CURRENT TRENDS IN TAX HARMONIZATION AND COMPETITIO N [613150]

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CURRENT TRENDS IN TAX HARMONIZATION AND COMPETITIO N
WITHIN THE EUROPEAN UNION
Sab /g259u-Popa Diana Claudia
University of Oradea, Faculty of Economic Sciences, Finance-Accountancy Department
Kulcsar-Pop Edina
University of Oradea, Faculty of Economic Sciences, Finance-Accountancy Department,
Gherman Adela-Teodora

This article treats on the fiscal harmonization pro cess within the European Union being
indispensable for assuring loyalty in the competiti on on its single market, given the fact that
different system of taxation had direct and powerf ul impact on the prices level and on chosing
the location for production and distribution activi ties.
Both direct and indirect taxation distort the four fundamental freedoms of the single market.
Most of the European Union´s regulations regarding fiscal harmonization resemble to the
Directive regarding especially the indirect taxes: VAT, Excises.
The fiscal reforms from the member states have to b e conceived in such a manner that they take
into account the necessity of fiscal harmonization on EU level, creating a reasonable
compromise between each country˙s sovereignty and t he desideratum of removing fiscal barriers
from the normal functioning of the single market.

Keywords: fiscal harmonization, fiscal reform, VAT , income tax, fiscal europeanization

JEL codes: H21, F36

1. Considerations on fiscal pressures within the Eu ropean Union
If we take a brief look back in time at the Romania n fiscal system during the transition period, an
important stage in the evolution of Romanian fiscal system represents the fiscal reform from
2005, when one has replaced the progressive tax on individuals incomes with a 16% flat rate and
the reduction of the income tax from 25% to 16%, wh ich lead to an increase of fiscal incomes
with about 7% of GDP. The objects of the reforms de pended on the support of the fair
distribution of the profit as a result of economic increase, business climate improvement and
consolidation of Romanian competition.
The Romanian particularity, in comparison with the old EU member states, before the 1st May
2004 consists in the incomes structures raised from the national budget. In Romania, as well as in
the other recently adhered Central and Eastern Euro pean countries, the fiscal incomes are mainly
composed of indirect taxes – VAT, excises, customs duty, while in the old EU member states, the
distribution of the three tax categories – direct t axes, indirect taxes, social contributions to the
incomes – is relatively close.

Table no. 1: The evolution of fiscal incomes from VAT (% of GDP) in the period 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
EU- 27 7 6.8 6.8 6.8 6.8 6.9 7 7.1 6.9
Belgium 7.2 6.9 6.9 6.8 6.9 7.1 7.1 7.1 7
Bulgaria 9.7 9.1 9.2 9.8 10.7 12.1 12.4 12.1 11.5
Denmark 9.6 9.6 9.6 9.6 9.8 10.1 10.3 10.4 10.1
France 7.3 7.2 7.1 7.1 7.2 7.3 7.3 7.2 7
Austria 8.1 8.1 8.2 8 8 8 7.7 7.7 7.8

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Romania 6.5 6.2 7.1 7.2 6.7 8.1 7.9 8.1 8.1
Source: http://epp.eurostat.ec.europa.eu/
VAT represents one of the most important income res ources, but in creating the national and the
EU budget. European Union´s average is 6.9% of GDP. From receipt point of view, Romania
exceeds the European average with 8,1% of GDP, the countries with the highest fiscal incomes
being Denmark and Bulgaria.

Table no. 2: Evolution of fiscal pressure (% of GDP ) in the period 2004-2008
2004 2005 2006 2007 2008
EU- 27 40.1 40.4 40.9 40.9 40.5
Belgium 46.9 46.9 46.5 46 46.5
Bulgaria 33.1 34.0 33.2 34.2 33.3
Denmark 50 51.7 50.5 49.9 49
France 45 45.4 45.7 44.9 44.6
Austria 44.9 43.9 43.5 43.8 44.4
Romania 27.7 28.5 29.2 29.8 29.4
Great Britain 36.7 37.6 38.4 38.1 38.9
Source: http://epp.eurostat.ec.europa.eu/

