TAX COMPETITION AND TAX PLANNING IN THE EUROPEAN UNION February 20, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School,

TAX COMPETITION AND TAX PLANNING

IN THE EUROPEAN UNION

February 20, 2004Module 3: European Tax Law

M.Sc. European Business LawEDHEC Business School, Nice

© A. Pediaditaki, EDHEC, 20.2.2004 2

International tax issues in a changing world

Several factors change the conditions of tax collection: • accelerating economic globalization • changing international economic conditions: deregulation

of monetary systems and financial flows• fast development of electronic communication and trade -

electronic commerce• explosive growth of financial cross-border investments• production factors are internationally mobile• know-how and other intangibles are almost as mobile as

capital• reliance on fixed assets for production: successively

reduced


Results

• international mobility of tax bases - national borders become less important

• structure of tax systems is no longer adapted to new developments (in terms of revenue, fairness and income distribution)

• need for international cooperation


Developments in corporate tax area

• New corporate tax structures

• tax rates have been considerably reduced

• tax bases have been broadened

Common features:

• controlled foreign corporation (CFC) legislation

• detailed transfer pricing rules

• special holding schemes

• tax free zones ….


Concept of « tax competition »

Voting with the feet:

« ...people do no longer influence the behaviour of

governments only by casting their vote in general

elections but by moving themselves or at least their

tax base to other jurisdictions… »

(C. Tiebout, 1956)

• Extension of the idea of a « market » (production and sale of private goods and services) ? Do the governments have to consider a « cost-benefit ratio » when they offer public goods to the inhabitants of their country?

• Democratic problem: massive influence on the fiscal policies of a state by foreign investors who do not belong to the constituency of a country (public choice theory)


TAX COMPETITION - WORLDWIDE LEVEL

The basic concept of tax competition:= the lowering of the tax burden in order to improve a country’s economy and welfare by increasing the competitiveness of domestic business and/ or attracting foreign investment. 2 ASPECTS: OBJECTIVE + SUBJECTIVEa) objective aspect: the alleviation of the direct tax burden imposed in a certain country on all or specific categories of taxpayers through a number of incentives. b) subjective aspect: it concerns the goal pursued by the country which lowers the tax burden (« good » and « bad » competition)


TAX COMPETITION: Fair vs. Harmful competition

The distinction depends on whether the alleviation of the tax burden is intended to :a) boost a country ’s economy and to benefit all taxpayers: « fair ( or desirable) competition» orb) it is mainly directed at attracting foreign business or capital at the expense of other (probably neighbouring) countries: « bad ( or harmful) competition »


Fair tax competition

Concernes the general aspects of the tax system, e.g. a general reduction of tax rates along with a broadening of tax base.

>> effects on a great number of taxpayers

>> includes all kinds of economic activities.

These measures are part of the budgetary policy of the

government - exercice of fiscal discipline.


Harmful tax competition

According to the OECD report, specific tax practices are considered harmful « as they do not reflect different judgments about the appropriate level of taxes and public outlays or the appropriate mix of taxes in a particular economy, which are aspects of every country ’s sovereignty in fiscal matters, but are, in effect, tailored to attract investment or savings originating elsewhere or to facilitate the avoidance of other countries’ taxes ».


Attention!

We should avoid confusion between: • PREFERENTIAL TAX PRACTICES they

confer legal (but economically problematic) incentives for cross-border investment

• TAX EVASION STRUCTURES e.g. non-declaration of income (they become easier by missing exchange of information)


Potential harmful elements of a tax system

Examples:• no or low effective tax rates• « ring-fencing », i.e. specific tax incentives for foreign

taxpayers• lack of transparency• lack of effective exchange of information• failure to adhere to generally accepted transfer pricing

rules• negotiable tax rate or tax base• secrecy provisions• active promotion of tax schemes


BASIC DISTINCTIONS1) Tax competition vs. Non-tax competition

among countries

a) Tax competition encompasses every measure implemented through the fiscal system and affecting the tax burden imposed on taxpayers.b) Non-tax competition concerns measures other than taxes that have a similar objective of improving the competitiveness of a country ’s domestic business or of attracting foreign investment. E.g. policies and measures concerning the setting or interest and exchange rates or the direct concession of grants, preferential loans etc...


