Opinion of the Economic and Social Committee on "Fiscal competition and its impact on company competitiveness"
Date: 2002-04-25
Institutions: European Economic and Social Committee
Subjects: business policy, competitiveness, tax harmonisation, tax system

21.6.2002

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Official Journal of the European Communities

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Opinion of the Economic and Social Committee on ‘Fiscal competition and its impact on
company competitiveness’

(2002/C 149/16)

On 28 February 2001, the Economic and Social Committee, acting under Rule 23(3) of its Rules of
Procedure, decided to draw up an opinion on ‘Fiscal competition and its impact on company
competitiveness’.

The Section for Economic and Monetary Union and Economic and Social Cohesion which was responsible
for preparing the Committee’s work on the subject, adopted its opinion on 25 February 2002 by a large
majority with 4 abstentions. The rapporteur was Mr Morgan.

At its 390th plenary session (meeting of 25 April 2002), the Economic and Social Committee adopted
the following opinion by 90 votes to 3 and 2 abstentions.

1.

Introduction

1.1.
The EESC has chosen to prepare an Own-initiative
Opinion on Fiscal Competition and Company Competi-
tiveness. The concerns which caused the opinion to be initiated
were well justified. There was evidence of widespread abuse.
However, as a result of recent EU and international initiatives,
the whole spectrum of issues is now being addressed. Accord-
ingly,
in this opinion, we define the issues and present a
progress report on the actions being taken.

1.2.
By ‘company competitiveness’ we mean a company’s
ability to survive and thrive in face of continually changing
market forces while fulfilling its responsibilities to share-
holders, employees, customers and suppliers.

Amongst the range of market forces which represent

1.3.
opportunities and threats to companies are factors such as:

— changing consumer preferences;

— competitor advances;

— economic cycles;

— impact of the single market;

— impact of globalisation.

costs and social systems, environmental taxation and regu-
lation, consumer regulation, transport infrastructure, workfor-
ce skills, education, health and the pattern of international
agreements. Most direct, of course, is the basis and scale of
company taxation.

1.5.
By ‘fiscal’ we mean the national fisc of EU Member and
non-Member States. In other words we mean the pattern of
tax receipts and public expenditure. ‘Fiscal competition’ can
arise in two ways. First, the overall fiscal posture of one
country versus others can make that country more attractive
to businesses. In this respect the basis and scale of company
taxation is often the key determinant. Second, whatever their
basic fiscal policies, states may make exceptions, derogations
etc. with the specific aim of attracting and retaining company
presence in the country. This is defined as harmful
tax
competition. These inducements may also take the form of
state aids.

Company decisions relative to facility location for
1.6.
optimum competitiveness are not necessarily and certainly not
only fiscally driven. Different factors will be more or less
important for different companies in different industries.

In our review of current EU and international initiat-

1.7.
ives we have considered the following:

— EU tax priorities;

— EU Commission study of company taxation;

The whole range of government activity, policy and
1.4.
action in many fields also create factors which can affect the
competitiveness of firms. Typical factors are employee social

— EU Code of Conduct to eliminate harmful tax compe-

tition;

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— EU actions to eliminate harmful state aids;

— OECD actions.

And there is a further reference in section 2.4: ‘(...) The level of
public expenditure is equally a matter for national preferences
as long as this is adequately met by revenues in such a way
that budget positions remain close to balance or in surplus
(...).’

2. Review of initiatives

2.1.

EU tax priorities

2.1.1.
The Commission published a Communication dated
23 May 2001 entitled ‘Tax policy in the European Union
— Priorities for the years ahead’. An Opinion on this
Communication has been presented (1). The Communication
gives a number of insights into the fiscal competition issue.
This Communication is also discussed at 4.1.

2.1.1.1.
In section 3.2.1 there is a reference to the inter-
national framework: ‘(...) The overall aim of the major world
economies, including those of the EU Member States, has been
to work towards a fiscal climate which promotes free and fair
competition and is conducive to cross-border business activity,
while at the same time ensuring that national tax bases are not
eroded. The work on tackling harmful tax competition, both
in the OECD and also in the EU through the tax package, has
been central to this aim in the last few years.’

