Opinion of the Economic and Social Committee on "Direct company taxation"
Date: 2002-07-17
Institutions: European Economic and Social Committee
Subjects: basis of tax assessment, corporation tax, fiscal policy, tax harmonisation, tax system

7.10.2002

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Official Journal of the European Communities

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Opinion of the Economic and Social Committee on ‘Direct company taxation’

(2002/C 241/14)

On 17 January 2002 the Economic and Social Committee decided, in accordance with Rule 23 of its
Rules of Procedure, to draw up an own-initiative opinion on ‘Direct company taxation’.

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 June 2002.
The rapporteur was Mr Malosse and the co-rapporteur Mrs Sánchez Miguel.

At its 392nd Plenary Session of 17 and 18 July 2002 (meeting of 17 July 2002), the Economic and Social
Committee adopted the following opinion by 127 votes to none, with one abstention.

1.

Introduction

for the Commission, without precedent since the conclusions
of the Ruding Committee in 1992. The most innovative
element is undoubtedly the proposal for a consolidated basis
for harmonised company taxation.

On 23 October 2001, the Commission submitted a
1.1.
communication to the Council,
the European Parliament
and the European Economic and Social Committee entitled:
Towards an Internal Market without tax obstacles: A strategy
for providing companies with a consolidated corporate tax
base for their EU-wide activities.

1.2.
The aim of this communication is to set out the
Commission’s views on the actions that it deems are necessary
and realistic to take in the field of company taxation in the EU
over the next few years in order to adapt the taxation of EU
companies to the new economic environment and enhance
the effectiveness of the internal market by removing internal
tax barriers. Corporate taxation represents 3,2 % of GDP in the
EU.

1.3.
The Commission is convinced that company tax
regimes in the EU have not succeeded in adapting to such
developments as globalisation, the economic integration of
the internal market and Economic and Monetary Union. It
therefore feels that a new approach is essential to ensure what
it calls the tax ‘welfare’ of business operators.

To build this new approach the Commission is coun-
1.4.
ting on the findings of a detailed economic and legal survey
which has enabled it to highlight the tax burden on companies
in the various EU countries and to identify ‘fields in which
company tax systems
... hamper cross-border economic
activity in the Internal Market (and consequently) undermine
the international competitiveness of European companies’.

1.5. More generally, and before assessing this communi-
cation in detail, one must note the importance of this initiative

1.6.
The EESC’s initiative falls within the framework of
the debate launched by the European Commission in its
Communication. But it also takes into account all the factors
that lead to big competitive differences between companies
within the single market, such as social security contributions,
the cost of capital and labour, general economic conditions,
the standard of infrastructure and public services, training and
staff skills. It must be noted here that taxation can be a decisive
factor, but it is not the only one to be taken into account when
choosing investment locations.

2. The findings of the European Commission’s study

The study first of all gives many examples of the tax burden
on companies in the various EU countries:

2.1.
According to the Commission, to make a comparison
one must consider not nominal but real rates, i.e. the tax really
paid by companies during a given operation.

The Commission noted that even if taxation is only
2.2.
one factor among others in determining investment and
financing decisions, the size of the variations in real tax rates
from one Member State to another required thorough analysis.
There are major variations — up to 30 % — between real
company tax rates across the EU, and these are mainly due to
differences in national legal tax rates, rather than differences in
the basis of assessment.

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2.3.
Despite differences in the basis of assessment, rates are,
according to the Commission, a good indicator of the overall
tax burden. However, the Commission remains convinced that
the fixing of company tax rates is, and must remain for the
moment, the responsibility of the Member States.

2.4.
Secondly, the study identifies a number of tax obstacles
that hamper cross-border economic activity in the internal
market. The co-existence of 15 separate sets of rules for
determining the basis of assessment in the internal market, as
well as generating compliance costs, causes numerous prob-
lems for the taxation of intra-group transactions (‘transfer
pricing’) and increases the risks of double taxation.

