Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Towards an Internal Market without tax obstacles - A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities
Date: 2001-10-23
Institutions: European Commission
Subjects: basis of tax assessment, corporation tax, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.10.2001
COM(2001) 582 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT AND THE ECONOMIC AND SOCIAL
COMMITTEE

Towards an Internal Market without tax obstacles

A strategy for providing companies with a consolidated corporate tax base for
their EU-wide activities

TABLE OF CONTENTS

1.

2.

3.

4.

5.

6.

Introduction................................................................................................................ 3

The need to adapt company taxation in the EU to a changing environment........ 4

The impact of differences in the effective levels of company taxation on
incentives to invest within the Internal Market ...................................................... 6

Removing the tax obstacles to cross-border economic activity in the Internal
Market....................................................................................................................... 10

Providing companies with a consolidated corporate tax base for their EU-wide
activities..................................................................................................................... 15

Way forward and conclusion .................................................................................. 20

Annex: Executive Summary of the Commission Services Study on "Company Taxation in the

Internal Market" [SEC(2001)1681]

2

1.

INTRODUCTION

Reform of EU
company taxation
is crucial for
achieving the
Lisbon-goals.

The Commission
services have
prepared a
comprehensive
study on the
subject.

In accordance
with a specific
Council mandate,
the Commission
explains its
strategy on
company taxation
in the EU over
the next few
years.

The European  Union  has  set  itself the  strategic goal "… to become the
most  competitive  and  dynamic  knowledge-based  economy  in  the  world
…".  This  objective  was  first  established  at  the  European  Council  in
Lisbon in March 2000 and reiterated by the Stockholm European Council
of March 2001. Generally, the Lisbon Council also called for building up
a  supportive  general  framework  for  economic  activity  in  the  EU.  The
taxation  of  companies  can  play  an  important  role  in  achieving  this
objective  and  creating  a  level-playing  field  for  businesses  in  the  EU.
However,  while  important  steps  have  been  taken  in  other  policy  areas,
little has happened here and Member States essentially operate the same
company tax systems as they did before the set-up of the Internal Market.
This  mismatch  in  development  needs  to  be  addressed  now  and  the
imminent enlargement of the EU makes it all the more urgent.

The  May  2001  Communication  “Tax  Policy  in  the  European  Union”
[COM(2001)260]  identified  both  general  objectives  and  a  number  of
specific  priorities  in  direct  and  indirect  taxation.  This  Communication
takes this process a step further in that it addresses the more detailed issue
of the direct taxation of companies in the European Union.

The  study  "Company  Taxation  in  the  Internal  Market",  the  Executive
Summary  of  which  is  annexed  to  this  Communication,  has  examined
whether  the  current  application  of  company  taxation  in  the  Internal
Market  creates  inefficiencies  and  prevents  operators  from  exploiting  its
full  benefits.  This  would  imply  a  loss  of  EU  welfare,  undermine  the
competitiveness  of  EU  businesses  and  thus  be  counter  to  the  Lisbon
objectives.

This Communication supplements and builds on that study. It sets out the
Commission view of what needs to be and what can be realistically done
in  the  area  of  company  taxation  in  the  EU  over  the  next  few  years  in
order  to  adapt  company  taxation  in  the  EU  to  the  new  economic
framework  and  to achieve  a  more  efficient  Internal  Market  without
internal tax obstacles. For this purpose, a number of concrete initiatives
are presented at the end of this Communication.

to 

together  respond 

the
Both  documents 
Commission by  the Council of Ministers in July 1999 to investigate the
impact  of  differentials  in  the  effective  level  of  corporate  taxation  in
Member States on the location of  economic activity  and investment and
of  tax  provisions  that  constitute  obstacles  to  cross-border  economic
activities in the Internal Market and remedies thereto.

the  mandate  given 

to 

3

Some history of company tax initiatives on EU level

Since  the  founding  of  the  European  Communities,  company  taxation  has  received  particular  attention  as  an
important element first for the establishment and then the completion of the Internal Market. Several studies like
the  Neumark-report  of  1962  and  the  Tempel-report  of  1970  have  been  presented  and  a  number  of  initiatives
designed to achieve a limited degree of harmonisation of the corporate tax system, base and also rates have been
taken. The Commission had put forward appropriate proposals for directives in 1975 and, more focussed on loss-
compensation, in 1984 and 1985. Those were later withdrawn. A draft proposal of 1988 for the harmonisation of
the tax base of enterprises was never tabled, due to reluctance of most Member States.

Recognising  the  lack  of  success  in  progressing  the  above  initiatives,  the  Commission  Communication  on
company  taxation  in  1990  [SEC(90)601]  suggested  that,  subject  to  the  principle  of  subsidiarity,  all  initiatives
should  be  defined  through  a  consultative  process  with  the  Member  States.  On  that  basis,  following  on  from
Commission  proposals  which  originated  in  the  late  1960s,  three  measures  -  two  directives  and  a  convention  -
were  finally  adopted  in  July  1990  [the  Merger  Directive  90/434/EEC,  the  Parent-Subsidiary  Directive
90/435/EEC and the Arbitration Convention 90/436/EEC]. A proposal on loss-offset cross-border is still pending
in  the  Council  COM(90)595].  In  1994,  the  Commission  withdrew  a  first  proposal  aimed  at  abolishing
withholding  taxes  levied  on  cross-border  interest  and  royalty  payments  between  associated  companies  of
different Member States. A new proposal was however made in 1998 [COM(1998)67].

The 1990 approach was developed further in 1996/1997 in a Commission Communication [COM(97)495]. The
'tax package', and notably the Code of Conduct for business taxation, have introduced a new dimension to the
discussion.  The  Single-Market  driven  approach  was  supplemented  with  the  objectives  of  stabilising  Member
States'  revenues  and  promoting  employment  which  are  now  taken  up  and  re-assessed  in  the  above-mentioned
recent Communication on the priorities of EU tax policy.

In 1999/2000 the Council, in order to supplement the ongoing work on the 'tax package' which had been agreed
by EU Finance Ministers in December 1997, requested a comprehensive study on company taxation to be carried
out by the Commission.

2.

THE  NEED  TO  ADAPT  COMPANY  TAXATION  IN  THE  EU  TO  A  CHANGING
ENVIRONMENT

The 1992 Ruding
report had little
impact.

The Internal
Market and
globalisation
have changed the
framework for
company tax in
the EU.

The  last  comprehensive  study  on  company  taxation  in  the  European
Community was the "Report of the Committee of independent experts on
company  taxation"  of  1992,  commonly  known  as  Ruding  Report.  In
response  to  a  Commission  request  this  report  examined  the  relation
between  company  tax  systems  and  the  functioning  of  the  forthcoming
Internal  Market.  However,  its  detailed  and  valuable  findings  and
recommendations  met  with  limited  support  and  failed  to  achieve  much
progress.

Today,  general  developments  call  for  a  renewed  assessment  of  the  EU
strategy  in  the  field  of  company  taxation.  The  overall  economic
framework has changed since the early nineties:
(cid:1)  The  EU  has  experienced  a  wave  of  international  mergers  and

acquisitions.

(cid:1)  The emergence of electronic commerce and the increased mobility of
economic  factors  make  defining  and  safeguarding  the  company  tax
base more difficult.

(cid:1)  Economic  integration  in  the  Internal  Market  and  Economic  and
Monetary  Union  continues  to  progress  and  the  non-fiscal  economic,
technological and institutional barriers to cross-border trade continue
to be pulled down.

4

(cid:1)  Large EU companies now view the whole EU as their "home market"
and  accordingly  seek  to  establish  effective  pan-European  business
structures. This results in EU-wide re-organisation and centralisation
of business functions within a group of companies.

(cid:1)  The  concerns  of  tax  payers,  be  it  corporate  or  individual  ones,  now

receive more attention.

(cid:1)  There  is  now,  via  the  Code  of  Conduct  for  business  taxation,
supportive similar action at OECD level and also the enforcement of
EU  State  Aid  rules,  the  real  prospect  of  eliminating  harmful
preferential tax regimes within the Internal Market.

All the elements
of company tax
systems in the EU
gain in
importance.

Given  these  developments  the  importance  of  all  the  features  of
company  tax  systems  almost  automatically  increases.  This  is  because
Member  States  compete  with  all  elements  of  their  tax  systems,  both
specific  and  structural,  for  investments  and  economic  activity  to  be
located within their territory.

Enlargement will
accentuate these
developments.

Many  of  these  developments,  which  both  raise  new,  and  emphasise
existing  problems  with  the  taxation  of  companies  and  their  EU-wide
operations,  will  be  accelerated  by  enlargement.  Hence,  there  is  a  clear
need to adapt Company Taxation in the EU to this changing environment.

Various
requirements
determine the
efficiency of the
EU company tax
system and the
competitiveness
of EU businesses.

For  assessing  the  overall  importance  of  these  problems  and  possible
solutions,  it  is  necessary  to  consider economic  efficiency.  From  an
economic point of view company taxation in the Internal Market must
(cid:1)  contribute  to  the  international  competitiveness  of  EU  businesses  in
line  with  the  strategic  goal  established  by  the  Lisbon  European
Council;

(cid:1)  ensure  that  tax  considerations  distort  as  little  as  possible  economic

decisions by operators;

But the overall
welfare effects
can only be
determined in a
broader
economic
assessment.

(cid:1)  avoid unnecessary or unduly high compliance costs and tax obstacles

to cross-border economic activity;

(cid:1)  not hinder the possibility of general tax competition while tackling all

harmful or economically undesirable forms of tax competition.

A  company  taxation  system  that  meets  these  objectives  will  a  priori
increase  welfare.  However,  to  assess  the  overall  level  of  welfare,  the
financing and supply of public goods and services, their complex relation
to  tax  revenues  and  the  efficiency  of  public  administration  would  also
have to be taken into account.

Moreover,  as  set  out  in  the  above-mentioned  Communication  on  “Tax
Policy in the European Union” [COM(01)260], in the Community context
tax  policy  must  support  and  reinforce  other  EU  policy  objectives.  This
also applies for company taxation policy.

5

3.

THE  IMPACT  OF  DIFFERENCES  IN  THE  EFFECTIVE  LEVELS  OF  COMPANY  TAXATION
ON INCENTIVES TO INVEST WITHIN THE INTERNAL MARKET

Purpose of the analysis

Marginal and
average effective
corporate tax
rates are
presented.

The Commission services study  on  company  taxation  presents  estimates
of  effective  corporate  tax  rates  (marginal  and  average)  on  domestic  and
transnational investments in the 15 EU countries (as well as the USA and
Canada  in  certain  cases)  taking  into  account  different  forms  of
investments  in  the  manufacturing  sector  as  well  as  different  sources  of
finance.

The methodology for calculating effective tax rates

The most commonly used indicators for analysing the impact of taxation on investment behaviour are based on a
forward looking concept and involve calculating and comparing the effective tax burden for hypothetical future
investment  projects  or,  alternatively,  the  effective  tax  burden  for  hypothetical  future  model  firms  behaviour,
using the statutory features of the tax regimes.

These  approaches  permit  international  comparisons  and  are  especially  tailored  to  provide  an  indication  of  the
general pattern  of  incentives  to  investment  that  are  attributable  to  different  national  tax  laws  as  well  as  to  the
working of the international tax regime.

Other  methodological approaches based on historical data can also be used to compute effective corporate  tax
burdens.  They  address  questions  other  than  those  addressed  in  this  study  and  they  may  give  rise  to  different
results.

In  the  Commission  services  study,  the  main  body  of  the  computation  builds  on  methodology  involving
calculating the effective tax burden  for hypothetical  future investment projects in  the  manufacturing  sector.  In
technical  terms,  the  analysis  relies  on  a  revised  and  extended  methodology  of  the  so-called  King  &  Fullerton
approach, set out by Devereux and Griffith (1998). This computation is supplemented by data arising from the
computation  of  the  "European  Tax  Analyser"  model  which  utilises  the  model-firm  approach  set  out  by  the
University of Mannheim.

Effective tax rates have been calculated for a so-called "marginal" investment (where the post-tax rate of return
just equals the alternative  market  interest  rate)  or  for  an  "infra-marginal"  or "average"  investment  project  (i.e.
one that earns extra-profits).

It is worth-noting that the numerical results depend heavily on the assumptions underlying both the hypothetical
investment  and  the  future  firm  behaviour  as  well  as  the  economic  framework.  Differences  in  the  assumptions
underlying  the  hypothetical  investment  and  the  economic  framework  can  give  rise  to  somewhat  different
numerical results.

Moreover, these approaches do not permit to take into consideration in the computation all the relevant features
of tax systems. However, the most important features of taxation systems such as the rates, major elements of the
taxable bases and tax systems are included.

The economic
methodology
allows for
valuable general
conclusions but
some caveats are
necessary.

The broad range of data computed does not intend to present "universally
valid values" for the effective tax burden in different countries, but rather
to  give  indicators,  or  illustrate  interrelations  in  a  series  of  relevant
situations. In fact, effective tax rates in a particular Member State depend
on the characteristics of the specific investment project concerned and the
methodology applied.

A number of general conclusions can nevertheless be formulated on the
basis  of  the  results.  These  can  help  explain  how  Member  States'  tax
regimes create incentives to  allocate  resources. A  striking  feature  of  the
quantitative  analysis  is  that,  across  the  range  of  different  situations,  the

6

Taxation is only
one of the
determinants of
investment and
financing
decisions.

Effective tax rates
differentials are
high inside the
EU.

relevant conclusions and interpretations remain relatively constant.

Taking  into  account  that  the  quantitative  results  depend  heavily  on  the
underlying assumptions and that the applied methodologies do not allow
taking  into  account  all  the  relevant  features  of  taxation,  the  numerical
results  should  be  understood  as summarising  and  quantifying  the
essential features of the tax system, as is the case for any computation
based on forward-looking methods.

As such, the analysis does not provide  empirical evidence of  the  impact
of  taxation  on  actual  economic  decisions.  Although  empirical  studies
show  that  there  is  a correlation  between  taxation  and  location
decisions,  due  to  the  weaknesses  of  existing  methodologies  and  due  to
the  lack  of  data,  none  of  the  existing  methodologies  could  have  been
usefully adopted in the Commission services study without considerably
extending the range of work.

Taxation  is,  of  course,  only  one  of  the  determinants  of  investment  and
financing decisions. A series of other structural and economic conditions
are  important  determinants  of  investment  behaviour.  Which  factors  are
relatively  more  important  very  much  depends  on  the  individual  type  of
investment decision.

Neutrality and distortion effects

Even allowing for the above considerations, the results of the quantitative
analysis for 1999 are quite  informative.  There  is  large  variation  in  the
effective  tax  burden  faced  by  investors  resident  in  the  different  EU
Member Countries, as well as in the way each country treats investments
in or from other countries (see tables at the end of this Communication).

The range of differences in domestic effective corporate taxation rates is
around  37  percentage  points  in  the  case  of  a  marginal  investment
(between -4.1% and 33.2%) and around 30 percentage points in the case
of a more profitable investment (between 10.5% and 39.7%).

In  the  international  analysis,  the  range  of  variation  of  the  effective  tax
rates  of  subsidiaries  located  in  different  host  countries  can  also  reach
more  than  30  percentage  points.  Similarly,  the  range  of  variation  of  the
effective tax rates for subsidiaries operating in a given country can reach
more than 30 percentage points depending on where their parent company
is located.

In  each  Member  States,  tax  systems  tend  to  favour  investment  in
intangibles  and  machinery  and  debt  is,  by  far,  the  most  tax-efficient
source of finance.

Across  the  range  of  domestic  and  cross-border  indicators  there  is  a
remarkable consistency as far as the relative position  of  Member  States,
notably at the upper and the lower ranges of the ranking, are concerned.