BASIC DISTINCTIONS2) Fiscal incentives vs. Financial incentives

a) Fiscal incentives are granted by a country through the tax system and are targeted at specific economic goals« tax expenditures »b) Financial incentives: direct grants, loans etc. (see eg. previous slide)The first ones are mostly hidden in the tax system and are non-transparent since usually they are not quantified in money terms and are not disclosed to the public. The second one are more transparent: quantified or easily quantifiable before-hand, mostly subject to parliamentary control and inserted in the annual budgetary law.


BASIC DISTINCTIONS3) Vertical vs. Horizontal Tax Competition

a) Vertical or Inter-governmental tax competition: occurs between governments or bodies provided with different degree of authonomy and power

E.g. USA: between federal level and state level

b) Horizontal or Inter-jurisdictional tax competition:

occurs between sovereign countries, or between governments or bodies having having the same or comparable powers at international level or within the same jurisdiction.

E.g. USA: tax competition between states.


TAX INCENTIVES : Forms and features

Tax competition occurs through an array of different tax incentives relating to:- taxable base- tax rate - final tax due Categories: a) general vs. specific e.g. reduced tax burden for R&D investments b) part of the general tax system (introduction into the statutory tax law) vs. specific deviation e.g. accelerated depreciation for certain enterprises


BASIC DISTINCTIONS4) Inbound vs. Outbound tax competition

The distinction is made between tax measures targeteda) at domestic business: « out-bound » or b) at foreign investors: « in-bound »


Comparison EU- USADIFFERENCES:The economic integration of Europe is not as advanced as inthe USA USA: full integration of the labour market and thefinancial market with high mobility for all production factors. EU: distinction between:• a highly integrated financial market;• a pretty advanced market for goods and services • a labour market which faces many non-legal impediments

(cultural background, different languages…)SIMILARITY: USA: regulation of companies is conductedat state level, so that each state has its own company law /Similarly, in the EU, the power to regulate company mattersis vested in MS.


Delaware effect

Refers to an undesirable situation, whereby throughout the

20th century US company law has been progressively

deregulated in an attempt by the states to attract companies to

their own jurisdictions. The state of Delaware, despite its

small size, must be considered the winner of this competition,

because the vast majority of US companies have been

incorporated in Delaware >> Approximately 50% of the companies

listed on the NY Stock Exchange are incorporated in Delaware, and so are

approximately 60% of the companies that make up the Fortune 500].

[http://www.state.de.us/corp/default.shtml]


Why do the states compete?

The incentive for a state to try to attract companies to its jurisdiction if primarily fiscal, because US companies pay a franchise tax to the state of incorporation >> considerable source of revenue

E.g. In 1998, franchise revenue in Delaware amounted to $400 millions, corresponding to almost 20% Delaware ’s total receipts.

To attract the largest number of companies, the states repeatedly amended their company laws with a view to making the law as attractive as possible to a company considering re-incorporation...


Consequences of forum shopping

• FORUM SHOPPING by companies:

The disagreement centres on whether the fact that the individual states periodically adapt their laws to the needs of the companies results in legislation enabling companies to optimise shareholder benefit from the competition, or whether the result is legislation that favours company management over shareholders, so that the competition benefits directors So, does competition lead to « a race to the bottom » or a « race to the top »?


a) Race to the bottom

• Competition will result in company legislation benefiting the interests benefiting the interests of company decision-makers (directors) instead of the interest of shareholders . This will lead to the erosion of state company laws.

• Thus, a competitive system involves the risk that company legislation allows the directors of a company to act opportunistically, because the deregulation leads to the erosion of the duties, that the directors owe to the shareholders.

(Federalist school)


b) Race to the top

• It is true that competition will lead to more lenient company laws. But, the result is a legislation which is more advantageous to shareholders, because the company directors will choose to re-incorporate in a state whose company law will maximise values for both shareholders and directors.

• State compete to offer optimal, value maximising legislation.


The efforts of OECD and EU to counter harmful tax competition

Set up of rules for distinction between fair and harmful

competition but different goals and approaches of the 2

organizations:

• OECD: non-legally binding rules:

a) « Harmful tax competition -An emerging global issue » (1998)

b) « Towards global tax cooperation » (2000)

• EU: combination of legally binding (: state aid) rules and non-legally binding rules (: Code of conduct)


The OECD efforts

• May 1996: Project of the OECD which was meant to « develop measures to counter the distorting effect of harmful tax competition on investment and financing decisions and the consequences for national tax bases ».

• Three reports were produced (1998, 2000, 2001) - the focus of the OECD changes over time.