In this respect, the study of the Commission highlights a series
of unfavourable consequences:

2.4.1.
on a basis of full competition through separate accounting.

Companies must assign profits to each jurisdiction

2.4.2. Member States are reticent about allowing the
deductibility of losses by affiliated companies whose profits
they cannot tax.

2.4.3.
taxation (capital gains and others).

Cross-border reorganisation is likely to generate

3.2.
But secondly, the Commission feels that in the longer
term companies must be offered the possibility of being taxed
for
on the basis of a consolidated basis of assessment
corporation tax covering all their activities in the European
Union, so as to escape the expensive inefficiencies which
currently result from the co-existence of 15 separate sets of
tax rules.

4.

First, a short-term strategy taking the form of targeted
measures

the adoption of certain
The Commission considers that
targeted measures ‘can, at the same time, be preparatory steps
for a comprehensive scheme’ and that in the immediate future
priority must be given to improving the rules in force and the
way they are applied.

4.1.

Facilitate application of case law of the Court of Justice

The Commission will formulate guidelines on the important
judgments of the Court of Justice with a view to facilitating
application in accordance with the Treaty and Community
law.
the Commission started a programme of
meetings with the Member States on this issue, which it
proposes to continue and step up.

In 2001,

2.4.4.
laws.

Double taxation may occur through a conflict of tax

4.2. Merger and Parent-Subsidiary Directives

2.5.
In addition to these difficulties there are differences in
regulations, the provisions concerning the collection of taxes,
in other words tax
the rules on disputes and verification,
practices, which are even more difficult to identify than the
basic texts.

Cross-border income flows and restructuring operations are
often affected by additional taxation. The Merger and Parent-
Subsidiary Directives (90/435/EEC and 90/434/EEC) have not
led to the solution of all the problems in this field.

3. The strategy proposed by the European Commission

The strategy proposed by the Commission to achieve the tax
‘welfare’ of business operators is in two stages.

3.1.
In the first place, this strategy envisages a number of
targeted measures covering such issues as the extension of the
directives on dividends and mergers, cross-border loss offset,
transfer pricing and double taxation agreements.

4.2.1.
The Commission will submit modifications to the
Merger and Parent-Subsidiary Directives, together with detailed
guidelines on their application and implementation.

In 1993, the Commission had already submitted
4.2.2.
proposals aiming to amend these directives (by widening their
scope to cover all forms of companies subjected to corporation
tax), but it now feels that these directives must also be extended
and improved so as to cover a broader range of taxes and
transactions. In addition, they will have to cover the companies
which will in future be governed by the statute for a European
company (‘societas europeae’, SE).

4.2.3.
The possibilities of cross-border loss offset remain
very limited, and groups are often taxed on the profits made

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in one country of the internal market without being able at
the same time to take account of losses suffered in another
country.

4.3.4.
In addition, since international tax conventions can-
not effectively apply here, the solutions envisaged by no
means remove the risk of differences in assessment occurring
depending on the states, which have only a partial view of
operations.

4.2.4.
The Commission will withdraw its 1990 proposal
for a directive, which sought to allow companies to take into
account losses suffered by their permanent establishments and
subsidiaries located in other Member States, and which turned
out to be unacceptable to the Member States.

In order to overcome the reservations of the Member
4.2.5.
States about any Community initiative in this field,
the
Commission proposes holding, in 2002, a series of preparatory
technical meetings with the Member States with a view to
drawing up a new improved proposal, possibly with a broader
scope, and submitting a report on its legislative intentions
before the end of 2003.

4.3.

Transfer pricing

The issue of transfer pricing is, on the international front, one
of the main bones of contention between companies and the
tax authorities, or even between the tax authorities themselves.

The taxation levied on trade in goods and services
4.3.1.
within multinational companies is all the more important in
view of the unprecedented growth in such trade in recent
years, which now accounts for almost half of world trade. The
tax authorities’ view of multinationals and their internal
commercial transactions is, of necessity, restricted by their
territorial jurisdiction, and an overall view of operations is
impossible.

