So, persuade me...

Jun 01, 2018
When it comes to EU tax reform, many see the constant need for persuasion as a problem – but it may well be a blessing.

A few weeks ago, a retiring senior executive of a very well-known US high-tech multinational issued a press release saying how much he was looking forward to his retirement. He can now focus on his interests, such as his collection of air cooled Porsches. With headlines like these, is it any wonder that the European reform agenda is driven not just by the great issues of the day – security, monetary policy and immigration – but also has a multinational tax component?

Change by persuasion

The EU has no competence in corporate taxation. Its tax acquis, as it is known, is in customs and VAT. Any other tax change must be by persuasion. The EU has changed quite a lot of tax rules by persuasion in recent years. The routine exchange of information between revenue authorities, best practices in relation to cross-border taxation and the degree of reporting by taxpayers in all EU member countries have largely come about by way of EU directive. It’s harder and more costly now for businesses to be fully tax compliant than it was a decade ago, which is a price the law-abiding are paying to help ensure that fewer slip out of the tax net. Indeed, most Chartered Accountants would agree that all forms of regulation, not just taxation, have become harsher and more intrusive.

‘Corporate taxation’ is largely a myth. When a company is taxed, ultimately it is people who lose out. Because of this, it is strange that the European emphasis on corporation tax reform doesn’t really involve examining how shareholders, employees, customers and suppliers pay taxes arising from their dealings with the company. The line of persuasion thus far has been on taxing the company as an entity in its own right. European tax reforms are about how assessable income is computed, and where it is taxed, without reference to the impact on individual stakeholders.

This disregard for individuals gives me cause for concern over the main tax debates facing Europe and corporation tax at the moment – the Common Consolidated Corporate Tax Base (CCCTB) and the Digital Tax. A Common Corporate Tax Base or CCTB could be a significant improvement to have the same set of rules in arriving at taxable profits applying to companies across Europe. I have some reservations about the apparent lack of grounding of the CCTB rules in existing accounting standards, but that’s a topic for debate rather than a disagreement on first principles.

However when the additional “C” is added to create a Common Consolidated Corporate Tax Base – consolidation meaning an additional set of rules on where the profits accruing to multinational groups are taxed – I begin to wonder. That makes the debate about where the tax is paid, not how much tax is paid.

Digital Taxation

The other big EU tax idea is Digital Taxation, the notion that high-tech firms should pay a levy on gross advertising revenues. A brand new levy to be applied equally across Europe by multiple revenue authorities? That’s just not practical. If Digital Taxation is supposed to be an interim short-term solution in advance of a broader set of corporation tax reforms, past experience suggests that by the time it’s fully implemented, that interim period will be long expired.

Many of the proponents of Europe-wide tax reform see the lack of EU acquis on tax issues and the constant need for persuasion as a problem. But the need for EU country unanimity on tax matters is a feature, not a bug, in the EU system. It’s impossible for the EU Commission to persuade people of the merits of any poor idea for too long. The requirement to persuade is the best filter for bad policies.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.