Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - An Internal Market without company tax obstacles:  achievements, ongoing initiatives and remaining challenges
Date: 2003-11-24
Institutions: European Commission
Subjects: European company, European tax cooperation, basis of tax assessment, case-law (EU), corporation tax, double taxation, multinational enterprise, single market, standardised accounting system, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 24.11.2003
COM(2003)726 final

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

An Internal Market without company tax obstacles
achievements, ongoing initiatives and remaining challenges

   
TABLE OF CONTENTS

1.

2.

3.

3.1.

3.2.

3.3.

3.4.

3.5.

4.

4.1.

4.2.

4.3.

4.4.

4.5.

5.

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

The continuing need to adapt company taxation in the EU ......................................... 3

Progress with the targeted measures for tackling the tax obstacles in the Internal
Market .......................................................................................................................... 6

Guidance on the implementation of the case law of the European Court of Justice and
monitoring the implementation of EU law in taxation................................................. 6

Revision of the Merger Directive and the Parent-Subsidiary Directive ...................... 8

Cross-border loss-offset ............................................................................................... 9

The 'EU Joint Forum on Transfer Pricing' ................................................................. 10

Double Taxation Treaties........................................................................................... 10

Advances towards a consolidated corporate tax base for the EU-wide activities of
companies................................................................................................................... 11

A new impetus to the debate in the EU...................................................................... 11

Home State Taxation as a way forward for small and medium-sized enterprises
(SMEs) ....................................................................................................................... 12

Developing a common EU tax base ........................................................................... 16

Allocating the tax base between Member States........................................................ 21

A European Tax regime for the Societas Europaea ? ................................................ 24

Conclusion and priorities for coming years ............................................................... 25

2

1.  INTRODUCTION

Company
taxation matters
for economic
progress in the
EU.

The  European  Union  is  currently  endeavouring  to  achieve  its  self-set
objective  of  becoming  the  most  competitive  and  dynamic  knowledge-
based  economy  in  the  world  capable  of  sustainable  growth  with  more
and  better  jobs  by  2010.  This  strategic  goal,  which  was  set  by  the
European  Council  in  Lisbon  in  March  20001,  has  been  confirmed  by
subsequent  Councils.  Company  taxation  in  the  EU  has  a  key  role  to
play  in  achieving  this  objective  and  in  reinforcing  the  necessary
supportive economic framework.

Commission
'two-track'
strategy defines
the way
forward.

The debate has
received new
impetus and
good progress
has been made
…

but
implementation
of the strategy
must now be
adapted to new
conditions and
challenges.

It  was  in  this  context  that  the  Commission,  in  its  Communication2  of
October  2001,  presented  a  two-track  strategy  aimed  at  tackling  the
tax-related  inefficiencies  and  obstacles  to  cross-border  economic
activity  in  the  Internal  Market.  The  Communication  was  based  on  the
results of a  detailed Commission services study3. It presented in detail
both targeted immediate solutions and steps towards a longer-term goal
of providing companies with a common consolidated tax base for their
EU-wide activities.

This Communication and the follow-up activities since have given new
impetus to the reform of EU company taxation. Whilst good progress
has  been  made  with  the  implementation  of  many  initiatives  it  is,
however, more difficult to advance in some other areas. Moreover, new
developments  have  taken  place  since  2001.  The  case  law  of  the
European Court of Justice on tax matters is gaining in importance. The
prospect  of  a  continued  unanimity  requirement  for  decision-taking  in
EU tax matters will obviously also affect the scope for further progress,
particularly when enlargement is taken into account.

The  present  Communication  is  intended  to  assess  the  results  of  the
Commission strategy as of today and to consider the prospect of future
implementation  of  its  various  parts.  In  presenting  the  Communication,
the  Commission  is  fulfilling  its  promise  made  in  the  above-mentioned
Communication  of  2001  to  "report  on  its  […]  policy  conclusions  by
2003".

2.  THE CONTINUING NEED TO ADAPT COMPANY TAXATION IN THE EU

The basic
company tax

The  company  tax  strategy  proposed  by  the  Commission  in  2001  was
based on two fundamental considerations. First, economic operators are

1

2

3

Point 5 of the Presidency Conclusions from the Lisbon European Council, 23 and 24 March 2000.
COM(2001)582: “Towards an Internal Market without tax obstacles. A strategy for providing
companies with a consolidated corporate tax base for their EU-wide activities”
Company Taxation in the Internal Market' [SEC(2001)1681]. The study has also been published in book
format and is being sold (for 31 €) by the Office for Official Publications of the European Communities
in Luxembourg (ISBN 92-894-1695-5); for more information see
http://publications.eu.int/general/en/publications_en.htm

3

                                                
strategy of 2001
still provides
the right
answers to the
tax problems of
the Internal
Market and
broader
economic
developments.

