Originally posted on Business Post 23 May 2021.
The Common Consolidated Corporate Tax Base is getting a new title— Befit. But a lack of real change suggests a naïveté and mission creep on the part of the European Commission
There can only be two motives for tax. The first and most obvious is fiscal, the second is purely political
The word “fair” was on almost every page of the short European Commission communication to its political masters last week. Modestly titled Business Taxation for the 21st Century, it sets out the Commission’s current policy on company tax issues.
Unlike regulations or directives, which have legal and binding effect, a communication ranks fairly low in the hierarchy of EU pronouncements. But it is rash to overlook them, because they often serve as harbingers of future mischief coming down the tracks from Brussels.
There can be really only two motives for having a tax policy. The first and most obvious is fiscal – the necessity to raise taxes to pay for government and its services.
The other motive is purely political. Such tax policies are intended to drive behaviours, or at least to signal official concerns at emerging behaviours in an economy.
Last week’s imposition of a 10 per cent stamp duty rate on houses purchased by investment funds is a good example. The new levy won't raise a lot of additional money for the exchequer. It is noticeable that the additional amount that might be collected has been largely absent in the debates.
The EU itself will have a pressing need for additional taxes in the coming years as the costs of the pandemic response programmes, funded by Brussels, come home to roost.
At the moment, EU costs are mainly met by direct national contributions along with elements of customs and Vat, but that is likely to change. While ideas on how to do this are touched upon in the document, EU funding is not its main focus. Rather, the emphasis is on ensuring that member countries play fair with their business taxes.
The political motive for raising taxes is sometimes used to cloak a more unpalatable fiscal motive. This is true of recent US tax announcements for their multinationals. It's appealing to American voters to promise to raise taxes to ensure companies pay a fair share, but the real drivers are the multitrillion-dollar investment and recovery programmes planned by the Biden administration.
It's hard to know if the Commission document is genuinely about using taxation as a lever for economic reform, or merely about taking in more money. The question might be easier to answer if there was any new thinking evident in the Commission’s proposals. In fact there is not.
It notes that it is following the OECD agenda on corporate tax reform, but that has long been the case. The ideas for a revised approach to calculating corporate profitability across the 27 member countries are not original either. A project to do that called the Common Consolidated Corporate Tax Base has existed for more than 20 years. Now it will have a catchier title – Befit (Business in Europe: Framework for Income Taxation). A name-change doesn't necessarily make something work better, however.
This name-change is illustrative of a curious air of naïveté about the whole process. The Commission’s thinking feels like a textbook economic exercise which doesn't recognise either commercial realities or the different needs of its member countries.
It may well have a point when it says it wants to migrate the corporate tax system to favour equity funding rather than loan funding, but it is the market that has prioritised loan funding over equity funding, not the tax system.
The emphasis on formulaic approaches to calculating the distribution of corporate profits across the single market is not realistic, given the disparity of economic requirements across the European Union.
For instance, the economy of Malta is radically different to the economy of Germany. How can a single apportionment formula work across such differences and offer a fair result? As the Commission points out, such apportionment methods are used in the US to help determine taxability between states, but the US is a country. It is not an economic bloc.
When it comes to taxation policy, the Commission appears to be looking in the wrong direction and succumbing to mission creep. It should be focusing on what it can control rather than what it clearly wants to control.
Both customs policy and Vat policy are entirely within the control of the EU institutions. Europe's external trade policy is controlled by customs and Vat. Trade policy is at least as important as an internal policy on company taxation, yet external trade does not feature in a communication purportedly about business taxation for the 21st century. Maybe external trade does not fit in with the Commission's vision of what needs to be fair.
The communication bemoans that only 7 per cent of taxes collected in the EU come through corporation tax. It’s a complaint that rings hollow for a country like ours, where the corporation tax contribution to the total tax take is closer to 20 per cent, with a tax regime that underpins our employment and industrial strategy. Maybe this too is unfair in the Commission’s eyes?
Beware of anyone who promotes fair taxation. Ultimately, it might be you they are after.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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