From the table above we can remark that the Romania n fiscal system is at an average level in
comparison with the European Union´s countries, bei ng considerably under the fiscal pressure 412
level of France and Denmark. A higher fiscal pressu re is specific to the developed countries:
Belgium, France, Austria. Although the fiscal press ure in Romania is under the EU-27 average of
40,5%, from tax payers´ point of view it is high. W hen analysing the fiscal pressure of some EU
countries we have to take into account their develo pment level, the purchasing power of the
country; according to these criteria Romania can be still considered a country with a developing
economy, in comparison with the developed countries : France, Germany, Austria, etc.
Further on, we limit our analysis to only three Eur opean Union countries: Bulgaria, France and
Romania. The reason of chosing these states consist ed in the fact that Bulgaria adhered to the UE
in 2007, as well as Romania who has a fiscal system similar to that from France. The analysed
tax types are: tax on the incomes of persons, profi t tax and VAT.

Bulgaria
The tendency of the tax on the persons incomes is i n decrease reaching in 2008 a share of 10%.
The proportional single tax rate is perceived on th e incomes from six different sources, existing
only a few fiscal exemptions. This rate is applied both on the incomes of the resident persons and
on the incomes made in Bulgaria by non-resident per sons. Pensions and other payments made
from the social assurances budget are exempted from taxes. Similarly, the incomes resulting form
interests of the savings deposited in banks in Bulg aria or other EU country are excepted from
imposition.
During the last decade, the taxation of commercial societies´ profits in Bulgaria became more and
more profitable for the development of businesses. From a 40% rate in 1995 for large companies,
the rate has been reduced almost each year, reachin g a rate of 10% on the 1st of January 2007.
There exists even exemptions from taxation even upt to 50% for initial investments and the
investments in computers, softwares and mobile phon es. The investments in new assets for the
purpose of promoting the energetic efficiency benef its from an exemption of 50% from the profit
tax. Another measure of business encouragement, eff ective since the 1st of January 2009, is the

412 We´ve taken into account the fiscal pressure calcu lated generally as a report between the fiscal
incomes+social contributions and VAT

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exepmtion for 5 years from tax payment for those wh o make profit from the following activities:
agriculture, hi-tech, infrastructure.
The VAT standard rate has been reduced from 22% to 20%. The rate reduced to 7% is applied for
the accomodation in hotel if it is about an organis ed travel.
France
Since 1999, one of the main purposes of fiscal poli cies was to reduce the taxes on the incomes
from salaries, taking into account the specific sit uation of each family. The tax on the income of
persons is percieved annually on the income resulti ng from any sources, in progressive rates on
instalments. In 2008, the maximum rate was 40% appl ied to the incomes higher than 69.505
Euro. A remarkable character is the high number of the applied exemptions. The incomes
resulting from investments, such as bank interests, incomes resulting from the profits on the
capital market are charged with a proportional rate of 16%.
The profit tax affects each profit made in France b y the companies and other legal entities, the
standard rate being 33,33%. The large companies wit h an asset turnover exceeding the threshold
of 7.630.000 Euro and with a taxable profit of 2.28 9.000 Euro have to pay a surtax with a 3.3%
additional rate.
France has a VAT standard rate of 19.6% and two red uced rates. A reduced rate of 5.5% is
applied to the absolutely necessary products and on the restaurant services and the reduced rate of
2.1% for newspapers, plays and approved medicines.

Romania
Since 2005, the tax rate on the incomes of persons are proportional, unique of 16%. This rate is
applied to the incomes resulting from independent a ctivities, from the concession of goods, from
salaries and agricultural activities. Moreover, the incomes of the employees whose main activity
represents software development are exempted from i ncome tax payments. Benefits in kind are
charged normally. The incomes from pensions are cha rged with 16% , but only those exceeding
1000 RON/month, that is about 235 euro. 413
Since 2005, the profit of commercial societies is a lso charged with the same proportional, unique
16% rate, reduced from 25%. In the context of inter national financial crisis and the current
government´ s desire to limit tax dodging, there ha s been introduced since April 2009 a minimal
tax on the profit of commercial socities, establish ed according to the total incomes registered at
the end of the last year.
Romania has a VAT standard rate of 19%, two reduced rates, one of 9% and one of 5%. The 9%
rate is used for medicines, medical equipements, bo oks, newspapers, the right to access some
cultural and hotel accommodation services, while th e 5% rate is applied for providing social and
some private housings.

