Company taxation: Commission suggests single consolidated tax base

IP/01/1468

Brussels, 23^rd October 2001

Company taxation: Commission suggests single consolidated tax base

The European Commission has just presented a strategy for company taxation in the EU. The Commission believes that company taxation systems in the EU have failed to keep up with developments such as globalisation, economic integration in the Internal Market and Economic and Monetary Union. A new approach is needed. There are large variations up to 30% - in effective company tax rates across the EU. Economic modelling suggests that the differences in effective tax rates are attributable mainly to differences in national statutory tax rates rather than to differences in the size of the tax base. The Commission continues to believe that company tax rates are a matter for Member States to decide. Furthermore, the Commission has identified a number of tax obstacles to cross-border economic activity in the Internal Market where Community action is necessary and proposes a two-track strategy to remove them. The Commission plans a number of targeted measures on such issues as the extension of the Directives on dividends and mergers, cross border loss relief, transfer pricing, and double taxation conventions. At the same time, the Commission believes that companies must in the longer term be allowed a consolidated corporate tax base for their EU wide activities to avoid the current costly inefficiencies of fifteen separate sets of tax rules. The Commission in its study has identified a number of ways of achieving a consolidated base and it plans to launch and lead a wide-ranging and detailed debate on the subject.

Commenting on the strategy, Taxation Commissioner Frits Bolkestein said "The Union's company taxation policy must support the objective of making the EU the most competitive economy in the world by 2010. The Commission has today established a clear programme of EU measures to remove tax problems facing businesses operating within the Internal Market and lay the foundations for an EU consolidated corporate tax base."

Company taxation must adapt to the changing environment

The Commission believes that the reform of company taxation in the EU is crucial to achieving the goal established at the Lisbon European Council of March 2000 and confirmed at the Stockholm European Council in March of this year of making the Union the most competitive and dynamic knowledge-based economy in the world by 2010. The economic environment has changed significantly in the last ten years with a wave of international mergers and acquisitions, the emergence of electronic commerce, the increased mobility of economic factors and the consequent difficulties in defining and safeguarding the company tax base.

Companies still have to comply with fifteen different sets of company taxation rules and a multiplicity of tax conventions, at considerable cost. Company taxation must not be left behind; it must become an instrument for achieving the EU's goals.

Large variations in effective corporate tax rates across the EU

The Commission study features the results of an extensive analysis of estimated effective tax rates using an economic methodology which relies on certain assumptions regarding the economic framework and cannot, for methodological reasons, include all the relevant features of tax systems. Furthermore, the precise numerical value of an effective tax rate in a particular Member State depends on the methodological and other assumptions as well as the characteristics of the specific investment project. Nevertheless, although the methodology does not compute universally valid values for the effective tax burden in different countries, it does enable some general conclusions to be drawn.

The Commission concludes that taxation is only one of the determinants of investment and financing decisions but that the large variation in effective tax rates in EU Member States nevertheless requires examination. There is a large variation in the effective tax burden faced by investors resident in the different EU Member States, as well as in the way each country treats investment in or from other countries. The range of variation can reach more than 30 percentage points. The Commission's analysis suggests that it is the statutory tax rate rather than the tax base that is the major factor in establishing the effective rate, particularly when profitability rises. The Commission study has not analysed the evolution of effective tax rates over time, the effects of tax competition or the effects of the differentials in tax rates on economic efficiency. The Commission therefore concludes that the level of taxation, and in this context the tax rate, is a matter for Member States to decide and specific Community action on tax rates is not recommended. However, the Commission will carefully monitor the trend of the effective levels of corporate taxation in the EU Member States in order to understand the dynamic effects of reforms in progress.

Cross-border tax issues

The Commission has identified a number of fields in which company tax systems hamper cross-border economic activity in the Internal Market and thus undermine EU companies' international competitiveness. The problems can be summarised as follows:

• The existence of fifteen separate sets of tax rules for computing the taxable base in the Internal Market, in addition to creating compliance costs, causes numerous problems in the field of the taxation of intra-group transactions ("transfer pricing") and double taxation.

• Cross border flows of income and restructuring operations are often subject to additional tax. Neither the Parent-Subsidiary nor Merger Directives (Council Directives 90/435/EEC & 90/434/EEC) have resolved all the problems in this field.

• Cross border loss relief remains very limited and corporate groups may be taxed on profits earned in one country in the Internal Market without being allowed credit for their losses incurred in another country in the Internal Market.

• Mechanisms for relieving the double taxation of cross border activities such as bilateral double tax conventions and the 1990 Convention designed to eliminate differences of opinion between national administrations in relation to the adjustment of transfers of profits between associated undertakings (the "Arbitration Convention" - 90/436/EEC) are not working efficiently.

Removing the obstacles a twin track strategy

The Commission has identified a number of actions to remove, or at least lessen the impact of, these obstacles to cross border activities.

