Official Journal of the European Union

C 88/48

Opinion of the European Economic and Social Committee on the Creation of a common consolidated corporate tax base in the EU

(2006/C 88/12)

On 13 May 2005, Mr László Kovács, member of the European Commission, requested the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, to draw up an opinion on the Creation of a common consolidated corporate taxation base in the EU.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 27 January 2006. The rapporteur was Mr Nyberg.

At its 424th plenary session, held on 14 and 15 February 2006 (meeting of 14 February), the European Economic and Social Committee adopted the following opinion by 94 votes to 6 with 4 abstentions.

Conclusions and recommendations

The 1992 Ruding report already established that common rules were needed to establish the tax base. It also called for the proposal for minimum/maximum tax rates to be extended.

The EESC sees the fact that a working group chaired by the Commission is to develop proposals for a common consolidated corporate tax base as a step — at last — in that direction. The fact that the work will take three years is understandable, given the complexity of the issue. The group's approach is one of considerable transparency. All the documents are available on the Internet so that those who wish to follow the discussions may do so. Reluctance to change in entrenched national systems must not be allowed to delay the introduction of the common tax base. The Member States must show that EU membership is worthwhile, since a common consolidated corporate tax base can only be created by the EU. Similarly, the question of the tax rate must be put to one side for the moment, in order to reduce the difficulties in coming to an agreement on the tax base.

Politicians must be the chief architects of tax systems. The Council of Ministers and the European Parliament need to develop common rules for company taxation otherwise this area will end up being regulated by the EC Court of Justice's legal decisions. Similarly, it is important that the discussions take place in cooperation with the social partners and civil society generally.

The common corporate tax base is a question of ‘nothing is settled until everything is settled’. Where there is a big risk of delays, however, it should always be considered whether the parts on which there is agreement can be introduced gradually, through daughter directives.

The deliberations that are needed are partly legal, partly tax technical, and partly economic. The Committee would urge the Commission and the Member States — despite the large number of technical details and the big differences between countries — to nevertheless be guided by the economic advantages that can be secured through a common consolidated corporate tax base.

Our discussions to date can be summarised by the principles for a common consolidated corporate tax base which we set out in the final section. At the same time, the Committee calls on the Commission to follow at all times the principles we set out as a beacon for working out the technical details. We have chosen to focus on reasons of principle as we believe that once these principles are accepted, it is easier to choose between different technical solutions.

1.   Background


On 13 May 2005 Commissioner Laszlo Kovacs asked the EESC for an exploratory opinion on a common consolidated corporate tax base. The Commissioner pointed out that such a tax base would remove many of the problems that firms operating in several EU countries come up against. There is wide support for the proposal within business and from many governments.


Since 2001 the Commission has produced several communications and reports on corporate tax, including a major report on company taxation in October 2001.


Following a July 2004 ‘non-paper’ on a common consolidated corporate tax base and a Council of Ministers discussion, a special group was set up comprising experts from the Member States. Until 2007 the group will look in detail at all the practical aspects of introducing a common tax base. As with this opinion, the discussions only deal with the basis for calculating corporate tax, and not with corporate tax rates. Neither is the issue of ‘home-state taxation’ addressed. This could perhaps be a temporary pilot project, whereas the common tax base is an overarching project.


The debate does not focus exclusively on creating a common tax base system, but also on the fact that it must be a consolidated one. This specifically concerns companies that are active in several Member States. For a common tax base to work best, such companies need to be able to pool their tax base and calculate profits for the group as a whole. The calculations would be consolidated. This will therefore require systems for sharing profits between the different parts of the company.


The debate only deals with corporate tax, not with all types of company taxation. There are many types of company, e.g. voluntary organisations and associations, and these differ between Member States. If a common tax base is introduced for limited companies, the relationships between these companies and other types of companies and activities change as regards taxation of profits. There could therefore be a case for national corrections in the area of taxation of profits for other types of companies and activities. The above-mentioned group involving the Commission and the Member States does not address this issue, and neither does this opinion.

2.   Previous EESC opinions on a corporate tax base


A number of EESC opinions have addressed the problems caused by the existence of different tax bases for corporate taxation in the EU countries. The EESC is working to create free and fair competition that encourages cross-border activity without undermining the national base for company taxation (1). The EESC would prefer to start by trying to find solutions for a common tax base for corporate tax, and only then to discuss tax rates (2).


A common corporate tax base could reduce or even eliminate most of the existing obstacles to cross-border activity for companies in the European Union. The problems include:

double taxation

internal pricing for cross-border transactions

different approaches to marketing when companies in different countries merge

allocation of capital gains or losses when companies reorganise across borders

compensation for losses within a company operating in several countries, and

different rules on taxation of investments.