The 1998 Report « Harmful tax competition:

an emerging global issue » • The Report was adopted by the OECD Member countries with the

abstention of Luxembourg and Switzerland the mere abstention of the two countries, rather than a formal veto meant that the adoption of the Report at OECD level would still be valid, the only effect being that these two countries would not be bound by the Report.

• Lack of definition of « harmful » tax competition as opposed to « acceptable ». The harmful tax competition seems to be understood as « a country’s exploitation of the interaction of the tax systems by the enactment of special tax provisions which principally erode the tax base of other countries ».

• The scope of the Report covers only « geographically mobile activities, such as financial and other service activities, including the provision of intangibles » .


The definition & identification of tax havens • The concept of « tax haven » is not defined because « it does not have

a precise technical meaning ». However, the Report refers to « countries that are able to finance their public services with no or only nominal income taxes and that offer themselves as places to be used by non-residents to escape tax in their country of residence and that raise significant revenues from their income tax but whose tax system has features constituting harmful tax competition » tax havens are perceived as being actively engaged in the erosion of other countries ’ taxable bases and unwilling to be involved in the process of combating harmful tax competition

• The Report lays down criteria in order to identify tax havens:- no or only nominal taxes- no substantial activity- lack of effective exchange of information-lack of transparency due to favourable administrative practices - regimes providing for an artificial definition of the tax base- failure to comply with internationally accepted transfer pricing rules- adoption of the full exemption method for relieving international double taxation on foreign-source income.


Countermeasures recommended

The Report sets out a total of 19 NON-LEGALLY BINDING RECOMMENDATIONS broken down into 3 categories dealing with:

- domestic laws of the Member States

- tax treaties

- international co-operation objective: adoption of comprehensive coordinated strategy under the auspices of the OECD - creation and establishment of a « Forum on harmful tax practices », with the task of supervision on the implementation of the standstill and rollback provisions envisaged in the Recommendations (see especially No 15-16). The Forum was supposed to issue a list of « tax havens » by the end of 2000, engage in dialogue with these countries and continue the study and discussion on other matters relating to hamrful tax competition.


The 2000 Report: «Towards global tax competition - Progress in identifying and eliminating

harmful tax practices » In fulfilment of the 1998 Report, the OECD came up with a secondreport, which again was approved with abstentions by Switzerland and Luxembourg.This Report: a) blacklisted 35 jurisdictions meeting the criteria of the 1998 Report which failed to make a commitment to comply with its principles and b) invited all these jurisdictions to make a « public political commitment » to this effect before July 2000 in order to avoid being included in a final « list of uncooperative tax havens » to be drawn up at that date. The Report stressed the need for an increased dialogue and involvement in the project of cooperative tax havens participation to the Forum November 2000: Memorandum of Understanding sets out the details of public commitment.


Reactions to the 2000 Report and follow-up

Spate of criticism from representatives of targeted jurisdictions and of OECD Member countries: e.g.

• unjustified intrusion of the OECD in the internal affairs of sovereign countries? / principles of international law?

• Matter of transparency and exchange of information?

• Sanctions recommended?

Most of these criticisms have pushed the OECD to rethink its approach after the release of the 2000 Report and the Memorandum of Understanding.


The 2001 Progress Report: a milder approach

The 2001 Report outlines the progress made since the 2000 Report. Basic focus: the work related to tax havens, in particulart those listed in the 2000 Report. Of the 35 jurisdictions, only 12 had made the political commitment. As a result of the changed approach of the OECD to engage in discussions and negotiations with each tax haven, the 2001 Report contains important changes aimed at encouraging the remaining blacklisted jurisdictions to make the public commitment. The changes have to do with:-the timing of the commitment (= extension of deadlines set in the 2000 Report)- the release of the final list of uncooperative jurisdictions - the criteria used to single out tax havens (= the ‘no substantial activity ’ criterion is dropped)The OECD confirms that it will help committed jurisdictions to deal with the potential negative economic consequences of the changes in their tax systems as a consequence of the commitment. For this purpose, cooperation with the International Monetary Fund and the World Bank


EUROPEAN COMMUNITY LEVEL

Different terms - Different situations & results:

• TAX HARMONISATION• TAX COORDINATION• TAX APPROXIMATION• TAX UNIFORMITY• TAX COMPETITION



Tax uniformity: In some cases, the EC law goes beyond fiscal harmonization and imposes uniformity in tax matters: according to art. 26 of the EC Treaty, Common Customs Tariff duties shall be fixed by the Council acting by a qualified majority on a proposal from the Commission.To rationalize and simplify the custom system, the Commission drew up Regulation (EC) 993/2001 amending Regulation (EEC) 2454/93 laying down provisions for the implementation of Council Regulation (EEC) 2913/92 which established the Community Customs Code. Nevertheless, tax uniformity is based on special provisions of the Treaty, which may not be extended to other tax matters.


