Select Committee on European Scrutiny Fourteenth Report


TAX POLICY


(22808)

COM(01) 582


Commission Communication: Towards the Internal Market without Tax Obstacles.

Legal base:
Document originated:23 October 2001
Deposited in Parliament:31 October 2001
Department:HM Treasury
Basis of consideration:EM of 9 November 2001
Previous Committee Report:None; but see paragraph 9 below
Discussed in Council:9 November 2001
Committee's assessment:Politically important
Committee's decision:Not cleared; further information requested.


Background

  4.1  The Commission has argued for some years that more needs to be done in the area of tax co­ordination. For example, at the informal ECOFIN meeting at Verona in April 1996, the Commission identified three interlinked and mutually reinforcing challenges for the EU: the stabilisation of Member States' tax revenues; the smooth functioning of the Internal Market; and promoting employment. The Commission also proposed greater tax co-ordination in its Communication of October 1997. In October 2001 the previous Committee cleared the Commission Communication: Tax Policy in the European Union — Priorities for the years ahead.

  4.2  However, as the previous Committee noted, despite the Commission's interest in developing closer co-ordination of tax policy, there are very few specific examples of tax policy amongst the Member States being closely co-ordinated. One example is the tax package agreed at the Council meeting on 26­27 November 2000 which, amongst other things, sought to curb harmful tax competition through the Code of Conduct for business taxation and the proposals on the taxation of income from savings. We consider the Commission's proposal on the taxation of income from savings in paragraph 9 below.

The document

  4.3  This Communication proposes a strategy for reforming company taxation in the EU in order to remove tax obstacles to the internal market. The Commission considers that having 15 different tax systems causes the European business environment to be unnecessarily complex and cumbersome, especially in the areas of transfer pricing, cross-border loss relief and cross-border business integration.

  4.4  The analysis in the document builds on that provided in a 450 page Commission staff working paper, Company Taxation in the Internal Market.[20] The working paper examined whether the current application of company taxation created inefficiencies in the internal market and concluded:

"The assessment of tax obstacles in the Internal Market reveals that many of the factors causing compliance cost also tend to increase the administrative cost for tax administrations. This is particularly evident with a view to transfer pricing. Moreover, the co­existence of 15 company tax systems in one Internal Market opens considerable room for tax evasion and tax avoidance. Therefore, many remedial measures will also to some extent benefit the efficiency and effectiveness of tax administrations. Finally, almost all remedial measures, targeted or comprehensive, call for more mutual assistance and administrative co­operation between Member States which provides reliable means for ensuring that tax audits will continue to be made in an appropriate way and that none of the remedies under consideration results in illegitimate and/or illegal tax evasion.

"In short, the report concludes that there are potentially significant benefits to be derived from providing, via a genuinely comprehensive solution, companies with a common consolidated tax base for the EU­wide activities. However, its findings are based mainly on the current stage of development of the research and further work would be necessary to implement any of the comprehensive approaches. Any solution going in this direction must obviously also take into account the competition rules laid down in the EC Treaty, in particular those concerning State Aids. Moreover, as already noted, the results of the quantitative analysis suggests that that the overall national tax rate is an important factor in determining the effective tax rate, and it is clear that a single or common base without further adaptations in practice would almost 'mechanically' accentuate this."

  4.5  In the Commission's view, the objective is to provide EU businesses with a consolidated corporate tax base for their EU­wide activities. It is argued that a consolidated corporate tax base would contribute to greater efficiency, effectiveness, simplicity and transparency in company tax systems and would help fill the loopholes that allow "tax avoidance and abuse". In short, a more efficient internal market would be created by reducing internal tax obstacles.

  4.6  The document sets out the Commission's view of what needs to be done over the next few years. The Commission proposes a two-track strategy for:

  • immediate action on targeted measures; and

  • the launch of a wider debate on the future of company taxation in the Internal Market.

