The future of taxation in the EU: further steps towards tax harmonisation?

Jana ZIFCIAKOVA

Confrontations Europe

Speekers : Uwe IHLI European Commission, DG Taxation and Customs Union Head of Section – Corporate Tax Directives and CCCTB. Michael BREI University Paris-Ouest Nanterre La Défense Lecturer – International Finance and Tax Havens.
Participants : Adriaensen Laura, The Belgian Federal Public Service Foreign Affairs, Foreign Trade and Development Cooperation Attaché European Affairs. Akcan Melis TUSIAD – Turkish Industry & Business Association Researcher. Baud Marie-France Confrontations Europe Head of Brussels Office. Biebel Reinhard, European Commission, DG Internal Market and Services Policy Coordinator – Financial Services. Chardonnet Aurore, European Confederation of Independent Trade Unions Policy Adviser. Conseil Pia Your Europe Advice – ECAS YEA Office Human Resources & Training Coordinator. De Marnix Paul European Parliament, Office of MEP Alain Lamassoure Parliamentary Advisor. Faure Emmanue lle European Foundation Centre EU Affairs Senior Officer. Freté Ondine EU Office of the General Confederation of Small and Medium Companies (CGPME) Policy Advisor – European Affairs. Gentili Andrea Kreab Gavin Anderson Associate. Gimeno Verdejo Carlos European Commission, DG TRADE, Unit WTO coordination Policy Coordinator. Giraud Emilie French Federation of Insurance Companies Policy Advisor – European & International Affairs. Heremans Tinne European Parliament, Office of MEP Marianne Thyssen Parliamentary Advisor. Herzog Philippe Confrontations Europe Founding Chairman. Hoinaru Razvan European Parliament, Office of MEP Theodor Stolojan Parliamentary Advisor. Hug Cathrin Representation of the Free State of Bavaria to the EU EU Affairs. Kosieradzka Monika Permanent Representation of Poland to the EU Trainee – Budget & Finance. Leouffre Patricia Conseil Supérieur du Notariat – Direction Europe & International Responsable du Bureau des Notaires de France. Macey Anne Confrontations Europe Delegate General. Nash Deborah Cabinet DN Director. Paleari Silvia Cabinet DN Senior Consultant. Partikova Slava Permanent Representation of the Slovak Republic to the EU Attaché – Customs & Fiscal Affairs. Past Harald EuroCommerce Adviser – International Trade and Taxation. Patelou Vinciane Cabinet DN Associate Director. Pecchini Lucia FleishmanHillard Account Executive. Pellissier Stéphane Geological and mining research bureau (BRGM) Taxation and Customs Manager. Petrucci Arturo Europe Analytica Research Assistant. Poder Martin Permanent Representation of Estonia to the EU Head of Finance Section. Rooze Simon FleishmanHillard Account Manager. Salson Nadja European Federation of Public Service Unions (EPSU) EPSU Officer. Siquier-Delot Delphine Chamber of Commerce and Industry of the Paris Region Head of the Taxation Department. Solanillos Carlos Banco Santander Public Affairs Analyst. Tetas Jonathan Industry Circle EU Affairs Manager. Wolszczak Alexandra Permanent Representation of Poland to the EU Counsellor – Budget & Finance. Zifciakova Jana Confrontations Europe Policy Analyst.

