Wednesday, November 16, 2005

“Tax harmonisation is not on the agenda, nor will it be.”

Quiz question: who is the author of the recent quote “Tax harmonisation is not on the agenda, nor will it be.”

The answer is the EU internal market Commissioner Charlie McCreevy.

In a speech last week, the Irish commissioner said tax competitiveness was a key ingredient of wealth creation across the EU. The curious thing is that it comes one week after the EU Commission which Commissioner McCreevy is part, released Communication (COM(2005) 532) on The Contribution of Taxation and Customs Policies to the Lisbon Strategy. In that communication the EU Commission clearly stated that it intends to carry out the necessary preparatory work towards a Common Consolidated Tax Base during the next three years in order to present a Community legislative measure by 2008.

Therefore bells start ringing as to whether the comments by the EU internal market Commissioner should be seen as direct criticism of the EU tax Commissioner or whether they are simply a reminder that a proposal like the Common Consolidated Tax Base goes against the interests of a country like Ireland (“the celtic low-tax tiger) and would difficulty be accepted.

It is common opinion that Ireland, with its low corporate tax regime, has long been a key jurisdiction for tax planning of multinational companies (MNE) and part of the recent economic success of Ireland. For example, a very recent and interesting article by Wall Street Journal (Irish Subsidiary Lets Microsoft Slash Taxes in U.S. and Europe) shows the scale of money involved on tax planning. According to the Wall Street Journal's report that Microsoft has a Dublin subsidiary (with few employees) that controlled assets of $16 billion and had gross profits of $8.9 billion last year, mostly related to money made on software licenses sold across Europe. The sums of money involved illustrate the huge value that MNE accrue from intellectual property - and the advantages to those firms of locating these assets in low-tax jurisdictions. When we think big the gains should also be big!

By coincidence, an article on the Economist on its 10 November issue talks about this conundrum of Europe's corporate taxes. The article starts by recalling the advice that Jean-Baptiste Colbert, treasurer to Louis XIV, offered the beleaguered taxman: “pluck the goose so as to get the most feathers with the least hissing. But suppose the goose is housed on one farm, eats the birdseed scattered in a second, and lays its eggs in a third. Which farmer gets the plumage?” In the end, who gets the money?

The EU Taxation and Customs Commissioner believes that the only systematic way to address the underlying tax obstacles which currently exist for companies operating in more than one Member State in the Internal Market is to provide companies with a consolidated corporate tax base for their EU-wide activities. But inside the Commission and outside such view appears to be raising the first problems.

According to Commissioner McCreevy, "to establish a common tax base we will need first to get agreement on what constitutes taxable profits. Assuming we can agree on [this] during our lifetime, we will probably then have completed one third of the journey. The harder bit comes next,". It has also been reported that the Slovak finance minister recently suggested he doubts that the "commission can find even three countries that would agree on the actual common provisions of such a base."

In fact, with the enlargement of the EU to 25 member states, Europe has now more diversity in terms of tax base. Therefore it is expected that, for example, Eastern and Central European countries and jurisdictions like Ireland, Malta and Cyprus will become hard liners when time comes to consider a proposal to consolidate tax bases in Europe. As the Commissioner previews “National vetoes will be retained and competition between member states for inward investment - some of it tax based - will continue”.

The clash between tax harmonization and tax competition appears to be back on the agenda! Perhaps the problem is even wider. As europeans appear to be split on almost every major issue, tax will be one more matter where “Polish plumber” type of arguments will appear. Let’s hope not.

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Blogger wessez said...

You must have spent a lot of time putting together your blog. You must be proud of it.

I am planning to start a blog soon - to go with my website on offshore tax haven.

Do you have any advice for someone just starting their own blog?

If you do, do you think you could post a quick message on your blog here so all of us could benefit from your wisdom?


17 November, 2005 22:03  

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