EU corporate tax base harmonisation proposal may actually increase tax competition

October 27th, 2011

The EU could adopt a Common Consolidated Corporate Tax Base by early next year. Regrettably, participation will be optional for both member states and companies and no minimum tax rate will be applied, leaving the door open to increased tax competition.

The Commission’s proposal is commendable for introducing a form of formularly apportionment which seeks to establish where real economic activity takes place by looking at staffing levels, sales, assets, etc. meaning that companies cannot simply cherry pick the location where rates are lowest. This would be a crucial step forward in the fight against transfer pricing abuse by companies that use subsidiaries in low tax jurisdictions in order to minimise their tax bills. Secondly this is a move towards increased tax cooperation.

However, as Walter Defraa of DG Tax stated in a recent meeting the reform could lead to more tax competition as it would be easier to assess effective rates. But another reason for this is that the commission’s proposal will be a voluntary initiative only. Ludo Vekemans of the European Trade Union Confederation rightly argued that in order to avoid this enhanced competition there should be a common or at least minimum tax rate as well, adding that the CCCBT should be made compulsory.

Provisionally this proposal is scheduled to be debated by member states on 8th November before being considered by the parliament in February of next year. Many companies are enthusiastic about this proposal, because of the current high costs of compliance with many different tax systems.

Multinational tax dodging is a major driver for illicit capital flight that deprives both rich and poor countries of much needed resources. Voluntary measures will not make the grade to address this. While governments are accumulating huge deficits and debts and prescribing austerity measures, multinationals are not paying taxes at home. In 2009, only one third of UK multinationals paid taxes in the UK and 25% of French Multinationals did not pay any tax in France in the same year. To address this Europe needs compulsory CCCTB and a minimum corporate tax rate.

Vested interests of Expert Advisors

Eurodad has previously raised concerns about bias in the EU Joint Transfer Pricing Forum which advises the EU. The group is made up entirely of private sector representatives including staff from each of the big four accounting firms. When I asked about the role of the forum in the formulation of the CCCBT proposal. Theo Keijzer formally Vice Chairman of the forum replied that the group had no specific role in the process however with his International Chamber of Commerce hat on he had recommended that the standards should be voluntary. I asked about whether the composition of the group, was appropriate. I was told that anyone can apply to join, however they need to be an expert working on transfer pricing issues on an almost daily basis. Apparently there are no suitable candidates from NGOs, trade unions or even SMEs. I find it unlikely.

Perhaps more importantly a broader perspective and the representation of different interests would be more valuable than narrow technocratic expertise. On 26 October the European Parliament voted resoundingly in favour of freezing part of the budget for the European Commission’s expert groups until measures are in place to make these groups more transparent and safeguard against their capture by special interests.

Written by Alex Marriage

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