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Harmony once again Back  
The ‘tax harmonisation’ banner has been raised in the EU yet again. This time the focus is on aspects of tax other than the tax rate. The ultimate objective is to make harmonisation of tax rates inevitable.
The EU Commission is hosting a tax conference! Normally this is the role of Taxation Institutes and commercial publishing firms. The EU Commission’s entry into this marketplace, at its Company Tax Conference on 29 and 30 April in Brussels, is the latest move in the campaign to bring about ‘tax harmonisation’ within the EU. The conference is due to discuss a 463-page report produced for the EU Commission, and entitled ‘Company Taxation in the Internal Market’.
The driving force behind the campaign for tax harmonisation is the wish of high spending high taxing states such as Germany to prevent business moving out of those states into low tax states (but not necessarily low spending states!) such as Ireland. Harmonisation is a code word for eliminating low corporate tax rates. Those driving the harmonisation campaign do not envisage bringing harmonisation about by reducing the high rates down to the level of the lower rates such as Ireland’s 12.5%.
The obstacle to tax harmonisation to date has been the fact that it requires unanimity among the member states were it to be introduced. Ireland and the UK have both indicated that they would veto any such an attempt.

Clever, dangerous
Against the power of a double veto, a report and a conference might seem a weak reaction. In fact they are clever and dangerous. The focus in the report and in the conference is not on harmonising tax rates. Rather it is on the harmonisation of the tax computational rules in the member states, and in a sinister proposal that multinationals should be entitled to account for tax in one state only, all member states then sharing from the pool of taxes so collected.
The EU Commission’s conference is looking at these two proposals.
The proposal to harmonise the tax computational rules in the member states sounds sensible. The report bewails the burden placed on companies when they do business across borders, in that they may be obliged to prepare and submit tax returns in more than one state. To do this they may have to acquaint themselves with the tax rules in more than one state. This is seen as an additional and wasteful cost imposed on business and an obstacle to cross border business. The solution envisaged is that there would be a single EU-wide set of rules for computing taxable profits for companies. A computation done in one country would be valid for any other country but for one tiny detail. That tiny detail would of course be the tax rate applicable in each separate country.
If all else is harmonised and only tax rates differ, the pressure to harmonise tax rates could become irresistible. The issue would then be isolated and focused on. This is probably the true interest of those who are pushing the current campaign.

The arguments
It may seem unreasonable to question or reject the proposal for harmonising tax rules across the EU. But let us look at the arguments in its favour more closely. Where does the major cost burden imposed by taxation on companies lie?
Is it in the obligation to prepare a tax return once a year in each country in which it operates? Or is it in the obligation to prepare PAYE returns every month of the year in every country in which it has employees; to prepare VAT returns in every country in which it operates on a monthly or bi-monthly basis throughout the year; to calculate and collect social insurance payments in every country in which it has employees, and account for it on a monthly basis; and to operate the myriad of withholding taxes on payments that occur throughout the year, whether they be dividends, interest, royalties, annual payments, payments to sub-contractors, and capital gains tax withholding?
Of course the taxation system imposes costs and burdens on business. It is legitimate to seek to reduce those costs and burdens in order to bring about a more efficient economy and to eliminate waste. But there is something very peculiar about starting with corporation tax, which is probably the tax which imposes the least level of administrative cost on companies.
VAT after all is an EU harmonised tax part of which goes to finance the EU. It is far more burdensome on companies than is corporation tax, in terms of its compliance costs. An indication of this would be that the number of cases reaching the superior courts in the UK on value added tax matters are approximately double the number of cases arising on all other taxes taken together.
If the true concern is in reducing costs, would it not have been more natural for the EU to study its own VAT system?
Customs duties are entirely an EU tax. They are harmonised across the EU and the proceeds go to the EU. Yet they are a notoriously bureaucratic form of tax, plagued by obscure classification problems, temporary exemptions, short-term quotas, and presenting companies with significant risks where they deal with non-EU suppliers who falsify documentation. Surely it is a candidate for reform, long before corporation tax?
One of the least plausible statements in the EU Commission’s report on company taxation in the internal market is the statement that multinational companies are in favour of harmonisation of the tax base across the EU. Ask any multinational which has had the benefits of an interest double dip, or a capital allowance double dip if it in favour of harmonisation! Will we next hear from the EU agriculture commissioner that turkeys have reaffirmed their faith in Christmas?

More pools
The second proposal, to pool tax revenues and share them out according to a formula is possibly the most dangerous in the long term. This proposal would involve multinationals submitting a single tax computation, and single tax payment in one member state only. The tax rate to be applied would be a hybrid rate based on the corporation tax rates applicable in the states in which the multinational has some business connection. The tax receipt would be shared out amongst those states according to a formula which might be based on a variety of factors such as where sales occurred, where employees are based etc.
The proposal, were it adopted, would have serious implications for Ireland. While there are several differing tax rates applicable in various member states of the EU, a multinational operating in the EU will logically wish to maximise the profits attributable to the member state with the lowest tax rate. In the modern economy profits are generated by intellectual property and intangible assets more than by employees equipped with screwdrivers. It is notable that in the EU’s draft proposal the allocation of tax revenue would not take into account the location of intellectual property. It is predictable that the effect of the proposed pooling of tax revenues would be to divert those revenues largely to the larger (and as it happens higher taxing) member states.

The real objective
The EU Commission’s report ‘Company Taxation in the Internal Market’ states that it is tax rate differentials rather than any other aspect of a taxation system that is the primary taxation influence in determining where investments are made and where business is located. The report makes no bones about a wish to have taxation eliminated as an influence on business decisions.
All of the activity described above is aimed at that objective. It is important that it be seen in its true context and not swallowed piecemeal. It is not about reducing compliance costs or increasing business efficiency in the EU. It is about permitting Germany to maintain exorbitantly high taxation rates indefinitely.

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