December 5, 2014
The recent revelations about complex financial transactions of some 300 major companies profiting from differentials between corporate income tax bases and rates among member states and specific tax deals reducing their tax bill raise questions about the compatibility of national company taxation regimes with an economic and monetary union.
After several fruitless efforts during the past the moment may have come for a leap forward.
Ideally, the EU should introduce an EU-wide corporate income tax for financing the EU budget.
In 2014, the average corporate income tax rate of the 28 member states was 23%, varying between only 10%-15% for Bulgaria, Cyprus, Ireland and Luxembourg and rates exceeding 30 per in seven member states (Belgium, France, Germany, Italy, Malta, Portugal and Spain).
This diversity allows companies to find ways and means for having their profits taxed in low-tax countries like Luxembourg or Ireland and for governments to use low corporate income taxes and specific tax arrangements to allure companies establish their legal headquarters kin their countries, though the bulk of the business may take place in other parts of the EU.
This what Ireland, Luxembourg, Netherlands and Cyprus have practised. The approach is perfectly legal, as member states continue to be full masters of their income tax systems. But it constitutes an unfriendly act towards their neighbours whom they deprive of tax revenue of billions of Euro.
The minimum answer to these dubious fiscal practises would be a harmonisation of the corporate tax bases and rates within the EU and full transparency of tax deals with companies.
The most ambitious response would be for the EU to place the corporate income tax under EU jurisdiction, which is the case in federal federal states like USA, Germany and Brazil.
The combined revenues from the corporate income tax in the EU account for 2.6% of GDP, more than twice the amount of EU budget. The simplest way would be for the EU to introduce a corporate income tax with a rate of some 12%, enough to finance EU expenditures.
Member states would be free to maintain a corporate income tax of their own, provided they apply the EU-wide tax base. National tax deals with companies would lose their attractiveness because of lower rates throughout the EU.
This system would greatly simplify the financing of the EU budget, which would be based on the corporate income tax, import duties/levies and penalties.
The opposition to an EU corporate income tax would be immense and come from three quarters: member countries critical of any additional transfer of competences to the EU; those with low-tax regimes and those which may feel better off with the present way of financing the EU budget.
For the EU to survive in the future it will need much more solidarity among member countries. The use of low corporate income tax rates and fiscal manipulations by mostly small and wealthy member states will no longer be tolerated when billions of Euro profits go untaxed because of fiscal paradises in certain parts of the EU.
Europe has to take the courage and tackle these fiscal anomalies that have far too long escaped a political debate. The best way to do so is for the Commission to produce a white paper on profit taxation in Europe as a first step towards legislative proposals
Eberhard Rhein, Brussels, 25/11/2014Author : Eberhard Rhein