7

When the domestic analysis is updated to take into account the 2001 tax
regimes, the overall picture is broadly unchanged in comparison to 1999.
However, as a  consequence of  a pattern  of  generally  declining  statutory
tax  rates  (albeit  with  relatively  small  reductions  apart  from  Germany),
more  profitable  investments  benefited  from  reductions  in  effective  tax
rates  in  a  number  of  countries.  As  a  result,  the  range  of  differences  in
domestic  effective  tax  rates  in  the  case  of  a  more  profitable  investment
decreased from 30 to 26 percentage points.

These  high  differentials  may  have  an  influence  on  the  international
competitiveness  of  EU  companies  located  in  different  Member  States
and  represent  incentives  for  companies  to  choose  the  most  tax-
favoured  locations  for  their  investments,  which  may  not  be  the  most
efficient location in the absence of taxes. If this is the case, differences in
the  effective  levels  of  company  taxation  may  imply  an  inefficient
allocation  of  resources  and,  therefore,  welfare  costs.  The  study  has  not
attempted to quantify the size of any efficiency loss or welfare cost that
might be associated with existing differences in effective corporation tax
rates  in  the  European  Union.  Nevertheless  the  size  of  tax  differentials
and dispersions deserves attention, considering  that some  externalities
as well as the different legitimate goals of tax policy may justify a certain
deviation from the objective of neutrality of taxation.

The  EU  wide  spread  cannot  be  explained  by  one  single  feature  of  the
national  tax  systems.  However,  the  analysis  of  general  regimes  tends  to
show that – leaving aside preferential tax regimes - the different national
nominal  tax  rates  (statutory  tax  rates,  surcharges  and  local  taxes)  can
explain  most  of  the  differences  in  effective  corporate  tax  rates  between
countries  both  in  the  domestic  and  transnational  analysis.  Tax  rates
differentials  more  than  compensate  for  differences  in  the  tax  base.
the
These  conclusions  are 
compensatory effects of a broad tax base compared to a relatively low tax
rate  on  the  effective  tax  burden.  The  relative  weight  of  rates  in
determining  the  effective  tax  burden  of  companies  rises  when  the
profitability  of  the  investment  rises.  Consequently,  any  compensatory
effects  of  a  lower  tax  base  on  effective  tax  rates  tend  to  disappear
when the profitability rises.

to  be  considered  when  discussing 

The overall
national nominal
tax rate is the
most relevant tax
driver affecting
competitiveness,
incentives to
locate and
financing
decisions.

To the extent that
taxation matters,
introducing a
common tax rate
in the EU would
be likely to go
some way in
reducing
locational
inefficiencies.

Simulating the impact of hypothetical harmonisation of particular features
of taxation system in isolation shows that:
(cid:1) 

Introducing a common statutory tax rate in the EU would have a
significant  impact  by  decreasing  the  dispersion  -  both  between
parent companies and between subsidiaries - of marginal and average
effective tax rates across the EU  countries. No other policy scenario
has such a significant impact on the dispersion of effective tax rates.
(cid:1)  Scenarios implying a common tax base or a system consisting in
applying  the  definition  of  the  home  country  tax  base  to  the  EU-
wide  profits  of  a  multinational  tend  to  increase  the  dispersion  in
effective tax rates if overall nominal tax rates are kept constant.

8

It should however be noted that these conclusions are the result of a static
analysis.  They  therefore  do  not  assess  the  dynamic  effects  and  possible
reactions induced by the harmonisation of particular features of taxation
in  isolation.  In  a  dynamic  context  it  is  possible  that  the  transparency
associated  with  the  harmonisation  of  the  taxable  base  would  induce  a
convergence of the statutory corporate tax rates thus implying a reduction
in the dispersion of effective tax rates.

The quantitative analysis of the Commission services study has drawn a
picture of corporate tax rates differentials inside the EU and the reasons
underlying these differences on  the  basis  of  a  robust  and  internationally
known  theoretical  framework.  The  Commission  wishes  to  draw  the
attention to the main results of this picture: effective tax rates differentials
are  high  inside  the  EU  and  the  overall  national  tax  rate  is  the  main  tax
driver  for  these  differentials.  When  harmful  preferential  tax  regimes  are
eliminated within the EU, differences in the nominal tax rates will  offer
alternative  possibilities  of  arbitrages.  In  the  context  of  the  imminent
enlargement this trend could be compounded.

The  Commission  services  study  has  not  analysed  the  evolution  of
effective tax rates over time and the effects of tax competition. Neither, as
mentioned above, has the Commission study assessed the size of possible
welfare losses associated with the existing differences in effective rates of
corporate  taxation  in  the  EU  Member  States.  Therefore,  at  this  point  in
time, there is no convincing evidence for the Commission to recommend
specific  actions  on the  approximation  of the national corporate tax  rates
or the fixing of a minimum corporate tax rate.

Moreover,  the  objective  of  tax  neutrality  is  obviously  not  the  only
legitimate  goal of tax policy  and  taxation  ultimately  involves  a  political
choice  and  a  trade-off  between  pure  economic  efficiency  and  other
legitimate policy goals. To what extent the possible inefficiencies for the
Internal  Market  due  to  the  differences  of  national  practices  in  corporate
taxation can be accepted is, ultimately, a matter of political choice.

The level of
taxation is a
matter for
Member States to
decide.

In  this  context,  it  is  worth  recalling  that:  "The  level  of  taxation  in  this
area  is, however, a matter  for  Member  States  to  decide,  in  accordance
the  recent
with 
Communication  on 
the  European  Union
[COM(2001)260].

the  principle  of  subsidiarity",  as 

the  Tax  Policy 

is  stated 

in 

in 

However,  the  Commission  will  carefully  monitor  the  trend  of  the
effective levels of corporate taxation in the EU Member States in order to
understand the dynamic effects of reforms in progress.

9

4.

REMOVING  THE  TAX  OBSTACLES  TO  CROSS-BORDER  ECONOMIC  ACTIVITY  IN  THE
INTERNAL MARKET

Cross-border
economic
activities in the
Internal Market
are still
hampered by
substantial
company tax
obstacles.

Tackling the obstacles

The  Commission  services  study  has  identified  a  number  of  fields  in
which company tax systems comprise or lead to obstacles to cross-border
trade,  establishment  and  investment  or  hamper  cross-border  economic
activity in the Internal Market. The additional tax or compliance burdens
associated with doing business in more than one Member State caused by
these  obstacles  undermine  the 
international  competitiveness  of
European  companies  and  waste  resources.  The  various  obstacles  are
analysed in detail in the study and the annexed Executive Summary gives
an overview about the key issues. In particular:
(cid:1)  Profits  have  to  be  allocated  on  an  arm’s  length  basis  by  separate
accounting, i.e. on a transaction by transaction basis. This gives, inter
alia, rise to numerous problems on the fiscal treatment of intra-group
transfer  pricing,  notably  in  the  form  of  high  compliance  cost  and
potential double taxation.

(cid:1)  Cross-border  flows  of  income  between  associated  companies  are
often  subject  to  additional  tax.  In  particular,  withholding  taxes  on
bona-fide  intra-group  payments  of  dividends,  interests  and  royalties
contain a risk of double-taxation and are not in line with the Internal
Market idea. Moreover, the scope of the Parent-Subsidiary Directive
(90/435)  is  too  narrow  and  its  implementation  in  Member  States  is
very different, which reduces its effectiveness.

(cid:1)  There are major limits on cross-border loss relief which may lead to
(economic) double-taxation. Generally, losses of subsidiaries are not
tax-effective  at  the  level  of  EU  parent  companies  and  losses  of
permanent  establishments  can  be  offset  against  headquarter  profits
only under specific circumstances.

(cid:1)  Cross-border  restructuring  operations  give  rise  to  substantial  tax
charges.  The  Merger  Directive  (90/434)  provides  for  the  deferral  of
corporate  tax  on  such  operations  but  its  scope  is  too  narrow  and  its
implementation in Member States is very different, thus reducing its
effectiveness.  Capital  gains  taxes  and  transfer  taxes  on  cross-border
restructuring  operations  are  often  prohibitively  high,  thus  forcing
companies to leave economically sub-optimal structures untouched.
(cid:1)  As  a  result  of  conflicting  taxing  rights,  there  is  a  considerable
potential  for  double  taxation.  This  holds  for  all  of  the  issues  which
have  been  identified  as  obstacles.  The  specific  problems  relating  to
double taxation conventions in the EU add to these difficulties.
(cid:1)  Certain  tax  systems  contain  a  bias  towards  domestic  investment.
This is, for instance, the case for imputation systems granting specific
tax credits only to domestic shareholders which are still operated by a
number of Member States.

10

15 tax
jurisdictions in
the Internal
Market lie at the
root of the
obstacles.

(cid:1)  Most of these problems stem from the fact that companies in the EU
need to comply with up to fifteen different sets of rules. Taking into
account  that  these  companies  increasingly  target  the  EU  as  one
market, this conflicts with economically efficient business plans and
structures.  The  multiplicity  of  tax  laws,  conventions  and  practices
entails substantial compliance costs  and  represents  in  itself  a  barrier
to cross-border economic activity.

Both targeted and
comprehensive
solutions are
necessary to
overcome these
obstacles.

There are two types of solutions for removing the company tax obstacles
to  the  Internal  Market,  those  targeted  at  particular  obstacles  and  those
which in a comprehensive manner remedy all or most of the obstacles 'at
a  stroke'.  They  all  aim  to  eliminate  the  risk  of  double  taxation  and  tax
charges  on  cross-border  re-structuring  and  to  reduce  compliance  costs
and 
legal  uncertainty.  They  all  have  specific  advantages  and
disadvantages.

In  the  Commission's  opinion  only  a  two-track  strategy  provides  a
realistic  prospect  of  removing  the  obstacles  and  hence  ensuring  that  the
full potential of the Internal Market is realised and the Lisbon objectives
achieved.

(cid:1)  Targeted  measures will help to address  the  most  urgent  problems  in

the short- and mid-term.

(cid:1)  A  comprehensive  solution  under  which  companies  can  operate  one
consolidated  corporate  tax  base  for  their  EU  wide  activities  will
provide a systematic and longer term solution.

A  comprehensive  solution  will  provide  a  better  and  more  definitive
response  to  the  current  problems  but  it  still  requires  further  technical
work before  making  specific  proposals.  The  targeted  remedial  measures
are in any event needed in the short term to improve the existing body of
EU legislation on  company  taxation  and  to  ensure,  via  appropriate  soft-
law  initiatives  and  collaboration  with  all  stakeholders,  that  these  are
evenly applied. Some targeted measures such as action on double taxation
treaty  problems  can,  at  the  same  time,  be  preparatory  steps  for  a
comprehensive scheme, others will continue to be necessary (e.g. those
addressing  cross-border  restructuring  operations).  The  focus  in  the
immediate  future  will  thus  be  the  improvement  of  the  current  rules  and
their application.

Targeted actions
in specific areas
are necessary as
a first step.

11

The Commission
will, in concert
with Member
States, develop
guidance on the
impact of ECJ
case law.

The Commission
will propose to
extend and
improve the
existing direct
taxation
directives.

The Commission
will issue
guidance on the
most important
implementation
issues.

Targeted measures

The  study  identifies  a  need  to  develop  a  more  general  understanding  of
the impact of important rulings by the European Court of Justice (ECJ) on
Member  States'  company  tax  rules  and  double  taxation  treaties.  The
Commission considers that the publication of guidance in this area would
be helpful not only to Member States but also to businesses and national
courts.  Such  guidance  would  facilitate  compliance  with  the  Treaty  and
make  a  significant  contribution  to  the  removal  of  tax  obstacles  to  the
Internal  Market.  It  should,  to  the  largest  extent  possible,  involve  the
European  Parliament 
the
consultation of Parliament.

the  existing  mechanisms 

through 

for 

→  The Commission proposes to develop guidance on important ECJ
rulings  and  to  co-ordinate,  via  appropriate  Communications  from
the  Commission,  the  implementation  of  these.  It  will  therefore
continue  and  expand  its  programme  of  meetings  with  Member
States that started in 2001.

The  Parent-Subsidiary  and  Merger  Directives  are  widely  recognised  as
having  played  a  major  role  in  removing  tax  obstacles  for  groups  of
companies with the EU. The Commission has already presented proposals
for amendment of the directives in 1993 [COM(93)293]. The study shows
that there are various ways in which the Directives could be extended and
improved  so  as  to  cover  a  wider  range  of  companies,  taxes  and
transactions. In particular, the Directives' scope should include all entities
subject to company tax and especially the companies which will in future
be run under the European Company Statute (Societas Europeae - SE).

The Parent-Subsidiary directive needs to be amended to cover both direct
and  indirect  shareholdings.  Alternatively  a  lower  minimum  holding
threshold  would  have  a  similar  remedial  effect.  Where  the  merger
directive  applies,  specific 
taxes  arising  on  cross-border
restructuring  operations  (notably  on  immovable  property)  should  be
included  in  the  Capital  Duty  Directive  [69/335/EEC  and  85/303/EEC].
Moreover, the scope of these and certain existing important provisions in
the directives needs further clarification.

transfer 

→  The  Commission  will  give  priority  to  tabling  the  necessary
amendments to the existing proposals for extension of the Merger
Directive and the Parent-Subsidiary Directive in 2003, following
technical consultations with Member States in the course of 2002.

→  At the same time, the Commission will issue detailed guidance on
how  it  considers  those  provisions,  notably  those  concerning
avoidance and abuse, should be implemented.

An innovative
solution is needed
on cross-border

The  problem  of  cross-border  loss  offset  is  at  the  same  time  one  of  the
most  important  issues  for  industry  and  yet  the  most  difficult  to  address
through  specific  measures.  The  study  has  examined  two  rather  different

12

loss offset.

targeted measures which would lead to the following alternative results:

The Commission
will in any event
withdraw its
current proposal
for a directive in
this field.

(cid:1)  An  amended  version  of 

the  existing  Commission  proposal
[COM(90)595]  in  this  area.  This  would  allow  parent  companies  to
take 
incurred  by  both  permanent
losses 
establishments and subsidiaries situated in another Member State.

into  account 

the 

(cid:1)  A more complete scheme for the consolidation of group income along
the lines of the Danish joint taxation system which in certain cases
enables  Danish  parent  companies  and  in  addition  to  their  branches
also their foreign subsidiaries to be taxed jointly in Denmark, thereby
enabling  the  parent  to  take  into  account  losses  incurred  by  foreign
subsidiaries (and branches).  This  would  attempt to achieve  a  greater
symmetry between the taxation of profits and the offset of losses.

Given  that  Member  States  have  been  reluctant  to  consider  any  EU
initiative in this area, a new round of  technical  preparatory  meetings
are  required  before  any  action  can  be  reasonably  launched.  The
discussions  will  have  to  take  into  account  that  the  issue  of  loss-
compensation and possible group consolidation is intimately linked to the
comprehensive solutions which are discussed further below.

→  The  Commission  will  withdraw  its  old  proposal  for  a  directive
concerning  cross-border  loss-offset  and,  starting  in  2002,  convene
consultative  meetings  with  Member  States  on  the  technical
possibilities for taking this issue further. In parallel to the progress
on  more  comprehensive  solutions  it  will  in  particular  examine  the
Danish  model  and  report  on  its  legislative  intentions  in  this  area
before the end of 2003.

There are
effective means
for avoiding or
removing double
taxation resulting
from transfer
pricing.

The  obstacles  and  problems  identified  concerning  the  taxation  of  intra-
group  transactions  (transfer  pricing)  are  varied  in  nature  but  all  are
increasingly  important  and  call  for  urgent  action.  The  Commission
considers it important to take into account the legitimate concerns of tax
administrations  and  businesses  and  to  develop  commonly  accepted
practices  in  this  field.  This  can  be  achieved  through  a  dialogue  at  EU
level.

Advance Pricing
Agreements and
co-ordination
among Member
States and
between Member
States and
businesses should
be encouraged.

The Arbitration

For  instance,  the  Commission  wishes  to  encourage  Member  States  to
introduce  or  expand  bilateral  or  multilateral  Advance  Pricing
Agreement  programmes.  It  also  suggests  better  co-ordination  between
Member States of documentation requirements and of the application
of  the  various  methods.  Such  co-ordination  should  build  upon  and
complement the OECD activities in this field. All this would  reduce  the
compliance costs and the uncertainty relating to transfer pricing.

