As long as I have anything to say in this area, harmonisation of income taxes is out

Frits Bolkestein

The EU's commissioner with responsibility for taxation, Frits Bolkestein, could not have been more categorical.

So long as he had a say in the matter, he said, harmonisation of income taxes across the EU was out.

The Tories also say the EU would force a Labour government to put up taxes, but the commission made clear its overriding aim is to reduce the tax burden, especially for lower-paid workers.

Healthy competition

The commission has adopted a comprehensive strategy covering all aspects of taxation in the EU.

Frits Bolkestein: A "Thatcherite" in Brussels

It is intended as a general policy statement, and is not legally binding but reflects current EU thinking on the matter.

In what is being seen as a turn-around in commission policy, the document argues that far from promoting across-the-board harmonisation, a "reasonable degree of tax competition" within the EU is healthy.

In the fields of value added tax (VAT) and excise duty, however, the commission says a "large measure of harmonisation" is necessary, because such indirect taxes can give rise to obstacles to the free movement of goods and the free supply of services across EU borders.

It is argued that Britain could even benefit from this, because it would mean other countries raising their rates of duty on, for example, cigarettes and wines - helping to eliminate smuggling from those countries into the UK.

Code of conduct

The commission leaves open the door for a committed group of EU member states to forge ahead with certain types of tax harmonisation where agreement cannot be reached among all 15 members.

British leaders have the power to veto moves towards a single tax policy

The principle of "enhanced co-operation", agreed at the Nice summit in December 2000, could allow some countries to agree, for example, an energy tax.

Company taxes are a moot point.

It is argued by some that countries like Ireland, with low company taxes, enjoy an unfair advantage in attracting foreign investment.

The commission is waiting for a study to be completed later this year, but appears to be prepared to allow variations in tax levels, provided member states agree to a code of conduct - a kind of gentleman's agreement that would reduce unfair competition.

As for the UK's zero-rated VAT on children's clothes, books and food, Mr Bolkestein said the commission had not yet look into whether this should be changed.

Single tax policy

Commission insiders condemned the Conservatives' interpretation of the document as "complete and utter tosh".

Some countries say lreland's low company taxes are unfair

They say the new stance, hailing the benefits of tax competition, reflects a victory by the free-market-oriented Bolkestein - described by some within the commission as a "Thatcherite" - over others such as the trade commissioner, Pascal Lamy of France.

Mr Lamy has been pushing for a more interventionist policy, demanding, for instance, harmonisation of company taxes.

The debate is clearly not over, though. There are many senior figures in Europe who believe that the single currency and the single market would work better if there were a single tax policy.

The issues will doubtless be debated for years to come, but in the meantime governments opposed to tax harmonisation, such as Britain's, will continue to be able to veto any change.

Any decisions in the field of taxation must be taken by a unanimous vote of all 15 member states.