Corporate Tax Battle Looms

by Shane Fitzgerald

The European Commissioner for Taxation, Algirdas Šemeta, has today presented long-awaited new proposals on a Common Consolidated Corporate Tax Base (CCCTB).

The goal is to introduce common rules about what corporate profits are taxable (the base) and to consolidate where they should be paid. The proposals cover tax bases but not rates, which would remain the prerogative of national governments.

The Commission has long sought greater harmonisation of corporate tax systems in the EU. It views the current complex situation as being detrimental to growth and believes that creating a common tax base would encourage cross-border investment and trade.


The CCCTB was first floated by the Commission in 2001, so this is just the latest in a long line of efforts to move this agenda forward (lots of information and all the relevant links here). The proposals will continue to be fiercely contested, but, for a couple of reasons, the Commission’s latest intervention is a timely one.

The first is that the Commission has scaled back its ambitions considerably, increasing somewhat their chances of fulfillment.

In a February 2011 speech on The Role of Tax and Customs in the Re-Launch of the Single Market (pdf), Commissioner Šemeta argued that the benefits of a CCCTB would include the fact that “companies would only have to apply one set of tax rules and deal with only one tax administration across the EU … an EU group of companies would no longer have to deal with the very burdensome transfer pricing compliance requirements of several different member states.”

It is true that, at the moment, there are 27 different sets of tax-free allowances for businesses and that this makes it difficult for companies to compare country-by-country what they will actually end up paying (e.g. Ireland’s tax base is quite broad but its headline rate is low whereas France’s base is quite narrow but its headline rate is high, resulting in effective tax rates for many companies being broadly similar in both countries).

But, while the current proposals do have a ‘common’ element, the Commission has been keen to stress that this move “is not about harmonizing tax rates in Europe”, that the scheme is optional for member states, and that companies could choose to stick with the existing system if the CCCTB didn’t appeal to them. If companies choose to opt in, their tax payments would be divided among participating states (in which it has operations) according to a formula which takes account of where their employees, assets and sales are located. But they would still have to deal with national tax rules in those countries which choose to stay out of the scheme.

All of this is designed to make the CCCTB easier to swallow by certain reluctant member states. But this is quite an array of caveats, to which a reasonable observer might respond: why bother? The answer to this fundamental question lies in the integrationist logic of ‘ever closer union’ whereby the EU acts as a centripetal force, inexorably deepening and expanding certain common policies.

Which brings us to the second reason that these proposals are well-timed. Brussels’ centripetal force, which always waxes and wanes, has been fed extra propellant lately by EU policymakers determined to make a great leap forward in economic governance in order to prevent the fragmentation of the eurozone by its financial and sovereign debt crises.

CCCTB and Economic Governance

Corporate tax has been a feature of many of their plans. Former Commissioner Mario Monti’s comprehensive May 2010 report, ‘A New Strategy For The Single Market’ (pdf), called for greater corporate tax coordination by member states, noting that though the “specific design of the proposal requires careful attention … the time seems mature to move forward.” But while Monti and the Commission seek new policies in this area as a way of making the EU as a whole a more attractive investment opportunity, many national leaders’ interventions in the debate are driven more by concern about – depending on your view – healthy tax competition among member states or unfair tax dumping practices by certain countries.

President Sarkozy of France and Chancellor Merkel of Germany angered many other European leaders earlier this year when they drew up a six-point ‘Competitiveness Pact’ without consulting their peers (pdf). In a curiously lightweight (albeit tentative) document, that seemed not to address many of the fundamental causes of Europe’s economic crisis, CCCTB featured prominently as item three, raising suspicion that Europe’s two most important national leaders were using the crisis as political cover to drive through long-held but previously unrealisable policy goals.

Commission President Barroso and Council President Van Rompuy’s version of this pact used more considered language, saying only that a CCCTB ‘could be a way forward’ (pdf).

Other plans, including ALDE leader Guy Verhofstadt MEP’s call for a ‘Community Act For Economic Convergence And Governance’ (pdf) also made reference to tax harmonisation.

But what will really have cheered the proposals’ advocates is that at the summit of Eurozone leaders that took place on 11 March, politicians managed to agree the following statement:

Pragmatic coordination of tax policies is a necessary element of a stronger economic policy coordination in the Euro area to support fiscal consolidation and economic growth. In this context, Member States commit to engage in structured discussions on tax policy issues, notably to ensure the exchange of best practices, avoidance of harmful practices and proposals to fight against fraud and tax evasion.

Developing a common corporate tax base could be a revenue neutral way forward to ensure consistency among national tax systems while respecting national tax strategies, and to contribute to fiscal sustainability and the competitiveness of European businesses. (pdf)

The Backlash

Most observers were impressed by the extent of agreement at this crucial summit, but not everyone was best pleased. According to reports, Ireland’s brand new leader, Enda Kenny, faced a tough crowd as he tried to convince his peers to reduce the interest rate on his country’s loans from a euro crisis rescue fund, the EFSF. A 1% reduction was offered, but only if Kenny agreed to make concessions in the area of corporate tax, which he refused (as he had been strongly mandated to in an election barely a couple of weeks old).

Ireland’s corporate tax rate is a particular bugbear of some central European states, particularly France. Its headline rate of 12.5% is among the lowest in the Union (although it argues that when derogations, subsidies and other anomalies are accounted for, its effective rate is not so different from the European norm).

Previous proposals for a CCCTB would have put small countries like Ireland at a disadvantage because they envisaged the collection of taxation being made at the final point of sale (and ipso facto more sales are made in big countries). The new proposals are more nuanced, and incorporate also where a company’s assets are located and in which country its primary operations are based. So a consolidation of the tax base may not have the strongly negative effect on investment that many in Ireland fear.

Nonetheless, Irish politicians have made the CCCTB an absolute red line in negotiations, seeing it as a ‘trojan horse’ that would inevitably lead to a move on rate harmonisation down the line (see this valuable critique by Prof. Frank Barry for an elucidation of this argument). But they will be familiar with the political negotiating principle that ‘nothing is agreed until everything is agreed’ and there may indeed be scope for some sort of move on closer coordination of tax bases if the proposals are seen to be less detrimental than previous versions.

In 2010, the Irish Department of Finance and other national stakeholders commissioned a report (pdf) by Ernst & Young to study the economic and budgetary impact of the introduction of a CCCTB in the EU. It strongly questioned the rationale for a CCCTB, concluding that compliance costs, effective tax rates and investment uncertainty would all be likely to increase.

That report modelled a number of scenarios. It has since been joined by yet more impact assessments. With the publication of the Commission’s proposals, there will no doubt be many more hefty consultancy fees in the offing as companies, countries and lobby groups try to get to grips with just what the CCCTB might mean for them.


Because of the strength of opposition, and the sovereignty implications of any move on taxation in the European Union, is far from clear that meaningful harmonisation of tax bases across the EU or eurozone could happen in the near future.

Because of that continuing doubt, it is far from clear precisely what benefit corporations will derive from the introduction of a 28th system of taxation into their calculations regarding EU investment opportunities.

All that said, if there really is to be a quantum leap forward that truly addresses the remaining imbalances and gaps in the single market and incorporates a real economic pillar into economic and monetary union, then the issue of taxation will inevitably have to be considered.

The Commission’s proposals have yet to even be considered by the European Parliament or by the ECOFIN Council of Finance Ministers. EU national leaders might be gearing up to address corporation tax as part of a‘grand bargain’ next week, but the depth of uncertainty and disagreement means that this debate has a long way yet to run.