Action on targeted measures

• The Commission will develop guidance on important rulings by the European Court of Justice to facilitate compliance with the Treaty and the application of Community legislation. The Commission began a programme of meetings with Member States in 2001 on this subject that it will continue and expand.

• The Commission will table amendments to both the Parent-Subsidiary and the Merger Directives together with detailed guidance on application and implementation. The Commission already presented proposals in 1993 to amend these Directives by widening their scope to include all entities subject to corporate tax. The Commission now considers that the Directives should also be extended and improved to include a wider range of taxes and transactions. They must also be expanded to include the companies which will be run under the European Company Statute (known by its Latin name 'Societas Europeae' or SE) adopted on 8 October by the EU Council of Ministers (see IP/01/1376).

• The Commission will withdraw its 1990 proposal for a Directive to allow enterprises to take into account the losses incurred by their permanent establishments and subsidiaries situated in other Member States, since it has not proved acceptable to Member States. In order to overcome Member States' reluctance to consider any EU initiative in this area, the Commission will, in 2002, launch a round of technical preparatory meetings with Member States with a view to developing a new improved and possibly more comprehensive proposal and report on its legislative intentions before the end of 2003.

• The Commission proposes to establish an 'EU Joint Forum on Transfer Pricing' with Member States in the first half of 2002 to establish better co-ordination between Member States and between Member States and businesses in the taxation of intra-group cross-border transactions. Double taxation can arise where two Member States do not agree on transfer prices between two associated companies. Furthermore there is a tendency for Member States to impose increasingly onerous transfer pricing documentation requirements. The Forum could address issues which do not require legislation such as Advance Pricing Agreements, documentation requirements, and transfer pricing methodologies within the OECD guidelines.

• The Commission will in 2003 present a proposal for a Directive with a view to renewing and improving the Arbitration Convention and making its provisions subject to interpretation of the Court of Justice.

• The Commission intends to present a Communication on Double Tax Conventions in 2004 on the need to adapt certain provisions of Member States' bilateral double taxation conventions based on the OECD Model Convention in order to comply with EC Treaty principles. The aim is to arrive in the long term at an EU version of the OECD Model Convention and Commentary that meet the specific requirements of EU membership or even at an EU multilateral convention.

• The Commission will ensure that the current body of EU company tax law will be fully applicable to companies formed under the European Company Statute by 2004. At the same time, it will explore the particular potential of the comprehensive company tax regime and consolidated corporate tax base for EU-wide activities of companies discussed below to be applied to SEs.

  A consolidated corporate tax base

The Commission recognises that, although the targeted measures would go some way towards remedying the tax obstacles, the underlying problem of 15 different tax systems in the Internal Market would remain. The Commission considers that a consolidated corporate tax base for the EU-wide activities of companies would have the potential to contribute to greater efficiency, effectiveness, simplicity and transparency in company tax systems, in particular by reducing compliance costs. A consolidated tax base would allow companies with cross-border and international activities within the EU to compute the income of the entire group according to one set of rules and establish consolidated accounts for tax purposes. The Commission therefore believes that it is only logical to steer its company taxation policy in this direction in the long run. The Commission study has identified a number of possible technical approaches to achieve this. These include:

• Home State Taxation (where groups of companies would be able to compute the taxable base for all their EU operations according to the tax code of their particular Home State);

• A Common (Consolidated) Tax Base (where groups of companies would be able to compute the taxable base for all their EU operations according to a new common tax code applicable across the EU)

Consolidation on an EU wide basis is the key feature of all the possible approaches. The creation of such a scheme requires also a mechanism to be agreed by all participants for allocating the consolidated corporate tax base to individual Member States for them to tax at their respective statutory rates. This is a major and complex project. The Nice Treaty highlighted the legal possibility which now exists of closer co-operation ("enhanced co-operation") between sub-groups of like-minded Member States but the full benefits of such a consolidated tax base will only be achieved if all Member States participate.

The Commission will initiate a structured dialogue with all stakeholders at a major European Company Tax Conference next year to assist the Commission in determining the best way of bringing this project to fruition. After the Conference and the following broader debate in the EU, the Commission intends to report on its subsequent policy conclusions by 2003.

Background

The full text of the Communication "Towards an Internal Market without tax obstacles. A Strategy for providing companies with a consolidated corporate tax base for their EUwide activities" will be available on the Europa internet site:

http://ec.europa.eu/taxation_customs/whatsnew.htmThe Communication develops the general priorities established by the Commission in May 2001 ('Tax Policy in the European Union Priorities for the years ahead' see IP/01/737) in the specific area of company taxation. It supplements and builds on an extensive study 'Company Taxation in the Internal Market' which the Commission services have completed with the assistance of two panels of experts.

An Executive Summary of the Commission study is annexed to the Commission Communication.

The complete study which runs to more than 400 pages will also be available on the Commission website (see above for URL).

For further details of the Communication, see MEMO/01/335.