11.4.2006   

EN

Official Journal of the European Union

C 88/48

1.1

On 13 May 2005 Commissioner Laszlo Kovacs asked the EESC for an exploratory opinion on a common consolidated corporate tax base. The Commissioner pointed out that such a tax base would remove many of the problems that firms operating in several EU countries come up against. There is wide support for the proposal within business and from many governments.

1.2

Since 2001 the Commission has produced several communications and reports on corporate tax, including a major report on company taxation in October 2001.

1.2.1

Following a July 2004 ‘non-paper’ on a common consolidated corporate tax base and a Council of Ministers discussion, a special group was set up comprising experts from the Member States. Until 2007 the group will look in detail at all the practical aspects of introducing a common tax base. As with this opinion, the discussions only deal with the basis for calculating corporate tax, and not with corporate tax rates. Neither is the issue of ‘home-state taxation’ addressed. This could perhaps be a temporary pilot project, whereas the common tax base is an overarching project.

1.3

The debate does not focus exclusively on creating a common tax base system, but also on the fact that it must be a consolidated one. This specifically concerns companies that are active in several Member States. For a common tax base to work best, such companies need to be able to pool their tax base and calculate profits for the group as a whole. The calculations would be consolidated. This will therefore require systems for sharing profits between the different parts of the company.

1.4

The debate only deals with corporate tax, not with all types of company taxation. There are many types of company, e.g. voluntary organisations and associations, and these differ between Member States. If a common tax base is introduced for limited companies, the relationships between these companies and other types of companies and activities change as regards taxation of profits. There could therefore be a case for national corrections in the area of taxation of profits for other types of companies and activities. The above-mentioned group involving the Commission and the Member States does not address this issue, and neither does this opinion.

2.1

A number of EESC opinions have addressed the problems caused by the existence of different tax bases for corporate taxation in the EU countries. The EESC is working to create free and fair competition that encourages cross-border activity without undermining the national base for company taxation (1). The EESC would prefer to start by trying to find solutions for a common tax base for corporate tax, and only then to discuss tax rates (2).

2.2

A common corporate tax base could reduce or even eliminate most of the existing obstacles to cross-border activity for companies in the European Union. The problems include:

2.2.1

Although corporate taxation is important to creating a favourable climate, it should be remembered that there can also be many other crucial factors, both in terms of cross-border trade and where the activity is carried out (3).

2.3

The EESC has also pointed out that the problem is not just tax base differences. There are also a number of practical regulatory differences relating to, for example, tax collection, accountancy arrangements and procedures for settling disputes. Some of these problems could be reduced by implementing the practical rules that must accompany a common tax base (4).

2.3.1

For companies the biggest practical advantage of a common tax base would perhaps be that they would only need to be familiar with a single set of rules and how to implement them. Instead of keeping separate accounts for the different sections of the company, combined accounting can be used. In addition to creating a more level playing field, a common tax base could provide efficiency gains not just for companies but also for the tax authorities (5).

2.4

The EESC has also called for the common tax base debate to be extended from the core issue to encompass cross-border problems. When a common tax base is created it must not only facilitate matters for companies that operate across borders, but also for those that are only active in the home market. The main objective — to create fair competition for companies that operate in several countries — must not be allowed to produce new differences between these companies and companies with only domestic activity.

2.4.1

The aim here is also to facilitate matters for small businesses, almost all of which are active in the home market only. Attempts to create simple, clear tax rules are of crucial importance in this context, too (6).

2.5

The EESC has previously stated that a common tax base cannot be voluntary, i.e. offer the option to choose between remaining with a national tax system or opt for a special system for companies with cross-border activity. The EESC therefore considers that when a common tax base is created for corporate taxation, it must be mandatory (7).

2.6

The EESC has consistently championed the case for dovetailing — insofar as possible — the rules for the common tax base with International Accounting Standards. The Committee is aware that the IFRS for international accounting only can be used as a starting point for the common tax base rules.

