The on-again, off-again issue of the offset of tax losses from one part of a company against profits at its headquarters located in another European Union state is resurfacing.
But many of those involved in the discussion don't expect a final solution to the problem anytime soon. In fact, it may take several years.
The stall would be comparable with the past delays of other initiatives that were aimed at achieving cohesion on tax matters between the 27 different EU member state finance ministries -- each one seemingly more volatile than the next over taxation matters.
"It usually takes 10 to 15 years to get adoptions on tax issues," explained Bernardus Zuijdendorp, a policy officer in the European Commission's taxation department.
The EU has been working to establish a common consolidated corporate tax base, which would help resolve the tax-loss problem. One of the recent examples of momentum toward that reform is a report from the European Parliament that presses for tax offsets to be made possible. Currently, corporations may have to wait anywhere from three to five years for cross-border losses to become bookable, according to European Parliament rapporteur Piia-Noora Kauppi. "The difference in tax treatment of branches and subsidiaries in a domestic situation, as opposed to a cross-border case, interferes with logical investment decisions. This distorts the smooth function of the single market and exerts a drag on the European economy."
A SINGULAR MARKET
Kauppi's position is that the EU, which has "the largest competitive single market in the world," must quickly be made "tax-competitive." The MEP contrasted the EU's internal market -- characterized by a large number of tax-induced obstacles -- with other single markets, such as the U.S, Japan and China.
Highlighting the obstacles associated with reform, another commission official said that in the so-called "single market," a firm may make a profit of, say 200 units in its home country, but lose 100 units in a start-up operation elsewhere. In this example, the firm may have to pay full national corporation tax on the 200, but may see its investment loss "stranded."
The situation may be more complex than that, because various bilateral agreements between some national governments may apply. Another factor complicating the matter is the legal status of the companies concerned, that is, corporations, partnerships, etc.
Another impetus to tackling the tax loss situation comes from rulings from the European Court of Justice, specifically the December 2005 judgment of global retailer Marks & Spencer. The ECJ decision allowed the retailer to gain a rebate of 65 million euros from its British tax bill, as offset against tax losses from its Continental European subsidiaries. Significantly, the ECJ worded its judgment to make it clear that it opposed tax losses that might be taken into account twice, as well as other tax-avoidance risks.
In 2006, the EC published Tax Treatment of Losses in Cross-Border Situations, which sets out clearly the problems of the present EU corporate tax regime; one being that it unfairly "favors large companies in comparison with small and midsized enterprises."
The paper also proposed a trio of alternative solutions. The first is a definitive transfer of losses or profits, without recapture, which is opposed by the commission, as it could shift tax bases across borders. The commission raised the possibility of a temporary loss transfer that allows for that loss to be recaptured by the national treasury of the subsidiary once the subsidiary returns to profit. Finally, it also put forward the idea of applying a worldwide system by which all foreign profits and losses are taken into account at corporate headquarters.
"We cannot tolerate disproportionate obstacles to cross-border activity within the EU," said László Kovács, the commissioner for taxation and customs.
However, the Economic and Financial Affairs Council of the European Union, or Ecofin, was not impressed with the commission's proposals, as it merely acknowledged the paper's existence, and warned that rapid reform could lead to opportunities for companies to maneuver to avoid paying corporation tax.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access