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Conversation With EU Tax Commissioner László Kovács

Posted on March 19, 2007 by Robert Goulder and Joann M. Weiner
Document originally published in Tax Notes International
on March 19, 2007.

      László Kovács, EU commissioner for taxation and customs, visited the United States March 4-8. The main purpose of his visit was to reinforce cooperation in the customs area on issues of common interest to the European Union and the United States. Kovács met with Homeland Security Secretary Michael Chertoff and Senate Homeland Security Committee Chair Joseph I. Lieberman, D-Connecticut. He also met with State Department and White House officials and with senior members of Congress.

      On March 5 Kovács delivered a keynote address to a tax policy conference on transatlantic competitiveness that was held in Washington. Tax Analysts, the Transatlantic Business Dialogue, and the Center for Strategic and International Studies sponsored the conference.

      The next day, Tax Analysts met with Kovács for an interview on current trends in European taxation and the state of transatlantic cooperation. Robert Verrue, director general of the taxation and customs union directorate general, and Michel Aujean, director of tax analyses and policy, also participated in the interview. The European Commission's Stephen Bill, head of cabinet; Maria Assimakopoulu, spokesperson; and Lilian Bertin, counselor at the EU delegation in Washington, were also present.

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Weiner:
Mr. Kovács, Mr. Verrue, Mr. Aujean, and your colleagues, on behalf of Tax Analysts we would like to thank you for meeting with us today during your very busy schedule in Washington. I particularly appreciate the opportunity to meet with you after having worked so closely on EU company tax reform during my time in Brussels. Thank you.

We appreciate your interest in helping to further strengthen the ties between the European Union and the United States and hope that through our meeting, we will help you get your message out to Americans who are interested in EU-U.S. relations and in EU tax policy. Robert and I would like to focus our questions on EU tax policy and the role the United States may play in this area.

Cooperation is one theme of your visit to Washington, and we are pleased that you have been able to discuss your ideas with so many members of the U.S. government, both in the tax area and in the trade area. Our questions this morning will focus on issues concerning interactions with the U.S. on the commission's tax projects, in particular on how the business community is assisting you in your efforts to reform company tax policy in the European Union.

EU Tax Commissioner László Kovács (Photo by Chris Quay)TNI: Company tax reform is a top priority for the European Commission. The European business community stands to benefit from creating a common consolidated corporate tax base [CCCTB] at the EU level, not only through lower compliance burdens, but also through the ability to operate under a single set of tax rules at the EU level. Despite the clear benefits to EU businesses from an EU-level tax base, we have seen few public statements from business indicating their support for the commission's efforts. Would you first please explain to us the role that EU businesses play in putting pressure on the member state governments to support the CCCTB? And second, could you explain how U.S. businesses may participate in this project? Are EU businesses taking an active role in supporting the proposal at the level of member state governments?

Kovács: As far as the business sector is concerned, yes, there is strong political support for the CCCTB. European businesses as a whole generally support the program. Many business groups have worked closely with the working groups on the CCCTB when they have met in extended session, and we have a good relationship with the business community. We have also met with many national business federations that have expressed support for the proposal. You can see this in the efforts of the UNICE, which is a federation of EU businesses, and through the UEAPME, which represents the interests of small and medium enterprises. The commission also posts all of its documents on its Web site, so that we are making our process very transparent. As for U.S. businesses, they obviously also have an interest in the CCCTB, since it will make operating in Europe easier for them, but it is, naturally, not as strong as the interest of EU businesses.

TNI: A number of recent judgments from the European Court of Justice have gone against the tax rules in member states. For example, today's decision from the ECJ on dividend withholding in the Meilicke case may adversely affect member state tax bases. In light of these rulings, and reinforced by support from the business community, do you find that momentum is building for the commission's CCCTB proposal?

Kovács: The recent tax judgments of the ECJ relate to the CCCTB mostly in regards to cross-border group relief as seen in the Marks & Spencer case. This decision has had a concrete impact on how member states may modify their tax policies and on how member states look to the commission to solve their problems. I think this decision had a positive impact on this relationship. Currently the EU's 27 different tax systems not only create a high compliance burden for taxpayers, but also create a lack of transparency and uncertainty as to the treatment of cross-border losses. The CCCTB would necessarily be a consolidated tax base, so we would address the group relief issue comprehensively by creating a consolidated tax base at the EU level. I stress the word "consolidated" because it is only through consolidation that the problems of the existence of 27 separate tax systems are truly solved.

TNI: The EU member states currently do not coordinate their responses to ECJ judgments. Some member states may react by applying the restriction at issue to all taxpayers -- both residents and nonresidents -- while others may react by going in the opposite direction and eliminating the offending provision altogether. Over time, these noncoordinated reactions could create a landscape that has greater tax barriers than desirable. Are the commission's recent communications on cross-border loss relief and exit taxes an attempt to address the varied member state responses to the ECJ's decisions?