4.3.2.
It is also true that the yield on such trade does not
always obey the law of the market place, as companies are
often suspected of reducing their overall
tax burden by
transferring profits to countries where the tax system is most
favourable. The tax authorities will therefore question prices
which, in their view, do not correspond to those which would
have been practised between independent companies, and the
risk of double taxation is great because of differences in
approach between countries. Thus, a price will be considered
too high in one state and too low in another, leading to an
adjustment in both cases, without the authorities being able to
agree on what should be the ‘correct price’.

4.3.3.
Despite the action taken to work out fair principles,
notably at the urging of the OECD, the risk of disputes with
the tax authorities is very great, especially as their major
priority is to safeguard tax income. As a result, there are
frequent cases of double taxation.

4.3.5.
As this problem will arise with even more urgency
in the future in an integrated European market, joint solutions
must be found at EU level.

4.3.6.
To do that, the Commission proposes to set up a
Joint EU Forum on Transfer Pricing with the Member States in
the first half of 2002. The aim would be to improve
coordination between Member States, and between Member
States and companies, as regards the taxation of cross-border
intra-group transactions. Moreover, Member States are tending
to impose increasingly strict documentation requirements on
companies as regards transfer pricing. This forum could
consider a number of issues that do not require the adoption
of legislation, such as advance pricing agreements, documenta-
tion requirements and transfer-pricing methodologies, within
the OECD guidelines on the matter.

4.4. The Arbitration Convention and double-taxation agreements

The machinery for reducing double taxation resulting from
cross-border activities, whether it be bilateral double-taxation
agreements or the 1990 convention aimed at eliminating
assessment differences between national administrations
regarding the adjustment of profit transfers between associated
companies (the Arbitration Convention — 90/436/EEC) does
not work properly.

In 2003, the Commission will submit a proposal for
4.4.1.
a Directive to renew and improve the Arbitration Convention
and submit its provisions for interpretation to the Court of
Justice.

In 2004,

4.4.2.
the Commission intends to publish a
communication on double taxation agreements which will
stress the need to adapt certain provisions of the bilateral
agreements between Member States based on the OECD model
convention, so as to bring them more into line with the
principles of the EC Treaty. The aim is eventually to have a
Community version of the OECD model convention and its
comments which would satisfy the specific requirements of
EU membership, and even to draw up an EU multilateral
convention.

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5. Second, a long-term strategy for a consolidated basis

of assessment for corporation tax

5.6.2.
Common consolidated base taxation. The consoli-
dated tax base of a multinational group would be calculated
according to completely new and harmonised rules, which
would apply throughout the EU.

This is the main innovation in the communication.

5.1.
Even if the various targeted measures quoted above
will allow some progress to be made on removing tax barriers,
the Commission is aware that the basic problem, namely the
co-existence of 15 different tax systems in the internal market,
will still exist. It is therefore necessary to tackle the root causes
of the problem.

5.2.
The study appended to the communication gives
plenty of food for thought by simulating the effects of a
theoretical harmonisation of certain features of the tax systems.

The most significant effect would be obtained by
5.3.
introducing a uniform nominal tax rate within the EU. No
other scenario will have a comparable impact.

5.4.
But the Commission feels that defining a consolidated
basis of assessment for corporation tax covering all of a
company’s activities in the EU would make corporation tax
in
schemes simpler, more efficient and more transparent,
particular by reducing compliance costs.

European company income tax: income tax would
5.6.3.
be levied on companies at European level and the proceeds
would fund (at least partly) the EU budget.

5.6.4.
Compulsory harmonisation of existing tax bases.
Unlike the three options above, which would co-exist with
national tax systems, the consolidated tax base for all EU
companies would be calculated from harmonised rules.

