The European Union (EU) reaffirmed its commitment to corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform today, announcing that it intends to foster an environment of fair and transparent taxation by enacting a harmonized tax regime that eliminates regulatory arbitrage, simplifying the administrative process, and improving coordination among the member states. The harmonized tax regime, known as the Common Consolidated Corporate Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. (CCCTB), aims to reduce the ability of companies to shift profits between member states in order to reduce their aggregate tax burden. Negotiations on CCCTB have ground to a halt since 2011, due largely to the complexities of harmonizing corporate tax regimes between the 28 member states.
If the CCCTB gains political traction and is enacted, it will be mandatory; EU multinationals will not be able to opt out, as opposed to the previous incarnation of the regulation, in order to combat tax avoidance. All member states would be required to apply the same rules for calculating taxable profits for multinationals. The EU notes that it would “introduce complete transparency on the effective tax rate” of every member nation.
When considered in conjunction with the European Commission (EC) competition division’s recent targeting of tax rulings, the renewed interest in enacting the CCCTB appears to be a part of a coordinated effort between the competition and tax divisions to combat what they perceive to be a continual erosion of the EU tax base combined with the increasing market power of multinational corporations.
Though it will not require member states to adopt the same rates of corporate taxation, the CCCTB establishes a universal formula for calculating a corporation’s tax liability in a particular member state. Called the three-factor formula and originally proposed by the EC’s taxation and customs division, it takes into account corporate capital, labor, and sales figures. The labor term incorporates the wage rate and number of employees, but it is unclear whether the capital term takes into account the rate of return on capital that the company requires. A 2005 EC paper cautions that member state corporate income taxes reduces the return on capital for EU companies, signaling that the EC may take capital costs into account when deciding on the final version of the formula.
Harmonization of corporate tax procedures across national jurisdictions could be beneficial if its net effect is to reduce tax carveouts for specific multinational corporations, which disadvantage smaller companies, or to simplify the overall tax filing process for multinationals. But harmonization also has the potential to reduce the effectiveness of certain broad-based, low-rate state-specific corporate tax structures, such as Estonia’s. Estonia ranks first on the Tax Foundation’s International Tax Competitiveness Index, in part due to its corporate tax structure, the best in the OECD.Share