Other  areas  require  a  more  traditional  solution.  The  Arbitration
Convention  (the  prolongation  of  which  currently  still  awaits  ratification
in all Member States) has been in place for many years but its application
still  gives  rise  to  numerous  problems.  Given  the  importance  of  these
problems  and  the  unique  character  of  the  Arbitration  Convention,  the

13

Convention must
be improved and
turned into an
instrument of EU
law.

Commission  recognises  its  improvement  as  a  priority  issue.  The
shortcomings  of  the  Convention  must  be  removed  and  its  provisions
should  be  made  subject  to  interpretation  by  the  Court,  preferably  by
turning  it  into  an  instrument  of  Community  law.  Moreover,  subject  to
safeguards  to  prevent  aggressive  tax  planning,  a  framework  should  be
established for prior agreement between the tax administrations involved
or at least consultation before tax administrations enforce transfer pricing
adjustments.

→  The  Commission  will  in the  first  half  of  2002  convene  a  standing
'Joint  Forum  on  Transfer  Pricing'  with  Member  States  and
business representatives in order to
- 

examine  the  issues  which  can  be  addressed  without  legislative
initiatives, e.g. develop and exchange best practice on Advance
Pricing Agreements and documentation requirements,
consider  the  scope  for  improving  and  rendering  more  uniform
transfer pricing methodologies within the OECD guidelines,

examine necessary improvements to the Arbitration Convention
with  a  view  to  presenting  a  formal  proposal  for  a  Directive  in
2003,  thus  turning  it  into  an  instrument  of  Community
legislation.

- 

- 

A common
approach to
double-taxation
treaty issues will
help to overcome
the current
complexities.

→  The Commission will determine the nature of  further initiatives in
the light of the discussions in the Forum, having regard inter alia to
the expiry of the present Arbitration Convention in 2005.

While  evidently  those  Member  States  concerned  must  complete  their
network  of  double  taxation  treaties  with  the  other  Member  States,  no
other  specific  action  offers  itself  as  "obvious"  solution  to  the  complex
problems  relating  to  EU  double  taxation  treaty  issues.  The  Commission
considers, however, that the current tax treaties of Member States should
be improved in order to comply better with the principles of the Internal
Market  enshrined  in  the  EU  Treaty  and  that  better  co-ordination  of
treaty policy in relation to third countries is necessary. Moreover, there is
a  compelling  need  for  binding  arbitration  where  conflicts  arise  between
treaty partners in the interpretation and application of a treaty, leading to
possible double taxation or non-taxation.

The Commission
believes in the
perspective of an
EU version of the
OECD model
convention.

In  the  Commission's  opinion  the  most  promising  way  forward  towards
achieving these objectives in a coherent way is, in the long term, to agree
an EU version of the OECD model convention and commentary (or of
certain articles) which meet the specific requirements of EU membership.
This  would  leave  intact  the  existing  bilateral  system.  Clearly,  such  an
exercise  requires  careful  preparatory  technical  work  in  concert  with
Member States.

14

→  The  Commission  intends,  following  technical  discussions  with
Member States, to come forward in 2004 with a communication on
to  adapt  certain  provisions  of  double  taxation
the  need 
conventions  based  on  the  OECD  model  to  comply  with  Treaty
principles.  This  will  constitute  a  first  step  towards  the  possible
elaboration of an EU model tax treaty.

Obviously,  the  Community  and  its  Member  States  should  at  the  same
time  continue  to  support  the  OECD  work  both  in  the  area  of  transfer
pricing and concerning double taxation treaties.

It  should  be  noted  that  none  of  these  possible  remedies  is  geared
specifically  towards  larger  or  small-  and  medium-sized  enterprises.
However, it follows from the nature of the problems and their effects that
internationally  active  small  and  medium-sized  enterprises  will  also
benefit from the removal of the tax obstacles. Generally, there are good
reasons  to  grant  small  and  medium-sized  enterprises  proportionate
simplification  and  standardisation  arrangements  for  reducing  their  tax
compliance  cost.  Depending  on  the  type  of  measure  such  initiatives  are
either appropriate at national level or should, as for instance currently in
the area of VAT, explicitly be supported on EU level.

Small and
medium-sized
enterprises must
be taken into
account.

5.

PROVIDING COMPANIES WITH A CONSOLIDATED CORPORATE TAX BASE FOR THEIR
EU-WIDE ACTIVITIES

The need for a comprehensive approach

Only a
consolidated
corporate tax
base for the EU-
wide activities of
businesses
ultimately
provides an
answer to the
challenges of
company tax
systems in the EU
today.

The above targeted solutions would go some way towards remedying the
tax  obstacles.  However,  even  if  all  of  them  were  implemented,  they
would  not  address  the  underlying  problem  of  dealing  with  up  to  15
different  tax  systems.  Only  providing  multinational  companies  with  a
consolidated corporate tax base for their EU-wide activities will really,
through a single framework of company taxation, systematically tackle
the majority of the tax obstacles to cross-border economic activity in the
Single  Market.  Companies  with  cross-border  and  international  activities
within the EU should in future be allowed to
(cid:1)  compute the income of the entire group according to one set of rules

and

(cid:1)  establish consolidated accounts for tax purposes (thus eliminating the
potential tax effects of purely internal transactions within the group).

It is important to note that this approach does not infringe Member States'
sovereignty to set corporate tax rates. They would apply their national tax
rate to their specific share of the overall tax base as computed according
to a commonly agreed allocation mechanism.

15

A consolidated corporate tax base for the EU-wide activities of companies is the only means which will

significantly  reduce  the  compliance  costs  resulting  from  the  need  to  deal  with  15  tax  systems  within  the
Internal Market;

do away, within the EU, with transfer pricing problems;

allow for the offsetting and comprehensive consolidation of profits and losses on an EU basis;

simplify many international restructuring operations;

reduce, without extending into the personal tax field, some of the complexities arising from the co-existence
of the classical and exemption approaches to international taxation;

avoid many situations of double taxation and

remove many discriminatory situations and restrictions.

(cid:1) 

(cid:1) 

(cid:1) 

(cid:1) 

(cid:1) 

(cid:1) 

(cid:1) 

A consolidated
corporate tax
base will improve
company tax
systems in the EU
in economic
terms.

A  consolidated  corporate  tax  base  for  the  EU-wide  activities  of
companies  would  contribute 
to  greater  efficiency,  effectiveness,
simplicity  and  transparency  in  company  tax  systems  and  remove  the
hiatuses  between  national  systems  which  provide  fertile  ground  for
avoidance and abuse. It would reduce compliance costs, allow the EU to
reap  the  full  benefits  of  the  Internal  Market,  thus  increase  the
competitiveness of EU business and lay the foundations for achieving the
goals set by the Lisbon European Council.

The Commission therefore believes it is only logical to steer its company
taxation  policy  towards  achieving  a  comprehensive  solution  to  the
existing  cross  border  tax  obstacles  in  the  Internal  Market.  Future  work
should be directed towards how to achieve the objective of a consolidated
corporate  tax  base  with  cross  border  loss  relief,  and  how  best  to  design
and agree on the necessary allocation mechanism.

→  The Commission believes that it is necessary to

-  provide  companies  with  a  consolidated  corporate  tax  base

for their EU-wide activities;

-  develop  an  appropriate  apportionment  mechanism  which

can be agreed by all participants;

-  and,  for  Member  States,  to  determine  the  applicable

national corporate tax rates.

Possible comprehensive approaches and technicalities

There are
different
technical means
for achieving a
consolidated
corporate tax
base.

The  Commission  services  study  has  identified  various  technical
possibilities for providing companies with the necessary consolidated tax
base  for  their  EU-wide  activities  ("Home  State  Taxation";  "Common
(Consolidated)  Base  Taxation";  "European  Corporate  Income  Tax";
"harmonised  single  tax  base  in  the  EU").  The  approaches  essentially
differ in the degree of ambition they show towards a harmonisation of the
tax base in the EU, the level of change required for their implementation
and  the  political  circumstances  of  their  possible  introduction.  The
approaches  are  summarised  in  the  attached  Executive  Summary.  All  of

16

Consolidation on
an EU-wide basis
is the key feature.

Member States
decide the
applicable
corporate tax
rates.

Enhanced co-
operation can
help to advance.

these approaches
(cid:1)  have particular advantages and disadvantages;
(cid:1)  could  provide  a  tax  solution  for  the  European  Company  Statute

(Societas Europeae - SE);

(cid:1) 

still raise technical difficulties, notably concerning the application of
double-taxation treaties;

(cid:1)  would require the development of an agreed mechanism for allocating
the consolidated corporate tax base to the various Member States;

(cid:1) 

in  short:  require  further  analysis.  As  the  study  shows,  it  is  not
possible to present and implement a particular technical solution now.

By  definition,  an  essential  element  of  all  the  solutions  is  that  there  is
group  consolidation  on  an  EU-wide  basis.  Currently  not  all  Member
States apply that principle even at the domestic level and only two, under
relatively  restrictive  conditions,  at  the  international  level.  Under  all
approaches Member States would retain the right to set company tax rates
which  the  quantitative  analysis  found  was  the  most  important  factor  in
determining  the  effective  tax  rate.  This  essential  sphere  of  national
competence  in  the  area  of  company  taxation  would  –  intentionally  –
remain untouched and Member States would be left with the autonomy
to adjust the most important element for tax revenues. The introduction of
a single or common tax base could lead to some Member States adapting
their tax rates to reflect changes in the tax base, but this would be for each
Member State to decide.

Good prospects for practical progress

In theory all the comprehensive  approaches could  be designed  such  that
not all  Member  States  would  have  to  participate.  It  is  important  to  note
that  the  Treaty  of  Nice  highlighted  the  possibility  for  enhanced  co-
operation by a group of Member States where agreement by all 15 is not
possible,  although  the  full  benefits  available  under  a  comprehensive
approach  will  only  be  realised  if  all  Member  States  participate.
Nevertheless,  this  may  be  particularly  appropriate  for  Home  State
Taxation,  which  presupposes  the  participation  solely  of  Member  States
with a fairly similar tax base. However, a group of Member States could
equally take advantage of this mechanism provided by the Treaty in order
to introduce any of the other comprehensive approaches. In any event, in
line with the principles agreed at the Nice European Council, the recourse
to  this  instrument  must  not,  among  other  things,  undermine  the  Internal
Market,  constitute  a  barrier  to  or  a  discrimination  of  trade,  distort  the
conditions  of  competition,  or  affect  the  competences,  rights  and
obligations of the non-participating Member States.

Tax
administrations
will also gain
substantial

It should be noted that it is not just companies who suffer from excessive
compliance costs, tax administrations incur  high  costs  as  well.  The  area
of transfer pricing is one such example. Moreover, the co-existence of 15
company  tax  systems  in  one  Internal  Market  creates  considerable  scope

17

benefits.

To some extent,
the IAS may serve
as a starting
point for
developing a
common tax base.

A consolidated
corporate tax
base is very
promising for the
European
Company Statute.

for  tax  evasion  and  tax  avoidance.  Accordingly,  any  remedial  measures
will also to some extent benefit the efficiency and effectiveness of tax
administrations.  As  all 
targeted  or
comprehensive,  call  for  more  mutual  assistance  and  administrative  co-
operation between Member States this will ensure that tax audits continue
and  indeed  should  become  more  effective.  This  will  also  help  to  make
sure that none of the remedies under consideration results in tax evasion.

remedial  measures, 

the 

Moreover, it is noteworthy that, after the (currently outstanding) adoption
of an appropriate Commission proposal for a regulation by the European
Parliament  and  Council  [COM(2001)80],  as  from  2005  listed  EU
companies will have to prepare their consolidated accounts in accordance
with  International  Accounting  Standards.  The  increasing  integration  of
financial markets and the creation of pan-European stock exchanges can
be  expected  to  accelerate  accounting  harmonisation  even  further.
Although not directly related to taxation, this development may generally
help the future development of a common corporate tax base and to some
extent the IAS may serve as a useful point of reference.

The European Company Statute (Societas Europeae - SE)

The  agreement  on  the  European  Company  Statute  at  the  European
Council  of  Nice  in  December  2000  underlines  the  urgency  of  the
situation. After the formal adoption of the appropriate legislative acts (i.e.
the amended proposals for a Council Regulation (EEC) on the Statute for
a European Company [COM(91)174] and for a Directive [COM(91)174]
complementing  the  Statute  for  a  European  Company  with  regard  to  the
involvement of employees) this new legal form will become available for
companies  in  the  course  of  2004.  By  that  date,  the  current  and  future
body  of  EU  company  tax  legislation,  such  as  the  Parent/subsidiary  and
Merger Directives, must be made available to companies that choose this
new legal form.

However,  this  might  not  be  sufficient  to  make  the  Statute  an  attractive
company  law  vehicle.  The  full  benefits  of  establishing  a  European
Company (SE) will only be achieved if existing companies can form such
an entity without incurring additional tax set up costs, and avoid some of
the existing tax obstacles of operating in more than one Member State. As
things  stand  neither  of  these  are  provided  for  and  its  success  could
therefore be jeopardised. The concept of the European Company Statute
is closely linked to that of a common company taxation system. The work
on  the  technicalities  that  are  necessary  for  providing  companies  with  a
consolidated corporate tax base for their EU-wide activities will therefore
be  particularly  beneficial  for  future  SEs,  and  an  appropriate  ‘pilot
project’ might usefully be introduced for such companies.

18

Only a high level
of support will
make the
consolidated
corporate tax
base the success
necessary for
achieving the
Lisbon goals.

→  The Commission intends to make sure that the current body of EU
company  tax  law  will  be  fully  applicable  to  companies  formed
under the European Company Statute as from 2004. At the same
time, it will – in parallel to the other work in this area - explore the
particular potential of a comprehensive company tax regime and of
a  consolidated  corporate  tax  base  for  the  EU-wide  activities  of
companies to be applied to SEs.

Stimulating a broad debate

The Commission’s endorsement of the fundamental concept of a common
company taxation system in the form of a consolidated corporate tax base
for the Internal Market as the most promising way to increase efficiency
and  company  competitiveness  is  a  major  development.  Notwithstanding
the  possibilities  provided  by  enhanced  co-operation  and/or 
the
introduction  of  Home  State  Taxation  by  a  group  of  Member  States
change  of  this  order  is  a  major  undertaking.  It  requires  a  high  level  of
support from a wide range of interested parties and operational decisions
on  possibly  taking  a  comprehensive  approach  forward  can  only  be
assessed in the light of Member States’ reactions to this Communication.

The  Commission  therefore  believes  that  the  first  step  should  be  a
structured  dialogue  involving  all  stakeholders:  Member  States  and
candidate  countries,  business  representatives  and  economic
operators,  senior  tax  professionals  and  academics,  as  well  as  the
social  partners.  This  will  take  place  in  the  Council,  in  the  European
Parliament  and  in  the  Economic  and  Social  Committee  but  as  the
Commission  recognises  the  need  to  widen  the  institutional  debate  it
wishes  to  involve  other  specific  fora.  The  purpose  is  twofold.  First,  to
present this Communication and raise  awareness  that,  without  action  on
company  taxation  systems,  the  Internal  Market  will  not  provide  the  full
potential  economic  benefits  it  could  and  that  the  Community  and  its
citizens  therefore  risk  foregoing  potential  growth,  employment  and
welfare. Second, to ensure support for the necessary further analysis and
development  of  one  or  more  of  the  approaches  outlined  so  that
implementation could be formally proposed.

→  The Commission will therefore, in the first half of 2002, organise a
European  Company  Tax  Conference  in  conjunction  with  the
Presidency  for  high  level  government  representatives  from  EU
Member States and candidate countries, business leaders, economic
operators,  senior  tax  professionals,  social  partners  and  academics
on  the  future  of  company  taxation  in  the  Internal  Market.  The
objectives will be:

- 

to  provide  a  forum  for  the  presentation  of  the  various
comprehensive approaches,

- 

to foster discussion between the parties involved,

19

- 

to  assist  the  Commission  in  determining  the  best  way  forward
with the project.