Future developments as regards the European company
5.7.
(European statute for SMEs as proposed by the own-initiative
opinion of the EESC adopted on 21 March 2002 (1) suggest
that a general corporation tax code and a consolidated basis of
assessment for corporation tax may be envisaged for these
companies too, covering all their activities within the EU.

For this second phase, the Commission has begun a
5.8.
genuine debate on what company taxation in Europe must
eventually be, with a presentation of several options for which
clear choices must be made.

Setting up a consolidated basis of assessment

5.5.
for
corporation tax would allow companies having cross-border
and international activities in the EU:

6. Basic principles to be adopted

— to compute the income of the entire group according to

one set of rules; and

The EESC supports the ambitious approach adopted
6.1.
by the European Commission. It feels that it is really up to the
European executive to make proposals that correspond to the
needs of European integration.

— to establish consolidated accounts for tax purposes, thus
eliminating the potential tax effects on purely intra-group
transactions.

To do this, the Commission study has identified several

5.6.
possible technical approaches. The options studied were:

6.2.
The EESC nevertheless regrets that the scope of the
Commission’s proposals is concentrated primarily on the fiscal
obstacles to companies’ cross-border activities, whereas tax
disparities affect all companies, especially small ones. The
EESC considers that one must not underestimate the negative
consequences of a lack of
transparency or of excessive
differentials that may create serious distortions of competition,
with tax dumping effects.

5.6.1.
Parent company home-state taxation. The consoli-
dated tax base of a multinational group would be calculated in
accordance with the tax code of the state where the parent
company is located (i.e. where its registered office is).

(1) OJ C 125, 27.5.2002, p. 100: ‘A European Company Statute for

SMEs’ (INT/109).

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6.3.
The establishment of fair competition between com-
panies, as the Ruding report pointed out, must be a priority of
any European initiative on taxes.

companies closer together, modifications and the special rules
for certain types of company have created a whole complex of
rules that makes harmonisation impossible.

Equal

treatment

6.4.
for all categories of companies,
especially the smallest, must be more than an objective; it must
be an imperative, underpinning this project at all stages in its
implementation.

6.5.
These tax proposals must be consistent with the EU’s
main political objectives. For example, according to the
strategies decided in Cardiff and Luxembourg, it is important
for these proposals to create a job-friendly climate, so they
should aim at tax neutrality in relation to the two production
factors that are labour and capital. It is also important for these
proposals to be resituated in relation to the competitiveness
objectives of the Lisbon European summit and promote a tax
code which encourages the creation and development of
businesses and jobs.

6.6.
The EESC supports an approach that will enable tax
codes to be simplified, both for cross-border and domestic
is essential to aim at
activities. To achieve this goal,
transparency in EU corporation tax codes.

it

6.7.
The EESC feels that the EU should take its cue from tax
solutions that have already been found in countries where
different codes, while respecting diversity and territorial sover-
eignty, do not jeopardise the principle of fair competition and
are applied openly. The Swiss example is worth closer study
here, for it would appear that it has managed to reconcile
subsidiarity with overall harmony.

6.8.2.
The use of International Accounting Standards (IAS)
could be a solution, and has already been included in the
Community standards (1) for companies listed on a stock
exchange,
financial companies and insurance companies.
However, it has to be borne in mind that these international
norms have a basic purpose: to give accounts information to
investors, whereas corporation tax needs an accountancy code
that reflects the state of the company’s assets, so that the result
obtained in each tax year can be worked out.

6.9.
The EESC supports the approach of linking the EU’s
tax proposals to European company statutes. As stated in the
EESC’s own-initiative opinion on a European company statute
for SMEs (2), these must be accessible to any category of
company.

6.10.
The EESC considers that the forthcoming enlargement
of the EU to include countries whose income generally is a
long way below the EU average, is a factor for speeding up any
European initiative on company taxation. On the one hand,
enlargement can only aggravate existing tax disparities within
the single market and, on the other, it is useful to establish a
certain number of common principles for countries which are
setting up their tax codes on entirely new foundations.

