At the time of this article going to press, the European Commission and the European Monetary Institute are preparing their evaluation report on the situation of the various Member States with respect to the criteria fixed by the Maastricht Treaty for the transition to the single currency. In May 1998 the list of the countries which will join the "first wave" of the transition to the single currency will be drawn up (the so-called "in" countries). At the same time the parities of the various "in" currencies will be determined. Such parities will acquire a fixed legal and binding status as from 1st January 1999, pursuant to "Regulation 109", which will enter into force on that date. As from 1st January 1999, the various national "in" currencies will legally become the non-decimal expression of the single European currency. Moreover, the jurisdiction of the "in" Member States in the field of national monetary policy will cease to exist - there will only be the Euro monetary policy undertaken by the European Central Bank, the national central banks thereafter only acting, in that field, as its agents. These two factors are likely to have important consequences in the tax field and the purpose of this article is to draw the reader's attention to some of them.
Unfair tax competition and the single currency: the Code of Good Conduct
In December 1997 the Council passed a "resolution relating to a Code of Conduct in the area of business taxation", commonly known as the "Code of Good Conduct" (hereafter the Code).
The Code, which has only a political value endeavors to freeze, and thereafter roll back the various privileged tax regimes which exist in one form or another in most, if not all Member States. Notable examples are the Belgian "coordination centers", the French "international headquarters", the Irish docks companies, various Dutch companies, etc.
Only time will tell if these good intentions actually result in legally binding texts. It should also be recalled here that neither the Maastricht Treaty nor the Amsterdam Treaty have removed the unanimity requirement in the tax field.
Moreover, it is somewhat paradoxical to note that even whilst Member States are drawing up this inventory of their privileged tax systems and are solemnly undertaking to "dismantle" them due to their anti-competitive effects, the European Community is considering initiating proceedings before the World Trade Organization against the US on the ground that the privileged tax regime granted by the US to its foreign international sales corporations (FISC) amounts to an export subsidy prohibited under the WTO rules. If these proceedings go ahead, the US could, in turn, use the Code to demonstrate the existence of similar regimes in Europe. Paradoxically, one could thus witness an acceleration of the dismantling of privileged tax regimes within the Community as a result of initiatives taken by the Community to attack (allegedly) similar regimes in the US.
As for the immediate future, one of the most significant consequences of the Code probably lies in the commitment undertaken by the Commission to "rigorously" apply the rules concerning State aids to the area of tax incentives. This commitment applies not only to "future" State aids, but also to "past" cases which had not raised difficulties with the Commission. This retroactive "rigorous" application of the law by the Commission raises certain questions concerning the – Community law – principle of legal certainty.
In any event, the first signs of this commitment "to apply the law" appear to be taking shape. A few weeks after the Code was adopted the Commission announced that it intended to initiate infringement proceedings against France in connection with the tax-free regime granted to the "livrets" (savings books) of two public sector credit institutions, Crédit Mutuel and Crédit Agricole, pursuant to a complaint lodged with the Commission in 1991 (!) by the private French banking sector. It remains to be seen whether the Commission will show the same rigorousness in its examination of other complaints which were submitted to it some time ago. The German private banks’ complaint against the "Landesbanken" is one such case that comes to mind.
Taxation of savings and the single currency - the latest developments
The proposal to harmonize savings taxation within the European Community has resurfaced periodically over the last ten years.
The move to the single currency has however sharpened the fears of certain Member States in this field, in particular those with a high level of personal taxation. The move to the single currency means, for example, that it is no longer necessary for Belgian residents to hold an account in Belgian francs in a Belgian bank in order to deal with their daily expenditure in Belgian francs. Similarly, the existence of irrevocably fixed parities between the "in" currencies as from 1st January 1999 means that it is no longer necessary for Belgian residents to invest their assets in Belgian francs if they wish to avoid being exposed to currency-exchange risks.
It is in this context that one must view the Commission's efforts to submit to the Council in the first half of 1998 a revised proposal for a Council Directive on the taxation of savings. This proposal should be based on the "elements of a minimum European Community solution in the field of savings taxation" which were submitted to the Council together with the Code.
Here too only time will tell if these new efforts will meet with success. However, even if the proposed directive is adopted, its scope will be limited to interest paid in a Member State to private individuals who are not tax residents of that Member State, but who are resident in another Member State. Dividends will not come within its scope. In addition, it is likely that there will be significant exclusions in respect of interest. In particular, the question arises whether there will be an exclusion for interest paid on Euro-bonds.
Implications of the single currency for subsidized financial products
Today, if a Member State grants a tax deduction to its resident taxpayers for life insurance premiums, the insurance company receiving these premiums will, in accordance with the requirements of sound management, invest these premiums in assets expressed in the same local currency, so as to match its assets and its liabilities in the same currency. In practice, this means that the revenue loss suffered by the Member State in terms of premium deduction will be indirectly compensated, either totally or partially, by the investment of the same premium in bonds issued by the same Member State.
The move to the single currency will completely change this situation.
In the future, if an insurance company receives premiums in Euros and enters into commitments in Euros, how can it justify the investment of these premiums in Euro obligations issued by only one of the Member States of the Euro zone ?
The Bank for International Settlements recently drew attention to the fact that when the last series of insurance directives were implemented in national law, certain Member States made it a requirement for their insurers that there be a correspondence between commitments entered into in the national currency and assets represented by bonds issued locally. In the context of the Euro zone, the requirement to invest in bonds issued locally (instead of bonds issued in the same currency) cannot be maintained.
As a result of this change of the "rules of the game", Member States are likely in the future to be far less generous than in the past in terms of tax subsidies concerning "institutionalized" savings. The immediate cost of these subsidies will no longer be indirectly compensated, thanks to the "law of automatic recycling" by easier public debt financing.
The single currency, cross-border financial services and banking secrecy
The transition to the single currency, combined with the development of remote access technology, will inevitably increase the volume of cross-border financial services. In time, many everyday payments (electricity and gas bills, etc) could well be made from a bank account located in another Member State within the Euro zone other than the one in which the accountholder normally resides.
However, these developments raise delicate problems as regards banking secrecy. Indeed, the interconnection between payment systems in the Euro zone is not paralleled by interconnection between tax authorities, especially concerning the latter’s powers to carry out investigations and attach bank accounts to collect taxes.
There is a strong possibility that difficulties will soon
surface in this area. Many tax procedures rely on the fact that, for obvious
reasons, in their everyday financial affairs, taxpayers deal with a bank
in the country where they live. This state of affairs may not necessarily
continue unchanged. Once again, Member States will be confronted with a
delicate political choice: either to agree to sacrifice the unanimity principle
regarding tax matters, or to put at risk the collection of income taxes.
The foregoing considerations are not meant to be exhaustive. Our objective was simply to draw the reader's attention to some of the structural changes which the move to the single currency will bring about in the tax field. The mechanisms set in motion by the move to the single currency are inexorable. From now on, a much more thorough integration will have to be pursued by the Member States, or they will risk putting the credibility of the single currency at risk.