2. Current trends regarding tax harmonization withi n the European Union
At the same time with the intensification of Europe an economic integration, persons and
individuals gain a greater freedom to benefit from the opportunities given by foreign economies.
Thus, international fiscal competition increases to gether with the inscrease of capital and work
force mobility. Fiscal harmonization proves indispe nsable for assuring loyalty in the competition
on the EU single market, given the fact that the di fferent system of taxation has a direct and
powerful impact on the level of prices and on the c hoice of the investment´s location. At the same
time, it is an extremely complicated process becaus e the modification agreed on the tax affects
the entire national fiscal system.

413 Romania´s Fiscal Code up dated

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Fiscal harmonization ambitions can be thus categori zed on three levels. 414 Two of them would be
the avoidance of immediate imbalance resulting from the opening of borders, EU fiscal system
smoothing 415 . Both direct and indirect taxes distort the main f our freedoms of the EU single
market. But the most EU directives refer to VAT and excises, which are indirect taxes.
Concerning the direct taxes, EU´s acquis regards th e profit tax, capital gains tax and less the tax
on the incomes of persons. Most of the dispositions regarding direct taxes are left at each state´s
disposal, a fact that represents an attribute of th eir sovereignty. From the point of view of the
harmonization of taxation elements , we can refer t o several aspects: kind of taxes, imposition
rate, taxation base and way of management.
According to a study one reached the conclusion tha t the more developed countries, such as
France or Germany, having large taxation base, are for the harmonization of direct taxes, in
comparison with the less developed countries which are skeptical regarding the process of
harmonization of these taxation categories. Romania n fiscal system integrates itself in the
typology of East-European fiscal system, rendering this martket more attractive by means of a
direct taxation, more reduced in comparison with th e Western-European fiscal system.
Fiscal disparities at EU level determined the Europ ean Commission to initiate the implement of a
common system of taxation of the profit made by the companies located on the European
Union´s territory. The system has the determined pu rpose to remove fiscal obstacles between
European transactions. This probably represents the beginning of the fiscal europeanization. The
fiscal europeanization can also have the meaning of dependence of the European Union´s main
institutions. Thus, there would gradually lose the national fiscal autonomies, or parts of them, and
the fiscal system would no longer represent a natio nal problem, but a Community problem.
A European measure in fiscal harmonization represen ts the implement of the common
consolidated base of the profit tax (Common Consoli dated Corporate Tax Base, or CCCTB),
having as main object to facilitate the economic op erations realised by the companies from the
European Union, but it has no compulsory character, but an optional one. The application of the
common base means actually the use of some common r egulations regarding the calculation of
taxation base for the profits made by the EU compan ies.
The Commission´s proposition for a common base of t axable profit at EU level, letting
continually the freedom to national governments to establish their own rate of profit tax is
pragmatic and reasonable. This would simplify the p rofit taxation of the companies which carry
on their activities on EU territory, without affect ing the competition and restricting the freedom
of national governments to establish tax rates cons idered adequate.
The common consolidated corporate tax base is not t he only object of the European Union
concerning the fiscal harmonization of direct taxes , but it has also in view to create a common
taxation system, applicable to fusions, divisions, assets assigning and shares changing within
companies belonging to different EU member states a nd a common profit tax system among
offices and head-quarters.

3. European Union´s fiscal paradises – a form of di sloyal fiscal competition
A major problem that the European economy is confro nting with represents the fiscal paradises,
known also as fiscal shelters or ˝fiscal heavens˝. Actually these are key-areas of the European
economy through which there are circulating freely and continually financial flows drawn as a
magnet by the facilities offered by these areas. We can appreciate the fact that these have
represented actually the stimulus of the capital mi gration at international level and even the fiscal
europeanization. Generally these are characterized by globally specializing in different services,

414 H. Sterdyniak, M – H. Blonde, G. Comilleau, J. Le Cacheux, J. Le Dear, Vers une fiscalite europeenne,
Ed. Economica, Paris, 1991, p. 79-97.
415 Tulai C., /g249erbu Simona, Fiscalitate comparat /g259 /g250i armoniz /g259ri fiscale, Editura Casa C /g259r/g288ii de /g249tiin /g288/g259 , Cluj-
Napoca, 2005, p.136-138.