After the conference and the following broader debate in the EU the
Commission intends to report on its subsequent policy conclusions
by 2003.

6.

WAY FORWARD AND CONCLUSION

The Commission
proposes a
strategy for
action for
achieving a
consolidated
corporate tax
base for the EU-
wide activities of
companies.

A  number  of  specific  and  general  measures  in  the  field  of  company
taxation have been identified in this Communication and the Commission
proposes a two track strategy directed towards:

(cid:1) 

Immediate action on targeted measures

(cid:1)  And,  at  the  same  time,  the  launch  of  a  wider  debate  on  general

comprehensive measures

with the objective of

(cid:1)  providing  EU  businesses  with  a  consolidated  corporate  tax  base  for

their EU-wide activities.

20

The Commission will:

– 

– 

– 

– 

– 

– 

– 

– 

– 

provide  guidance  on  and  co-ordinate,  via  appropriate  Communications  from 
Commission, the implementation of jurisprudence by the European Court of Justice;

the

step up its efforts  of  monitoring  the  implementation  of  EU  tax  law  by  Member  States  and
work together with Member States towards common guidance notes in this field;

amend  its  existing  proposals  for  extension  of  the  Merger  Directive  and  the  Parent
Subsidiary-Directive  with  a  view  to  broadening  the  scope  and  the  coverage  of  both
individual taxes and types of transactions;

withdraw its old proposal for a directive concerning cross-border loss-offset with a view to
its replacement after technical discussions with Member States and other stakeholders;

present  a  proposal  for  a  Directive  with  a  view  to  renewing  and  improving  the  Arbitration
Convention;

establish an 'EU Joint Forum on Transfer Pricing';

prepare for a Communication on the issue of double taxation conventions of Member States
with a view to the eventual conclusion of either a multilateral convention or an agreed EU
model;

insist  that  the  current  body  of  EU  company  tax  law  will  be  fully  applicable  to  companies
formed  under  the  European  Company  Statute  as from  2004.  At  the  same  time,  it  will  –  in
parallel to the other work in this area - explore the particular potential of a comprehensive
company tax regime and of a consolidated corporate tax base for the EU-wide activities of
companies to be applied to SEs.

launch a broad debate on the future of company taxation in the Internal Market and the need
for fundamental reform to achieve the EU objectives of becoming the most competitive and
dynamic knowledge-based economy in the world as agreed at the Lisbon European Council
June 1999. In this context, the Commission will undertake to organise a European Company
Tax  Conference 
level  government
representatives from EU Member States and candidate countries, business leaders, economic
operators,  senior  tax  professionals,  the  social  partners  and  academics  on  the  future  of
company taxation in the Internal Market. The objectives will be:

the  Presidency  for  high 

in  conjunction  with 

– 

– 

– 

to  provide  a  forum  for  the  presentation  of  the  various  comprehensive
approaches

to foster discussion between the parties involved

to assist the Commission in determining the best way forward with the project.

After the conference and the following broader debate in the EU the Commission intends to
report on its subsequent policy conclusions by 2003.

21

Table 1
2001

Cost  of  Capital  and Effective Marginal  Tax Rate  by  country,  years  1999  and

Table 2

Effective Average Tax Rate by country, years 1999 and 2001

Table 3
earnings, year 1999

Effective  Average  Tax  Rate  when  the  subsidiary  is  financed  with  retained

Table 4
year 1999

Table 5
1999

Effective Average Tax Rate when the subsidiary is financed with new equity,

Effective  Average  Tax  Rate  when  the  subsidiary  is  financed  with  debt,  year

22

Table 1

Cost of Capital and Effective Marginal Tax Rate by country, years 1999 and 2001
-by asset, source of finance and overall
-only corporation taxes

2001

f
o

t
s
o
C

l
a
t
i
p
a
C

5.7
6.4
6.8
6.4
6.5
6.0
7.3
6.4
4.3
5.7
6.3
6.5
6.3
5.8
6.7

e
t
a
r
o
p
r
o
C

)
1
(

s
e
t
a
r
x
a
t

34.00
40.17
39.35
30.00
35.00
37.50
36.43
29.00
40.25 (2)
10.00
37.45
35.00
35.20
28.00
30.00

Country

Austria
Belgium
Germany
Denmark
Spain
Greece
France
Finland
Italy
Ireland
Luxembourg
Netherlands
Portugal
Sweden
UK

1999

f
o

t
s
o
C

l
a
t
i
p
a
C

R
T
M
E

6.3
6.4
7.3
6.4
6.5
6.1
7.5
6.2
4.8
5.7
6.3
6.5
6.5
5.8
6.6

20.9
22.4
31.0
21.9
22.8
18.2
33.2
19.9
-4.1
11.7
20.7
22.6
22.5
14.3
24.7

e
t
a
r
o
p
r
o
C

)
1
(

s
e
t
a
r
x
a
t

34.00
40.17
52.35
32.00
35.00
40.00
40.00
28.00
41.25 (2)
10.00
37.45
35.00
37.40
28.00
30.00

s
e
l
b
i
g
n
a
t
n
I

5.9
5.2
5.4
4.2
6.5
6.8
5.2
6.1
2.9
5.3
5.2
5.1
6.7
5.0
5.5

COST OF CAPITAL
1999

l
a
i
r
t
s
u
d
n
I

s
g
n
i
d
l
i
u
B

y
r
e
n
i
h
c
a

M

l
a
i
c
n
a
n
i
F

s
t
e
s
s
A

s
e
i
r
o
t
n
e
v
n
I

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
e

y
t
i
u
q
e
w
e
N

6.1
7.0
7.2
8.1
6.7
5.1
8.5
6.1
4.6
6.8
6.8
6.9
6.2
6.0
8.2

5.9
5.3
5.8
5.4
5.4
6.1
8.4
5.6
3.8
5.2
5.3
5.9
5.2
5.0
5.6

7.3
8.0
10.0
7.1
7.4
5.1
8.0
6.8
7.7
5.5
7.7
7.4
7.7
6.6
6.9

6.3
6.7
7.9
7.1
6.4
7.4
7.4
6.8
5.0
5.5
6.5
6.9
6.5
6.6
6.9

7.5
8.0
9.7
7.5
7.7
7.6
9.0
7.2
5.5
5.9
7.7
7.7
7.9
6.7
7.7

7.5
8.0
7.6
7.5
7.7
7.6
9.0
7.2
5.5
5.9
7.7
7.7
7.9
6.7
7.7

EMTR
1999

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
e

y
t
i
u
q
e
w
e
N

33.3
37.5
48.4
33.3
35.1
34.2
44.4
30.5
10.0
15.2
35.1
35.1
36.7
25.4
35.1

33.3
37.5
35.5
33.3
35.1
34.2
44.4
30.5
10.0
15.2
35.1
35.1
36.7
25.4
35.1

t
b
e
D

-25.0
-42.9
-56.2
-13.6
-21.9
-47.1
-8.7
-11.1
-38.9
3.8
-35.1
-21.9
-28.2
-39.5
-25.0

t
b
e
D

4.0
3.5
3.2
4.4
4.1
3.4
4.6
4.5
3.6
5.2
3.7
4.1
3.9
4.3
4.8

R
T
M
E

12.6
22.4
26.1
21.6
22.8
16.9
31.8
21.3
-15.9
11.7
20.7
22.7
21.0
14.3
24.8

Note. Each asset column represents an average across all three types of finance, with weights of 55% retained earnings, 10% new equity and 35% debt. Each finance column represents an
unweighted average across all 5 assets. The overall average is an average across all 15 types of investment, with the same weights.
(1) including surcharges and local taxes
(2) Under the Italian “dual income” system, the statutory corporate tax rate of 36 % in 2001 and 37 % in 1999 (net of surcharges and local taxes) is reduced to 19 % in certain cases. In the
above marginal case this lower rate applies, except to debt where the higher rate applies.

23

 
 
 
 
 
 
 
 
 
Table 2

Effective Average Tax Rate by country, years 1999 and 2001

- by asset, source of finance and overall

- only corporation taxes

EFFECTIVE AVERAGE TAX RATES

Country

e
t
a
r
o
p
r
o
C

1
0
0
2

)
1
(

s
e
t
a
r
x
a
t

l
l
a
r
e
v
O

n
a
e

M

1
0
0
2

s
e
t
a
r
x
a
t
e
t
a
r
o
p
r
o
C

9
9
9
1

)
1
(

l
l
a
r
e
v
O

n
a
e

M

9
9
9
1

s
e
l
b
i
g
n
a
t
n
I

1999

1999

l
a
i
r
t
s
u
d
n
I

s
g
n
i
d
l
i
u
B

y
r
e
n
i
h
c
a

M

l
a
i
c
n
a
n
i
F

s
t
e
s
s
A

s
e
i
r
o
t
n
e
v
n
I

d
e
n
i
a
t
e
R

s
g
n
i
n
r
a
e

y
t
i
u
q
e
w
e
N

t
b
e
D

Austria

34.00

27.9

34.00

29.8

28.6

29.2

28.4

33.2

29.9

33.9

33.9

22.3

Belgium

40.17

34.5

40.17

34.5

30.7

36.1

31.0

39.2

35.3

39.1

39.1

25.8

Germany

39.35

34.9

52.35

39.1

33.9

39.0

34.9

46.8

40.8

46.1

40.1

27.7

Denmark

30.00

27.3

32.00

28.8

21.3

34.7

25.3

31.2

31.2

32.3

32.3

22.1

Spain

Greece

France

35.00

31.0

35.00

31.0

31.1

31.8

27.4

34.2

30.7

35.2

35.2

23.3

37.50

28.0

40.00

29.6

35.5

30.4

33.4

11.6

37.1

34.4

34.4

20.8

36.43

34.7

40.00

37.5

30.6

40.6

40.1

39.0

37.1

42.1

42.1

28.8

Finland

29.00

26.6

28.00

25.5

24.8

24.8

23.1

27.3

27.3

28.8

28.8

19.3

Italy

40.25

27.6

41.25

29.8

24.9

29.8

27.4

36.1

31.1

31.8

31.8

26.1

Ireland

10.00

10.5

10.00

10.5

8.9

15.8

8.2

9.8

9.8

11.7

11.7

8.2

Luxembourg

37.45

32.2

37.45

32.2

28.6

33.7

29.2

36.6

32.9

36.6

36.6

24.0

Netherlands

35.00

31.0

35.00

31.0

26.7

32.4

29.2

34.2

32.5

35.1

35.1

23.3

Portugal

35.20

37.0

37.40

32.6

33.2

31.8

28.6

36.5

32.8

37.0

37.0

24.5

Sweden

28.00

22.9

28.00

22.9

19.6

23.4

19.7

25.7

25.7

26.0

26.0

17.1

UK

30.00

28.3

30.00

28.2

24.2

33.7

24.7

29.3

29.3

31.8

31.8

21.6

Note. Each asset column represents an average across all three types of finance, with weights of 55%
retained earnings, 10% new equity and 35% debt. Each finance column represents an unweighted average
across all 5 assets. The overall average is an average across all 15 types of investment, with the same
weights.
(1) Including surcharges and local taxes

24

 
 
 
 
 
 
 
Table 3

Effective Average Tax Rate when the subsidiary is financed with retained earnings, year 1999
- only corporation taxes; weighted average of parent finance

EATR
%

o
t

a
i
r
t
s
u
A

m
u
i
g
l
e
B

k
r
a
m
n
e
D

from
Austria

Belgium

Germany

Denmark

Spain

Greece

France

Finland

Italy

Ireland

Luxembourg

Netherlands

Portugal

Sweden

UK

Canada

USA

Mean

(33.9) *

39.1

29.9

20.1

30.1

29.7

32.9

29.5

30.6

30.3

32.7

29.4

33.9

30.2

30.8

30.3

40.1

31.8

30.0

(39.1)

26.4

35.4

35.1

34.5

34.8

35.9

35.5

38.0

34.8

39.1

35.5

36.1

35.6

44.5

36.9

35.4

32.3

28.7

18.8

(32.3)

28.4

32.9

28.3

29.2

29.0

31.2

28.2

32.3

29.0

29.4

29.0

32.3

30.3

29.0

d
n
a
l
n
i
F

28.8

25.0

14.3

25.0

24.6

31.8

24.5

(28.8)

25.3

27.6

24.4

28.8

25.2

25.7

26.5

33.4

29.1

25.5

e
c
n
a
r
F

y
n
a
m
r
e
G

42.1

38.1

29.8

38.4

38.1

37.5

(42.1)

38.9

38.4

41.0

37.8

42.1

38.4

39.1

38.6

43.8

39.7

38.4

46.1

42.1

(46.1)

42.4

42.1

41.5

41.8

42.9

42.4

45.0

41.8

46.1

42.3

43.1

42.7

50.4

43.5

43.0

e
c
e
e
r
G

34.4

30.4

25.4

30.6

30.2

d
n
a
l
e
r
I

11.7

8.1

-5.7

7.8

7.4

(34.4)

27.9

30.0

31.0

30.7

33.2

29.9

34.4

30.7

31.2

32.9

34.4

33.0

31.1

7.5

8.3

8.4

(11.7)

7.1

11.7

8.3

8.5

22.1

11.7

25.0

9.9

y
l
a
t
I

31.8

28.0

17.9

28.1

27.8

27.5

27.6

28.6

(31.8)

30.7

27.5

31.8

28.3

28.8

28.3

38.3

29.9

28.0

g
r
u
o
b
m
e
x
u
L

36.6

32.6

23.4

32.8

32.5

33.4

32.3

33.3

32.9

35.4

(36.6)

36.6

32.9

33.5

33.1

38.5

34.4

32.9

s
d
n
a
l
r
e
h
t
e
N

35.1

31.2

21.6

31.3

31.0

33.5

30.8

31.8

31.5

34.0

30.7

(35.1)

31.4

32.0

31.6

37.1

33.0

31.2

l
a
g
u
t
r
o
P

37.0

33.0

23.8

33.2

32.9

33.9

32.7

33.7

33.3

35.8

32.6

37.0

(37.0)

33.9

33.5

48.4

38.6

33.3

n
i
a
p
S

35.2

31.2

21.7

31.4

(35.2)

33.5

30.8

31.9

31.5

34.0

30.7

35.2

31.5

32.1

31.6

41.2

35.0

31.6

n
e
d
e
w
S

26.0

22.2

11.0

22.2

21.8

30.3

21.7

22.7

22.5

24.8

21.6

26.0

22.5

(26.0)

24.8

28.4

27.6

22.9

d
e
t
i
n
U

m
o
d
g
n
i
K

31.8

27.9

17.7

28.0

27.6

33.2

27.5

28.5

28.2

30.6

27.3

31.8

28.2

28.7

(31.8)

31.8

30.7

28.4

n
a
e

M

33.4

29.2

19.0

29.8

29.2

33.2

28.6

30.5

30.0

33.8

28.8

33.3

29.6

30.9

31.5

37.0

33.2

30.1

 * The data into parenthesis represent the corresponding domestic effective average tax rates

25

Table 4

Effective Average Tax Rate when the subsidiary is financed with new equity, year 1999
- only corporation taxes; weighted average of parent finance

EATR
%

o
t

a
i
r
t
s
u
A

m
u
i
g
l
e
B

k
r
a
m
n
e
D

from

Austria

Belgium

Germany

Denmark

Spain

Greece

France

Finland

Italy

Ireland

Luxembourg

Netherlands

Portugal

Sweden

UK

Canada

USA

Mean

(33.9)**

39.1

30.6

21.0

30.1

29.7

36.0

29.9

30.6

30.9

32.7

33.9

33.9

30.8

30.8

30.3

45.2

33.5

30.8

(39.1)

