MEPs Say Race To The Bottom Must Be Stopped Starting With Double Non-Taxation

European Parliament/Pietro Naj-Oleari/Flickr*

On the 22 September, the Committee for Economic and Monetary Affairs (ECON) in the European Parliament passed a report containing both concrete measures and broader statements against the race to the bottom in European corporate taxation, citing the financial strain this is placing on European countries and their citizens.

The EU is currently revising the parent-subsidiary directive, with the intention of preventing double or multiple taxation when the profits of a subsidiary are distributed to the parent company or companies. Too often such treaties effectively lead to double-non taxation. To address this the MEPs voted for an amendment to the proposal adding a tax, which must equal or exceed, 70% of the average official corporate tax rate of all EU member states, on capital inflows from dividend payments to parent companies. However the tax paid by the subsidiary in another member state can be deducted as long as it was taxed at or above this rate, currently 16%. This should reduce the harm done by treaty shopping within the EU, where companies locate their HQ wherever tax is most favourable.

This directive still has to be passed by member states in the European Council so adoption of this amendment is far from guaranteed. The report was written by Sven Giegold the financial and economic affairs spokesman for the Greens in the European Parliament, who has an excellent track record of promoting measures against tax dodging. To address tax competition the report suggests that the proposed Common Consolidated Corporate Tax Base (CCCBT) should be applied to all publiccompanies without exception. CCCBT is a type of formula apportionment which uses data such as sales, assets and staffing costs to allocate profits or losses to the country where they are generated without determining the rate at which they will be taxed, this an invaluable tool in the fight against transfer pricing which, due to its complexity, hits under-resourced developing country tax authorities particularly hard.

The report also calls for a common corporate tax rate. There have been some move in this direction already. In August Angela Merkel and Nicholas Sarkozy announced plans to introduce a common Franco-German corporate tax rate and base by 2013 citing greater economic integration as a means to deal with Europe’s budget crisis. Although the directive applies only amongst member states the report highlights that multinational companies are eroding Europe’s tax base using transfer pricing and tax havens. The report makes statements recommending a 25% tax on inflows from outside the EU to be combined with stronger anti abuse measures, country-by-country reporting could be one such measure.

There is a constant stream of double taxation agreements being signed between developing and developed countries which in the current global regulatory environment frequently lead to double non taxation. This amendment will not help developing countries directly but acknowledgement of the problem is surely welcome.

See more information about this in German on Sven Giegold’s website.