A European Commission official said EU states were ready to co-ordinate taxation policies, and a common tax policy was necessary to complete the single market.
Tony Blair has ruled out common rates of income tax, but optimism in Brussels suggested Britain may give ground as EU countries seek to bring company tax levels into line. That would alarm business leaders in Britain, where corporation tax rates are among the lowest in Europe.
Vanden Abelee, a senior Commission official, said: "The need for an increased level of tax co-ordination, and the willingness of member-states to go down that road, is now clear." He said such co-ordination would need to "strike a balance" between the fiscal sovereignty of member-states and "the removal of all distortions of competition and the remaining barriers to a fully functioning single market". He denied the commission was trying to seize tax powers from national governments.
But he warned: "Increasingly, integrated markets will simply erode member- states' tax bases if they continue to exercise their national fiscal sovereignty in isolation." While fair competition had "positive effects," Mr Abelee said, "harmful tax competition can indirectly penalise employment by altering the tax structure."
The Tories seized on his comments, saying Mr Blair was misleading the public by secretly preparing to harmonise business taxes. On Wednesday Mr Blair dismissed Tory claims that the Government had dropped its threat to veto a 20- per-cent "withholding tax" on savings in other EU states, a proposal which would damage the City of London.
Francis Maude, shadow chancellor, said: "It is time the Government owned up to what is going on in Brussels and what they are signing up to in their desperate efforts to be seen as good Europeans."
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