Commission Communication: Towards the Internal Market without Tax Obstacles.
|Document originated:||23 October 2001
|Deposited in Parliament:||31 October 2001
|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.
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.
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.
The working paper examined whether the current application of
company taxation created inefficiencies in the internal market
"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.
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
- 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
- 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.
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
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."
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
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.
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
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
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
from page 21 of the document. Back
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
Deb 1 November 2001, cc. 798-9. Back