EUROPEAN COMMUNITY LEVELTax competition:

• To some extent, approximation of tax laws is being achieved through an alternative way to tax harmonization: the « tax competition » = free movement of capital encourage MS to reduce corporate tax rates and to adopt tax benefits for capital gains.

• We say that it is an alternative way (not an additional one) because tax competition implies giving up tax harmonization to a certain extent.: tax competition is a defensive (or selfish) reaction to the failure of tax harmonisation.

• It is generally acknowledged that this tendency has the advantage of being followed by market forces which overcome political obstacles. Therefore, non-harmful competition could contribute to the smooth functioning of the internal market.



Tax competition (continued)• However the term « competition » is misleading: such a

competition does not take place in a real free market, ruled by the law of demand and supply. It is only a play of political and economic interests, where the player with less real freedom (worker) is bound to lose and the owner of the capital is likely to win.


EU legal framework of harmful tax competition

Combination of instruments:

• I. The Code of Conduct non-legally binding rules

• II. EC state aid rules legally binding rules


I. The EU package to tackle harmful tax competition and the Code of Conduct

• Approval by the ECOFIN Council on 1/12/1997.

• Broad goal of the package is the need «to tackle harmful tax competition in order to help achieve certain objectives such as reducing the continuous distortions in the single market, preventing excessive losses of tax revenue or getting tax structures to develop in a more employment-friendly way ».

• The package is composed of three linked elements:

a) a Code of Conduct on business taxation

b) a set of guidelines in the area of taxation of savings

c) proposition for a Commission directive on cross-border interest and royalty payments between associated companies.


The legal nature of the Code of Conduct

Legal nature: it has been adopted by the Council of Ministers as a resolution (: a non-legally binding instrument): part of EC soft law.

The Member States stress in its Preamble that the Code of Conduct « is a political commitment and does not affect the MS’ rights and obligations or the respective spheres of competence of the MS and the Community resulting from the Treaty ». As a result, its rules may not be enforced before the ECJ by the EU institutions or the MS in case of failure of compliance with them.


The scope of the Code of Conduct

The Scope concerns corporate taxation as a whole, including activities performed within groups of companies, and does not include measures concerning individual taxation. The Code covers « potentially harmful tax measures » singled out by reference to elements:a) objective the Code catches tax measures which deviate from a MS ’s « benchmark » tax system (i.e. those providing for a significantly lower level of taxation, including zero taxation, than those levels which generally apply in the MS in question)b) subjective the Code catches tax measures which affect or may affect, in a significant way, the location of the business activity in the Community.



Conclusion:

• There is nothing wrong with having a competitive tax system. The problem starts with tax measures departing from the normal tax system, favouring certain activities.

• By and large , the scope of the Code seems broad enough to catch all MS’ special tax incentives directed at both direct investment and mobile investment.

• BUT problems of interpretation (locational decisions and motives to invest, « significantly lower level », « effective level of taxation » …)



The Code tries to overcome these interpretative shortcomings by listing a number of criteria:

• off-shore characteristics--> availability of a tax measure only to non-resident taxpayers or transactions concluded with non-resident taxpayers -

• ring-fencing: no repercussions of a tax measure on the domestic tax base of the country granting it due to its insulation from the domestic economy

• lack of substance--> availability of a tax measure to investors regardless of their having an actual economic presence or carrying on a real economic activity in the MS concerned

• availability of a tax measure relying on the computation of taxable income according to principles other than the internationally accepted ones (e.g. the OECD transfer pricing rules)

• lack of transparency of a tax measure: unpublished advance rulings, relaxation of legal provisions at administrative level, negotiability of tax burden etc.



The Code contains also other factors to be taken into account in the assessment of tha harmful nature of tax measures:a) their spillover effects, i.e. the impact they are likely to have on the economies of (neighbouring) MS, also taking into account how the activities are commonly taxed in the EU;b) the underlying policy objectives linked to the support of economic development pursued by a MS ’s tax measure, which should in any event be proportional and targeted - possible justification in the outermost regions and small islands, without undermining the integrity and coherence of the Community legal order.


