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Tax policy plays a significant role in the internal market. However, the EU has relatively little competence in taxation. Direct taxation is regulated almost entirely through bilateral agreements, while the EC Treaty contains a few provisions concerning indirect taxation and the harmonization indirect taxation.


Despite the introduction of a single market and economic and monetary union, there is still no genuine Community policy on taxation. What the EU does is to ensure that national tax rules are consistent with the Union's goal of job creation and that they do not give businesses from one country an unfair advantage over their competitors in another country. EU tax policy is about upholding the principles of the single market and free movement of capital.


National governments raise tax to finance their expenditure. Different member states have different spending priorities and the EU does not stand in the way of those priorities providing member states stay within reasonable spending limits. If they overspend and become too indebted, they could jeopardize the economic growth of other EU countries. However, providing they are prudent in their economic policy, they have considerable discretion on how to spend their money and, therefore, what taxes to raise to fund their spending. Member states' governments are free to set tax rates on corporate profits and personal incomes, savings and capital gains. The EU as a whole merely keeps an eye on these decisions to see they are fair to the EU as a whole.


Company taxation.EU pays particular attention to corporate taxation because of a risk that taxes could create obstacles to the smooth movement of goods, services and capital around the EU's single market. For example, member countries are bound by a code of conduct to prevent them providing tax breaks which distort investment decisions. As part of a tax package aimed at countering harmful tax competition, the Council of the European Union has adopted:

• a Code of Conduct on business taxation (December 1997);

• an act to remedy distortions in the effective taxation of savings income in the form of interest payments (Directive on the taxation of cross-border income from savings - June 2003);

• a common system of taxation applicable to interest and royalty payments made between associated companies

(Interest and Royalty Payments Directive - June 2003).


Individual taxation.Personal taxation rules and rates on the other hand are matters for individual EU governments, unless an individual's cross-border rights are affected. So the European Commission has taken action to ensure that EU citizens are not deterred from working in other EU countries by problems linked to the transfer and taxation of their pensions and pension rights.


The EU also has a role in avoiding cross-border tax evasion. While EU citizens can place their savings where they think they will get the best return, they cannot use this as a means of avoiding paying tax. EU governments lose legitimate revenue if their residents do not declare interest income on savings held abroad.


EU countries and some other European governments have agreed to exchange information on non-residents' savings. The only exceptions are Austria, Belgium and Luxembourg and some other countries, which for the time being impose a withholding tax instead. They then transfer a large part of the money to the home country of the saver. As this is a bulk payment, the individual saver's anonymity is not breached, but the tax is still paid where it is due.


Value-added taxation.The adoption of the single currency is making the establishment of truly common rates of value-added tax (VAT) in the European Union a matter of increasing urgency.


Value added tax rates require a degree of EU involvement as they are fundamental to a properly functioning single market and fair competition across the EU. The EU has therefore set upper and lower limits on the VAT rates: the standard rate of VAT may not be less than 15%. Member states may apply one or two reduced rates of not less than 5%.


This nevertheless leaves considerable liberty for national differences in VAT rates. Exemptions can be allowed if a country so wishes, for example, for goods and services not in competition with goods and services from another EU member, or for the necessities of daily life, such as food and medicine.


Moreover, VAT rules and rates respect the EU principle that decisions on tax matters can only be taken if countries are unanimous. This rule safeguards national independence.


Excise taxation. Changes and differences in excises on petrol, drinks or cigarettes can very easily distort competition across EU borders. This is why they too are subject to some common rules. Nevertheless, they leave plenty of room for cultural differences. That is one reason why beer and wine prices vary so widely from one EU country to the next. Economic differences are another. A country with healthy public finances cannot be forced to tax for taxation's sake and Luxembourg's low excise duties offer bargains for motorists and shoppers from neighboring countries or for those passing through.


It also makes sense for the EU to have common rules on taxing energy products. This makes it possible for the EU to take a single approach to using them as incentives to energy efficiency, but again rules are flexible enough to accommodate special national circumstances.


Over to you

In this country, what percentage of national income goes to the government as tax? Do you know how this compares with other countries?

What is the incidence of taxes in this country?

Recommended resources:


The World Insurance Market



1. How do you understand the idea of insurance?

2. What insurance companies do you know?

3. Why has insurance become an important part of the financial services market?


Section A

Vocabulary list:

1.risk management - управление рисками hedge againstthe risk – страховать, снижатьриск

3. to appraise – оценивать

4. toindemnify – компенсировать, гарантировать возмещение убытков от порчи или потери

5. n.indemnification

6. exposure – страхуемый риск

7. accidental loss – потери при несчастных случаях

8. the law of large numbers – законбольшихчисел

9. insurance coverage – страховое покрытие

10. premium – страховой взнос

11. calculable loss – рассчитанные потери

12. utmost good faith – наивысшая добросовестность (фундаментальный принцип страхового дела, предполагающий, что лицо, желающее оформить страховой полис, должно предоставить всю необходимую страховщику для правильного расчета страховой премии за страхуемый риск информацию.)

13. subrogation – суброгация – переход прав страхователя к страховщику

14. proximate cause – непосредственная причина

15. to syndicate the risk – синдицировать, объединять

16. reinsurance – перестрахование



1. occupational disease – профессиональная болезнь

2. injurious conditions – условия, влекущие причинение вреда, ущерба

3. an insured event – страховой случай

4. the loss recoverable as a result of the claim – возмещениеубытковпопредъявлениипретензии

5. capital constraint – ограниченность капитала


I. Skimming

Skim through the text to find answers to the following questions:

1. Howisinsurancedefined?

2. What are the parties participating in an insurance contract?

3. What is insurability? How can it be determed?

II. Scanning

Scan through the text to find answers to the following questions:

1. What are the sources from which insurers pay for the losses?

2. Can every risk be insured?

3. What are the major legal principles of insurance?


Insurance: Сoncept


In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.


The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.


Risk which can be insured by private companies typically shares seven common characteristics:


1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of actors, sports figures and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.


3. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.


4. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable.


5. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.


6. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that the insurance will be purchased, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance.


7. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.


8. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the U.S., flood risk is insured by the federal government. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.

Legal considerations

When a company insures an individual entity, there are basic legal requirements. Severalcommonlycitedlegalprinciplesofinsuranceinclude:


Indemnity – the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest.


Insurable interest – the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons.


Utmost good faith – the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed.


4. Contribution – insurers which have similar obligations to the insured contribute in the indemnification, according to some method.


5. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for insured's loss.


6. Causaproxima, or proximate cause – the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded.

III. Understanding main points. Answer the following questions and do the assignments:

1. What are the liabilities of the insurer and the insured under the insurance transaction?

2. Enumerate the common characteristics of insurable risk. Expand on them.

3. What are the legal considerations of insurance? Please expand.

IV. Understanding details. Support or refute the following statements:

1. Insurance rate is a factor used to appraise and control risk.

2. The law of large numbers, applied to insurance, means that all exposurers have particular differences thus receiving different premium rates.

3. Events containing speculative elements may be considered as “accidental loss”, but they are not subject to insurance.

4. The size of the premium is to be reasonable, otherwise the insurance won’t be bought.

5. Individual losses are normally not serious enough to erode the insurer’s ability to pay.

6. There must exist insurable interest in most insurable events.


V. Summarizing.

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