  4.7  The former track is a more limited or piecemeal approach involving measures targeted at removing specific tax obstacles. By contrast, the latter is a more comprehensive approach that seeks to overcome the tax obstacles at once. The measures proposed by the Commission are summarised in annex 1.[21]

  4.8  The document considers four technical possibilities for achieving a consolidated corporate tax base:

  • Home State taxation: where groups of companies would, if they wished, be able to compute the taxable profits for all their EU operations according to the tax code of their particular home State;

  • Common (Consolidated) Base Taxation: where groups of companies would, if they wished, be able to compute the taxable profits for all their EU operations according to new harmonised EU rules;

  • European Corporate Income Tax: where groups of companies would, if they wished, be able to compute the taxable profits according to EU rules, with some or all of the revenue going directly to the EU;

  • Harmonised Single Tax Base in the EU: where national systems would be replaced and groups of companies would compute their taxable profits according to a harmonised EU approach.

  4.9  According to the Commission, the four approaches differ in the degree of ambition they show towards harmonisation of the tax base in the EU, the level of change required for their implementation and the political circumstances of their possible introduction. The Communication states that there are advantages and disadvantages to each of the four approaches and recognises that further analysis is required. For example, it is necessary to develop appropriate ways of apportioning revenue between Member States and for Member States to determine the applicable national corporate tax rates. The Commission acknowledges that it is not currently possible to implement a particular solution. As part of its debate on the subject, the Commission proposes to organise a European Company Tax Conference in the first half of 2002.

  4.10  An important feature is the optional or compulsory nature of the different approaches. The document states:

"By contrast with a compulsory harmonised base, Home State Taxation, Common (Consolidated) Base Taxation and European Corporate Income Tax operate alongside and do not fully replace existing national systems. In certain circumstances however this can have the disadvantage that competing enterprises in other Member States are subject to different taxation rules. For example, under Home State Taxation three competing retail shops in Germany would compute their tax base under Belgian, French or German rules according to whether the home state of the group to which they belonged was Belgium, France or Germany. However, the differences may be relatively small given that an underlying assumption of the Home State Taxation model is that participating States will have similar tax bases. Under Common (Consolidated) Base Taxation or European Corporate Income Tax competing businesses may be subject to either local or Common (Consolidated) Base Taxation/European Corporate Income Tax rules, which may be quite different. It may however be possible to permit local companies to opt into the scheme, for example, where there are competition issues.

"In addition the solutions based on a parallel rather than a single compulsory system raise a number of technical issues requiring further study. Among the main issues are those relating to restructuring, foreign income and double taxation treaties, and minority interests."

  4.11  All the approaches, except the Harmonised Single Tax Base in the EU, could allow optional schemes to run alongside national systems. It is important to emphasise that the Commission's proposals relate to rules on defining a corporate tax base and not rates of corporate tax. The position would be similar to that for VAT where there is a harmonised tax base, while Member States are free, within limits, to set rates. The document states:

"Under all approaches Member States would retain the right to set company tax rates which the quantitative analysis found was the most important factor in determining the effective tax rate. This essential sphere of national competence in the area of company taxation would — intentionally — remain untouched and Member States would be left with the autonomy to adjust the most important element for tax revenues. The introduction of a single or common tax base could lead to some Member States adapting their tax rates to reflect changes in the tax base, but this would be for each Member State to decide."

  4.12  There is some support for the Commission approach among some groups of industrialists.[22]

The Government's view

  4.13  In her Explanatory Memorandum of 9 November 2001, the Minister says:

"The Government will consider in detail any proposals which emerge from the broad debate. The Government will not support any action at the European level that will threaten jobs or the competitive position of British business. Some of the short-term proposals to remove obstacles to the Single Market are in line with the Government's approach. Namely: a more even application of existing Community legislation; and updating and improving existing company directives.

"However, the Government view is that the short-term proposals should be assessed pragmatically on their own merits: that it is important Member States do not introduce extra layers of bureaucracy in the process of looking at technical measures. Moreover, expertise on many of these issues goes wider than the EU and they should be more appropriately considered in wider fora."