27.2

35.4

35.1

34.5

35.2

35.9

36.1

38.0

39.1

39.1

36.1

36.1

35.6

49.5

38.5

35.9

32.3

29.3

19.6

(32.3)

28.4

36.6

28.6

29.2

29.6

31.2

32.3

32.3

29.6

29.4

29.0

32.3

31.7

29.8

d
n
a
l
n
i
F

28.8

25.6

15.1

25.0

24.6

37.4

24.9

(28.8)

25.9

27.6

28.8

28.8

25.9

25.7

27.5

36.8

32.4

26.5

e
c
n
a
r
F

y
n
a
m
r
e
G

42.1

38.8

30.7

38.4

38.1

37.5

(42.1)

38.9

39.0

41.0

42.1

42.1

39.0

39.1

38.6

45.4

41.4

39.0

40.1

36.9

(40.1)

36.4

36.1

35.5

36.2

36.9

37.1

39.0

40.1

40.1

37.1

37.1

36.7

50.3

39.5

37.5

e
c
e
e
r
G

34.4

31.1

29.2

30.6

30.2

d
n
a
l
e
r
I

11.7

8.8

-4.8

7.8

7.4

(34.4)

39.5

30.4

31.0

31.4

33.2

34.4

34.4

31.3

31.2

34.1

34.4

34.6

31.9

7.8

8.3

9.0

(11.7)

11.7

11.7

9.0

8.5

29.8

11.7

34.7

11.9

y
l
a
t
I

31.8

28.7

18.7

28.1

27.8

27.8

27.9

28.6

(31.8)

30.7

31.8

31.8

28.9

28.8

28.3

43.3

31.6

28.6

g
r
u
o
b
m
e
x
u
L

36.6

33.3

24.2

32.8

32.5

34.8

32.6

33.3

33.6

35.4

(36.6)

36.6

33.5

33.5

33.1

40.2

36.1

33.3

s
d
n
a
l
r
e
h
t
e
N

35.1

31.9

22.4

31.3

31.0

36.1

31.1

31.8

32.1

34.0

35.1

(35.1)

32.1

32.0

31.6

38.8

34.7

32.0

l
a
g
u
t
r
o
P

37.0

33.7

24.7

33.2

32.9

35.3

33.0

33.7

34.0

35.8

37.0

37.0

(37.0)

33.9

33.5

58.4

43.6

33.9

n
i
a
p
S

35.2

31.9

22.5

31.4

(35.2)

36.1

31.2

31.9

32.2

34.0

35.2

35.2

32.1

32.1

31.6

46.2

38.4

32.3

n
e
d
e
w
S

26.0

22.9

11.9

22.2

21.8

36.6

22.1

22.7

23.1

24.8

26.0

26.0

23.1

(26.0)

26.5

30.1

31.5

24.0

d
e
t
i
n
U

m
o
d
g
n
i
K

31.8

28.6

18.6

28.0

27.6

38.0

27.8

28.5

28.8

30.6

31.8

31.8

28.8

28.7

(31.8)

31.8

33.1

29.2

n
a
e

M

33.0

29.4

20.1

29.3

28.8

35.8

28.5

30.1

30.2

33.4

32.8

32.9

29.8

30.5

31.9

39.6

35.7

30.4

* The data into parenthesis represent the corresponding domestic effective average tax rates

26

Table 5

Effective Average Tax Rate when the subsidiary is financed with debt, year 1999
- only corporation taxes; weighted average of parent finance

EATR
%

o
t

a
i
r
t
s
u
A

m
u
i
g
l
e
B

k
r
a
m
n
e
D

d
n
a
l
n
i
F

e
c
n
a
r
F

from
Austria
Belgium
Germany
Denmark
Spain
Greece
France
Finland
Italy
Ireland
Luxembourg
Netherlands
Portugal
Sweden
UK
Canada
USA
Mean

(22.3) *
32.3
27.8
29.4
30.1
36.0
31.7
28.5
31.5
24.5
30.6
30.1
31.6
28.2
29.0
40.1
32.7
30.1

33.1
(25.8)
31.5
32.7
33.3
34.4
34.9
31.8
34.7
29.6
33.9
33.3
34.8
31.5
32.3
42.8
35.8
33.0

29.2
31.5
26.7
(22.1)
29.4
36.6
31.0
27.9
30.8
24.2
29.9
29.4
30.9
27.6
28.3
31.4
31.7
29.5

26.8
29.3
24.3
26.4
27.0
37.4
28.7
(19.3)
28.5
21.5
27.6
27.0
28.6
25.1
27.5
34.7
32.4
27.5

36.2
38.4
35.0
35.7
36.4
37.5
(28.8)
34.9
37.7
31.0
36.9
36.4
37.8
34.5
35.3
40.8
38.7
36.0

y
n
a
m
r
e
G

35.0
37.3
(27.7)
34.6
35.2
36.3
36.8
33.7
36.5
29.9
35.7
35.2
36.6
33.4
34.1
44.4
37.6
35.0

e
c
e
e
r
G

d
n
a
l
e
r
I

y
l
a
t
I

28.3
30.7
31.9
27.9
28.5
(20.8)
30.2
27.0
30.0
26.4
29.1
28.5
30.1
26.6
30.0
30.6
31.9
28.9

15.9
18.6
11.7
15.4
16.1
39.5
17.9
14.5
17.8
(8.2)
16.7
16.1
17.9
14.2
29.8
18.3
34.7
18.7

33.5
35.8
31.9
33.1
33.7
35.2
35.3
32.2
(26.1)
28.3
34.2
33.7
35.1
31.8
32.6
43.1
36.2
33.3

g
r
u
o
b
m
e
x
u
L

31.4
33.8
29.6
31.0
31.6
34.8
33.2
30.1
33.0
26.2
(24.0)
31.6
33.1
29.8
30.6
36.3
34.2
31.4

s
d
n
a
l
r
e
h
t
e
N

30.8
33.2
28.9
30.3
31.0
36.1
32.6
29.4
32.4
25.5
31.5
(23.3)
32.5
29.1
29.9
35.7
33.6
30.9

l
a
g
u
t
r
o
P

n
i
a
p
S

n
e
d
e
w
S

d
e
t
i
n
U

m
o
d
g
n
i
K

31.9
34.2
30.1
31.4
32.1
35.3
33.7
30.6
33.4
28.3
32.6
32.1
(24.5)
30.2
31.0
49.3
39.7
31.9

30.8
33.2
28.9
30.4
(23.3)
36.1
32.7
29.5
32.4
25.5
31.6
31.0
32.5
29.1
29.9
40.9
36.2
31.0

24.5
27.0
21.6
24.1
24.7
36.6
26.4
23.2
26.3
19.3
25.3
24.7
26.4
(17.1)
26.5
29.7
31.5
25.5

29.1
31.5
26.9
28.7
29.3
38.0
31.0
27.8
30.8
23.8
29.9
29.3
30.9
27.4
(21.6)
31.4
33.1
29.6

n
a
e

M

29.7
31.9
27.6
29.4
29.9
36.4
31.1
28.7
31.1
26.0
30.4
29.9
31.3
28.5
30.5
36.6
34.7
30.2

* The data into parenthesis represent the corresponding domestic effective average tax rates

27

Annex

Executive Summary of the Commission Services Study on

"COMPANY TAXATION IN THE INTERNAL MARKET"

 [SEC(2001)1681]

Introduction

1. 

2. 

The  conclusions  of  the  ECOFIN  Council  in  December  1998  requested  the
Commission  to  carry  out  an  analytical  study  on  company  taxation  in  the
European Union. This study should illuminate differences in the effective level
of  corporate  taxation  and  identify  the  main  tax  provisions  that  may  hamper
cross-border  economic  activity  in  the  Single  Market.  On  this  basis  an
assessment  should  be  undertaken  of  the  effects  on  the  location  of  economic
activity  and  investments.  In  July  1999  the  Permanent  Representatives
Committee  (COREPER)  refined  this  request  into  a  formal  mandate  for  the
Commission asking for a factual analysis and a policy assessment with a view
to EU company taxation.

The  Commission  has  been  assisted  by  two  specifically  created  panels  of
experts  one  focussing  on  the  method  for  calculating  the  effective  tax  rates  in
Member  States  and  the  other  on  the  remaining  tax  obstacles  to  the  proper
functioning of the Single market. The first panel was composed of  academics
with  appropriate  experience  and  scientific  reputation  in  relevant  theoretical
works. The second panel included experts from among the business community
and  social  partners  at  the  Community  level.  The  individual  members  of  the
second panel were designated by the respective organisations.

The Ruding report and the impact of the Internal Market

3. 

This  study  takes  the  report  of  the  Committee  of  Independent  experts  on
Company Taxation into account that was asked by the Commission in 1990 to
determine whether differences in business taxation and the burden of business
taxes among Member States lead to major distortions affecting the functioning
of  the  Single  Market  and  to  examine  all  possible  remedial  measures  (Ruding
Committee). The underlying analysis of this earlier study is mostly still topical.
In this  context it has  to  be  noted  that  little  progress  has  been  achieved  in  the
field  of  company  taxation  as  a  result  of  its  findings  and  recommendations.
However, the context for studying company taxation in the EU has since then
changed in various ways. Moreover, the mandate given to the Commission by
the Council for the present study is broader than that given by the Commission
to  the  expert  committee  in  1990  as  it  explicitly  requests  the  analysis  of  tax
obstacles in the Internal Market.

4. 

The  overall  economic  framework  has  changed  significantly  since  the  early
nineties. An unprecedented wave of international mergers and acquisitions, the
emergence of electronic commerce and the increased  mobility of  factors with

28

5. 

6. 

the growing development of  "tax havens" all change the scenery under which
European Member States levy taxes on company profits. These general global
developments are still on-going and are particularly strong within the Internal
Market.

Most  significantly,  the  Internal  Market  had  not  been  established  yet  in  1990.
The same holds for Economic and Monetary Union. Both developments impact
on  how  the  functioning  of  company  tax  systems  within  the  EU  has  to  be
evaluated.  As  economic  integration  in  the  Internal  Market  proceeded,  the
economic,  technological  and  institutional  barriers  to  cross-border  trade
continued to wane. At the same time, taxation systems adapted to this process
only very gradually. The pattern of international investments is therefore likely
to be increasingly sensitive to cross-border differences in corporate tax rules in
an environment now characterised by full mobility of capital. Moreover, while
considerable  progress  has  been  made  in  the  removal  of  the  wide  range  of
barriers  to  the  establishment  of  the  Internal  Market  (including  the  recent
agreement  on  the  European  Company  Statute),  the  tax  impediments  to  cross-
border  activities  within  the  Internal  Market  are  becoming  increasingly
important.  These  elements  describe  important  specific  EU  dimensions  on
company taxation which did not exist in the same way in 1990.

EU businesses are presently confronted with a single economic zone in which
15  different  company  tax  systems  apply.  This  causes  losses  of  economic
efficiency,  generates  specific  compliance  costs,  and  contributes  to  a  lack  of
transparency.  The  Internal  Market  and  Economic  and  Monetary  Union  also
strongly  impact  on  the  way  EU  companies  carry  out  business  in  the
Community and set the - intended - incentive to create effective pan-European
business  structures.  This  is  because  EU  companies  increasingly  no  longer
define one Member State but rather the whole EU as their "home market". The
the  EU-wide  re-organisation  and
to 
resulting  structural  changes 
centralisation  of  business  functions  within  a  group  of  companies,  many  of
which were traditionally present in many or even all Member States. Such re-
organisation  can  be  achieved  via  internal  realignments,  via  mergers  and
acquisitions or through  the  creation  of  foreign  branches.  These  tendencies,  in
turn, impact on the taxation of these companies. EU companies argue that their
perception of the EU as their "home market" generally does not correspond to a
tax  reality,  unlike  the  USA  for  US  companies.  Thus,  a  variety  of  legal  and
economic  factors  define  a  specific  "EU  dimension"  for  analysing  company
taxation.

lead 

The effective level of company taxation in the EU

7. 

From the point of view of economic efficiency, tax systems should ideally be
"neutral"  in  terms  of  economic  choices.  In  such  an  analytical  framework,  the
choice of an investment, its financing or its location should in principle not be
driven  by  tax  considerations.  From  this  perspective,  and  in  an  international
context, similar investments should not face markedly different effective levels
of taxation purely because of their country location. Differences in the effective
levels of corporate taxation may in fact imply welfare costs because economic
activity may not take place in the lowest (pre-tax) cost location by the lowest

29

8. 

9. 

10. 

11. 

12. 

cost producers. If the impact of differences in tax regimes favours one location
over another, or one producer over another, then goods may be produced at a
higher pre-tax cost. Therefore, the size of these tax differentials and dispersions
deserves attention.

However, a full welfare cost assessment of differences in effective corporation
tax rates would require a broader analysis, taking into account the existence of
other taxes and other economic parameters, as well as national preferences for
equity and the provision of public goods. Moreover, to the extent that there are
pre-existing  distortions  and/or  imperfections  in  the  market  economy  (market
failures),  taxes  may  be  used  to  internalise  these  externalities  (e.g.  pollution),
thereby  enhancing  economic  efficiency.  It  is  impossible  to  precisely  quantify
the  size  of  tax  differentials  needed  to  correct  or  mitigate  market  failures.
However, the larger the tax differentials, the larger the market failure must be
unless there is to be a loss of efficiency and welfare. It should be stressed that
this  study  has  not  attempted  to  quantify  the  size  of  any  efficiency  loss  or
welfare  cost  that  might  be  associated  with  existing  differences  in  effective
corporation tax rates in the European Union.

In  any  event,  taxation  ultimately  involves  a  political  choice  and  may  entail  a
trade-off  between  pure  economic  efficiency  and  other  legitimate  national
policy  goals  and  preferences.  Furthermore,  in  the  Community  context,  the
subsidiarity principle and Member States' competences in the field of taxation
have to be taken into account when assessing differences in effective tax rates
between Member States.

The  purpose  of  the  analysis  of  differences  in  the  EU  corporations'  effective
level  of  taxation  is  twofold.  First,  it  gives  summary  measures  of  the  overall
relative  incentive  (or  disincentive)  provided  by  each  country's  tax  law  to
undertake  various  types  of  investments  at  home  or  in  another  EU  Member
State.  Second,  it  identifies  the  most  important  tax  drivers  influencing  the
effective tax burdens, that is the weight of each of the most important elements
of the tax regimes in the effective tax burden.

The  analysis  does  not  provide  evidence  of  the  impact  of  taxation  on  actual
economic decisions. Although empirical studies show that there is a correlation
between  taxation  and  location  decisions,  because  of  the  weaknesses  of  the
existing methodologies and their limitations due to lack of available data, it has
been considered that none of the existing approaches could have been usefully
adopted  in  the  current  study  without  considerably  extending  the  range  of  the
work.

Taxation  is,  of  course,  only  one  of  the  determinants  of  investment  and
financing decisions. The existence and quality of economic infrastructures, the
availability of qualified work, as well as the short and medium-term outlook in
different markets and countries are among the other important determinants of
investment  behaviour.  The  geographical  accessibility  of  markets,  transport
costs,  environmental  standards,  wage  levels,  social  security  systems  and  the
overall  attitude  of  government  all  play  an  important  role  too.  Which  of  these
factors are relatively the more important very much depends on the individual

30

13. 

14. 

15. 

type of investment  decision.  Nevertheless,  as  economic  integration  in  the  EU
proceeds in the context of the Economic and Monetary Union and the Internal
Market,  in  an  environment  where  capital  is  fully  mobile,  the  pattern  of
international  investment  is  likely  to  be  increasingly  sensitive  to  cross-border
differences in corporate tax rules.

The  study presents  estimates  of  effective  corporate  tax  rates  on  domestic  and
transnational investments in the 15 EU countries (as well as the US and Canada
in  certain  cases)  taking  the  tax  systems  in  operation  as  of  the  year  1999.  In
addition,  it  presents  estimates  of  effective  corporate  tax  rates  on  domestic
investments  for  the  EU  Member  States  in  2001.  In  view  of  the  structure  and
magnitude  of  the  German  tax  reform  approved  in  2000,  the  effects  of  this
reform,  as  of  the  1st  January  2001,  are  separately  analysed.  The  calculations
consider primarily corporation taxes in each country, but also include the effect
of personal income taxation of dividends, interest and capital gains.