The commitment of the Member States

With the Code, the MS committed themselves:• not to introduce any new tax measures which are harmful as

described (« standstill») and • to repeal existing tax measures which after review, are

labelled harmful (« rollback »)Primarolo Group: A group of high-level representatives of the MS was set up to gather information and to assess any national tax measures that might fall foul of the Code criteriaThis Group produced an interim report in December 1998 and a more definite report on 23/11/1999: elaboration and application of the Code criteria and blacklist of harmful national tax measures. Furthermore, the Report contained also many footnotes of individual MS disagreeing with the blacklisting of certain measures, and especially the manner of interpretation of the Primarolo Group.


The Report of the Primarolo Group

The Report distinguished six categories of harmful tax measures, relating to:a) financial services, financing activities within groups of companies, and royalty payments;b) insurance, reinsurance and captive insurance activities; c) transfer pricing for intragroup services;d) holding company regimes;e) exempt and offshore companies;f) miscellaneous measures, as tax-free zones.


Harmful measures identified

The Group investigated almost 200 national tax measures in force in MS and identified 66 of them as harmful, of which 40 were measures in force in MS, 23 in dependent or associated territories (e.g. Aruba, Jersey etc) and 3 in Gibraltar.For example, they included:- the Austrian, Danish, Luxembourg and Netherlands holding company regimes, - the Belgian, German, Luxembourg and Spanish coordination centre regimes,- the French headquarters and logistics centre regime- the Irish International Finance Service Centre regime and its 10% manufacturing rate- the Netherlands ruling practice.


The Agreements of the Ecofin Councils (2000,2003)

• On 27 November 2000, the Ecofin Council reached an « interim agreement » providing for conditional phasing out of certain measures. This agreement provides that tax schemes for the following activities must be considered harmful if the following circumstances occur:a) headquarters functions;b) finance branchesc) holding companies

• On 21 January 2003, the Ecofin Council granted an extension of the validity of the blacklisted regimes until the end of 2010, in conformity with the timing derogation provided for in the Code of Conduct package.


II. The State aid prohibition

Art. 87-88 EC: Treaty prohibits State aid to undertakings as such aid obviously distorts competition. Tax measures amounting to State aid are therefore also prohibited.Art. 88§3: MS may not introduce measures possibly constituting State aid without prior notification to the Commission.Art. 87§§2-3 + 88§§1-2: The Commission will not authorize any such measure if it is incompatible with the internal market. Art. 88 § 2: If the MS involved does not abide by a prohibition or if it has implemented a measure without prior notification, the Commission may take that MS to CourtThe finding of illegality of the national tax measure results in an obligation for the MS to recover, from the recipients, the aid illegally granted, irrespective of national time limits or other national legal impediments to recovery.


The 1998 Notice on fiscal state aid

As part of the « Package », the Commission was asked by the MS to be more effective and clear in the application of the Treaty State aid rules in the area of direct taxation as an additional tool to counter harmful tax competition in the EU.

The outcome of that was the release of the 1998 Notice on the application of the state aid rules to corporate taxation.

The 1998 Notice of the Commission interpreted art.87 of the EC Treaty as meaning that it sets the following four criteria to identify fiscal state aid in national tax measures:

a) favourable tax treatment;

b) at the cost of State resources ;

c) affecting competition and trade between MS;

d) selectivity.


(a) Favourable tax treatment

= the national measure confers upon addressees an advantage which relieves them of charges that are normally borne from their budgets.

Mechanisms concern:

i) the taxable base : e.g. special deductions, accelerated depreciation, special free tax reserves.

ii) the taxable amount: e.g. total or partial reduction of the rate or of the subjection to tax

iii) the collection of taxes due: e.g. deferment, cancellation, rescheduling of tax debts)


(b) At the cost of State resources

= the advantage must be granted by the State or through State resources (including regional or local public bodies) : tax expenditure

Such a special measure may be enacted through laws, regulations, or administrative practices of the authorities by either central governments or decentralised bodies provided with autonomous powers.


(c) Potential negative impact on competition and trade between MS

= the measure must favourably affect addressees carrying on an economic activity involving trade between MS.

This condition is easily met: it is not necessary for recipients to be engaged in export or import themselves, as long as the measure (potentially) affects their position in comparison to competitors who may be engaged in cross-border trade.


(d) Selectivity

= the measure must be non-general (non-horizontal) - it must be specific or selective in that it favours certain undertakings or the production of certain goods.

However, a selective measure may still be justified by the nature or general scheme of the national tax system. The MS are free to change their general tax structure, and especially their ‘‘tax mix’’.


