Rhein on Energy and Climate

With the necessary political backing the EU has always been able to produce hat tricks. This time the taxation on profits of the corporations operating across the EU are the target.

On March 11th, the heads of government of the 17 Euro-zone countries had invited the Commission to submit proposals for a harmonisation of the diverse tax bases on which corporate income tax is calculated. Less than a week later, the Commission has tabled a draft proposal. It had been in the drawers for a long time, the issue of harmonising the tax basis going back to the beginning of the century. But despite the pressure from European business the Commission had never dared to submit proposals, as there was no chance of transforming them into law because of unanimity requirement.

Since 2000 two major changes have taken place.

First, the Lisbon Treaty has made it easier for a group of member states to overcome the hurdle of unanimity, by embarking on enhanced cooperation.

Second, Germany and France have targeted the low corporate income tax rates in several member states as harmful to their economic interests.

The Commission proposal is wisely limited to the tax base, i.e. the way in which profits are calculated. Depreciation charges constitute the single most important component for that calculation. The Commission proposes a linear depreciation period of four years for machinery, equipment, vehicles etc.

With an identical tax base companies operating in several member countries will be able to declare a combined EU-wide profit, which will be subject to taxation in individual member states pro rate the capital, employees and turnover of the company units deployed.

Companies will be free to continue applying the old system or adopt the new method of calculation ; but considering the pressure from European business for harmonisation and the lower costs accruing from simplified accounting most of them are likely to go for aggregation of their profits.

The Council and the EP will take a close look for what would be the most far-reaching tax regulation adopted in the field of direct business taxation. But in the end, the harmonisation will come, because it offers competitive advantages to business and because big member states, including UK, with businesses scattered across Europe will find it attractive. By 2013 the new regulation should be in force if everything proceeds smoothly and the European Council continues to monitor the ongoing work.

With a transparent EU-wide tax base the discussion will inevitably turn to harmonisation of tax rates, which presently vary between 10 and 25 percent. This debate might coincide with another one on EU tax resources. The EP and even some member states might find it attractive to fund a substantial part of the EU budget by revenues from an EU corporate income tax, which would be an elegant method of putting an end to tax competition between member states, as is the case in the USA.

But for the time being this is no more than a pipe dream.


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