The  most  commonly  used  indicators  for  analysing  the  impact  of  taxation  on
investment  behaviour  are  based  on  forward-looking  approaches  which  permit
international  comparisons  and  are  especially  tailored  to  provide  an  indication
of  the  general  pattern  of  incentives  to  investment  that  are  attributable  to
different  national  tax  laws  as  well  as  on  the  most  relevant  tax  drivers  that
influence  the  effective  tax  burdens.  In  this  study,  the  main  body  of  the
computation  of  the  effective  corporate  tax  burden  builds  on  the  methodology
involving  calculating  the  effective  tax  burden  for  a  hypothetical  future
investment project in the manufacturing sector. In technical terms, the analysis
relies  on  a  revised  and  extended  methodology  of  the  so-called  King  &
Fullerton approach, set out by Devereux and Griffith (1998). This computation
is  supplemented  by  data  arising  from  the  application  of  the  "European  Tax
Analyzer"  model  which  utilises  the  model-firm  approach  set  out  by  the
University of Mannheim and ZEW (1999). Considering that each methodology
is based on different hypotheses and restrictions, the comparison of the results
of  these  approaches  permits  the  testing  and,  possibly,  confirmation  of  the
general trends arising from the computations.

The  results  of  the  application  of  these  approaches  depend  heavily  on  the
assumptions  underlying  both  the  definition  of  the  hypothetical  investment  in
terms of assets and financing or of the future firm behaviour in terms of total
cash receipts and expenses, assets and liabilities over time and of the economic
framework.  As  far  as the economic  framework is  concerned,  the  value  of  the
real  interest  rate  is  a  crucial  element.  The  existing  studies  based  on  these
approaches assume different hypotheses in relation to the economic framework
and the definition of the investment. This study, for example, like the Ruding
report, calculates effective tax rates at a given post-tax rate of return, whereas
other studies1 compute the effective tax rate for a given pre-tax rate of return.
Differences in the assumptions underlying the hypothetical investment and the
economic framework can give rise to somewhat different numerical results.

1

see, for instance: Baker & McKenzie, Survey of the Effective Tax Burden in the EU, Amsterdam;
1999 and 2001

31

                                                
16. 

17. 

18. 

19. 

20. 

These  approaches  do  not  permit,  for  methodological  reasons,  taking  into
consideration  in  the  computation  all  the  relevant  features  linked  to  the
existence and functioning of different tax systems. For instance, the effects of
consolidating profits and losses throughout the EU are not included because the
model assumes all investments are profitable. Neither is it possible to quantify
or include compliance costs. However, the most important features of taxation
systems such as the rates, major elements of the taxable bases and tax systems
are  included.  The  results  produced  should  therefore  be  understood  as
summarising and quantifying the essential features of the tax system.

Effective  tax  rates  can  be  calculated  for  a  so-called  "marginal"  investment
(where  the  post-tax  rate  of  return  just  equals  the  alternative  market  interest
rate) or for a "infra-marginal" investment project (i.e. one that earns an  extra-
profit).  This  study  has  analysed  both  marginal  and  infra-marginal  (average)
effective company tax indicators. These reflect different hypotheses related to
the  underlying  methodology,  as  well  as  to  the  domestic  or  international
localisation of the investment, the profitability of the investment or of the firm
considered,  and  the  size  and  behaviour  of  the  companies.  The  computations
have  been  supplemented  by  "sensitivity  analysis"  which  tests  the  impact  of
different hypotheses on the results.

The broad range of data computed does not intend to present "universally valid
values"  for  the  effective  tax  burden  in  different  countries,  but  rather  to  give
indicators, or illustrate interrelations, in a series of relevant situations. In fact,
effective tax rates in a particular Member State depend on the characteristics of
the specific investment project concerned and the methodology applied.

A number of general conclusions regarding both the differences in the effective
tax  burdens  and  the  identification  of  the  most  relevant  tax  drivers  which
influence these tax burdens, can nevertheless be formulated on the basis of the
results.  Therefore,  explanations  can  be  given  on  how  Member  States  tax
regimes  create  incentives  to  allocate  resources.  A  striking  feature  of  the
quantitative analysis is that, across the range of different situations, the relevant
conclusions and interpretations remain relatively constant.

When domestic investments are considered, the analysis for 1999 suggests that
there  is  considerable  variation  in  the  effective  tax  burden  faced  by  investors
resident in the various EU Member States, depending on the type of investment
and  its  financing.  However,  the  Member  States'  tax  codes  tend  to  favour  the
same forms  of  investment  by  assets  and  sources  of  finance.  The  range  of  the
differences  in  national  effective  corporate  taxation  rates,  when  personal
taxation is not taken into account is around 37 points in the case of a marginal
investment  (between  -4.1%  and  33.2%)  and  around  30  points  in  the  case  of
more profitable investments (between 10.5% and 39.1% when the hypothetical
investment  methodology  is  applied  and  between  8.3%  and  39.7%  when  the
"Tax  Analyser"  model  is  applied).  The  introduction  of  personal  taxation
substantially increases the effective tax burdens and  the  observed differences.
Moreover, the analysis suggests that, in practically every situation analysed tax
systems tend to favour investment in intangibles and machinery and debt is the
most tax-efficient source of finance.

32

21. 

22. 

A recent study by Baker and McKenzie conducted under different hypotheses
concerning the economic context and the applied tax codes, shows that in the
most similar economic situation to that considered in this study (pre-tax rate of
return  of  6%  as  against  a  post-tax  rate  of  return  of  5%  considered  in  the
Commission study), the range of variation is 32 points in the case of a marginal
investment (from 4.9% to  36.8%). When the pre-tax  rate  of  return  is  fixed  at
10%  (base  case  in  the  Baker  and  McKenzie  computation),  the  range  of
variation is 23 points  (from 6.8  to 30.1). This  study also  shows that  the most
tax efficient method of finance is debt and that the tax systems tend to favour
investments in intangibles and machinery.

Differences between the effective tax burden in the EU Member States may be
important  for  two  reasons.  First,  differences  in  effective  tax  rates  faced  by
companies  located  in  different  countries,  but  competing  in  the  same  market,
may  affect  their  international  competitiveness:  two  different  companies,
competing in the same market, may face two different tax rates. Second, when
multinational companies face only the tax rate of the country where the activity
takes place then differences in the effective tax rates between countries  could
also affect the location choice of individual activities. This can occur either as a
result  of  the  provisions  of  international  tax  codes,  for  example  when  the
repatriation of profits by way of dividend from a subsidiary to a parent results
in  no  further  taxation  because  the  dividend  is  exempt,  or  as  a  result  of  tax
planning.  A  multinational  company  may  therefore  face  different  tax  rates,
depending  on  where  its  activities  are  located.  As  indicated,  this  economic
reasoning is based on pure tax considerations and cannot, on its own, explain
the actual behaviour of companies.

Clearly, the EU wide spread cannot be explained by one single  feature of  the
national  tax  system.  However,  the  analysis  of  general  regimes  tends  to  show
that – leaving aside preferential tax regimes - the different national nominal tax
rates  on  profits  (statutory  tax  rates,  surcharges  and  local  taxes)  can  explain
many  of  the  differences  in  effective  corporate  tax  rates  between  countries.
Although  tax  regimes  are  designed  as  more  or  less  integrated  systems  (in
general high tax rates on profits seem to correlate with a narrower taxable base
and vice versa), tax rate differentials tend to outweigh the differences in the tax
bases. The quantitative analysis also shows that the relative weight of rates in
determining the effective tax burden of companies rises when the profitability
of the investment rises and  that,  consequently,  any  compensatory  effects  of  a
lower  tax  base  on  effective  tax  rates  tend  to  disappear  when  the  profitability
rises. The study conducted by Baker and McKenzie concluded that, in general,
the composition of the tax base does not have a  great  impact on the  effective
tax burden and that the level of the tax rate is the truly important factor for the
difference in the tax burden.

23. 

When  transnational  investments  are  considered,  the  results  for  1999  show
variations  in  the  way  each  country  treats  investments  in  or  from  other
countries. Thus, the effective tax burden of a subsidiary of a parent company in
one country depends crucially on where that subsidiary is located. On the basis
of  the  assumptions  considered  in  this  study,  the  range  of  variations  of  the
effective tax burdens of subsidiaries located in different host countries can rise

33

above 30 points regardless of  the method  of  financing of the subsidiary. This
provides an incentive for companies to choose the most tax-favoured locations
for  their  investment,  which  may  not  be  the  most  favourable  location  in  the
absence  of  taxes.  Similarly,  subsidiaries  operating  in  a  given  country  face
different  effective  tax  burdens  depending  on  where  their  parent  company  is
located. Even in this case the range of variation can reach more than 30 points.

24. 

The analysis of the effective tax burden of transnational investment also gives
an indication of the allocation effects of international taxation by capturing the

Corporate Tax Rates 1999 - Statutory, and Effective Average at pre tax returns of 20% & 40%

50,00%

45,00%

40,00%

35,00%

30,00%

25,00%

20,00%

15,00%

10,00%

5,00%

0,00%

EATR @ 20%
EATR @ 40%
Statutory Rate

Ireland

Finland

Sweden UK

Denmark

Austria
Netherlands

Spain

Portugal

Luxembourg

France

Greece

Belgium

Italy

Germany

extent to which the tax treatment of transnational investments gives incentives
to undertake transnational, as opposed to domestic, investment. The data show
that, on average in the EU, outbound and inbound investment are more heavily
taxed  than  otherwise  identical  domestic  investments  and,  therefore,  the
additional  components  of  the  transnational  system  add  somewhat  to  the
effective tax rates on investment.

25. 

26. 

But, to the extent that companies are free to choose the most tax-favoured form
of  finance,  then  the  international  tax  system  works  such  that  foreign
multinationals operating  in  a  host  country  are  likely  to  face  a  lower  effective
tax  burden  than  domestic  companies.  This  seems  to  be  true  even  when  the
treatment  of  multinationals  is  compared  with  the  more  favourable  domestic
treatment allowed for small and medium sized companies.

The  spreads  observed  between  the  effective  rates  of  taxation  in  the
international analysis are the results of complex interactions between different
tax regimes and cannot be explained by just one feature of taxation. However,
as was the case for the domestic investment, the analysis tends to show that the
most  relevant  tax  component  which  provides  an  incentive  to  locate  cross

34

27. 

28. 

29. 

border  and  to  choose  a  specific  form  of  financing  is  the  overall  nominal  tax
rate. This is, in general, an important tax driver when the incentives of taxation
to use particular sources of finance and specific locations are considered.  The
tax  base  does  however  have  a  greater  impact  in  specific  situations  when  a
country applies, for instance, particularly favourable depreciation regimes.

It is worth noting that across the range of domestic and cross-border indicators
presenting the effective tax burden at the corporate level, there is a remarkable
consistency  as  far  as  the  relative  position  of  Member  States,  notably  at  the
upper and the lower ranges of the ranking, is concerned. In general, Germany,
and  France  tend  to  show  the  highest  tax  burdens  while  Ireland,  Sweden  and
Finland  tend  to  be  at  the  lower  range  of  the  ranking.  Only  Italy's  ranking
changes materially when the profitability of the investment changes. Due to the
working  of  the  dual  income  system,  marginal  investments  are,  in  fact,
subsidised, whereas more profitable investments suffer an effective tax burden
which is in the middle range of the ranking.

When  the  domestic  analysis  is  updated  to  take  into  account  the  2001  tax
regimes,  the  overall  picture  is  broadly  unchanged  in  comparison  to  1999.
However,  as  a  consequence  of  a  pattern  of  generally  declining  statutory  tax
rates  (albeit  with  relatively  small  reductions  apart  from  Germany),  more
profitable  investments  benefited  from  reductions  in  effective  tax  rates  in  a
number of countries. As a result, the range of differences in domestic effective
tax rates in the case of  a more profitable investment decreased from  30  to  26
percentage points.

The  German  tax  reform  that  entered  into  force  at  1.1.2001  is  a  significant
reform which implies a substantial cut in the corporation tax rate and in income
tax  rates,  partly  financed  by  the  broadening  of  the  tax  base,  including  the
abolition of the split rate system and the imputation system. However, despite
these  changes  the  German  tax  reform  has  only  minor  effects  on  the  relative
position of Germany in the EU  country  ranking  and  both  the  overall  national
corporate  tax  rate  and  the  effective  tax  burden  remains  among  the  highest  in
the EU.

30. 

Simulating the impact of a hypothetical harmonisation of particular features of
taxation systems in isolation on effective tax rates shows that:

Introducing  a  common  statutory  tax  rate  in  the  EU  would  have  a  significant
impact  by  decreasing  the  dispersion  -  both  between  parent  companies  and
between  subsidiaries  -  of  marginal  and  average  effective  tax  rates  across  the
EU  countries.  To  the  extent  that  taxation  matters  such  a  scenario  would  be
likely to go some way in reducing locational inefficiencies within the EU.

By  comparison,  no  other  scenario  would  have  such  an  impact.  For  example,
introducing  a  common  tax  base  or  a  system  consisting  in  applying  the
definition  of  the  home  country  tax  base  to  the  EU-wide  profits  of  a
multinational  tends  to  increase  the  dispersion  in  effective  tax  rates  if  overall
nominal tax rates are kept constant.
Moreover,  two  remarks  have  to  be  made  concerning  these  results  for  a

35

31. 

common tax base. First, the methodologies applied do not permit to  take into
consideration  all  the  elements  of  the  tax  bases.  However,  the  "Tax  Analyser
model",  whose  results  are  similar  to  those  arising  from  the  simulations  of
hypothetical investment, does consider a more significant number of elements
of  the  tax  bases.  Second,  benefits  which  would  arise  under  either  a  common
consolidated  tax  base  or  a  home  country  tax  base  approach  such  as  loss
consolidation  and  simplified  transfer  pricing  cannot  be  modelled  using  the
methodologies used in this report.

It  is  worth  emphasising  that  these  results  are  based  on  a  static  analysis  and
cannot capture the dynamic effects and reactions induced by the harmonisation
of particular features of taxation in isolation.

The potential distortions in the allocation of resources reported in the analysis
of  transnational  investments  indicate  that  there  can  be  an  incentive  for
companies to alter their behaviour in order to minimise their global tax burden.
Therefore the study has considered some stylised examples of tax optimisation
strategy of companies by means of an intermediary financial company focusing
the attention on the likely effects of an abolition of these tax reducing financing
structures.  However,  the  removing  of  these  possibilities  of  optimisation
strategy  will  not  contribute,  per  se,  to  solving  the  problem  of  tax-induced
resources  mis-allocations.  Since  the  main  tax  driver  for  effective  tax  rate
differentials  is  the  overall  national  tax  rate,  companies  located  in  "high  tax"
countries  will  be  able  to  compensate  for  the  removal  of  these  financial
intermediaries  by  making  greater  use  of  differences  in  general  tax  rates  and
structuring their investments to take advantage of lower rates.

Tax obstacles to cross-border economic activities in the Internal Market

32. 

33. 

The  Council  mandate  also  asks  for  a  "highlighting  [of  the]  remaining  tax
obstacles  to  cross-border  economic  activity  in  the  Internal  Market"  and  calls
for  the  identification  of  "the  main  tax  provisions  which  may  hamper  cross-
border  economic  activity  in  the  Single  Market".  For  this  purpose  the  present
study focuses on additional tax or compliance burdens which companies incur
as  a  result  of  doing  business  in  more  than  one  Member  State  and  which
therefore  represent  a  barrier 
trade,  establishment  and
investment.

to  cross-border 

The  underlying  cause  of  those  additional  tax  and  compliance  burdens  is  the
existence within the Internal Market of 15 separate tax systems. First, the fact
that  each  Member  State  is  a  separate  tax  jurisdiction  has  a  number  of
consequences. In particular:

– 

companies  are  obliged  to  allocate  profits  to  each  jurisdiction  on  arm’s
length  basis  by  separate  accounting,  i.e.  on  a  transaction  by  transaction
basis;

–  Member  States  are  reluctant  to  allow  relief  for  losses  incurred  by
associated companies whose profits fall outside the scope of their taxing
rights;

36

34. 

