Saturday, 29 October 2005

EU Tax Cartel: EU to cirumvent national veto on company taxes

Anthony Coughlan writes: the EU Commission is planning to use the “enhanced cooperation” provisions of the Treaty of Nice to harmonise company taxes, beginning with the tax base and inevitably moving on in time to tax rates.

This is the message in the report below from today’s EUobserver news agency.

So-called “enhanced cooperation” allows some Member States to adopt closer integration among themselves and use the EU institutions for that purpose, even though other Member States are opposed. It effectively abolishes the national veto on closer EU integration. It ends the idea of the EU as a notional “partnership of equals” and opens the way to a two-tier EU.

The National Platform, Equal in Europe and other No-side advocates were sneered at and denigrated by Yes-side supporters during the two Nice Treaty referendums for pointing out that the “enhanced cooperation” provisions of that Treaty would be used to harmonise company taxes in stages, and that the provisions if implemented would make a fundamental change in the nature of the EU/EC that Ireland joined.

Two years after the Nice Treaty came into force the first attempt to use the enhanced cooperation provisions of the Nice Treaty is in relation to company taxes, as the report below indicates.

Low rates of company tax have been generally regarded as critical in encouraging high rates of foreign capital investment in Ireland in recent decades.

Brussels to circumvent national veto in company tax law

The European Commission is set to use for the first time the “enhanced cooperation” method, allowing it to circumvent the veto of five states that oppose a controversial law harmonising company tax rules.

EU tax commissioner Laszlo Kovacs announced on Wednesday (26 October) that the Barroso commission will step up efforts to set up a law harmonising corporate tax bases, setting 2008 as a target date for the legislation.

Tax bases refer to rules on what share of businesses’ profits are taxed, taking special tax breaks and exemptions into account.

The UK, Ireland, Estonia, Lithuania and Slovakia are fundamentally opposed to the harmonisation of tax bases, fearing that the next step for Brussels will be interference in the levels of their corporate taxes as well.

The commissioner said that if opposition persists, Brussels intends to move ahead with the other 20 member states under the so-called “enhanced cooperation” mechanism in the EC treaty – a possibility which was already considered by the previous Prodi commission.

Enhanced co-operation is an instrument enshrined in the EC treaty which has so far never been used.

It provides for the possibility of a limited number of member states to push forward with initiatives that are opposed by other member states.

“Avant-garde” groups were already formed by member states while co-operating in the Schengen border control area, as well as in the adoption of the euro currency – but these initiatives were launched by member states and not by the commission.

Although a commisison spokesman said Brussels wants to apply enhanced co-operation only “as a last resort”, Brussels’ taxation department seems happy with the instrument as it can circumvent the veto in tax matters.

Corporate tax battle
Three of the states rejecting Mr Kovacs’s scheme, Estonia, Lithuania and Slovakia, have been leading the way in offering companies far lower corporate tax rates than in the Western part of Europe.

Estonia and Slovakia run effective tax rates (showing what firms need to pay in practice) of around 17 percent, while the effective rate in Lithuania is the lowest in the EU at around 13 percent.

Average effective company tax rates in the “old” EU member states lie at an average of 28 percent.

But other low-tax states such as Poland and Latvia do not share their neighbours’ concern that base harmonisation will inevitably lead to rates harmonisation.

Experts have pointed out that a single EU corporate tax base will not hamper competition between states on tax levels, but rather boost it, as real tax differences will become more visible with one set of rules.

Commissioner Kovacs has frequently tried to reassure the five mistrustful states, saying in a recent speech “Let me be clear: the purpose of the commission is to harmonise only the corporate tax base. Tax rates should remain in the competence of the Member States”.

The 20 states supporting the commission generally point to the fact that Mr Kovacs’ scheme also gets the support of Europe’s business community.

Company tax base harmonisation is backed by business organisations like the European employers’ organisation, UNICE, which says one set of rules across the EU will make life easier for companies operating across the bloc.

Race to the bottom?
The issue of corporate taxation last year sparked a passionate war of words between “old” and “new” member states.

The low-tax policies of the new states prompted the French, German and Swedish governments to call for an EU minimum company tax standard – fearing that their companies would shift production to the east.

German chancellor Schroder called the new states’ tax policies “ruinous” and former French finance minister Nicolas Sarkozy said EU funds to the new countries should be slashed if they did not raise their taxes.

But meanwhile, “old” member states have followed the new member states’ example by themselves cutting their company tax rates.

Since EU enlargement in April 2004, seven old EU member states decided to reduce rates, with Austria frequently advertising one full-page ad in “The Economist” that its new tax rate is competitive to that of new member states.

By Mark Beunderman
This article first appeared on