2.1.1.2.
In section 1 there is a reference to harmful tax
‘The efforts to curb harmful tax competition
competition:
through the Code of Conduct for business taxation and the
proposals on the taxation of
income from savings will
allow Member States to consolidate their tax revenue raising
capacities, thus offering scope for reducing the high average
tax burden on labour.
It is important therefore that the
Community sees the various elements of the tax package
through to their conclusion.’

In section 2.1 the options for national

2.1.1.3.
fiscal
strategies are discussed: ‘The EU policy dialogue has promoted
an integrated approach with a greater awareness of policy
options and constraints for taxation. Tax cuts should be
focused on areas where they have beneficial supply side effects
and they should be accompanied by reforms to benefit systems
in order to increase growth potential and employment.
Emphasis has been put on the need to reduce the fiscal
pressure on labour and non-wage labour costs, in particular
on relatively unskilled and low-paid labour.’

2.2.

EU company taxation study

2.2.1.
The Commission study on Company Taxation was
published on 23 October 2001, in the form of a communi-
cation (COM(2001) 582) and a Commission staff working
paper (SEC(2001) 1681). The EESC will examine these in a
separate opinion. This study is further discussed at 4.2.

The Commission (2) notes that the results of the
2.2.2.
quantitative analysis for 1999 show that ‘there is a 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 (...)
The range of differences in domestic effective corporation
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 %). (...) 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 lower ranges of the ranking are
concerned.’

‘These high differentials may have an influence on
2.2.3.
the international competitiveness of EU companies located in
different Member States and represent incentives for compani-
es to choose the most tax-favoured locations for their invest-
ments, 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. Never-
theless, 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.’

2.2.4.
In order to remedy the tax obstacles in the EU, the
Commission (3) considers various targeted solutions. However
‘Only providing multinational companies with a consolidated
corporate tax base for their EU-wide activities will really,
through a single framework of company taxation, systemati-
cally tackle the majority of 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 compute the income of the entire

(1) OJ C 36, 6.2.2002.

(2) COM(2001) 582 final, p. 7.
(3) COM(2001) 582 final, p. 15.

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group according to one set of rules and establish consolidated
accounts for tax purposes (thus eliminating the potential tax
effects of purely internal transactions within the group).’

When assessing whether such measures are harmful, account
should be taken of, inter alia:

2.2.5.
‘It is important to note that this approach does not
infringe Member States’ sovereignty to set corporate tax rates.
(...)’

2.2.6.
‘The Commission (therefore) believes that 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 (...). 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.’ (1) Various approaches
and technical possibilities are examined in the Commission
services study.

2.3. Code of Conduct

The Code of Conduct (Business Taxation)/Primarolo
2.3.1.
Group report was published on 29 November 1999. At its
session on 28 February 2000, the Council took no position on
its content.

2.3.2.
Paragraph 3 of the report defines harmful measures
in the following terms: ‘A. Without prejudice to the respect-
ive spheres of competence of the Member States and the
Community, this code of conduct, which covers business
taxation, concerns those measures which affect, or may affect,
in a significant way the location of business activity in the
Community. Business activity in this respect also includes all
activities carried out within a group of companies.

The tax measures covered by the code include both laws or
regulations and administrative practices.

B. Within the scope specified in paragraph A, tax measures
which provide for a significantly lower effective level of
taxation,
including zero taxation, than those levels which
generally apply in the Member State in question are to be
regarded as potentially harmful and therefore covered by this
code.

1. whether advantages are accorded only to non-residents
transactions carried out with non-

or in respect of
residents, or

2. whether advantages are ring-fenced from the domestic
market, so they do not affect the national tax base, or

3. whether advantages are granted even without any real
economic activity and substantial economic presence
within the Member State offering such tax advantages, or

4. whether the rules for profit determination in respect of
activities within a multinational group of companies
departs from internationally accepted principles, notably
the rules agreed upon within the OECD, or

5. whether the tax measures lack transparency, including
where legal provisions are relaxed at administrative level
in a non-transparent way.’