Although corporate taxation is important to creating a favourable climate, it should be remembered that there can also be many other crucial factors, both in terms of cross-border trade and where the activity is carried out (3).


The EESC has also pointed out that the problem is not just tax base differences. There are also a number of practical regulatory differences relating to, for example, tax collection, accountancy arrangements and procedures for settling disputes. Some of these problems could be reduced by implementing the practical rules that must accompany a common tax base (4).


For companies the biggest practical advantage of a common tax base would perhaps be that they would only need to be familiar with a single set of rules and how to implement them. Instead of keeping separate accounts for the different sections of the company, combined accounting can be used. In addition to creating a more level playing field, a common tax base could provide efficiency gains not just for companies but also for the tax authorities (5).


The EESC has also called for the common tax base debate to be extended from the core issue to encompass cross-border problems. When a common tax base is created it must not only facilitate matters for companies that operate across borders, but also for those that are only active in the home market. The main objective — to create fair competition for companies that operate in several countries — must not be allowed to produce new differences between these companies and companies with only domestic activity.


The aim here is also to facilitate matters for small businesses, almost all of which are active in the home market only. Attempts to create simple, clear tax rules are of crucial importance in this context, too (6).


The EESC has previously stated that a common tax base cannot be voluntary, i.e. offer the option to choose between remaining with a national tax system or opt for a special system for companies with cross-border activity. The EESC therefore considers that when a common tax base is created for corporate taxation, it must be mandatory (7).


The EESC has consistently championed the case for dovetailing — insofar as possible — the rules for the common tax base with International Accounting Standards. The Committee is aware that the IFRS for international accounting only can be used as a starting point for the common tax base rules.


An unwelcome effect of the Council of Ministers' and the European Parliament's inability to reach a decision on a common corporate tax base is that the positions that have to be adopted anyway end up in the EC Court of Justice. As long as differences exist there will be a need for legal decisions relating to the different tax systems. Member States tax systems are then affected by the Court's decisions relating to the internal market, despite the fact that no political decisions have been taken (8). (9)The ‘Marks and Spencer’ case that was recently decided at the EC Court of Justice provides a clear illustration of this.


The EESC's wish to consider corporate taxation in a broader political perspective means that tax neutrality must be considered not just in relation to company tax, but also to the two production factors — labour and capital. However, this position of principle is largely contingent on the tax rate chosen (10).


Integration and increased competition go hand in hand and can enhance efficiency and increase growth. However, this means that those unable to cope with increased competition cannot compensate for poor productivity by lowering corporate taxation. If the positive effects of integration are to be achieved, those aspects of corporate taxation that can distort competition must be eliminated (11).


A common — and hopefully mandatory — tax base would provide greater scope to monitor tax payments as the authorities only need to be familiar with a single system and can communicate with each other more easily. It would also make it easier to deal with tax evasion to some degree. A non-binding common tax base — where one can choose between the latter and a residual national tax base calculation that applies to domestic companies — would, moreover, create a situation in which the Member States, rather than companies, would have to deal with several tax systems.

3.   Some facts about corporate tax


Tax receipts from companies vary according to which country the tax is collected in. The most important reason for this is different tax rates (between 12.5 % and 40 %) but as the tax base varies it is not always clear how much the situation actually depends on differences in tax rates (12).


The Commission has compiled information on what is known as the ‘implicit tax rate’, which is meant to explain the proportion of corporate profits actually paid in tax, whereas the debate usually focuses on comparisons of tax rates alone. The latter can be misleading; for example, a high tax rate can give small tax receipts if there is wide scope to make deductions. Tax receipts can also vary depending on how effective collection is and the control measures in place. The extent of corporate resources devoted to corporate tax payment also depends on whether taxation arrangements are efficient or bureaucratic (13).


In 1990 the OECD noted that 60 % of world trade takes place within corporate groups. Differences between national tax systems are therefore a problem for companies, as they apply to these corporations.


It is difficult to calculate the economic impact of a common corporate tax base. A recent study puts it at between 0.2 % and 0.3 % of GNP. The calculations only cover the common rules for the tax base; consolidation and administrative savings are not taken into account. This should also be seen in light of the fact that corporate taxation as a whole accounts for approximately 3 % of GNP (14).


Nowadays major companies account for the majority of cross-border activity. Differences in corporate taxation are therefore a problem for them. Those that operate in several countries have, however, acquired the necessary expertise and managed to cover the additional costs. However, it is probably differences in tax systems that impact most on those small and medium-sized firms that have considered but thought twice about setting up outside their national borders. Common rules would lower the bar considerably for firms wishing to start up in several countries. There is considerable scope here for greater integration and increased competition, which could be one of the biggest gains from a common system for calculating the corporate tax base.