35. 

36. 

37. 

38. 

– 

cross-border  reorganisations  entailing  a  loss  of  taxing  rights  for  a
Member  State  are  liable  to  give  rise  to  capital  gains  taxation  and  other
charges;

– 

double taxation may occur as a result of conflicting taxing rights.

Moreover, each Member State has its own sets of rules, in particular laws and
conventions  on  financial  accounting,  rules  for  determining  taxable  profit,
arrangements  for  collection and administration  of  tax  and  its  own  network  of
tax treaties. The need to comply with a multiplicity of different rules entails a
considerable  compliance  cost  and  represents  in  itself  a  significant  barrier  to
cross-border economic activity. The costs and risks associated with complying
with  more  than  one  system  may  in  particular  discourage  small  and  medium-
sized enterprises from engaging in cross-border activity.

These  fundamental  problems  hamper  cross-border  economic  activity  in  the
Internal  Market  and  adversely  affect  the  competitiveness  of  European
companies.  In  economic  terms  they  result  in  a  loss  of  potential  EU  welfare.
The  imminent  enlargement  of  the  EU  makes  it  all  the  more  urgent  to  find
appropriate solutions.

To  some  extent  the  problems  faced  by  the  EU  reflect  general  difficulties  in
taxing  international  activities,  and  the  work  of  the  OECD  and  its  forerunners
has  provided  the  basis  for  an  extensive  network  of  mainly  bilateral  double
taxation  treaties  between  Member  States.  The  OECD  has  also  published
guidance  on  a  range  of  international  tax  issues,  in  particular  concerning  the
application of transfer pricing methods and on documentation requirements. In
addition, the EU itself has taken several initiatives with a view to removing tax
obstacles to cross-border co-operation and activity: Directive 90/434 ("merger
directive"),  providing 
taxation  on  cross-border
the  deferral  of 
reorganisation;  Directive  90/435  ("parent-subsidiary  directive"),  eliminating
double  taxation  on  cross-border  dividend  payments  between  parent  and
subsidiary companies; and the Arbitration Convention (90/436), providing for a
dispute  resolution  procedure  in  the  area  of  transfer  pricing.  Although  going
some  way  to  resolving  the  obstacles  to  cross-border  activity  they  do  not
provide  a  solution  which  keeps  pace  with  the  growing  integration  in  the
Internal Market.

for 

A  basic  concern  of  companies  operating  within  the  Internal  Market  is  the
removal of tax obstacles to income  flows  between associated  companies. The
Parent-Subsidiary  Directive  abolishes  withholding  taxes  on  payments  of
dividends between associated companies of different Member States. However,
its  effectiveness  is  reduced  by  the  fact  that  it  does  not  cover  all  companies
subject to corporation tax and applies solely to direct holdings of 25% or more.

There is the further problem that - independent of the directive- certain systems
of  company  taxation  have  an  in-built  bias  in  favour  of  domestic  investment.
For example, under imputation systems applied in a number of Member States
a tax credit is granted to resident (individual or corporate) shareholders for the
tax paid on company level; that credit is usually not available to non-resident

37

39. 

40. 

shareholders and is not normally granted in respect of foreign dividends. There
is evidence to suggest that such systems form a serious obstacle to cross-border
mergers within the EU and can have an influence on related business decisions
(e.g. location of corporate seat).

Payments  of  interest  and  royalties  between  associated  companies  of  different
Member  States  are  often  still  subject  to  withholding  taxes  that  effectively
create situations of double taxation. The  Commission has already presented a
proposal for a directive on this subject [COM(1998)67], and it is expected that
this proposal will be adopted in the context of the "tax package".

In  addition  to  obstacles  to  income  flows,  corporate  restructuring  can  also  be
affected  by  one-off  costs  more  directly  linked  to  the  restructuring  operation
itself. The tax-cost induced by cross-border mergers, acquisitions and internal
reorganisations  in  the  form  of  capital  gains  tax  and  various  transfer  taxes  is
often  prohibitively  high  and  forces  companies  to  choose  economically  sub-
optimal  structures.  Such  obstacles  place  existing  EU  companies  at  a
disadvantage  as  non-EU  companies  as  new  entrants  will  generally  be  better
placed to set up the most suitable structure.

41. 

The merger directive provides for deferral of capital gains charges in a number
of situations. However, a number of problems remain:

– 

– 

– 

First, not all situations are covered. Like the Parent-Subsidiary Directive,
it  does  not  include  all  companies  subject  to  corporate  tax.  It  does  not
cover  all  types  of  tax  charge  (e.g.  transfer  taxes)  that  can  arise  upon  a
restructuring.  Moreover,  it  does  not  cover  all  types  of  operation  which
may be involved  in  a  restructuring,  e.g.  the  centralisation  of  production
or  other  activities.  Furthermore,  the  conversion  of  existing  operations
(subsidiaries)  into  branches  may  endanger  the  future  absorption  of  tax
losses accumulated pre-conversion.

Second,  the  directive's  usefulness  is  reduced  by  the  fact  that  currently
there  is  no  EU  company  law  framework  for  cross-border  mergers.
Companies  are  therefore  obliged  to  have  recourse  to  share  for  share
exchanges or transfers of  assets.  The  recent agreement  on the  European
Company Statute will change this situation in  one respect and  allow,  as
from 2004, for companies to merge into a new legal structure.

Third,  the  implementation  of  the  directive  differs  significantly  between
Member States. Even though such differences are to some extent intrinsic
to  the  legal  instrument  of  a  "directive",  the  study  identifies  significant
disparities which undermine the overall aims sought by the directive. In
particular  Member  States,  in  implementing  the  Directive,  have  imposed
varying  conditions  for  the  tax  deferral  provided  for  under  the  Directive
with  a  view  to  preventing  tax  avoidance,  in  some  cases  significantly
limiting  the  scope  of  the  Directive  and  leaving  situations  of  double
taxation unrelieved.

38

42. 

43. 

44. 

45. 

46. 

The  study  identifies  particular  difficulties  in  relation  to  cross-border  loss-
compensation  which,  from  a  business  perspective,  constitute  one  of  the  most
important  obstacles  to  cross-border  economic  activity.  The  current  rules  in
Member  States  generally  allow  only  for  the  offsetting  of  losses  of  foreign
permanent  establishments  but  not  for  those  of  subsidiaries  belonging  to  the
same  group  but  located  in  different  EU  countries.  If  available,  the  loss
compensation  often  takes  place  only  at  the  level  of  the  parent  company  or  is
deferred  in  comparison  to  domestic  losses  (which  creates  significant  interest
cost).  The  differences  which  exist 
loss
compensation arrangements also impact on business decisions.

in  Member  States’  domestic 

The current loss compensation arrangements entail a risk of  economic double
taxation  where  losses  cannot  be  absorbed  locally.  This  situation  provides  an
incentive in favour of domestic investment and of investment in larger Member
States.

In  the  area  of  transfer  pricing,  the  tax  problems  for  cross-border  economic
activity in the Internal Market have increased over the past  years and  are still
growing.  The  problems  consist  essentially  in  high  compliance  costs  and
potential double taxation for intra-group transactions. A difficulty, according to
business representatives, is that the transfer prices which are calculated for tax
purposes  often  no  longer  serve  any  underlying  commercial  rationale  in  the
Internal  Market.  There  is  in  particular  an  increasing  practice  among  larger
companies to adopt, in EU intra-group trade, standard "euro" transfer prices for
intermediate  products,  regardless  of  the  production  facility  from  which  the
goods are purchased within the group.

intangibles)  cause  growing  difficulties 

There  is  also  a  tendency  among  Member  States,  fearing  manipulation  of
transfer prices, to impose increasingly onerous transfer pricing documentation
the  various  methods  for
the  application  of 
requirements.  Moreover, 
determining  the  "correct"  (i.e.  "arm's  length")  transfer  price  for  a  determined
intra-group  transaction  is  becoming  increasingly  complex  and  costly.  New
technologies  and  business  structures  (which  imply,  inter  alia,  more  emphasis
the  comparable
on 
uncontrolled transactions often required for establishing the arm's length price.
In  addition,  there  are  substantial  divergences  in  the  detailed  application  of
transfer  pricing  methods  between  Member  States.  The  same  holds  for  their
implementation of the relevant OECD guidelines. EU businesses therefore face
uncertainty  as  to  whether  their  transfer  prices  will  be  accepted  by  the  tax
administrations upon a subsequent audit. The study indicates that the combined
effect  of  these  difficulties  for  companies  can  be  a  significant  increase  in
compliance cost for international activities.

identify 

to 

transaction,  without 

Double taxation in transfer pricing occurs when the tax  administration of one
Member State unilaterally adjusts the price put by a company on a cross-border
intra-group 
this  adjustment  being  offset  by  a
corresponding  adjustment  in  the  other  Member  State  or  States  concerned.
While  inquiries  made  by  the  Commission  services  among  Member  States
suggest that the number of transfer pricing disputes between Member States is
fairly limited, a survey of multinational companies published by the accounting

39

firm  Ernst&Young2  reports  a  significant  number  of  instances  of  double
taxation  arising  from  transfer  pricing  adjustments.  This  is  consistent  with
representations made by business representatives, who complain moreover that
the cost and time relating to the current dispute settlement procedures are often
too high for enterprises with the result that it is often less costly to accept the
double  taxation.  In  this  context  the  present  study  finds  that  the  Arbitration
Convention 90/436/EEC,  which  seeks  to  provide  a  binding  dispute  resolution
procedure,  is  rarely  used  and  that  certain  of  its  provisions  may  act  as  a
deterrent for taxpayers to make use of it.

In  short,  the  study  concludes  that,  while  there  is  evidence  for  aggressive
transfer  pricing  by  companies,  there  are  equally  genuine  concerns  for
companies which are making a bona fide attempt to comply with the complex
and  often  conflicting  transfer  pricing  rules  of  different  countries.  Such
concerns  are  becoming  the  most  important  international  tax  issue  for
companies.

The study also identifies the area of double taxation conventions as a potential
source of obstacles and distortions for cross-border economic activities within
the  EU.  Although  the  intra-EU  network  of  double  taxation  treaties  is  largely
complete,  there  nevertheless  remain  some  gaps.  Most  treaties  within  the  EU
follow the OECD Model but there are significant differences in the terms of the
various  treaties  and  their  interpretation.  There  are  also  instances  of  divergent
application of treaties by the treaty partners, leading to double taxation or non-
taxation.  Business  representatives  also  refer  to  the  increasing  complexity  of
treaty provisions as a source of compliance cost and uncertainty. What is more,
the  study  shows  that  tax  treaty  provisions  based  on  the  OECD  Model,  in
particular  non-discrimination  articles,  are  not  adequate  to  ensure  compliance
with  the  EU  law  principle  of  equal  treatment.  Moreover,  the  lack  of  co-
ordination in the treaty practice of Member States in relation to third countries,
for  example  regarding  limitation  of  treaty  benefits,  is  liable  to  give  rise  to
distortions and partitioning of the Internal Market.

The  study  also  notes  that  certain  areas  of  taxation  which  do  not  form  part  of
company taxation may nevertheless entail significant obstacles to cross-border
economic  activity  in  the  EU.  This  notably  relates  to  the  taxation  of  fringe
benefits  and  stock  options,  of  supplementary  pensions  as  well  as  VAT.  It  is
important to note that together with the company tax obstacles these difficulties
have a cumulative effect for the companies concerned. As regards VAT, this is
particularly true for small and medium-sized enterprises for which the nature of
the  various  tax  obstacles  to  cross-border  economic  activity  is  generally
identical  but  which  suffer  from  disproportionately  -  and  sometimes
prohibitively - high compliance cost for dealing with them.

47. 

48. 

49. 

2

Ernst-Young Survey: Transfer pricing 1999 Global Survey: Practices, Perceptions, and Trends for
2000 and beyond

40

                                                
Remedies to the tax obstacles in the Internal Market

50. 

There are essentially two approaches which could be envisaged for tackling the
company tax obstacles in the Internal Market:

51. 

52. 

53. 

– 

Targeted solutions which seek to remedy individual obstacles

–  More  comprehensive  solutions  which  seek  to  address  the  underlying

causes of the obstacles.

A  comprehensive  approach  providing  EU  businesses  with  a  single  common
consolidated  tax  base  for  their  EU  activities  would  address  most  of  the  tax
obstacles  to  cross-border  economic  activity  that  have  been  identified.  A
piecemeal approach only is unlikely to achieve this in a comparable manner. It
should  also  be  noted  that  clearly  all  proposals  raise  a  number  of  technical
issues which would need to be explored in greater detail.

Regardless of the basic approach of remedies, it is important to note that in the
absence of political solutions taxpayers have been compelled to have recourse
to  the  legal  process  to  overcome  discriminatory  rules  and  other  obstacles.  In
consequence, the European Court of Justice (ECJ) has developed a large body
of case law on the compatibility of national tax rules with the Treaty. National
courts are also increasingly being asked to give rulings in this area. While the
ECJ  has  made  a  significant  contribution  to  the  removal  of  tax  obstacles  for
companies,  it  is  unlikely  that  the  interpretation  of  the  Treaty  is  sufficient  to
address  all  tax  obstacles  to  cross-border  activity.  Moreover,  ECJ  rulings  are
confined  to  the  particular  case  put  to  it  and  may  therefore  relate  solely  to
individual aspects of a more general issue. The implementation of ECJ rulings
is left to Member States, who often fail to draw the more general consequences
which  flow  from  them.  There  therefore  seems  to  be  scope  for  introducing  a
Community framework for exchanging views of the implications of significant
ECJ rulings.

One important example for the aforementioned principle is the problem of the
bias in favour of domestic investment in certain systems of company taxation,
notably imputation systems, for which the case law of the Court has particular
significance.  Recent  rulings,  such  as  Safir,  Verkooijen  and  Saint-Gobain,
suggest that tax systems which  provide a  disincentive to  cross-border activity
or  investment  may  be  contrary  to  the  Treaty  provisions  on  the  fundamental
freedoms. Such rulings raise important issues for the design of Member States’
tax systems for which more guidance on EU level would be desirable.

Targeted remedial measures

54. 

The  various  problems  relating  to  the  divergence  of  application  of  (both  the
existing  and  future)  EU  Taxation  Directives  across  Member  States  could  be
tackled  via  a  regular  exchange  of  best-practices  and/or  some  form  of  peer
review.  This  could  also  give  the  opportunity  to  develop  a  more  common
understanding  of  important  concepts  in  EU  company  taxation,  notably  tax
avoidance. Ensuring a more uniform application of EU tax law is an important

41

55. 

56. 

57. 

58. 

59. 

step  in  order  to  reduce  compliance  costs  and  increase  the  efficiency  of  EU
company taxation. At the same time, the need for litigation would be reduced.

The shortcomings identified in the Merger Directive and the Parent-Subsidiary
Directive suggest the need for amendment of those directives. The Commission
has already presented proposals for amendment of the directives suggesting, in
essence, that their scope be extended to cover other entities subject to company
taxation  [COM(93)293].  In  addition  to  this  and  with  a  view  to  clarifying  the
scope  of  certain  important  provisions  in  the  directives,  notably  those
concerning  avoidance  and  abuse,  further  amendments  to  the  Directive  and/or
more detailed guidance on how those provisions should be implemented could
help.