639
mainly bank services, serving the interests of mult inational companies. These consitute the
meeting point of ˝white money˝ with ˝black money˝, implying no discrimination, even though
these fiscal shelters have strict laws concerning ˝ black˝ money laundering to assure that financial
institutions headquartering there are not used illi citly. Moreover, they have special departments
investigating any possible regulation violation. Th e offshore banks have stricts methods of
˝acknowledging the client˝, the well known anonymou s accounts are just a myth.
Within the European Union we can meet several fisca l paradises, such as Luxembourg, Cyprus or
Malta. Some EU member states have become ˝black˝ mo ney laundering centres without being
fiscal paradises such as Latvia, Poland or even Rom ania.
There are also ˝fiscal heavens˝ outside the Communi ty absorbing important financial flows from
the European Union, such as Liechtenstein, being on e of the most old fiscal paradise from the
world and offering the best services of private ban king in the entire world. The case of
Switzerland, very well known, constitutes a problem for the European Commission, fighting with
the removal of Swiss fiscal system. Monaco is a fis cal paradise more oriented towards persons, as
it is not charging incomes, dividends or direct lin e of successions or capital increase of persons.
Thus, the lack of taxes has drawn a high number of ˝tax refugees˝ from the European Union,
having money earned mainly outside of Monaco.
We consider that the current global economic and fi nancial crisis is due partly to these ˝black
holes˝ of global economy, because there exist many companies having repatriated their profits in
offshore centres and, thus, the states they have in vested in lost possible considerable budget
resources, achieving a ˝chain˝ reaction: budgetary persons have no longer been well enough
remunerated in order they may pay their loan rate, the banks confronted with serious financial
problems because of many bad credits, leading to th e release of global crisis. The lack of a
political will to put an end to these ˝black holes˝ of financial globalisation makes them to flourish
and to put into danger the global financial stabili ty. The developed countries tolerated and are
still tolerating the existence of these fiscal para dises because they assure profits to the large
companies, but they don´t see the long term effects of this phenomenon. We cannot ignore the
fiscal paradises when debating a global problem, ta king into account the fact that analysts assert
that about 70% of the tolerated monetary volume are circulating from the shade of fiscal
paradises. Thus, as long as there are fiscal paradi ses, there will also exist economic crisis. Their
cycles are legitimate as long as the problem of fis cal paradises is not removed.

4. Conclusions
By means of the European System Accounts (ESA95) it has been tried to bring to a common
denominator the classification of national accounts and within the taxes and EU contributions.
The European system of national and regional accoun ts is a compatible framework on
international accountancy level for the systematic and detailed description of a total economy, as
well as of its components and relations with other economies. ESA95 is according to the revised
orientations from the entire world regarding accoun tancy at national level, System of National
Accounts (1993 SNA, or simply SNA). 5
Within the European Union´s common fiscal policy th ere exist also the tendency of modernizing
Community and national regulations concerning VAT, as well as the stimulation from fiscal point
of view of the research-development field or the re sources use according to the Community
principles of long-lasting development.
Since quite a long time, rumours are heard about th e introduction of a common tax in the
European Union which shall finance EU´s activity. B ut the institutional (especially the unanimity
regulation of the member states discussed again in the Treaty of Lisbon), technical and political

5 http://circa.europa.eu/irc/dsis/nfaccount/info/data /ESA95/en/titelen.htm

640
(fear from federalism and budgetary derivation) obs tacles still remain numerous and, thus, the
introduction of such a resource seems less realist for medium term.
Regarding the recently debated fiscal standardizat ion, there exists a series of arguments for,
among which: the necessity of fiscal debureaucratiz ation, as a component of institutional
debureaucratization; a step towards the legislative fiscal stability at national level; a state´s
foreign business would adapt itself more easily to the economic environment of that country;
many conventions at international level would no lo nger be necessary; the smoothing of fiscal
legislation would support a better circulation of m onetary capitals and, as a consequent, of the
main three freedoms and, of course, the fact that t here would be no longer divergence, fiscal
contrasts at European level, between areas with hig h fiscal relaxation and those with too much
fiscal pressure. Of course, this standardization wo uld be carried into effect only after the ending
of national fiscal reforms and only for long term. On Utopian scheme, a fiscal union would be
established.

Bibliography :
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europeenne, Ed. Economica, Paris, 1991, p. 79-97.
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