| Debate on tax harmonisation is missing the point |
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| Debate on the controversial topic of tax harmonisation has missed some key points, according to Mike Hayes and Antra Bhargava, who argue that not only are there many factors to consider when assessing relative tax burdens, but that the newly enlarged EU is most certainly not ready for harmonisation of corporate tax. |
EU Tax Harmonisation – Through the Looking Glass
‘The time has come, the Walrus said, To talk of many things:
Of shoes - and ships - and sealing wax - of cabbages - and kings; And why the sea is boiling hot; And whether pigs have wings.’ - Lewis Carroll
 | | Antra Bhargava - KPMG |
The debate on tax harmonisation within the European Union has lately received renewed attention following the publication of a survey by the European Commission on the tax issues facing companies from member states. Some of the main conclusions of this survey were: that companies whose activities transcended the borders of one member state faced higher tax costs; that tax was a factor in determining corporate structures and investment location; and that transfer pricing rules were regarded as an obstacle by most companies. These results are at best self-evident - and in our view do not nessessarily lead one to the conclusion that tax harmonisation is imminent or even that it is a desired result. At the risk of repeating the oft-voiced concerns on the potential implications for Ireland of EU tax harmonisation, it is important to note that this is an issue that is close to our hearts, and more importantly, close to our financial well-being! Besides, the likelihood of such harmony ever being achieved is remote if one looks at the eight year delay, thus far, in the implementation of the savings tax directive.
 | | Mike Hayes - KPMG |
The intensity of the EU tax harmonisation debate is evident from the radically opposed views that greeted the publication of this survey. On one hand, the Franco-German group regarded this survey as proof of the obvious need for harmonisation, while on the other, newcomers like Estonia, stated that any ‘candy’ seeking to detract from the sovereignty over their taxes would be refused. It is ironic that the entire debate on EU tax lacks the one characteristic it seeks to discuss, namely – harmonisation! It centres on a fundamentally flawed premise and assumes that the two sides are singing off the same hymn sheet. Some proponents of a single European corporate tax are advocating the application of similar computational rules across the continent; while the opponents are generally against a standard tax rate across the EU. As the Ruding Report rightly identified, tax can be many different things - a rate, a base and a system and real tax harmonisation involves the development and acceptance of a unified code for all three aspects.
In the context of this debate, one should note that corporate taxation is a different breed of animal from VAT. The latter has its origins solely within the EU legislative structures and therefore, any talk of harmonising VAT rules and rates should be viewed as quite distinct from the discussions on corporate tax. This survey concludes that there are a number of complications relating to VAT procedures within the EU especially in relation to obtaining refunds. This indicates that it would be expedient to attune administrative procedures, such as VAT forms within the EU and also to improve communication between tax authorities in the member states. Notwithstanding these challenges, VAT harmonisation is achievable and remains a realistic possibility by 2010. However harmonising corporate tax, with its historic multifaceted sources, is an entirely different proposition and one, we believe, that is many years away from a successful realisation.
Before we analyse the particular difficulties which lie ahead for corporate tax harmonisation it should be noted that there have been a number of significant developments in recent years which have helped push the corporate tax environment towards harmonisation. These include the following:
- The adoption of International Financial Reporting Standards or IFRSs. The standardisation of the basis of financial statements should reduce the complications with cross-border tax analysis as tax rules generally follow or derive from the generally accepted accounting treatment (see the new Finance Bill for evidence of this)
- EU tax directives such as the Parent Subsidiary Directive, the Savings Directive and the Merger Directive, all of which have helped codify some common practice in EU member states
- The continuing jurisprudence on anti-discrimination which has almost invariably favoured the taxpayer.
These cases have enabled companies to operate beyond the confines of domestic tax law through reliance on various anti-discrimination provisions contained in tax treaties and in the Treaty of Rome – including the Marks & Spencer case on loss utilisation which will have very significant implications for Revenue authorities in the EU once the decision is handed down. The obvious response from Revenue authorities to this unhelpful trend (from their perspective) is harmonisation
Despite these developments, our view is that corporate tax harmonisation faces some significant obstacles which we have analysed below.
Firstly, this is a particularly sensitive time for the EU as a result of rapid changes in its composition with the introduction of ten new members, whose concerns were not reflected in the recently published survey. Most of these states have already expressed their reluctance to harmonise corporate taxes, seeing it as a ‘step too far’ and at this stage, definitely too soon. It will take a few years before these states are comfortable within the existing EU regulatory framework. Economies are to an extent moulded and shaped by tax policy and it is one of the most effective ways in which states can effectively control and manipulate the entities within it.
This is especially important since regulation of economies through currency and inflation tools have already been handed over to the EU. The new member states are unlilkely to relinquish control of such a tool at this stage of their economic development, particularly when they see the ecomomic advantages which have accrued to Ireland from the use of competitive tax policies. Also, even in such a harmonised tax environment as the US, individual states still compete with each other using tax as a tool for attracting investment.
Although Ireland’s 12.5 per cent corporation tax rate is a sore point for many countries on the continent, it is indisputable that this competitive rate is one of the main attractions for foreign investment into the country. Other well-recognised attractions are our well educated, English-speaking populace and the stable democratic economy that we operate in. Ireland also has a number of competitive disadvantages, like high labour costs, that result in our poor ability to attract manufacturing type industries and in fact outsourcing of the same is a major local concern.
In order to balance the scales we require an edge in other areas such as financial services, which we have achieved with considerable success in the IFSC. Introducing tax harmonisation in the absence of dealing with the other competitive disadvantages inherent in the economies of Ireland and certain other member states will be a hard sell for the EU. This is particularly true if it is to avoid the charge of larger states imposing undue influence on smaller states.
Secondly, as we indicated earlier, tax rate harmonisation is but one of three fundamental elements of harmonisation. Any real comparison between member states should require close examination of factors beyond the headline tax rate such as supplementary corporate taxes (Irish employers’ PRSI being a good example), specific reliefs and favourable computational rules. This would give an entirely different picture to one based solely on comparison of rates. Indeed, some of Irelands principal competitors within the EU have very effectively combined a high headline rate with some very generous provisioning rules resulting in a low effective rate. This issue only demonstrates the difficulties which lie ahead if the EU decides to move the harmonisation debate forward. Equally, we could examine different attitudes to enforcement, evasion etc. but the point is hopefully obvious to the reader.
Thirdly, internal tax competitiveness means that EU companies have the ability to make comparative decisions. This supports the EU goal of creating free movement of persons, goods and capital between the member states. Internal competition also increases our external competitiveness, ensuring that the EU remains an attractive place to invest for global companies and that they do not need to look to non-EU states for better deals. This contradicts the prediction made by certain European Commissioners, who having looked into their crystal balls, stated that a consolidated corporate tax base would render the EU the world’s most competitive and dynamic knowledge-based economy by 2010. Suffice to say that, adverse effects on external competitiveness aside, in the current environment where it takes many years for a tax measure to get EU approval, this time frame is is in the realm of fantasy.
In conclusion, therefore, we believe that the role of the EU should be focused on improved communication between the Revenue authorities of member states and in those commercial areas where harmony exists on paper. Therefore, all talk of creating a single corporate tax across the EU, or a consolidated tax base and ‘whether pigs have wings’ should be indefinitely postponed till the Walrus says that ‘the time has come’. |
Mike Hayes is a tax partner with KPMG and Antra Bhargava is a tax senior with KPMG.
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| Article appeared in the March 2005 issue.
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