(d) Selectivity: general vs. specific measures

General measures are those having: a) a technical nature, such as the ones concerning tax rates, depreciation rules, period of loss carry-forward, or prevention of double taxation;b) an underlying general economic policy objective to be achieved by way of alleviation of part of the tax burden concerning certain firms ’ production costs, such as R&D expenses, environmental-friendly investments, training and employement activities.Specific measures: a) « sectoral » fiscal measures, eg. manufacturing or financial sectorb) « horizontal » fiscal measures, limited to certain functions within a firm, e.g. training and employment, environment…c) « regional » fiscal measures, whose applicability is limited to a certain area of the MS.


Aim and nature of the Notice

The Notice aims at setting uniform rules and standards applicable in fiscal state aids in order to ensure objectivity and equality of treatment between MS.

The Notice forms part of the Commission ’s soft law containing policy statements on the application of the Treaty rules, and therefore it is able to create legitimate expectations for both MS and interested parties.

As a result of the Notice, the Commission has undertaken a rigorous scrutiny of potentially fiscal state aid measures of MS.


SOLUTION FOR THE STATES: REACTION OR ACTION?

REACTION• = states enact legislation, ECJ declares the

incompatible with EC Treaty provisions (eg. fundamental freedoms) and then states change tax law >> case-by-case negative harmonisation

• Consequences:1) No legal security2) Danger that states eliminate discrimination by applying less favourite treatment of cross-border cases to domestic cases


SOLUTION FOR THE STATES: REACTION OR ACTION?

ACTION• = States check their tax law for compatibility with

EU law and revise their statutes bottom up approach

• = EU issues directives top down approach

Which is preferable? Bottom up approach- clarification of the law and adaptation to the needs- restatement of the tax rules being compatible with

basic freedoms


COMPREHENSIVE APPROACHES NEEDED: Why?

One market but currently 15 and from 1st May 25jurisdictionsTax obstacles : - cross-border restructuring- cross-border loss compensation- transfer pricing problems4 different approaches for the EU companytaxation: See:• SEC(2001)1681• COM(2001)582 • COM(2003)726


The four bases1. HOME STATE TAXATION: A multinational group can

opt for computing its consolidated tax base according to the rules of the Member States where its headquarters are based.

2. COMMON CONSOLIDATED BASE TAXATION: A multinational group can opt for computing its consolidated tax base according to a completely new set of restructured EU wide rules.

3. EUROPEAN CORPORATE INCOME TAX: Company tax should be levied at the European level and the revenues should go (at least partly) to the European budget.

4. COMPULSORY HARMONISATION OF EXISTING BASES: All companies in the EU would compute their consolidated tax base according to harmonised rules.


1. HOME STATE TAXATION (HST)

A multinational group can opt for computing its consolidated tax base according to the rules of the Member State where its headquarters are based.Thus:a) Home state rules would apply to consolidated profits of entire enterpriseb) Tax rates would be set in each MS.c) Profits would be allocated and paid locally

Similar enterprises may be subject to different rules


2. COMMON CONSOLIDATED BASE TAXATION (CCBT)

A multinational can opt for computing its consolidated tax base according to a completely new set of restructured EU wide rules.Thus:a) Optional choice to apply new rules to consolidated profitsb) Enterprise deals only with one (headquarter) Member Statec) Tax rates would be set in each Member Stated) Profits and tax would be allocated to each Member State.


3. EUROPEAN CORPORATE INCOME TAX (EUCIT)

Company tax would be levied at the European level and revenues would go ( at least partly) to the EU budget.Thus: a) Single tax code applicable across the EU.b) Administration by a new tax authority.c) Tax revenue would fund EU institutions with excess rebated to the Member States.d) Compulsory for all companies (vs. option for systems 1 and 2)


4. COMPULSORY HARMONISATION OF EXISTING TAX BASES

All companies in the EU would compute their consolidated tax base according to harmonised rules.Thus: a) Existing separation of tax systems would continue BUTb) … all Member States would apply the same rulesc) Cross-border offset of losses would be achieved through use of consolidated tax base.d) Compulsory for all companies.


What solution to choose?• HST for SMEs• CCBT for MNEs• Basic issues:

– allocation key– definition of basis for CCBT– treatment of non-EU income– problem of currency (non-Euro countries)– IntangiblesUnanimity vs. Qualified Majority Voting???? Enhanced co-operation?Pilot projects before general application?


INSTEAD OF CONCLUSION

Documents

TAX COMPETITION AND TAX PLANNING IN THE EUROPEAN UNION February 20, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School,