Compliance
costs and
substantial tax
obstacles are
still at the core
of operators'
preoccupations
within the
Internal Market.

the  appearance  of  e-commerce  and 

still  hindered  by  tax  arrangements  from  exploiting  the  full  benefits  of
the Internal Market. It is imperative to change this. Second, the overall
economic framework has undergone important changes in recent  years
such  as 
increased
internationalisation  of  companies  through  cross-border  mergers  and
other  restructuring  operations.  These  considerations  have  major
implications  for  the  functioning  of  corporation  tax  systems  in  the  EU
and  both  are  still  valid  and  topical.  The  imminent  enlargement  of  the
EU will accentuate the problems further. There is, therefore, no reason
to cast doubts on the basic rationale of the Commission strategy and
the Commission confirms its commitment thereto.

the 

The tax obstacles identified by the Commission in 2001 are still highly
topical. In particular, the need for  companies to deal with 15 and soon
25 or  more different tax  systems  clearly  remains  the ultimate  cause  of
most  of  the  tax  problems  within  the  Internal  Market  and  of  high
compliance costs. The Commission thus confirms its view that the two-
track  strategy  is  necessary  and,  in  particular,  that  the  common
consolidated  corporate  tax  base  for  the  EU-wide  activities  of
companies  is  the  only  means  by  which  companies  in  the  Internal
Market  can  overcome  these  difficulties  in  a  systematic  way  and  true
Internal Market conditions can be established in the corporate tax field.
To the extent possible, work towards this objective should also seek to
address the specific tax problems of non-incorporated businesses which
are not subject to corporate income tax.

 Business Test Panel Survey on company and value added taxation

The  Commission  recently launched a very comprehensive compliance cost survey of more than
2 000 EU companies. The aim of the survey is twofold. First, to gain a better understanding of how
the  need  to  cope  with  15  separate  tax  systems  impacts  on  companies,  in  particular  on  their
compliance  costs and their  decision  making.  Second,  to  try  and  quantify  the  costs  and  how  they
differ  between  companies  and  types  of  activity.  It  is  hoped  to  collect  a  great  deal  of  useful
information  on  both  company  taxation  and  value  added  taxation  which  will  require  careful  and
detailed analysis.

When the survey is completed and the results analysed a full report will be published separately.
The results should give a general indication of whether, and if so the extent to which, companies do
feel  it  is  more  difficult  to  comply  with  the  administrative  aspects  of  company  and  value  added
taxation once they become active 'cross-border'. The results should also indicate whether, and if the
extent  to  which  the  lack  of  cross-border  loss  relief  and  the  difficulties  associated  with  transfer
pricing and mergers and acquisitions are seen as obstacles. They should also indicate the extent to
which, if at all, company taxation issues influence companies' decisions as regards their corporate
and financing structures – which could of course lead to sub-optimal decisions for the economy as
a whole.

Quantifying compliance costs has traditionally been extremely difficult due mainly to the problem
of collecting data which is often considered to be commercially confidential. The Survey requests
extensive and detailed data but will not release any individual company data. The Commission is
therefore  confident  that  sufficient  data  will  be  forthcoming  and  that  when  the  analysis  has  been
completed it will provide a comprehensive and detailed picture of company  tax  and  value  added
tax compliance costs across the EU.

4

The substance
of the
Commission's
long-term
strategy is
widely accepted
…

but the political
process is slow.

Member States
should take a
constructive
stance!

and 

certain 

ambition 

technical  difficulties  of 

The idea of a common consolidated EU tax base has been quickly  and
widely  accepted  and  even  welcomed  in  the  business  community  and
among tax experts as a logical and coherent correlative for the Internal
Market, at least in the longer term. However, today, the reactions to the
Commission strategy of 2001 give rise to new political considerations
and many  Member  States  are  currently  sceptical,  both  for  political
and  technical  reasons.  Some  even  query  the  basic  rationale  of  the
concept. While the Commission disagrees with this, it acknowledges the
the
political 
comprehensive  approaches  under  consideration.  The  Commission
nevertheless remains convinced that, as a measure designed to improve
the  Internal  Market,  the  common  tax  base  is  necessary  and  should
ideally  be  decided  on  a  qualified  majority  voting  basis.  However,  the
existing  unanimity  requirement  should  not  be  treated  as  an  excuse  for
failing  to  address  the  obstacles  that  the  lack  of  a  common  tax  base
creates. The Commission will continue to pursue the project further and
will  consider  measures  both  where  unanimity  is  required  and  where
other  approaches  are  possible.  Some  Member  States  seem  to  be
hesitant  about  concrete  steps  towards  the  long-term  goal.  In  this
respect,  the  Commission  recognises  that,  to  the  extent  possible,  the
assessment of  the  practical  impact  on  Member  States  and  operators  of
the various measures needs to be refined.

