EU tax policy - Commission has 'no ambition' to harmonise corporate tax
Author:
Gerald Murphy
Mr. László Kovács, European Commissioner for Taxation and Customs Union was in Dublin at the end of February to deliver a speech on European tax policy at a lunch organised by the European Movement of Ireland. The Commissioner met members of the press ahead of the lunch and indicated that there will be no harmonisation of corporate tax rates - what is more likely, he suggested, is an eventual reduction from 25 to 6 EU tax bases.
Well, strictly speaking, the Commissioner said that the Commission has no ambitions to propose the harmonisation of corporate tax rates - which may not be the same thing - but he reiterated that response to several questions from the journalists present.
Mr Kovács also said that, in his view, there was no need even for a minimum corporation tax rate.
He emphasised that aspects of the taxation rules need to be modified if they are to contribute to the proper functioning of the internal market and to the competitiveness of the EU as a whole. This in turn is linked to developing cooperation between tax administrations.
He noted that there are many tax measures which discourage firms from investing in operating outside their domestic jurisdictions. Many of these relate to the 25 different tax systems which are presently in place.
HARMONISING CORPORATE PROFIT CALCULATIONS - CCCTB
In the field of corporation tax, the Commissioner took time to emphasise his commitment to the common consolidated corporate tax base (CCCTB).
Essentially, this is a proposal to establish a framework for computing taxable profits under a European tax structure. All profits derived by an enterprise from its operations anywhere within the EU could then be computed on the same basis and so would avoid the complications of 25 tax systems where the business traded across borders.
The time frame is to produce a report from the working groups by the end of 2006 and draft legislation by 2008.
While all member States are cooperating in the technical process, political support is mixed. The Commissioner is confident of the political support of twenty members; five States, comprising apparently Ireland, UK, Estonia, Slovakia and Slovenia are less enthusiastic.
As unanimity is the rule for taxation and as unanimity is unlikely, the Commissioner envisages a “twin-track” CCCTB project under the ‘enhanced co-operation’ mechanism.
-more than 1/3 of Member States are willing to participate;
-other Member States have the option of participating at later stage.
In response to questions from Accountancy Ireland as to the need of business for simplicity and certainty, the Commissioner said that given support by 20 Member States he would expect there to be in effect a reduction from twenty five to six Community tax bases in the future - one for the 20 States currently expected to participate and one each for the five who at present had reservations.
Although the Commissioner did not say so, one might expect that, as a consequence, business would tend to focus its activities within and invest in those Member States which were applying CCCTB.
The structure of CCCTB still has to be agreed. A working group is focusing on the definition of the tax base at present while the question as to how the consequent profits will be allocated to the various Member States involved has not yet been addressed.
Finally, it is worth noting that the EC has now decided to render the CCCTB optional, and not mandatory as was originally intended. This would allow enterprises which are not operating cross- border still to use their national tax base if they wish.
HOME STATE TAXATION HST
The Commissioner also mentioned HST which is a pilot proposal aimed primarily at small and medium-sized enterprises. This too is part of the harmonisation process.
It contrasts with the CCCTB in that it does not require a new basis of calculating profits. Under this system, the taxable profits would be computed according to the rules of the jurisdiction in which the parent or lead company is established/ resident. Again, the profits would be allocated to the various Member States in which the SMEs operate in accordance with an, as yet, specified formula. Such profits would then be taxed at the rates appropriate to each Member State.
The Commissioner mentioned that the HST scheme has received lukewarm interest from the Member States. Accountancy Ireland understands that no single Member State has offered to participate in the pilot scheme.
INDIRECT TAXES - VRT
One area of tax harmonisation which was particularly emphasised by the Commissioner lay in the area of VRT. From studies of the tax, the EC had reached the conclusion that VRT was a contributory factor in a very fragmented car market within the EU. Commissioner Kovács also saw it as a tax which was prone to give rise to double taxation particularly where car owners were transferring residence within the EU.
In short, he was proposing that VRT be eliminated but, to compensate the States for lost tax revenues, it should be integrated within the annual car registration tax.
At the same time, he saw an opportunity within the extension of the registration tax to include measures to deal with CO2 emissions. Thus, in the year 2008, 25% of the registration tax should be targeted at high-emission vehicles and 50% in subsequent years.
OTHER INDIRECT TAX MEASURES
The EC is focusing on the one-stop shop mechanism as one of the best ways to achieve simplification in EU VAT particularly for SMEs and continues to take steps to secure its implementation.
On 14 February, the Council adopted a directive enabling Member States to continue to apply VAT reduced rates for certain labour-intensive services until 2010 .
By the end of June 2007, the Commission will have to present a report assessing the impact of reduced rates on locally-provided services, including restaurant services, in terms of job creation, economic growth and the internal market, on the basis of a study to be carried out by an independent economic think-tank.
As to customs duties, we await the introduction of eCustoms which should save costs and aid simplification.
ANTI-FRAUD
Finally, the Commission is currently preparing a new EU anti-fraud tax policy focusing on improvement and enhancement of cooperation between national administrations. However, the Commission is of the view that exchange of information may have little effect if limited to the EU and therefore there must be greater transparency and exchange with third countries as well as dependent or associated territories.
Gerald Murphy is Taxation Executive with The Institute of Chartered Accountants in Ireland