Semeta seeks tax co-ordination

Commission plans to harmonise EU corporate tax systems.

The European Commission is reviving a 10-year-old plan for partial harmonisation of national corporate tax systems, as member states also start to consider tax co-ordination.

Algirdas Semeta, the European commissioner for taxation, will announce on 16 March proposals for a common consolidated corporate tax base (CCCTB). He will suggest that the ‘enhanced co-operation’ mechanism could be employed, to defuse opposition from resistant member states by allowing them to stay out of it.

The idea was floated in the text of the ‘competitiveness pact’ worked on by Herman Van Rompuy, the president of the European Council, and José Manuel Barroso, the president of the Commission, as part of wider reforms of the eurozone in the wake of the sovereign-debt crisis.

The plan is most controversial in Ireland, which has one of the lowest corporation tax rates in the EU, at 12.5%. Enda Kenny, who officially became Ireland’s prime minister yesterday (9 March), has vowed to protect this rate despite criticism, notably from France, that it gives the country an unfair competitive advantage, particularly at a time when it is receiving financial support to rescue its economy.

Cross-border investment

CCCTB does not lower the rate of tax directly – this, the Commission insists, should remain an issue of national sovereignty – but rather harmonises the tax ‘base’.

It will set out which income streams are taxable and what exemptions are allowed. The Commission argues in favour of harmonising the 27 current systems, which it says makes the corporation tax process too complex and costly for businesses that operate in more than one member state. It also claims that a common tax base will provide an incentive for more cross-border investment.

The Commission’s proposals would not oblige companies to take part. They could choose to remain under the corporate tax structure of the country where they are based. But opting in would permit companies operating in more than one member state to file a single tax return in the member state where it has its headquarters. This could allow it to consolidate its losses in one member state against the profits made in another.

The most controversial aspect is the allocation of tax revenues to each member state. The Commission proposes a formula giving equal weight to where sales are made, where capital assets are based, and the relative size of the workforce and salaries in each country.

The Irish Business and Employers Confederation has criticised the proposal, warning of higher compliance costs, higher effective tax rates, more uncertainty around tax rates, and damage to the EU’s attractions as an investment location. It cites estimates from Ernst & Young that a CCCTB would add a net 13% to the tax compliance of Irish companies.

EU-wide business groups are less dismissive. BusinessEurope, which represents larger companies, is broadly in favour, although it believes that any system should remain optional.

Gerhard Huemer at UEAPME, which represents small businesses, said his members are also supportive because it would remove obstacles to investing across borders.

But he argues that CCCTB should not be optional for companies. “You would just end up with 28 different tax systems; the 27 existing ones plus the new common one,” Huemer said.