2.3.3.
Paragraph 4 of the Report seeks to eliminate future
abuses: ‘Member States commit themselves not to introduce
new tax measures which are harmful within the meaning of
this code. Member States will therefore respect the principles
underlying the code when determining future policy.’

2.3.4.
Paragraph 5 discusses the specific issue of islands
and dependent territories: ‘Insofar as the tax measures are used
to support the economic development of particular regions,
an assessment will be made of whether the measures are in
proportion to, and targeted at, the aims sought. In assessing
this, particular attention will be paid to special features and
constraints in the case of the outermost regions and small
islands, without undermining the integrity and coherence of
the Community legal order, including the internal market and
common policies.’Member States with dependent or associated
territories or which have special responsibilities or taxation
prerogatives in respect of other territories commit themselves
within the framework of their constitutional arrangements, to
ensuring that these principles are applied in those territories.

2.3.5.
following groups:

The report classified harmful measures into the

a)

financial services, group financing and royalty payments;

Such a level of taxation may operate by virtue of the nominal
tax rate, the tax base or any other relevant factor.

b)

insurance, re-insurance and capital insurance;

c)

intra group services;

(1) COM(2001) 582 final, p. 19.

d)

holding companies;

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e)

exempt and offshore companies;

b) monitoring the State aid control rules;

f) miscellaneous.

In total, nearly 300 measures have been identified and classified
as either acceptable or harmful and unacceptable. It has been
broadly agreed that there are 66 harmful measures which
should be rolled-back for 2003 and a report was submitted to
the 4 December ECOFIN Council but there were no clear
conclusions. The Council asked the working party to continue
its work in accordance with the timetable set for the fiscal
package.

2.4.

EU Action on State aids

2.4.1. Mario Monti, EU Competition Commissioner,
recently stated (1): Progress is being made; however there is still
room for manoeuvre to reduce aid further. The Commission
therefore strongly supports the Member States in their quest
to reduce overall amounts of aid, in line with the Stockholm
European Council’s conclusions of spring 2001. Member
States should continue to make all efforts to carefully rethink
their aid spending. Every single reduction of aid clearly reduces
the distortion of competition in the internal market and
increases the benefits of Economic and Monetary Union. On
the Commission’s side, I will maintain strict state aid control
as a priority.

2.4.2. Whilst the EUR 28 billion spent in the manufacturing
sector are less than the EUR 36 billion in the preceding period
from 1995 to 1997, the overall decrease is not EU wide and
still mainly depends on the two countries Italy and Germany.
In both Member States aid amounts fell substantially.
In
Belgium, Greece, Spain, Luxembourg, the Netherlands and in
the United Kingdom levels of aid to manufacturing also
dropped but were offset by increases in other Member States.

Substantial differences between individual Member
2.4.3.
States remain. Aid levels in relation to value added are highest
in Greece and lowest in the United Kingdom and Portugal. A
comparison shows that in Greece, aid as a percentage of value
added is over seven times higher than in the UK. Member
States like Sweden, the Netherlands, the UK or Portugal have
maintained their low levels of aid whereas Italy, Germany and
Spain are rapidly reducing their aid levels.

2.4.4.
taking further action along the following lines:

The Commission announced in July 2001 that it is

a)

increasing transparency, via the State Aid Register and
Scoreboard;

(1) Commission press release on ‘State Aid movement in the right

direction’, 19.7.2001 (IP/01/1033).

c)

d)

enforcing state aid control effectively in candidate
countries;

faster recovery of illegal aid. Particular importance will be
attached to a more speedy recovery of aid which the
Commission has declared incompatible with EC State aid
rules.

On 11 July 2001, Commissioner Monti launched a
2.4.5.
large scale state aid investigation into business taxation
schemes. This concerned 11 corporate tax schemes in eight
Member States, and also existing fiscal advantages in four
other Member States that are no longer justified following the
economic changes of the EU single market (see press release
IP/01/982).

