An effective corporate tax system for the EU – Paul Sweeney
Tax wars have so far deprived the EU of the unanimity needed to stop the race to the bottom on corporation tax.
The European social contract is broken. The largest corporations no longer contribute adequately to the provision of the public services and infrastructure they use. If the European project and the single market are to survive and prosper, there must be an effective European tax system. The low amounts of tax paid by some of the most profitable companies in the world are undermining citizens’ trust in government, politicians and Europe.
The good news is that politicians are aware of these facts and are doing their best to build a working tax system. Their best is still not good enough, however.
The European Union has made workable tax reform proposals, and the Organization for Economic Co-operation and Development has crafted corporate tax reforms for the world, through its “base erosion” process. taxation and profit shifting. Both are making progress, but it’s far too slow in terms of agreement between states. Europe needs fair corporate taxation now, when revenues are so urgent.
Corporate tax reform will not be easy, as several challenges can be identified. But only two concern the design of the reforms: defining the basis on which to tax companies and dealing with the transfer of profits by multinationals (MNEs), particularly on intangible assets. The others boil down to obtaining a political agreement.
Taxation is a competence of the Member States and unanimity is currently required for EU action. Yet a deal is unlikely between the 27 member states as a few, like Ireland, favor ‘tax competition’ – in reality, taxation wars— between democratic states to attract investment.
These tax wars have driven average nominal corporate tax rates down from 35 percent in 1995 to less than 20 percent today, and they continue to fall. More important again, effective tax rates are close to zero for some large multinationals.
Europe is used to defending secrecy and “commercial confidentiality” for corporations, the rich, despots, criminals and money launderers. The EU has also been the scene of wars over other taxes – states cutting income taxes, social charges and/or capital gains taxes – which are not even discussed, although that all taxes are interdependent.
The basis on which corporation tax is calculated – what is taxed and what is deductible – would be disputed in any state, but especially in a union. The solution will be iterative after debate, but some issues need to be resolved. What is deemed tax deductible used to be fairly straightforward but state tax wars, competing for foreign investment, have led to a surge in tax breaks (on research, patents, etc.) which has undermined the ‘plate.
Multinationals trade internally without market prices and can legitimately assign prices. In a globalized economy, this allows profits to be shifted to low-tax or no-tax states, especially for service and digital businesses. It is difficult to control, but cooperation between Member States in the single market could contain it.
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It is not the tax rate that is in question but the tax actually paid. The EU should move from seeking ‘harmonised’ tax rates to coordinated rates within bands, say between 15 and 25%. This would allow peripheral and poorer countries to set lower nominal rates if they so wished. What is needed is closing the gaps between nominal and effective rates and eliminating tax breaks.
A single market will not work effectively if any of the 27 states can hold a veto over corporate tax reform. The solution is a kind of majority or agreement between the aberrant countries: Ireland, the Netherlands and Luxembourg.
The basis, deductions, rates, intangible assets, etc. may be agreed by the experts, provided that they are authorized by the political leaders of the Member States. Progress on taxation at the G20 in November should prompt the EU to act.
Accounting is important to help businesses thrive. But by cutting tax revenue for vital public services, aggressive tax avoidance has turned ‘tax professionals’ – among Europe’s highest paid individuals, paid by the recipients of low or no taxes – into tax evaders. value, subtracting from welfare rather than adding to it.
Yet they shape the tax debate in many states, excessively influencing policy at many levels with their expert knowledge, enveloping policy makers in complexity. The Big Four accounting firms and major law firms also have their professional bodies and tax institutes to influence opinion, not only through the media and academia, but also to senior officials in government finance departments.
The anti-tax lobby has, however, been too demanding, with corporate taxation reduced to almost zero. It sparked a fierce public reaction that changed the debate, finally inspiring action.
However, the EU is not moving fast enough or efficiently enough in terms of opening and publishing country-by-country accounts. The underground economy represents nearly 20% of European gross domestic product.
Europe should set up a well-funded EU tax agency, “Eurotax”, with broad powers to investigate tax evasion and evasion by wealthy individuals, businesses and criminals. Eurotax would implement tax policy, including the coordination of tax assessments and collection. With a single market, the EU needs a single tax body to oversee taxation in this globalized world.
The agency would be made up of experts seconded from each Member State, in order to maximize expertise, coordination and cooperation. Eurotax could help tax authorities in failing member states, showing them the latest taxation and collection methodologies, ensuring that there are no weak links within the union.
The EU must respond to the need for the 27 States to work together on all taxes over time to end tax wars. The process, as difficult as it is, is essentially political and must be completed within two to three years.
This is part of a series on corporate taxation in the age of globalization supported by the Hans Böckler Foundation