7. The positions of the EESC

7.1.
As regards the first stage, the EESC first of all supports
the European Commission’s proposals aimed at speeding up
measures to avoid double taxation, particularly the proposal
to set up a Joint EU Forum on transfer pricing.

7.1.1.
The EESC considers such proposals to be a major
step towards removing fiscal barriers within the single market.
Even so, these initiatives will have no effect on the exaggerated
tax distortions which persist within the single market and are
likely to get worse with enlargement.

The EESC would stress that tax regulations must be

6.8.
closely linked to the harmonisation of accounting standards.

7.1.2.
solutions be implemented without delay.

The EESC urges that this first phase of practical

6.8.1.
The EU has not achieved a true harmonisation of
European companies’ accounting obligations. While it is true
that the adoption of the Fourth and Seventh Company Law
Directives has brought national accounting standards for

(1) OJ C 260, 17.9.2001, p. 86:
accounting standards’ (INT/101).

‘Application of

international

(2) OJ C 125, of 27.5.2002, p. 100: ‘A European Company Statute

for SMEs’ (INT/109).

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As regards the next phase, the EESC (1) approves the
7.2.
aim of having an internal market free from tax barriers. It feels
this can only be a means of establishing common
that
principles to encourage an internal market where fair compe-
tition would prevail. These common principles should also
encourage simplification, competitiveness and job creation.

The EESC feels it

is essential to create tax code
7.2.1.
transparency in the EU prior to establishing conditions for fair
competition. With this in mind, the fourth option proposed
by the Commission, that of a harmonised basis of assessment,
is the only option to meet this aim. The other three options
proposed by the European Commission (except the case of a
non-optional European tax) seek to create two different codes
for companies, depending on whether they trade beyond their
national borders or not. These solutions would create a sort of
tax privilege, a two-speed tax system. They cannot therefore
be accepted.

7.2.2.
The objective of a harmonised tax base for all EU
companies is compatible with the tax sovereignty of the EU’s
Member States and regions because it preserves their power to
fix the level of
the
transparency of a harmonised tax base would enable economic
players to put strong pressure on national authorities, which
is not the case today because tax codes are so opaque. An

It must be stressed here that

tax.

( 1) OJ C 48, 21.2.2002, p. 73: ‘Tax policy in the European Union –
Priorities for the years ahead’ (ECO/072) and OJ C 149, 21.6.2002,
p. 73: ‘Fiscal competition and its impact on company competi-
tiveness’ (ECO/067).

Brussels, 17 July 2002.

eventual real convergence of the levels of direct company
taxation would be desirable. An intermediate stage could be to
fix tax bands that, among other things, meet the Lisbon
summit’s objectives of boosting EU competitiveness.

7.2.3. When considering what should be a harmonised tax
base, the European Commission should also take into account
the need for a tax code that has a neutral effect on production
factors, taking particular care not to discourage employment.

7.2.4.
The EESC thinks the process for having a harmonised
tax base should be tried by companies that have opted for a
European statute, on the understanding that they will have no
tax privileges compared with other companies. To help them,
however, and to make European statutes attractive, one could
propose to them a consolidated tax base in accordance with
the European Commission’s second option, which would
simplify matters for companies with transnational activities.
The EESC is in favour of all companies, whatever their
organisation and size, being allowed to opt for a European
statute.
In this connection the EESC asks the European
Commission to examine without delay its own-initiative
opinion calling for a European statute for SMEs.

7.2.5.
The EESC also supports the institutional advances
which would make it possible to achieve an internal market
with a transparent tax code, particularly the modification of
the rule of unanimity for corporate taxation matters. It is also
in favour of the procedure for strengthening co-operation as
defined in the Treaty of Nice, which would enable a group of
Member States to move forward as pathfinders in accordance
with Community rules.

The President

of the Economic and Social Committee

Göke FRERICHS