Harmonisation of indirect taxation in the EU
- Value added tax in the EU
- VAT rates and removal of fiscal frontiers in the EU
- Excise duties in the EU
- Other indirect taxation in the EU
Indirect taxes are those on turnover, production or consumption of goods and services - regarded as components of cost prices and selling prices - which are collected without regard to the realisation of profits, or indeed income, but which are deductible when determining profits. Customs duties are a form of indirect taxation [see section 5.1]. That is why, following the removal of customs barriers in a common market, Member States could be tempted to replace them with fiscal barriers, i.e. with internal taxes. That danger was foreseen in the EEC Treaty, Articles 95 to 98 of which contained provisions to obviate it, together with Article 99, which called upon the Commission to consider how the legislation of the various Member States concerning turnover taxes, excise duties and other forms of indirect taxation could be harmonised in the interest of the common market. Indeed, the Commission, assisted by two committees of experts, examined the harmonisation of indirect taxation and proposed the adoption by all Member States of a system of turnover taxes which did not distort conditions of competition either within a country or between Member States. Such a system was the tax on value added.
The cumulative multi-stage taxes, which were practised by five of the six countries of the original Community, had the specific characteristic of levying turnover tax on raw materials, semi-processed products, component parts and finished products each time they were sold by one firm to another. The result was that the taxes on the various stages of production of a product burdened its consumer price all the more inasmuch as it had taken numerous transactions to manufacture and distribute it and, consequently, the system burdened more the production of small and medium sized enterprises (SMEs). Moreover, given the inherent complexity of cumulative taxes, the fixing of average levels for compensation measures at frontiers in respect of such taxes did not rule out the unfavourable treatment of imports and the favourable treatment of exports. Hence, the Commission was convinced, at the beginning of the 1960s, that the only radical solution to the problems arising from cumulative multi-stage taxes was to replace them by the value added tax.