Kovács: The commission brought this package of three communications forward both because the CCCTB is going to take some time to be proposed and because even with a CCCTB, some areas will continue to be in need of a solution to the remaining tax obstacles. While the CCCTB is a comprehensive initiative, it may take two years or more for adoption and, even if we are successful, at least another year for implementation. So that means perhaps at least three years from when the proposal is introduced [in 2008]. But what should the commission do in the meantime, for instance, on important issues like cross-border loss relief? We need a temporary solution to address these problems. That is why we adopted the cross-border loss offset communication. Another reason for the commission to pursue coordination is that the CCCTB, once implemented, will not cover all corporate taxpayers in the EU. Some member states will choose not to join in the process at the beginning. And in those countries where the CCCTB will be available, not every taxpayer will elect to take part. We intend participation not to be compulsory, but optional. That explains the need for some specific solutions on key issues so that all companies will be able to gain from the reduction in tax obstacles that hinder their operations in the internal market. Finally, as some of the tax obstacles come from tax areas other than corporate taxation, coordination has a role to play beyond the CCCTB.

TNI: U.S. companies have not appeared to be very involved in the EU initiatives up to this point. What role do you see for U.S. businesses in developing the CCCTB?

Kovács: All companies that do business in the EU single market are covered by communications and will eventually be eligible for the CCCTB. So, yes, U.S. companies are part of the picture. Certainly, U.S. firms invest billions of euros in Europe, so they play a remarkable role in our economy. Compliance burdens will be reduced for everyone, not just for local companies. The United States is the EU's largest trading partner, so U.S. business views are very important to us. Indeed, representatives of AMCHAM-EU have attended both of the working group meetings where business has participated, and my services have met with them several times. In addition, AMCHAM has contributed in writing on some important technical issues. In general, they seem supportive of our work, although of course the degree of their support will depend on the final details of our proposal.

TNI: Beyond the CCCTB, what future trends would you like to see in EU-U.S. cooperation on international tax policy?

Kovács: I think that with increasing globalization, good governance is an important concept generally, and specifically for tax policy. For instance, both the EU and U.S. are doing a lot of business with developing countries, and it is in our mutual interest that these countries should respect internationally recognized rules like fiscal transparency, exchange of information for tax purposes, and fair tax competition. These are three major themes that need some kind of recognition by our trade partners. That's a shared interest for the world's two most important trading blocs: the EU and the U.S.

TNI: One of your main goals in visiting the United States is to strengthen the cross-Atlantic cooperation in tax policy. Does the commission have a concrete relationship with the U.S. government and with the U.S. Treasury Department in cooperating on tax policy? Has the commission been able to establish good relationships with the United States in pursuing good governance in certain countries or regions?

Kovács: I am pleased with my meetings in the United States. I met with Assistant Secretary Eric Solomon from the Treasury Department, and it was a very productive meeting, and I will meet with U.S. government officials on trade issues later this week. Mr. Solomon and I agreed that the EU and U.S. should have further contacts to see how and where cooperation could be strengthened. And to that effect, we will continue to explore the possibilities offered by this good governance initiative. As a former foreign minister of Hungary, I am very much in favor of transatlantic cooperation in policies, especially for trade and taxation. These two groups -- the EU and the U.S. -- share the basic common values of democracy, free enterprise, and human rights. These values demand cooperation, even if we are competitors in the marketplace. Neither the U.S. nor the EU can alone tackle the important global challenges we both face, like security of our energy supply or climate change.

Aujean: There is presently a convergence between the EU and the U.S., outside the OECD context, that these principles of fair competition and internationally recognized rules must be effectively enforced. Up to now there was no specific cooperation between the two blocs. I think it's time to restart the conversation on how we could come together more effectively on this subject. I believe that we have reached such a consensus now.

TNI: Mr. Kovács, in your remarks to the conference yesterday you focused on the issue of good governance -- exchange of information, transparency, and fair competition -- in tax policy. Given the importance of good governance, would you please explain how involved the United States has been on this issue and whether the issue of good governance will appear on the agenda for the upcoming EU-U.S. summit scheduled to be held in Washington at the end of April.

Kovács: You may remember that already in 2005, the conclusions of the EU-U.S. summit called for action. As such, good governance will probably not be on the agenda of this upcoming summit. It is a bit early for that, and the discussion might be premature. However, in a relatively short time I hope the issue of good governance will be meaningfully addressed -- perhaps at the following summit meeting, since it remains a new and very promising field of cooperation.

TNI: You have mentioned the importance of EU-U.S. cooperation in international tax policy. The United States has a seat at the table at the OECD so it can help shape tax policy in that environment, but it does not have a seat at the EU table. Given this situation, does it make sense to pursue these mutual goals, say for good governance, on a separate basis?

Kovács: The EU can accomplish important results through our ability to conclude bilateral agreements. For example, we entered into agreements in connection with the savings tax directive with nonmember states like Switzerland, Liechtenstein, Monaco, San Marino, and Andorra. We now have a mandate from the council and from ECOFIN to commence preliminary talks with Asian financial centers such as Hong Kong, Macau, and Singapore.

TNI: Thank you very much for your time. It has been a pleasure to meet with you and with Mr. Verrue, Mr. Aujean, and your colleagues. We look forward to continuing this dialogue, perhaps in Berlin.

Kovács: Thank you. I very much appreciated meeting with you and hope that we will meet again.



Robert Goulder, editor in chief of the international division at Tax Analysts, and Joann M. Weiner, contributing editor for Tax Notes International, conducted the interview. E-mail: rgoulder@tax.org and jweiner@tax.org