The working group questioned the participants whether tax rates in the EU should be harmonised and what would that mean for those Member States that currently benefit from a more competitive tax regime. She indicated that the European Commission is currently working on a new proposal on a Common Consolidated Corporate Tax Base (CCCTB).
Uwe Ihli revealed that one of the most important events related to CCCTB was that Jean-Claude Juncker mentioned already this project in his speech in the European Parliament on the 15th of July 2014. He declared ‘I will combat tax evasion and tax fraud. I am in favour of the adoption at the EU level of a common consolidated corporate tax base and of a financial transaction tax’.
Moreover Mr Ihli gave an overview on the CCCTB explaining that it is a common consolidated corporate tax base for which businesses would have the option to choose one tax system which would have the same rules in all the Member States, then the profits realised in all the Member States by a group would be put all together and shared out. He underlined that it is an optional system. He explained that currently, under the Italian Presidency the European Commission is continuing with the discussion that started in 2011.
Furthermore, Mr Ihli made a point on the BEPS emphasising that since last year, when the OECD introduced the BEPS (Base Erosion and Profit Shifting) action, it was an initiative at the G20/G8 level in which Member States were unhappy with the current situation of profit shifting in the world, not in the EU, but in the world. Very often economic activities undertaken in some states do not result in taxes paid to finance ministry in the same state. They are either taxed in other state with low tax rates or sometimes even within no state. That is the background of BEPS. Now, the European Commission and the OECD works usually very closely together on tax policy matters, so it is obvious that we do not want to have contradicting approaches. The majority of OECD Member States are also EU Member States, so it would be very ineffective to have a solution for the EU Member States proposed and discussed in the Council, and then a different solution for the same Member States proposed and discussed at the OECD level. However the OECD is also a bilateral organisation and all its actions are based on bilateral solutions.
Concerning tax competition, Mr. Ihli stressed that it is a very complex topic. First, purely institutional, Member States agreed to discuss tax competition aspects in the Code of Conduct. Currently there are two big topics. One is the Code of Conduct discussion on tax boxes which has different types, but the best ones from a business viewpoint are 2.5% taxation in Cyprus and even 0% taxation in Malta, which is good for business, but very hard for finance ministers in high-tax countries to accept. When a company pays 1 million Euros into such a tax box as expenses they are deducting the tax base in their first country the 25-30%, and on the other side they are very lowly taxed, nearly 0% in Malta. The question is then of course when is such a system justified and where not. Competition whether it is fair, it is not only fair for citizens to ensure that each one pays its fair share to the budget, but also businesses.
Furthermore, Michal Brei talked about international taxation and tax arbitrage, underlining that some countries that appear as high-tax countries have certain tax havens because they have a very complicated tax system, they have high tax rates, but they have plenty of exemptions, which then allow foreign entities to operate in those countries without really paying taxes.
He also stated that tax harmonisation is an important topic, as differential tax regimes may create distortions in the efficient allocation of capital, but he believes this requires much more than just equalisation of tax rates. In the international tax system, there are plenty of different tax rates applied to active and passive income, dividend, capital gain, branch taxes, and withholding taxes. And on top of this, there are exemptions and bilateral tax treaties, so it is quite difficult to get a precise view on how much taxes a multinational pays in a country. He believes that this calls for a simplification of the tax system, because multinational enterprises have a lot of resources which are put into research on how to optimize and allocate their entities, and they are sometimes much better than governments in performing that.
He added that tax harmonisation requires first a global approach, so it is not helpful if we do it here in Europe only, and then other countries do not harmonise their taxes. So I think we need to increase and improve the cooperation of tax authorities that exchange information about the identities of the person who is behind the entity. One major problem is that it is often difficult to track back who is the beneficial owner of an entity.
Another problem is that for example interest payments on debt are usually deductible from income, so when you take a loan and you take 10% interest, you can deduct it at the end from your income, but for equity, for the own capital of enterprises, it is not deductible. And this may create incentives that firms operate with very low equity levels and that they finance everything with debt, because the debt they can at the end deduct from income taxes. This creates a lot of distortions as well, so often multinational firms relocate finance to low tax jurisdictions and they make the loan at the subsidiary in the high tax jurisdiction, because there then the entity has a big income, but it will also have a big interest expense which will be then deducted and that is called tax base erosion.
He stated that that becomes more dangerous is when companies combine aggressive transfer pricing with hidden ownership. For example, if in the Netherlands, a US company wants to licence a patent or a copyright for a film for a UK company, if it would do it directly, the American company would pay a royalty for this patent of 100 USD to the UK and its after-tax cost would be 61 USD (if we assume that there is a tax rate of 39%). If you transfer a patent of 200 USD to the Caiman islands, and from the Caiman islands you pay the 100 USD of royalty to the UK firm and then you get the patent, your after-tax cost will be only 22 USD.
To conclude, Mr Brei said that he believes that tax rates are actually too high, and if Europe would reduce tax rates to 15 or 20%, tax revenues would actually increase because firms would to then less tax base erosion, they would be more willing to show income. And so, although you reduce tax rates, you will create maybe more tax revenues at the end.
The meeting included a debate which focused mainly on tax harmonisation and tax havens.

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