As  regards  the  merger  directive,  the  study  also  identifies  certain  other  areas
where  further  amendments  would  facilitate  cross-border  restructuring.  Within
the logic  of  the  existing  Directive, it  could first  be  examined  to  which  extent
specific transfer taxes arising on cross-border restructuring operations (notably
on  immovable  property)  could  be  taken  into  account.  Second,  the  Directive
could be clarified to make it clear that instances of economic double taxation
should be avoided. One example for this could be to prescribe that capital gains
arising  on  the  sale  of  shares  received  in  exchange  for  shares  or  assets  are
calculated  on  the  basis  of  the  market  value  at  the  time  of  the  exchange,  thus
resolving  previously  accumulated  "hidden  reserves"  without  immediate  tax
consequences.  A  more radical change  to  the  Directive  would  be  to  extend  its
scope  so  as  to  defer  the  triggering  of  tax  charges  where  assets  are  moved  to
another  Member  State  while  preserving  Member  States’  tax  claims.  The
parent-subsidiary directive could be amended to cover both direct and indirect
shareholdings  or,  alternatively,  provide  for  a  lower  minimum  holding
threshold.

Finally, it may be noted that the recent  agreement  on  the European Company
Statute  will  provide  a  company  law  framework  for  cross-border  mergers  the
absence of which has hitherto undermined the utility of the Merger Directive.

As regards cross-border offsetting of losses, the Commission in 1990 presented
a  proposal  for  a  directive  [(COM(90)595]  allowing  parent  companies  to  take
into account the losses incurred by permanent establishments and subsidiaries
situated in another Member State. The Council failed to adopt the proposal and
has ceased discussion of it. A review of the proposal conducted as part of the
present study suggests that a number of technical amendments could be made
to  the  proposal.  For  example,  it  could  be  envisaged  calculating  losses
according to the rules of the State of the parent company rather than that of the
subsidiary as under the proposal.

Alternatively,  a  similar  result  from  the  company's  perspective  could  be
achieved by devising a scheme similar to the Danish system of 'joint taxation'.
In essence under the Danish arrangements a group of companies with a Danish
parent  company  is  taxed  as  if  it  were  organised  as  a  branch  structure  so  that
Denmark  taxes  the  consolidated  results  of  the  group.  The  advantage  of  this

42

60. 

61. 

62. 

approach over the Commission proposal lies in the greater symmetry between
the taxation of profits and the offset of losses.

There are a variety of measures available that would help remedy the various
transfer  pricing  problems.  The  practical  application  of  the  Arbitration
Convention  could  certainly  be  improved  and  its  provisions  made  subject  to
interpretation by the Court. Moreover, Member States could be encouraged to
introduce  or  expand  bilateral  or  multilateral  Advance  Price  Agreement
programmes;  such  instruments,  although  costly,  are  an  effective  means  of
dealing with the uncertainty relating to transfer  pricing. Subject to safeguards
to  prevent  aggressive  tax  planning,  a  framework  for  prior  agreement  or
consultation  before  tax  administrations  enforce  transfer  pricing  adjustments
could also be considered.

More generally, the compliance costs and the uncertainty could be reduced by
better  co-ordination  between  Member  States  of  documentation  requirements
and of the application of the various methods, for example by developing best
practices. Such co-ordination could take place in the context of an EU working
group and should build upon and complement the OECD activities in this field.
It would be possible to develop that process further in order also to address the
concerns of business. The establishment by the Commission of a Joint Forum
on  transfer  pricing  comprising  representatives  of  tax  authorities  and  business
might  allow  the  currently  conflicting  perspectives  of  the  two  sides  to  be
reconciled. While on the one hand tax administrations view transfer pricing as
a common vehicle for tax avoidance or evasion by companies and as a source
of harmful tax competition between Member States, business on the other hand
considers  that tax  authorities  are imposing  disproportionate  compliance  costs.
The  study  finds  that  both  sides  have  legitimate  concerns  to  which  it  is
necessary to seek a balanced solution through a dialogue on EU level. A more
uniform  approach  by  EU  Member  States  would  also  contribute  to  a  stronger
position in relation to third countries.

The  filling  of  the  few  remaining  gaps  in  the  existing  network  of  double
taxation  treaties  within  the  EU  would  be  helpful.  Moreover,  the  current  tax
treaties  of  Member  States  could  be  improved  in  order  to  comply  with  the
principles  of  the  Internal  Market,  in  particular  in  relation  to  access  to  treaty
benefits.  Better  co-ordination  of  treaty  policy  in  relation  to  third  countries
would  also  help.  In  addition,  the  study  identifies  a  possible  need  for  binding
arbitration  where  conflicts  arise  between  treaty  partners  in  the  interpretation
and application of a treaty, leading to possible double taxation or non-taxation.
The  most complete solution to  such  problems  would  be  the  conclusion  under
Article  293 of the Treaty  of  a multilateral tax treaty  between  Member  States,
conferring interpretative jurisdiction on the Court. Another possibility, leaving
intact the existing bilateral system, would be to elaborate an EU version of the
OECD  model  convention  and  commentary  (or  of  certain  articles)  which  met
the specific requirements of EU membership.

63. 

Despite  the  fact  that  tax  compliance  costs  are  regressive  to  the  size  of  the
company, the study finds that the nature of the obstacles is essentially the same
for  all  companies.  Therefore  specific  tax  initiatives  for  small-  and  medium-

43

instance, 

the  administrative 

sized enterprises do not seem to be justified. There are however exceptions to
this basic approach which could be usefully addressed mainly at Member State
level.  For 
formalities,  bookkeeping
requirements  etc.  for  small-  and  medium-sized  enterprises  should  be  less
demanding  than  for  bigger  companies,  also  in  cross-border  situations.
Moreover, the  difficulties  with the cross-border  offsetting  of  losses  hit  small-
and medium-sized enterprises particularly hard and therefore seem to deserve a
specific remedy.

tax 

Comprehensive approaches on EU company taxation

64. 

The study also examines more general remedial measures aimed at minimising
or  removing  the  obstacles  in  a  more  comprehensive  manner  and  analyses  a
number  of  comprehensive  approaches  that  have  been  presented  to  the
Commission.  All  aim  to  address  the  various  tax  obstacles  by  providing
multinational  companies  with  a  common  consolidated  tax  base  for  their  EU-
wide activities:

– 

– 

– 

– 

Under the mutual recognition approach of "Home State Taxation" the tax
base  would  be  computed  in  accordance  with  the  tax  code  of  the
company's home state (i.e. where the headquarter is based), thus building
on  the  existing  tax  systems  and  the  related  experience  and  knowledge.
This  approach  is  conceived  as  an  optional  scheme  for  companies  in
Member States with a sufficiently similar tax base.

Another  possibility  would  be  to  devise  completely  new  harmonised  EU
rules for the determination of  a single tax base  on European  level.  This
again would be an  optional  scheme  for  companies  existing  as  a  parallel
system  alongside  present  national  rules.  Generally  known  as  "Common
(Consolidated)  Base  Taxation",  this  approach  is  advocated  in  particular
by some business representatives.

A  further  model  suggested  in  some  literature  would  be  a  "European
Corporate  Income  Tax".  This,  although  originally  conceived  as  a
compulsory  scheme  for  large  multinationals,  could  also  be  an  optional
scheme  operating  alongside  national  rules.  Under  this  model  the  tax
could  be  levied  at  the  European  level  and  a  part  or  all  of  the  revenue
could go directly to the EU.

Finally, the more ‘traditional’ approach would be  to harmonise national
rules on company taxation by devising a single EU company tax base and
system as a replacement for existing national systems.

65. 

The most important fundamental advantages of providing EU businesses with a
single  consolidated  tax  base  for  their  EU-wide  activities,  under  whichever
form, are as follows:

– 

The compliance cost resulting from the need to deal with 15 tax systems
within the Internal Market would be significantly reduced.

44

– 

– 

Transfer  pricing  problems  within  the  group  of  companies  would
disappear, at least within the EU.

Profits  and  losses  would,  in  principle,  be  automatically  consolidated  on
an EU basis.

–  Many international restructuring operations would be fiscally simpler and

less costly.

The  business  representatives  of  the  expert  panel  assisting  the  Commission
emphasised  these  fundamental  points.  Under  a  comprehensive  approach  of
whatever precise design compliance cost would be reduced, many situations of
double-taxation  would  be  avoided  and  many  discriminatory  situations  and
restrictions would be removed.

By definition, an essential  element of  all the  solutions  is  that  there  should  be
group  consolidation  on  an  EU-wide  basis.  At  present  not  all  Member  States
apply that principle even at the domestic level and only two at the international
level.  Under  all  approaches  (with  the  possible  exception  of  the  European
Corporate  Income Tax) Member States  would  retain  the  right  to  set  company
tax rates.

To  a  varying  extent,  all  comprehensive  approaches  could  potentially  be
designed  such  that  not  all  Member  States  would  have  to  participate.  In  this
context, it is important to note that the Treaty of Nice extended the possibility
for enhanced  co-operation by  a  group  of  Member  States  where  agreement  by
all  15  is  not  possible.  This  may  be  particularly  appropriate  for  Home  State
Taxation, which presupposes the participation solely of Member States with a
fairly close  tax  base.  However,  a  group  of  Member  States  could  equally  take
advantage of this mechanism in order to introduce any of the other approaches.

A further key element of all the comprehensive approaches is a mechanism for
allocating the common consolidated tax base to the various Member States. For
this purpose the USA and Canada use a formula apportionment system which
allocates the tax base according to a key composed of factors such as payroll,
property  and/or  sales.  Another  solution  available  to  the  EU  would  be  to
apportion the tax base according to the (adjusted) value-added tax base of the
companies  involved.  Under  all  of  these  Member  States  would  be  allocated  a
specific  share  of  the  overall  tax  base  according  to  apportionment  keys  and
apply their national tax rate to that share.

All the  above  models  would  meet  the  concerns  inasmuch  as  they  remove  the
need  to  comply  with  up  to  15  different  tax  systems,  largely  eliminate  the
transfer  pricing  problems  arising  from  separate  accounting  and  effectively
provide  for  cross-border  loss  compensation.  They  would  also  provide  a  tax
solution for the European Company. An appraisal of the various models should
take account of their respective characteristics.

66. 

67. 

68. 

69. 

70. 

71. 

An  important  point  to  note  is  that  Home  State  Taxation  does  not  require
Member States to agree on a new common EU base because it is based on the

45

72. 

principle  of  mutual  recognition  by  Member  States  of  each  other’s  tax  codes.
The other approaches all entail agreement on an entirely new tax code.

By  contrast  with  a  compulsory  harmonised  base,  Home  State  Taxation,
Common  (Consolidated)  Base  Taxation  and  European  Corporate  Income  Tax
operate alongside and do not fully replace existing national systems. In certain
circumstances  however  this  can  have  the  disadvantage  that  competing
enterprises in other Member States  are subject to  different  taxation  rules.  For
example, under Home State Taxation three competing retail shops in Germany
would compute their tax base under Belgian, French or German rules according
to whether the home state of the group to which they belonged  was  Belgium,
France  or  Germany.  However,  the  differences  may  be  relatively  small  given
that  an  underlying  assumption  of  the  Home  State  Taxation  model  is  that
participating States will have similar tax bases. Under Common (Consolidated)
Base Taxation or European Corporate  Income Tax competing businesses may
be subject to either local or Common (Consolidated) Base Taxation / European
Corporate Income Tax rules, which may be quite different. It may however be
possible to permit local companies to opt into the scheme, for example, where
there are competition issues.

73. 

In  addition  the  solutions  based  on  a  parallel  rather  than  a  single  compulsory
system raise a number  of technical issues  requiring  further  study.  Among  the
main  issues  are  those  relating  to  restructuring,  foreign  income  and  double
taxation treaties, and minority interests.

– 

– 

First,  as  regards  restructuring,  since  under  Home  State  Taxation  a
company’s  tax  base  is  determined  in  accordance  with  the  rules  of  its
parent’s  state,  each  time  the  ownership  of  a  company  changes  and  its
shares  are  sold  the  method  by  which  it  computes  its  tax  base  could
change.  This  equates  in  current  terminology  to  a  potential  change  of
residence and is potentially very costly. For example a Belgian subsidiary
sold by its German Home State Taxation parent to a French parent could
find its tax base changing from German to French, or if France were not
participating in Home State Taxation, back to a Belgian base. In contrast,
as under Common (Consolidated) Base Taxation there would only be one
tax base such a sale within the Common (Consolidated) Base area would
not  involve  such  a  change,  and  even  if  a  company  were  sold  to  a  new
parent  from  a  non  participating  state  treatment  under  the  Common
(Consolidated) Base system could perhaps be maintained.

Second,  the  treatment  of  foreign  income  under  Home  State  Taxation,
Common  (Consolidated)  Base  Taxation  or  European  Corporate  Income
Tax  is  complicated  by  the  current  situation  of  bilateral  double  taxation
agreements,  the  co-existence  of  exemption  and  credit  relief  tax  systems
and  the  need  for  a  system  of  allocation.  For  example,  a  subsidiary  in  a
state which operates the credit system, with a 3rd country branch may be
entitled under its DTA to a credit for foreign tax paid by the branch. This
could give rise to a claim under the DTA for the foreign tax credit even
though  the  foreign  income  had  been  exempted  under  the  Home  State
Taxation rules.

46

74. 

75. 

76. 

– 

Third,  minority  shareholders  might  find  themselves  receiving  dividends
under  a  taxation  system  which  is  incompatible  with  their  existing  local
personal  tax  system.  For  example  a  minority  shareholder  might  receive
dividends  paid  under  a  Common  (Consolidated)  Base  Taxation  or
European  Corporate  Income  Tax  imputation  system  whereas  previously
dividends had been paid under the local  classical system. This can only
be  avoided  if  the  payment  of  dividends  by  subsidiaries  to  minority
shareholders remains subject to the local tax code which is the approach
envisaged  under  Home  State  Taxation.  This  would  imply  additional
record keeping.

These  issues  would  not  arise  if  Member  States  were  to  agree  on  the  more
traditional solution of a single harmonised company tax system, i.e. a common
consolidated  base  with  an  agreed  allocation  system  and  method  of  dividend
distribution. Nevertheless, despite their drawbacks, the other solutions meet the
objectives  of  removing  obstacles  to  cross-border  activity  without  requiring
such  fundamental  change.  More  generally,  all  the  solutions  would  have  the
potential  to  contribute  to  greater  efficiency,  effectiveness,  simplicity  and
transparency  in  EU  company  tax  systems  and  remove  the  hiatuses  between
national systems which provide fertile ground for avoidance and abuse.

The assessment of tax obstacles in the Internal Market reveals that many of the
factors causing compliance cost also tend to increase the administrative cost for
tax administrations. This is particularly evident with a view to transfer pricing.
Moreover, the co-existence of 15 company tax systems in one Internal Market
opens  considerable  room  for  tax  evasion  and  tax  avoidance.  Therefore,  many
remedial  measures  will  also  to  some  extent  benefit  the  efficiency  and
effectiveness  of  tax  administrations.  Finally,  almost  all  remedial  measures,
targeted or comprehensive, call for more mutual assistance and administrative
co-operation  between  Member  States  which  provides  reliable  means  for
ensuring that tax audits will continue to be made in an appropriate way and that
none  of  the  remedies  under  consideration  results  in  illegitimate  and/or  illegal
tax evasion.

In short, the report concludes that there are potentially significant benefits to be
derived  from  providing,  via  a  genuinely  comprehensive  solution,  companies
with a common consolidated tax base for the EU-wide activities. However, its
findings are based mainly on the current stage of development of the research
and further work would be necessary to implement any of the comprehensive
approaches. Any solution going in this direction must obviously also take into
account the  competition rules  laid  down  in  the  EC  Treaty,  in  particular  those
concerning  State  Aids.  Moreover,  as  already  noted,  the  results  of  the
quantitative  analysis  suggests  that  that  the  overall  national  tax  rate  is  an
important  factor  in  determining  the  effective  tax  rate,  and  it  is  clear  that  a
single  or  common  base  without  further  adaptations  in  practice  would  almost
'mechanically' accentuate this.

47