2.5. OECD

In the global context the OECD has been working on
2.5.1.
harmful tax competition, and in particular the existence of so-
called tax havens, and has arrived at a list of 35 tax havens. So
far 28 territories have made commitments and will be removed
from the OECD black list. The USA has expressed concern
about the ethics of imposing OECD views on sovereign states.
However, since the events of 11 September 2001, the political
support for combating tax fraud and money laundering has
increased and so-called tax havens have come under greater
scrutiny.

2.5.2.
The deadline for the havens to agree to cooperate
with the OECD is 28 February 2002. For havens which fail to
comply, it is likely that sanctions will be imposed.

3. Characteristics of national taxation

The characteristics of national taxation have their basis

3.1.
in historic and cultural choices by government and citizens.

This reflects the role assigned to government

3.2.
in
different countries. Countries choose their economic and social
policies and politics, in the knowledge that such policies will
have a particular effect on the fiscal regimes they must impose.

3.3.
For example, the tax disadvantages created in high
tax countries may be compensated for by superior public
infrastructure, or by a higher skills base. Host countries and
the trade-off
companies located there are fully aware of
between levels of taxation and consequent government expen-
diture.

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3.4.
It is the conclusions of the study on company taxation
that company tax rates are a matter for Member State
governments.

4.2.2.
Inter-company payments of interest and royalties are
subject to withholding taxes by Member State tax authorities,
in double taxation. Should this occur,
which can result
companies face time-consuming administrative procedures,
and may incur financial costs between payment and reimburse-
ment of these taxes.

4. Company competitiveness and taxation

The following issues affecting company competi-
4.1.
tiveness are discussed in the parallel ESC Opinion on Tax
policy in the European Union (1).

4.1.1.
high in some Member States that
discourage inward investment.

Employment costs, or non-wage labour costs, are so
they may potentially

4.1.2.
Cost of raw materials can represent a significant
proportion of total costs. For energy intensive industries, the
effective rate of taxation of energy may be an important factor.

4.1.3.
The EU has a common VAT regime, yet applicable
rates vary within a given band, and with some derogations in
certain Member States. The VAT regime in any one Member
State may be an attraction or a deterrent to new companies, as
may be seen, for example, in the current debate over VAT and
e-commerce, where there is a concern that non-EU companies
required to register within the EU will choose a country where
a low VAT rate applies.

4.1.4.
Taxes and levies on labour vary among Member
States, and may have an impact on the company’s ability to
employ the workers it requires.

The difficulty of transferring pensions from one
4.1.5.
Member State to another is a barrier to the mobility of labour,
particularly for managers and professionals.

4.2.
The following issues are among those addressed by
the Company Taxation Study which was presented by the
Commission in October 2001.

4.2.1.
Transfer pricing refers to the price charged by
individual parts of one economic entity for transactions of
goods and services between themselves, for example within a
multi-national corporation. Within the EU, the Arbitration
Convention is a means of resolving transfer pricing disputes.

(1) COM(2001) 260.

4.2.3.
Cross-border loss compensation is the possibility for
a company to offset losses across borders, i.e. if a company
makes a loss in one market it can offset this against profits
made in another. There is no mechanism for this within the
single market. This represents a serious cost to business, and
may deter a business from investing in new and untried
markets.

4.2.4.
Cross-border business integration can be expensive
even within the single market, preventing companies from
restructuring in an optimal way. The problems encountered
include transfer taxes due upon transfer of taxes to a branch
structure, loss of pre-conversion losses that cannot be trans-
ferred to a new branch structure, and the obligatory release of
provisions which have up to that point reduced taxable profits.
The 1990 Mergers Directive went some way to improving the
situation, but the existing obstacles place EU companies at a
disadvantage compared to non-EU companies which start a
Greenfield operation in the EU.