4.   Common decisions taken thus far on corporate tax


Only three directives have so far been adopted in the field of corporate taxation. The Parent companies/subsidiaries Directive (90/435) establishes that the dividend from a subsidiary in one country will be tax free in the Member State of the parent company. Tax-free status can, however, be replaced by a rule allowing tax paid in the subsidiary company country to be deducted from the tax due in the parent company country.


The Mergers Directive (90/434) regulates taxation when companies re-organise. Although there is no civil law covering cross-border mergers and split-offs, they are still not covered by the directive, which chiefly regulates sell-offs.


A third, recently adopted directive deals with taxation of interest and royalty payments between associated companies (2003/49). The directive eliminates withholding tax in such cross-border transfers.


Since 1997 there has been a code of conduct for company taxation, according to which the Member States shall not attract investment through harmful measures in the tax area. The code requires the countries to undertake not to introduce new harmful taxes and to review their existing provisions. The code has been supplemented with a list of 66 tax measures that are deemed to be harmful. These are currently being eliminated.

5.   Discussion of the technical details


The rules governing deductions that may be made from the tax base before tax is calculated are the tax base calculation area where differences between countries are greatest, and this is therefore an important issue for Member State discussions. In this connection, the Committee would stress in particular the need to aim for a broad base for corporate taxation. It must be remembered, however, that a broader basis may require a review of the tax rate.

Unfortunately, the discussion needs to start with the basics. Expenditure can already be treated differently if it is to be classed as ordinary expenditure and therefore be included in the calculation of the tax base, or if it can be deducted from profits because the tax base is fixed. Tax experts still have a lot of work ahead of them before they can produce a common proposal.


The tax base system must be competitive so as to create a favourable climate for investment in the EU. The tax system must not, however, generally influence the type of investment or the choice of Member State in which it will be located. Profitability is the crux of the matter, not how funding can be found for an investment. Clearly there must be potential to encourage environmentally-friendly investment or steer it towards neglected regions, but this can be done more appropriately using resources other than the corporate tax base.


Similarly it is important to maintain a clear line of demarcation with income tax. Distribution of stockholder dividends is a matter for income tax and must not be drawn into discussions about taxation of corporate gains. Moreover, this is not an issue that affects decisions on the corporations' location.


Even if it is possible to agree on a common tax base, it must include different rules for certain sectors. For example, special rules on reserves might be required for certain sectors, such as the banking and financial sector, particularly the life insurance industry, where reserves are often particularly important. Another example is the forestry industry, where in extreme cases revenue can come in at up to hundred-year intervals.


Another aspect concerns whether the firm is mainly funded through loans or through own capital. If interest payments on the loans are tax-deductible, then only a small part of the firm's income is taxed in the form profits on the few shares. If there are no loans and everything is funded through in-house shares then everything is taxed as profit. Corporate tax should, as far as possible, not be allowed to influence choice of funding.


When it has been established what deductions can be allowed, it only remains to decide when and how this can be done. The biggest difference between Member States is whether each type of investment can be written off individually or whether all investments can be pooled together. Firms find pooling easier to handle, as there is no need to make calculations for individual machines or equipment.


In order to introduce a consolidated tax base where profit is calculated for an entire group of undertakings, a definition is needed for the latter. The alternatives for such a definition are: a percentage of ownership in each part of the business; or for activity in each part of the business to need to be connected with the parent company's activity. It would seem necessary to choose a combination of these, since there is no reason to create a consolidated tax base for commonly-owned companies, where these exist, within separate sectors.


Once there is agreement on the tax base for calculating corporate taxation, the problem of consolidation remains: how are profits for companies active in several countries to be distributed between the various countries? A common tax base is not enough to avoid tax systems being used to move profits; there must also be a simple, logical system for distributing profits between the Member States (and consequently between countries with different tax rates). When profits are amalgamated in this way between different parts of a company in different countries, tax authority cooperation also needs to move up a gear.


In light of these requirements, we might usefully look at the system used in Canada (half of the profit is distributed according to the proportion of the workforce and half according to the proportion of the sale).


If profits distribution is to be a simple matter in practice, more rules than just those governing calculation of the tax base need to be uniform. For example, calculations should be made on a half-yearly basis and tax payments made at the same time in all countries. Standardised electronic transfers should be another requirement.