  4.14  Disappointingly, the Explanatory Memorandum does not explicitly set out the Government's position on the Commission's stated objective to establish a consolidated corporate tax base. However, in response to a series of written questions[23] on the document, the Minister has said:

"The Government's position is that tax harmonisation, including proposals for a consolidated company tax base, is not the way forward for Europe."

"The Government's view is that fair tax competition not tax harmonisation is the way forward for Europe. The Government are committed to ensuring that the UK remains an attractive location for business, with strong international links and high levels of both inward and outward investment."

Conclusion

  4.15  The document itself does not contain any legislative proposals. However, it clearly sets out the Commission's objective to establish a European consolidated corporate tax base whereby companies with cross­border activities within the EU will be able to compute the profits of the whole group on a consolidated basis according to one set of rules. The objective is seen by the Commission as a way of overcoming tax obstacles to the internal market.

  4.16  We note the Government's position that it will scrutinise closely any specific policy proposals and that tax remains subject to unanimity. However, we were disappointed that the Minister did not specifically address the Commission's stated objective of creating a consolidated corporate tax base, nor the different approaches in achieving this as set out in the document. The Commission is launching a debate on the subject of company taxation. For our part, we have decided to request further information from the Minister about the Commission's proposal for establishing a consolidated tax base and the relative merits of the different approaches outlined by the Commission, especially their optional and compulsory nature and the effect on the Government's freedom to determine its own tax rates.

  4.17  Meanwhile, we do not clear the document.

ANNEX 1

Extract from the Commission Communication summarising the measures proposed by the Commission

The Commission will:

—  provide guidance on and co-ordinate, via appropriate Communications from the Commission, the implementation of jurisprudence by the European Court of Justice;

—  step up its efforts of monitoring the implementation of EU tax law by Member States and work together with Member States towards common guidance notes in this field;

—  amend its existing proposals for extension of the Merger Directive and the Parent Subsidiary­Directive with a view to broadening the scope and the coverage of both individual taxes and types of transactions;

—  withdraw its old proposal for a directive concerning cross­border loss-offset with a view to its replacement after technical discussions with Member States and other stakeholders;

—  present a proposal for a Directive with a view to renewing and improving the Arbitration Convention;

—  establish an 'EU Joint Forum on Transfer Pricing';

—  prepare for a Communication on the issue of double taxation conventions of Member States with a view to the eventual conclusion of either a multilateral convention or an agreed EU model;

—  insist that the current body of EU company tax law will be fully applicable to companies formed under the European Company Statute as from 2004. At the same time, it will — in parallel to the other work in this area — explore the particular potential of a comprehensive company tax regime and of a consolidated corporate tax base for the EU-wide activities of companies to be applied to SEs.

—  launch a broad debate on the future of company taxation in the Internal Market and the need for fundamental reform to achieve the EU objectives of becoming the most competitive and dynamic knowledge­based economy in the world as agreed at the Lisbon European Council June 1999. In this context, the Commission will undertake to organise a European Company Tax Conference in conjunction with the Presidency for high level government representatives from EU Member States and candidate countries, business leaders, economic operators, senior tax professionals, the social partners and academics on the future of company taxation in the Internal Market. The objectives will be:

—  to provide a forum for the presentation of the various comprehensive approaches

—  to foster discussion between the parties involved

—  to assist the Commission in determining the best way forward with the project.

After the conference and the following broader debate in the EU the Commission intends to report on its subsequent policy conclusions by 2003.


20  An executive summary of the working paper is annexed to the document. Back

21  Taken from page 21 of the document. Back

22  For example, the European Round Table of Industrialists (ERT). See Statement on the Commission's Strategy for Company Taxation in the EU, 27 November 2001. Back

23  HC Deb 1 November 2001, cc. 798-9. Back


 
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