4.2.5.
Corporate taxation also varies widely among Member
States, both in terms of the taxable base and of the corporate
tax rate. Governments determine how they wish to tax
companies in their jurisdiction, and may be able to use this,
for example, as a tool to encourage new start-up companies,
or to attract foreign investment. In some cases, companies are
able to offset investments against their tax bill, through capital
allowances.

In addition to the difficulties of multi-country oper-
4.2.6.
ations described above, companies active in other Member
States where they have no corporate presence often face
administrative difficulties with fiscal and social arrangements
which are not imposed on national companies. These problems
represent distortions of competitiveness.

4.3. Within the EU, companies should be able to operate
efficiently across borders, thus benefiting from the creation of
the internal market. The difference in efficiency of operation
between a multi-country and a single country enterprise is a
measure of the obstacles that affect the competitiveness of a
company operating within the internal market.

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4.4.
The elimination of fiscal distortion between Member
States can either be formal or informal. The Company taxation
study has the scope to achieve a considerable degree of
formal convergence between corporate tax systems. However
convergence of tax rates will only be achieved informally by
Member States reacting accordingly.

5. Conclusions and further actions

5.1.
Company tax rates will remain subject to Member
State autonomy. Accordingly, since the systems will differ,
they will naturally remain in a state of latent competition. This
situation will persist, but following the Commission study on
Company Taxation, many inconsistencies should be removed.
Overall the Lisbon European Council conclusions invited all
Member States to improve the competitiveness of their fiscal
systems.

5.2.
In the meantime harmful measures affecting company
location need to be acted upon. The EESC calls on the Council
to commit itself to a political follow-through to the problems
treated in the Primarolo report, since the issues which it
addresses are central to the question of fiscal competition,
without, however, losing sight of the Verona Agreement of
December 1997 (1) on a package of fiscal measures (‘tax
package’) and the fact that a parallel timetable has been drawn
up (2) for work to implement the key parts of the package. The
preparation of the Report was a great step forward. Failure to
act would be two steps backwards.

5.3.
The EESC is encouraged by the recent Commission
activity in the area of state aids. In the Tax Priority Communi-
cation the Commission indicates that for taxation generally it
intends to pursue non-conforming Member States through the
ECJ. The ESC urges the Commission to use this route to
eliminate illegal state aids.

(1) ECOFIN Council Conclusions, OJ C 2, 6.1.1998.
(2) Presidency Conclusions from the meeting of the European Council
of Ministers in Santa Maria da Feira. Press release (19/6/2000)
No 200/1/00.

Brussels, 25 April 2002.

5.4.
The EESC encourages the Commission and the Member
States to ensure that the OECD study is brought to a fair and
honourable conclusion, after the 28 February 2002 deadline.

5.5.
As far as companies are concerned, the first priority
must be to complete the programme outlined in the Tax
Priority Communication. VAT, personal pensions and transfer
pricing are just some of the issues involved.

5.6. Most important for company competitiveness when
operating in the EU will be the outcome of the study on
company taxation published in October 2001, although it is
important to note that rates of corporate tax would remain
the responsibility of Members States. The Commission’s two-
track strategy includes immediate action on targeted measures
and the launch of a wider debate on general comprehensive
measures with the objective of providing EU businesses with a
consolidated corporate tax base for their EU-wide activities.

5.7.
There are many issues but priority must be given to
the tax dimension of the European Company Statute. 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 that one Member
State. As things stand neither of these are provided for and its
success could therefore be jeopardised. At the same time the
implementation of the SE statute should not lead to new fiscal
distortion vis-à-vis companies registered in Member States

5.8.
Although fiscal arrangements and fiscal competition
are important contributors to company competitiveness, the
defining issues would not normally be fiscal unless the
fiscal arrangements are unreasonable and harmful. Fiscal
arrangements are political and reflect public choice. Many
market forces affecting company competitiveness are, in effect,
uncontrollable. Companies look to politicians to control fiscal
arrangements sensibly and logically and to maintain stability
over time.

The President

of the Economic and Social Committee

Göke FRERICHS