Europe taking timid steps toward tax harmonization

An initiative to breath life into the harmonization of corporate taxation rules across the European Union - which got a nudge from the European finance ministers' meeting in September - is now rumbling its way through the Brussels-based EU institutions.

But any proposed spirit of togetherness would entail only the tax base, and not tax rate uniformity itself. And some experts predict that it could remain in the negotiating stage anywhere from five to 10 years.

European Tax Commissioner Laszlo Kovács may have aimed too high back in May when he forecast that a Franco-German plan for more rapprochement could be ready in "three years, if everything goes well."

A spokesperson for Kovács stressed that any move to get the 25 EU member states to share the same, or similar, rules on the setting of the corporate tax base, had nothing to do with unification of the actual tax rate on company profits.

What the national finance ministers decided, at their meeting last September near The Hague in the Netherlands, was to issue a "non-paper" - what amounted to a subtle request for an investigation into whether there is common ground among the EU countries for a common corporate tax base. Since then, several technical meetings have taken place. One looked at tax rules on depreciation, while another held in Italy in March discussed how to account for intellectual property in any common tax base.

Despite the clouds of caution, in general, 20 of the EU's countries could achieve harmonization with the Common Consolidated Corporate Tax Base.

There would be some inevitable exceptions, such as the French protection of their business lunch as tax-allowable. This would be done to preserve Gallic national culture. Such exceptions would be minor.

Peter Cussons, an international corporate tax partner with PricewaterhouseCoopers, believes there will eventually be a common tax base in the EU. "Not in the next five years, I would think, but I should not be surprised to see it across most countries within 10 years."

Cussons said that he would agree with Kovacs that "there is a fair prospect of a Franco-German togetherness much sooner."

The background view of the European fellowship holds that taxation policy in the EU has a vital role to play in the economic zone's strategy to deliver growth and jobs.

Naturally, the 20 countries are now seeking to overcome at least one challenge, and that is to avoid having 25 different ways to calculate company taxation. This is an imperative need, if only to make fair comparisons for companies serving the economic zone's 450 million people, they say. Their stance comes together in a provisional draft report from the European Parliament.

The document noted that the continuing existence of 25 heterogeneous tax systems sets up massive obstacles to companies' cross-border activities. It brings in considerable inefficiencies in terms of administrative and economic burdens.

Pier Luigi Bersani, a member of the European Parliament, and the rapporteur - a member of Parliament chosen to lead on a subject - railed against economic distortions in terms of investment. He cited the problem of the allocation of capital and the location of productive activity. The present hodgepodge also gives rise to losses to national governments resulting from fraud and tax evasion, he said.

Bersani suggested that EU countries work more closely together to deal with specific issues, such as the cross-border offsetting of losses, and transfer pricing for tax purposes.

His solution is a step-by-step approach. He would start with the initial introduction of an optional common consolidated tax base. This would leave companies with a choice between adopting existing national tax bases, or a European tax base. This could be followed by an assessment, in the medium term, of moving over to a compulsory common consolidated tax base. Discussions on the draft were due to take place in June.

In a recent address, Taxation Commissioner Kovács took the same approach. He emphasized that, "We must reduce ... the red tape, excessive compliance costs, administrative burdens and double taxation that businesses encounter dealing with the tax administrations of more than one member state."

Speaking to members of the Confédération Fiscale Européenne - the European Taxation Federation, representing 28 organizations from 21 countries - Kovacs continued that a single EU-wide set of rules would result in firms making economically sounder choices between competing investments.

Kovács stressed that a common company tax base would not mean a common corporate tax rate. "I believe that tax competition is not bad by definition. ... It forces governments to produce value for money."

Countries opposing harmonization are the U.K. and Ireland, backed by Cyprus, the Slovak Republic and Estonia.

A spokesman at the Brussels office of UKRep, the British permanent representation in Brussels, expressed his anxieties over the subject. He "categorically rules out any chance of the U.K. joining such a scheme." Harmonization of the tax base was a certain step on the road to tax rate harmonization itself, said Jonathan Allen. This would contradict the U.K.'s position, which is strongly in favor of a policy of taxation competition. However, according to Allen, the U.K. was still "very much in the listening mode, but listening skeptically!"

The U.K.'s position is surprising, given the fact that, at 30 percent, its corporate taxation rate is not particularly low. Cyprus comes in at 10 percent. Ireland's is 12.5 percent. The Slovaks are at 19 percent, while Estonia has caused ire in Western Europe with a rate of zero.

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