The European Commission has proposed measures aimed at co- ordinating national tax systems in the EU and warned that binding legislation may be required.

Tax commissioner László Kovács said his proposals would eliminate double taxation and discrimination against firms and individuals if they were adopted by states. They would also remove distortions in the EU's internal market that discourage many businesses and people from expanding or moving outside their home state.

In a communication published yesterday, Mr Kovács urged member states to consider practical and administrative ways to co- ordinate their tax systems. He also published proposals aimed at eliminating exit taxes on the assets of people who moved to another member state, and on tax relief on losses for firms with foreign subsidiaries.

Further commission proposals on co-ordinating inheritance tax, anti-avoidance rules and withholding taxes would also be unveiled in the future, said Mr Kovács, who acknowledged the sensitive nature of tax required a "step-by-step" approach to ensure the goodwill of states.

Member states hold a veto over any legislative proposals in the field of taxation policy and several recent commission proposals have been blocked by governments.

Asked if he thought legislation would be required to enforce the commission proposals, Mr Kovács said that if practical co-ordination did not work, it would make sense to propose legally binding solutions. "In most of the cases, wherever it's possible, a communication can and should be followed by a directive," he said.

In the absence of agreement by states on commission proposals on taxation, the European Court of Justice has issued a swathe of judgments defending the rights of companies and individuals in the internal market.

This includes a landmark case involving the British retailer Marks & Spencer, which had been blocked from obtaining relief on losses incurred by its subsidiaries in other EU states.

Mr Kovács's proposal on relief for losses invites states to explore ways of allowing companies to offset their losses from overseas subsidiaries on profits made at home. If new rules granting relief were adopted across the EU it would boost the ability of small and medium-sized businesses to expand in Europe and remove distortions that lead to less efficient firms and business decisions, according to Mr Kovács.

He said this was a short-term solution before a common corporate tax base could be adopted by member states, which would provide a more comprehensive system for the offsetting of losses that were incurred by foreign subsidiaries.

Mr Kovács said he was confident his initiative to create a common corporate tax base would be adopted by states despite strong opposition from Ireland and Britain.

He reiterated his view that a common corporate tax base was not a Trojan horse that would inevitably lead to common corporate tax rate in the Union.

Meanwhile, the commission also proposed a discussion on how to remove exit taxes, which are levied when people move their assets from one EU state to another. The European Court of Justice has ruled that a state cannot ask someone to pay tax on an asset when a gain on it has not yet been realised. Mr Kovács said this hindered free movement inside the EU.