One of the most important consequences of a common tax base is that the system would be transparent. For the layman, this is currently only the case with tax rates. To demonstrate how misleading this can be it is useful to compare corporate tax rates and corporate taxation as a share of GDP. The lowest share of GDP (0.8 %, 2003 figures) is in Germany, with a tax rate of 39.5 %. This is probably partly a reflection of the problems in defining what constitutes the tax base. In the ‘new’ Member States, the figure is on average 2.7 % of GDP, with tax rates that vary from 35 % to 15 %. Most of the ‘old’ Member States have a figure of circa 3 % of GDP, but with tax rates that vary from 38 % to 12.5 % (15). It is important that such unexpected variations should be visible, not just for companies but for the sake of electoral democracy.

6.   Principles for a common consolidated corporate tax base (16)

6.1   Broad bases

The objective of taxation is to finance public welfare. The tax levy base should therefore be as broad as possible. Broad bases also keep distortion of the economy to a minimum, since they make it possible to keep tax rates down.

6.2   Neutrality

A common corporate tax base must be neutral with regard to different investment alternatives and not distort competition between sectors. Genuine economic considerations must decide where companies choose to locate and where the technical tax base will be. A neutral tax base helps to create free and fair competition between companies.

6.3   Simplicity

Simplicity, clarity and transparency must be the hallmark of any common rules. For the sake of simplicity, and where appropriate from a taxation stand, there must be a tie-in with international accounting standards, which are already used by many companies. Simpler systems are also created when the same rules apply to when and how payment is to take place.

6.4   Efficiency

Tax must be levied efficiently, including in the sense that it must be easy to monitor so that tax errors can be prevented and tax fraud combated.

6.5   Stability

It is important that tax systems should be stable. Company investment has to be motivated by a long-term perspective and since tax systems are a factor in investment decisions they cannot be subject to a barrage of changes.

6.6   Legitimacy

The design of the tax system must be accepted by those directly affected, i.e. by the social partners and by the public as a whole, as it is used to fund the public sector.

6.7   Fairness

Distributing the profits calculated under a common corporate tax base between the Member States provides the basis for a fair system. Fair distribution enhances Member States' freedom to determine their own tax rate levels.

6.8   International competition

When establishing the tax base, its relationship to non-EU company tax systems must also be considered.

6.9   Mandatory

In order to avoid new differences in tax treatment being created within the Member States, in an optimum system the tax base rules must be mandatory both for companies with cross-border activity and for those operating in one country only. If a common system follows general principles and is sufficiently simple and competitive for firms, then the argument for a mandatory or for a voluntary system will be largely academic. The design of the system will determine whether or not a mandatory system is called into question

6.10   Interim/transitional rules

However, allowing companies the freedom to choose could be an acceptable interim system. A major change such as that introduced by a common corporate tax base might also require transitional rules. An interim system or transitional rules option would make for a more flexible implementation of a common system.

6.11   Smooth decision-making procedures

Despite the need for a long-term, stable taxation system for companies, there must also be potential for change in order to be able to respond to changes in the world around us or to plug ‘gaps’ in the system. This could be a matter of whether the system creates any unintentional effects, for example. Any decision on a common system therefore needs to include rules to enable adjustments to be made smoothly.

Brussels, 14 February 2006

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

(1)  Tax policy in the European Union - Priorities for the years ahead. EESC opinion – OJ C 48/19 of 21.2.2002, p. 73.

(2)  Taxation in the European Union: common principles, convergence of tax laws and the possibility of qualified majority voting. EESC opinion – OJ C 80/33 of 30.3.2004, p. 139.

(3)  Fiscal competition and its impact on company competitiveness. EESC opinion OJ C 149/16 of 21.6.2002, p. 73.

(4)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p. 75.

(5)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p. 75.

(6)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p. 75.

(7)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p. 75.

(8)  An internal market without company tax obstacles – achievements, ongoing initiatives and remaining challenges. EESC opinion OJ C 117/10 of 30.4.2004, p. 41.

(9)  In 2003 and 2004 the ECJ ruled on 25 cases relating to direct taxation.

(10)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p. 75.

(11)  Taxation in the European Union: common principles, convergence of tax laws and the possibility of qualified majority voting. EESC opinion OJ C 80/33 of 30.3.2004, p. 139.

(12)  Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002.

(13)  Taxation in the European Union: common principles, convergence of tax laws and the possibility of qualified majority voting. EESC opinion OJ C 80/33 of 30.3.2004, p. 139.

(14)  Economic effects of tax cooperation in an enlarged European Union, Copenhagen Economics 2004 (Copenhagen Economics (2005) p. 36).

(15)  Structures of the taxation systems in the European Union, Copenhagen Economics (2005 edition).

(16)  The order in which the principles are presented does not imply any ranking of these principles.