EU member states have made progress towards improving their tax systems but most still struggle to reduce the tax burden, clamp down on tax avoidance and improve collection rates, with VAT compliance running at levels as high as 40% non-collection in certain states, according to a report on tax reforms across the EU28 published by the European Commission
The Tax reforms report 2015, published by the Commission’s directorate general for economic and financial affairs (ECFIN) and the directorate general for taxation and customs (TAXUD), presents an overview of recent tax reforms in the 28 member states and gives an indication of their performance in major areas of tax policy.
Since 2011, the overall tax burden in the EU has risen by 1.2% from 37.6% to 38.8% as a percentage of GDP. VAT is singled out as an area for widespread abuse, with 15% of VAT uncollected with the worst compliance rates in Latvia, Greece and Romania. The UK was VAT collection rates were one of the highest in the report with less than 12% uncollected annually.
The UK has one of the lowest employee tax levels in the EU, at an average 25.2%, well below the EU28 average of 36.1% of implicit tax rate on labour. The highest comparable tax rates were levied in Belgium and Italy, both on 42.8%, while it was 37.8% in Germany and 32.9% in Luxembourg.
There are also signs that countries are trying to address corporate tax avoidance while reducing corporation tax rates and offering a range of tax breaks for business with R&D reliefs.
The UK has one of the lowest corporation tax rates in the EU at 20%, down from 40% in 1995. Ireland levies 12.5%, while Bulgaria has the lowest CT rate at 10%. This compares with Luxembourg’s effective corporate tax rate of 29.2%, and Germany at 30.2% (see table A2:9, pg 115 of report).
One of the main areas where the Commission wants to see effective reform is in reducing the tax burden on employees and labour generally.
Acknowledging this challenge, euro area finance ministers recently committed to benchmarking the performance of their countries in this area to the EU average.
The report also highlights problems with the design of housing taxation systems, the preferential treatment of debt in corporate income taxation, tax compliance particularly in VAT, the efficiency of tax administrations, and improving fairness.
On corporate debt taxation the report states: ‘Besides anti-abuse measures, member states could introduce more fundamental reforms to address the corporate debt bias by treating debt and equity-financing on equal footing for tax purposes.’
In June, the Commission presented an action plan for fair and efficient corporate taxation, which Commission president Jean-Claude Juncker referred to in his recent State of the European Union speech.
An EU infographic highighting the key findings of the report is available here
The 132-page Tax Reforms in EU Member States 2015 report is available here
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