field of VAT found that there is significant diversity in the interpretations of EU law and that the EU is far from implementing a harmonised VAT system.

The problem with compliance of indirect tax laws such as VAT rules is that the EU legislation is so extensive. There are a couple of hundred articles in the VAT directive. "It's scary," says Rosca. "There are so many laws it's even difficult for specialists to grasp them all. The Commission wants an easier system but there are still rules and exceptions to the rules. All entities are treated differently," she says.

"You see a lot of litigation in VAT because there's a lot of uncertainty about the VAT directive," says Sinfield.

Half of all procedures against the Czech Republic concern VAT infringements. "There is a complex set of specific rules involving VAT laws so many VAT infringements exist," says Fryzek.

The VAT directive outlines how VAT legislation should be implemented. The problem members states have applying direct taxation laws is there are no clear regulations in the EU treaty.

In Germany several people in the ministry of finance think the EU's basic freedoms are not applicable in the field of direct taxation. "Germany feels it is its responsibility to enact direct taxation legislation not the responsibility of the EU," Rehfeld says.

An important power

The fact that member states treat the EU differently suggests that it is far from achieving a harmonised and fair tax system across Europe. Part of the problem is how different governments perceive the EU. If the EU wants to achieve single unit status among its members, governments need to respect EU legislation.

"In Spain, EU law is not a top topic for the government," Hortala says. "They keep it in mind when drafting legislation but it's not their main concern."

"Germany has not transferred any power to the EU to enact direct taxation legislation," Rehfeld says. "But the EU says member states still have to implement basic freedoms in their national legislation."

Countries often wait until the Commission confronts them with problems with their laws rather than being proactive. "Normally member states take a back seat on taxation," Ruiz says. "Really they should be more pre-emptive." The fact that they are not reveals EU laws are not top priority.

Member states have their own interests at heart. The will of the EU is usually a secondary issue. In some cases governments do not react straightaway. "They gain some time and study the issue," Nuncio says. "Especially if it involves a large amount of money."

Governments may wait a while before changing especially if it will decrease state revenue, says Lisauskas. "If it increases state revenue, that's a different story."

The Commission continues to plough time and resources into infringement procedures. "There is a constant high number but I hope this will decrease as awareness increases," Ruiz says. Yet there have been calls from members of the European Parliament for better use of infringement procedures against member states.

In a report published in February monitoring the application of Community law in 2005, MEPs noted that the accession of the 10 new member states had no impact on the number of infringements of Community law. The Parliament has asked the Commission to provide reassurance that this is not due to a lack of registration of the complaints or of the internal resources or "to a political decision to be more indulgent towards those member states".

There is hope that the number of infringement procedures will reduce in the future. "Member states may go through a learning process over the coming years," says Ruiz. "Maybe there will be more forward looking tax authorities and risk management will become more of an issue."

Uncertainty for taxpayers

With member states reacting to EU infringement procedures in their own way, taxpayers are left to deal with the uncertainty of what will happen in the future. For tax directors of multinationals, forecasting their companies' tax position is near impossible. If, for example, there is an apparent infringement in Germany's corporate tax legislation, it may be months before a decision is taken to amend the infringement or not. Tax directors have to wait and see what will happen to the national law.

So although infringement procedures exist to make sure member states adhere to EU law and to ensure national tax rules respect the fundamental freedoms of movement for goods, services, people and capital and right of establishment, with the hope of benefiting the taxpayer in the long term, in the short term tax payers are left with a great deal of doubt.

Unless all national governments comply fully with EU legislation, the problem will continue. Infringement procedures may be an effective mechanism of imposing EU law in theory, but in practice they create more confusion and inconsistency for member states.

EU tax infringement since 2005 by country and tax
Austria
Indirect taxation	3
Excise duties	2
Dividends	1
Personal taxation	1
	7
Belgium
Administrative	5
State aid	3
Anti-discrimination	2
Dividends	2
Excise duties	2
Personal tax	2
Charities	1
Tax incentives	1
	18
Bulgaria
Dividends	1
	1
Cyprus
Car taxation	1
	1
Czech Republic
Indirect taxation	3
Administrative	1
Anti-discrimination	1
Dividends	1
	6
Denmark
Maritime taxation	2
State aid	2
Car taxation	1
Dividends	1
	6
Estonia
Dividends	1
	1
Finland
Indirect taxation	4
Car taxation	3
Dividends	1
Maritime taxation	1
Personal taxation	1
	10
France
State aid	10
Indirect taxation	6
Energy taxation	3
Excise duties	2
Royalties	1
	22
Germany
Indirect taxation	7
Non-resident taxation	4
Dividends	3
Pensions	2
Administrative	1
Cross-border losses	1
Energy taxation	1
Foundations	1
Manufacturing taxation	1
Personal taxation	1
Tax exemptions	1
	21
Greece
Indirect taxation	4
Administrative	2
Company capital	2
Dividends	2
Car taxation	1
Partnerships	1
Royalties	1
State aid	1
Tax exemptions	1
	15
Hungary
State aid	3
Indirect taxation	2
Car taxation	1
R&D	1
	7
Ireland
Indirect taxation	3
State aid	3
Administrative	2
Excise duties	2
Charities	1
Dividends	1
Royalties	1
	13
Italy
State aid	10
Indirect taxation	8
Administrative	4
Dividends	4
Excise duties	3
Royalties	2
	31
Latvia
Dividends	2
	2
Lithuania
Dividends	2
	2
Luxembourg
Administrative	3
Dividends	2
State aid	2
Holding companies	1
Indirect taxation	1
	9
Malta
Car taxation	2
Indirect taxation	2
State aid	2
	6
Netherlands
Dividends	4
State aid	2
Car taxation	1
Holding companies	1
Indirect taxation	1
Transport taxation	1
	10
Poland
Indirect taxation	5
Car taxation	2
Energy taxation	2
State aid	2
Charities	1
Dividends	1
Lotteries	1
	14
Portugal
Administrative	4
Indirect taxation	4
Dividends	3
Excise duties	2
Foreign banks	2
State aid	2
Amnesty	1
Anti-discrimination	1
Foreign investors	1
Royalties	1
	21
Romania
Car taxation	2
Dividends	1
	3
Slovakia
State aid	3
	3
Slovenia
Dividends	1
	1
Spain
Indirect taxation	5
Administrative	4
Dividends	4
State aid	4
Capital duty	3
Anti-abuse	1
Capital gains	1
Excise duties	1
Lotteries	1
	24
Sweden
Capital gains	3
Indirect taxation	3
Dividends	1
Maritime taxation	1
Non-residents	1
Pensions	1
	10
United Kingdom
Indirect taxation	5
State aid	3
Charities	1
Incentives	1
Offshore companies	1
Royalties	1
	12
Source: European Commission