89 Chapter 4 COMPARISON AND HARMONISATION OF THE CROATIAN TAX SYSTEM WITH THE TAX SYSTEMS IN THE EUROPEAN UNION Hrvoje Arbutina Faculty of Law Zagreb Danijela Kuli Institute of Public Finance Zagreb Mihaela Pitarevi Institute of Public Finance Zagreb ABSTRACT This paper analyses the EU tax system and its main components qua conditions for the accession of the Croatia to the European Union as well as the current degree of adjustment of Croatian taxation regulations with the corresponding regulations in the EU As a result of this analysis proposals for further procedures on the part of the creators of taxation policy in Croatia are made After the tax reforms started in the 1990s after the achievement of independence the Croatian tax system was comparable with the tax systems of EU member countries All the essential taxes correspond conceptually to the same kinds of taxes in EU countries However there is still space for further adjustment above all in connection with value added tax and it is desirable that this should be carried out 90 as soon as possible However adjustments in the area of profit tax and adjustments of some rates of excise duties should be put off until the moment when they will have to be done for the sake of joining the Union because the maintenance of the current situation which is not in line with the provisions of European regulations but nevertheless not in contravention of general rules regulating the area of taxation is in the interests of Croatia In the area of the taxation of income no adjustment or coordination is needed for members are allowed to settle the taxation of income in their countries independently as long as the fundamental principles of the single market are not threatened the free movement of goods people services and capital Key words European Union Croatia taxes profit tax income tax value added tax excise duties adjustment harmonisation INTRODUCTION From its outset the EU has been founded on the four freedoms as they are called the free movement of people goods services and capital essential conditions for the existence and successful operation of the united European economic area For this reason the basic tasks of the taxation policy of the EU in recent years have been tightly connected with the development of the internal market the reinforcement of monetary union and economic integration As far back as the early 1990s the regulation of the internal market led to a definition of the legal framework for the area of indirect taxes value added tax and excise duties while in the area of direct taxes income and profit tax no legal background was clearly defined For the improvement of the coordination and harmonisation of tax policy among the member countries in 1997 the basic directions of tax policies were set out COM 97 495 these should encourage the stabilisation of member states tax revenues the obviation of difficulties in the functioning of the internal market employment However the disparateness of tax systems was a constant roadblock in the way of full accomplishment of these objectives the solution of which has to be attained via continued harmonisation of the tax systems of the member countries It has turned out however that this kind of harmonisation is very difficult to achieve in the area of taxation as a whole Nevertheless fairly significant results in the harmonisation of the diverse systems have been obtained in the area of indirect taxes Within the framework of direct taxes the effects have been much 91 weaker Certain aspects in the area of the taxation of income are not anyway subject to harmonisation and every member has the discretionary right to regulate it in its own way while certain results have been obtained in the area of profit tax The legal instruments for harmonisation among the members in the area of taxation are the directives They are used to prescribe the settlement of certain relations and members are obliged to put into their legislation provisions through which to achieve the objectives defined in the directives can be attained In the process of the approach to fully fledged EU membership Croatia should harmonise its legislation with that of the EU For this reason the purpose of this paper is to sketch out in the most important lines what happened in the 1990s with the tax systems of the EU to what extent Croatia has already made adjustments to these changes and what remains to be done This work is composed of six parts After the introduction in the second part the situation and trends in taxation in the EU and in Croatia are presented in the third profit tax is discussed in the fourth VAT in the fifth excise duties and the sixth part offers conclusions and recommendations TAXATION IN THE EU AND IN CROATIA THE CURRENT SITUATION AND THE TRENDS Tax revenue as a percentage of GDP The objective of this paper is to offer a general overview of the basic trends of development and the current state of the tax systems of EU members Because of limitations of space it is not possible to comment on all the diversity of the tax systems of the individual countries i Thus only the most important and most marked changes of the last decade in the tax systems of the EU are shown that is the changes in tax revenue as percentage of GDP in the structure of the tax systems in the highest rates and the number of brackets for income tax in the tax base and in the basic rates of profit tax and the standard rate for VAT ii During the 1990s in most EU countries there was a continuous rise in total tax revenues including contributions expressed as a percentage of GDP For example tax revenue collected rose from 39 of GDP in 1990 to almost 42 of GDP in 1999 Table 1 The reason for 92 this can be found mainly in the larger expenditures for health and retirement insurance and for public welfare because of the ageing of the population Rosen 1999 18 19 Also mentioned as causes for this increase are a rise in the interest rates which means outgoings for the public debt increased governmental aid for government owned corporations and the implementation of major public infrastructure projects Joumard 2001 7 Table 1 Total tax revenue as percentage of GDP Unweighted average 1990 1995 1999 EU 15 39 2 40 0 41 6 Source OECD 2001 As against the clear picture of growth of total tax revenue as percentage of GDP in the EU countries a glance at Graph 1 will not give a simple answer to the question about what was happening at the same time with total
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