2.7

An unwelcome effect of the Council of Ministers' and the European Parliament's inability to reach a decision on a common corporate tax base is that the positions that have to be adopted anyway end up in the EC Court of Justice. As long as differences exist there will be a need for legal decisions relating to the different tax systems. Member States tax systems are then affected by the Court's decisions relating to the internal market, despite the fact that no political decisions have been taken (8). (9)The ‘Marks and Spencer’ case that was recently decided at the EC Court of Justice provides a clear illustration of this.

2.8

The EESC's wish to consider corporate taxation in a broader political perspective means that tax neutrality must be considered not just in relation to company tax, but also to the two production factors — labour and capital. However, this position of principle is largely contingent on the tax rate chosen (10).

2.9

Integration and increased competition go hand in hand and can enhance efficiency and increase growth. However, this means that those unable to cope with increased competition cannot compensate for poor productivity by lowering corporate taxation. If the positive effects of integration are to be achieved, those aspects of corporate taxation that can distort competition must be eliminated (11).

2.10

A common — and hopefully mandatory — tax base would provide greater scope to monitor tax payments as the authorities only need to be familiar with a single system and can communicate with each other more easily. It would also make it easier to deal with tax evasion to some degree. A non-binding common tax base — where one can choose between the latter and a residual national tax base calculation that applies to domestic companies — would, moreover, create a situation in which the Member States, rather than companies, would have to deal with several tax systems.

3.1

Tax receipts from companies vary according to which country the tax is collected in. The most important reason for this is different tax rates (between 12.5 % and 40 %) but as the tax base varies it is not always clear how much the situation actually depends on differences in tax rates (12).

3.2

The Commission has compiled information on what is known as the ‘implicit tax rate’, which is meant to explain the proportion of corporate profits actually paid in tax, whereas the debate usually focuses on comparisons of tax rates alone. The latter can be misleading; for example, a high tax rate can give small tax receipts if there is wide scope to make deductions. Tax receipts can also vary depending on how effective collection is and the control measures in place. The extent of corporate resources devoted to corporate tax payment also depends on whether taxation arrangements are efficient or bureaucratic (13).

3.3

In 1990 the OECD noted that 60 % of world trade takes place within corporate groups. Differences between national tax systems are therefore a problem for companies, as they apply to these corporations.

3.4

It is difficult to calculate the economic impact of a common corporate tax base. A recent study puts it at between 0.2 % and 0.3 % of GNP. The calculations only cover the common rules for the tax base; consolidation and administrative savings are not taken into account. This should also be seen in light of the fact that corporate taxation as a whole accounts for approximately 3 % of GNP (14).

3.5

Nowadays major companies account for the majority of cross-border activity. Differences in corporate taxation are therefore a problem for them. Those that operate in several countries have, however, acquired the necessary expertise and managed to cover the additional costs. However, it is probably differences in tax systems that impact most on those small and medium-sized firms that have considered but thought twice about setting up outside their national borders. Common rules would lower the bar considerably for firms wishing to start up in several countries. There is considerable scope here for greater integration and increased competition, which could be one of the biggest gains from a common system for calculating the corporate tax base.

4.1

Only three directives have so far been adopted in the field of corporate taxation. The Parent companies/subsidiaries Directive (90/435) establishes that the dividend from a subsidiary in one country will be tax free in the Member State of the parent company. Tax-free status can, however, be replaced by a rule allowing tax paid in the subsidiary company country to be deducted from the tax due in the parent company country.

4.2

The Mergers Directive (90/434) regulates taxation when companies re-organise. Although there is no civil law covering cross-border mergers and split-offs, they are still not covered by the directive, which chiefly regulates sell-offs.

4.3

A third, recently adopted directive deals with taxation of interest and royalty payments between associated companies (2003/49). The directive eliminates withholding tax in such cross-border transfers.

4.4

Since 1997 there has been a code of conduct for company taxation, according to which the Member States shall not attract investment through harmful measures in the tax area. The code requires the countries to undertake not to introduce new harmful taxes and to review their existing provisions. The code has been supplemented with a list of 66 tax measures that are deemed to be harmful. These are currently being eliminated.

