Accounting Essays - The Economic and Monetary Union

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The Economic and Monetary Union (EMU)

The Economic and Monetary Union (EMU) has been planned for several years and the European Union governments in 1992 as part of the Maastricht Treaty agreed to establish a single European currency. EMU does not, however, simply refer to a change in the denomination of the UK currency. It also involves the transfer of British economic powers to the control of Central European Bank (CEB). Interest rates will be set by this new ECB for all participating countries, irrespective of the specific monetary needs of the individual countries, with the Bank of England becoming nothing more than a subsidiary of the ECB, by merely administrating its decisions. The sovereignty of British parliamentary democracy will become increasingly powerless, even those economic policies that remain in UK control, will also be subjected to detailed supervision by the CEB.

Individual governments can still employ fiscal measures, hence, taxation and government spending to help control their economies. But some observers argue that such measures still need to be co-ordinated with other EU member countries. This can result in a future transfer of fiscal policy decision as well as monetary to the European Union governing body. Given such transfer of national powers it is not surprising to see that UK has chosen not to participate and keep its parliamentary sovereignty and governments remain the principal decision makers in regards to taxation, both direct (Income tax) and indirect (Value added taxation).

The ideal of 'tax harmonisation' within the EMU is still at an early stage. This is designed to bring into line all member states tax rates and policies. The need for this integration is based on two grounds, firstly, from a neo-liberal point of view, national differences in tax regimes and rates represent inefficient and trade distorting barriers to competition. The second argument for tax harmonisation is that there must be European control of tax and fiscal policy in order to offset the ECB's control of interest rates and setting of monetary policy. Recent opinion polls have shown that there is very little support for European tax harmonisation. The current rates of VAT, corporation tax and excise duties within member states vary significantly as a result.

But if the EU 'fails' to get compliance and harmonisation on tax and spending, does it matter? Not really if there is a balance between 'negative integration' (EU attempting to prevent UK government from engaging in industry protectionism or running deficits) and 'positive integration' (EU regulations, social policies and subsidies) (Bale, T., (2005).

Table 1.0: Total tax revenue as a percentage of GDP 1973-2001


Country

1973

1981

1986

1995

2001

Sweden

38.8

47.4

49.3

48.5

51.4

France

34.0

40.9

43.4

44.0

45.0

Italy

24.4

31.6

35.9

41.2

42.0

UK

31.4

36.7

38.2

34.8

37.3

Germany

33.0

34.2

34.0

38.2

36.8

Spain

18.0

24.3

29.6

32.8

35.2

EU-15

31.0

36.5

39.2

40.1

41.2

US

26.9

27.5

25.9

27.6

28.9

Source: Data from OECD Revenue Statistics, 1965-2001, p.74. Bale, T., 2005
The varying rates of taxation within EU member states are a remaining mean of encouraging capital (having lost control over monetary policies), among other things, to relocate to where taxes are lowest. To ensure that there country remains an attractive place for foreign direct investment.

EU & UK Direct and Indirect taxation

Article 99 of the Treaty of Rome illustrates the growing influence of EU in the area of UK indirect taxation. The treat called for the 'harmonisation of indirect taxation' to ensure the proper functioning of the internal market. UK adopted the VAT taxation short after its membership into the common market in 1973, and since then has to withdraw many zero rate exemption as a result of the EU.  Therefore, the UK government must harmonise VAT with rest of the EU member states by charging VAT on children's clothing and books.

Gordon Brown, at the March 1998 ECOFIN held in York, claimed that the UK's independence and autonomy in its tax affairs was unaffected. He has now been proved to have grossly misled the country on this essential point of British fiscal sovereignty.

Therefore, the EU also has powers to impose UK to alter its direct corporate taxation policies under the terms of the Rome Treaty.

Case study: M&S

The case of M&S vs. Halsey is attracting a lot of attention in the debate of EU tax harmonisation. M&S has filled a case against Inland Revenue to the European Court of Justice. The dispute is in terms of M&S's use of group tax losses; M&S wishes to offset its UK corporate taxation bill via the losses from its Spanish subsidiary. M&S is claiming that the UK corporate taxation laws are discriminating under the Treaty of Rome (as discussed earlier). Under the treaty rules, companies operating within the EU have 'freedom' to carry out business in any member state with out being discriminated by national laws. This is the freedom of ' establishment'. The principal also applies to personal taxation as well as capital gains tax for both individuals and corporations. Various other cases have been filed with the European court and the success rates have been high.

Conclusion

Under the Maastricht plan national governments keep control of their individual economic and budgetary policies, while their monetary policy is organised by the EBC and the EU as a whole. However, there is a concern that such separation of policies can lead to imbalance between monetary union and fiscal 'disunion'. The question of national sovereignty is under threat as highlighted by the M&S cases, the legal community expects M&S to win its case again the Inland Revenue. Therefore, it would appear that UK's membership of the EU does significantly influence the development of domestic tax policy. The M&S case will be a watershed and the catalyst for tax harmonisation.

References & Bibliography

Bale, T., (2005) European Politics: A Comparative Introduction, Palgrave Macmillan

http://www.eurofaq.freeuk.com/cj_frame.html

Van Neder, N.; Vanhaverbeke, W., (1990) (eds.) De Ge Grauwe, P., The Economics of Monetary Integration, Oxford University Press (1992)

Armstrong, P., May/June 2004, 'Bottling It' Tax Business,

http://www.taxbusiness.co.uk/pdf/tb1-1.pdf#search='EU%20taxation%20M&S'

Davidson, I.D., EMU The Kingsdown Enquiry (1996) McMillan Press Ltd

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