Conferenza Torino, 15 novembre 2005

1. Conferenza Torino, 15 novembre 2005 La tassazione delle imprese in Europa: dalla competizione al coordinamento fiscale Carola Maggiulli Commissione Europea Analisi e Politiche Fiscali

2. The Institutional Context • Each Member State is sovereign in determining the appropriate size of its budget on both expenditure and revenues side (limit: close to the balance or in surplus) • Art. 94 – 308 of the Treaty (direct taxes): • Approximation of legislation by means of directives wherever this is necessary to improve the functioning of the Single Market or meet other Community objectives • Unanimity

3. Why is tax competition an issue? • Impact on the overall level of government revenues: • Putting a break on the "Leviathan"? • Putting at risk the "European social model"? • Impact on the structure of tax systems: • Shift of the tax burden towards less mobile bases such as labour (unemployment); • Equity concerns.

4. Evolution of statutory corp. tax rates

5. 50,00 45,00 40,00 35,00 Rate 30,00 25,00 20,00 15,00 10,00 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Statutory rates Average effective rates Statutory and effective tax rates (EU15)

6. Race to the bottom • General Government total revenues (tax revenues and social contributions) have been practically stable at around 41% of GDP on average in the EU-15 in the last decade. • Corporate tax revenues in the EU 15 have increased from 2.0% to 2.8% of GDP from 1995 to 2000 and decreased again to 2.2% in 2003.

7. Evolution of corporation tax revenues

8. Harmonisation and coordination • Harmonisation: replacing national provisions in one area by a common EU legislation (VAT 6th Directive); • Coordination: keeping legislation at national level but rendering those national legislations compatible with the Treaty and compatible one with another.

9. Reasons for coordination • A number of pieces of national tax legislations are creating major difficulties from an EU single market perspective: double taxation, double non-taxation, tax avoidance, tax evasion • These measures often give rise to tax cases before the ECJ: obstacles to one or more of the four freedoms or discrimination • Harmful tax competition

10. Corporate taxation and Internal Market • Existence of tax barriers is an obstacle to the realisation of the Internal Market and to the competitiveness of the EU business • Existing tax barriers mainly consist in: • double taxation, • compliance costs, • cost involved in business restructuring. • Compliance costs related to taxation represent an amount equivalent to 1.9% of taxed paid for large companies and a considerable higher amount for SMEs.

11. Commission proposals • Short-term targeted solutions aimed at removing single tax barriers. • Long-term comprehensive solutions aimed at offering a global liberalised framework.

12. Targeted solutions (1) • Aim: to propose to the European firms a more efficient and not discriminatory taxation framework. • By: • reduction of extra-costs which constitute a pure deadweight loss (transfer pricing); • removal of tax measures which can inefficiently penalise firms willing to operate cross-border (cross-border loss compensation).

13. Targeted solutions (2) • Parent-Subsidiary and Merger Directives amended (abolition of withholding tax on dividends and deferred taxation of capital gains for restructuring companies); • Interest and Royalties Directive adopted; • Commission Communication on cross-border losses (2006); • Commission Communication on Double Taxation Treaties (2006); • Joint Transfer Pricing Forum working: following a report of 2005, proposal for a Code of Conduct on a common approach to transfer pricing documentation (before the end of 2005).

14. Increasing importance of the ECJ in the direct tax field • Starting point: the four fundamental freedoms - free movement of services, goods, persons; freedom of establishment • Member States must not discriminate against foreign EU nationals/residents or restrict free movement/ establishment • Development of EU Tax Law has largely taken place via these Treaty provisions as interpreted by the ECJ in cases referred by national courts (preliminary rulings) • The ECJ has taken a “firm” line • The number of cases have increased significantly in recent years and trend continues

15. Comprehensive solutions (1) • Aim: To strengthen competition in the Internal Market by a better allocation of resources, notably physical capital investment, thus contributing to the process of optimisation of firms. • By: Simultaneous removal of tax obstacles.

16. Comprehensive solutions (2) • Commission legislative proposal on a "Common Consolidated Tax Base" (tailored more specially to big enterprises); • A multinational group can opt for computing its tax base according to completely new harmonised EU rules. • Commission Communication on "Home State Taxation" (tailored to SMEs). • A multinational group can opt for computing its tax base according to the rules of the Member State where its headquarter is based.

17. Home State Taxation (HST) • Based on the mutual recognition by Member States of each others tax rules • A group of companies can choose to calculate their tax base according to the rules of the Member State where its headquarters is based – the 'home state' • Each Member State then taxes its share of the overall taxable group profits at its own tax rate • Bilateral or multilateral agreement between Member States having a similar tax base

18. Common (Consolidated) Corporate Tax Base • Concept • Additional EU tax base that is available as option for internationally active group • Formulary apportionment of tax base to MS with subsequent application of national tax rates • Coherent and systematic approach from industry perspective • Potential drawbacks • Developing a completely new EU tax base is a complex and time-consuming task • Member States would have to administer two tax systems • Possible discrimination problems? • Potential technical problems (double-taxation agreements with third countries; treatment of minority shareholders)

19. CCCTB Working Group • Informal ECOFIN Council of September 2004 • In discussion of Non-Paper only a minority of MS opposed work on CCBT • Support for creation of CCCTB working group • CCCTB technical working group • Commission chair; participation of all 25 MS • Initially mandate for three years • Tentative work programme agreed • Meetings +/- every three months • Several sub-groups chaired by a Member State • Full information on COM website

20. Apportionment of the EU consolidated tax base • Macro apportioning (factors aggregated at national level, as GDP); • Formulary Apportionment (factors deemed to generate the group income, as payroll, property and sales); • The Value added option.

21. Conclusions • Short term targeted measures – good progress; some initiatives already implemented • Comprehensive initiatives – slower progress, but it is long term project • Home State Taxation - Communication planned for 2005 • Common Consolidated Tax Base – CCCTB working group active with three year mandate; progress report in 2006 • No EU action on tax rates • For more information: Company Tax Website http://europa.eu.int/comm/taxation_customs/taxation/company_tax/gen_overview/index_en.htm