5.1

The rules governing deductions that may be made from the tax base before tax is calculated are the tax base calculation area where differences between countries are greatest, and this is therefore an important issue for Member State discussions. In this connection, the Committee would stress in particular the need to aim for a broad base for corporate taxation. It must be remembered, however, that a broader basis may require a review of the tax rate.

Unfortunately, the discussion needs to start with the basics. Expenditure can already be treated differently if it is to be classed as ordinary expenditure and therefore be included in the calculation of the tax base, or if it can be deducted from profits because the tax base is fixed. Tax experts still have a lot of work ahead of them before they can produce a common proposal.

5.2

The tax base system must be competitive so as to create a favourable climate for investment in the EU. The tax system must not, however, generally influence the type of investment or the choice of Member State in which it will be located. Profitability is the crux of the matter, not how funding can be found for an investment. Clearly there must be potential to encourage environmentally-friendly investment or steer it towards neglected regions, but this can be done more appropriately using resources other than the corporate tax base.

5.2.1

Similarly it is important to maintain a clear line of demarcation with income tax. Distribution of stockholder dividends is a matter for income tax and must not be drawn into discussions about taxation of corporate gains. Moreover, this is not an issue that affects decisions on the corporations' location.

5.3

Even if it is possible to agree on a common tax base, it must include different rules for certain sectors. For example, special rules on reserves might be required for certain sectors, such as the banking and financial sector, particularly the life insurance industry, where reserves are often particularly important. Another example is the forestry industry, where in extreme cases revenue can come in at up to hundred-year intervals.

5.4

Another aspect concerns whether the firm is mainly funded through loans or through own capital. If interest payments on the loans are tax-deductible, then only a small part of the firm's income is taxed in the form profits on the few shares. If there are no loans and everything is funded through in-house shares then everything is taxed as profit. Corporate tax should, as far as possible, not be allowed to influence choice of funding.

5.5

When it has been established what deductions can be allowed, it only remains to decide when and how this can be done. The biggest difference between Member States is whether each type of investment can be written off individually or whether all investments can be pooled together. Firms find pooling easier to handle, as there is no need to make calculations for individual machines or equipment.

5.6

In order to introduce a consolidated tax base where profit is calculated for an entire group of undertakings, a definition is needed for the latter. The alternatives for such a definition are: a percentage of ownership in each part of the business; or for activity in each part of the business to need to be connected with the parent company's activity. It would seem necessary to choose a combination of these, since there is no reason to create a consolidated tax base for commonly-owned companies, where these exist, within separate sectors.

5.7

Once there is agreement on the tax base for calculating corporate taxation, the problem of consolidation remains: how are profits for companies active in several countries to be distributed between the various countries? A common tax base is not enough to avoid tax systems being used to move profits; there must also be a simple, logical system for distributing profits between the Member States (and consequently between countries with different tax rates). When profits are amalgamated in this way between different parts of a company in different countries, tax authority cooperation also needs to move up a gear.

5.7.1

In light of these requirements, we might usefully look at the system used in Canada (half of the profit is distributed according to the proportion of the workforce and half according to the proportion of the sale).

5.8

If profits distribution is to be a simple matter in practice, more rules than just those governing calculation of the tax base need to be uniform. For example, calculations should be made on a half-yearly basis and tax payments made at the same time in all countries. Standardised electronic transfers should be another requirement.

5.9

One of the most important consequences of a common tax base is that the system would be transparent. For the layman, this is currently only the case with tax rates. To demonstrate how misleading this can be it is useful to compare corporate tax rates and corporate taxation as a share of GDP. The lowest share of GDP (0.8 %, 2003 figures) is in Germany, with a tax rate of 39.5 %. This is probably partly a reflection of the problems in defining what constitutes the tax base. In the ‘new’ Member States, the figure is on average 2.7 % of GDP, with tax rates that vary from 35 % to 15 %. Most of the ‘old’ Member States have a figure of circa 3 % of GDP, but with tax rates that vary from 38 % to 12.5 % (15). It is important that such unexpected variations should be visible, not just for companies but for the sake of electoral democracy.