At  the  end  of  the  day,  only  Member  States  can  ultimately  agree  and
subsequently  implement  any  measure  in  this  area.  It  is  high  time  that
they  did  so.  One  should  not  overlook  the  fact  that  over  the  last  few
years  EU  tax  policy  makers  have  been  mainly  concerned  with
stabilising  Member  States'  tax  revenues.  In  particular,  the  Code  of
Conduct  on  business  taxation  has  essentially  been  implemented  and
corresponding  work  is  under  way  concerning  the  acceding  countries.
Thus,  the  harmful  and  economically  undesirable  forms  of  tax
competition  (and  only  these)  are  being  tackled.  Such  harmful  tax
measures  were  an  important  reason  for  Member  States'  reluctance  to
tackle the tax obstacles in the Internal Market but those concerns are
now  no  longer  valid.  Therefore,  priority  must  be  given  to  other
important  and  generally  accepted  objectives  of  EU  tax  policy,  notably
those  of  contributing  to  the  smooth  functioning  of  the  Internal  Market
and  promoting  employment  and  sustainable  economic  growth  and
welfare  in  the  EU.4  As  the  Commission  stressed  in  its  Tax  Policy
Communication of May 2001,5 it is now necessary "to put much more
emphasis on the concerns of the EU taxpayer."

The  Commission  believes  that  it  is  only  the  systematic  approach  put
forward  which  will  ultimately  adequately  protect  the  legitimate
financial  interests  of  Member  States  and  enable  them  to  take  their

4

5

These overall objectives were originally agreed at the Informal ECOFIN-Council in Verona in April
1996. See Commission Communication "A package to tackle harmful tax competition in the European
Union" [COM(1997) 564] for additional information.
"Tax policy in the European Union - Priorities for the years ahead" [COM(2001)260]

5

                                                
Without
fundamental
reform, Member
States' tax
revenues may
suffer.

In the absence
of political co-
ordination, tax
obstacles will
be addressed by
the ECJ.

revenue-raising capacities into account when implementing tax policy.
At the moment there are potential problems in some Member States as
some aspects of their tax policies appear to contravene the principles of
the  Treaty.  If  individual  Member  States  delay  corrective  action  until
these contraventions are confirmed in ECJ decisions they are then faced
with  having  to  make  hurried  and  uncoordinated  changes  to  their  tax
systems.  This  approach  is  inefficient,  fails  to  address  the  fundamental
problems,  and  often 
tax  planning  opportunities.
Furthermore, inasmuch as investment decisions are driven by such 'tax
engineering'  considerations,  rather than by  expectations about  the  pure
economic  return,  this  is  also  particularly  detrimental  to  an  optimal
allocation of capital and thus the above-mentioned 'Lisbon-objectives'.

leaves  open 

Finally,  even  if  Member  States  take  no  action,  many  of  the  obstacles
under  consideration  will  be  referred  to  the  European  Court  of  Justice
(ECJ). In recent years, the number of important corporate tax  cases
submitted  to  the  Court  has  been  significantly  increasing.  In  its
judgments the Court has insisted on the ‘four freedoms’ (free movement
of  goods,  persons  [including  the  right  of  establishment],  services  and
capital) in EU direct tax matters. EU law as interpreted by the Court, in
almost  all  cases  supported  by  the  Commission,  not  only  prohibits  any
form  of  discrimination,  it  also  is  opposed  to  restrictions.  The  Court
rarely  accepted  justifications  invoked  by  Member  States.  However,  a
piecemeal approach  to tax obstacles by  way of litigation could lead  to
new problems in Member States' tax legislation  and  perhaps even – in
the  worst  case  –  prove  harmful  for  the  completion  of  the  Internal
Market.

3.  PROGRESS WITH THE TARGETED MEASURES FOR TACKLING THE TAX OBSTACLES IN THE 

INTERNAL MARKET

Commission
work
programme  has
been
implemented.

implemented 

The Communication of October 2001 presented  a  work  programme  of
specific measures which the Commission would undertake following a
clearly  defined  timetable  in  the  years  2002  to  2004.  The  Commission
has 
invested
considerable  resources  in  the  required,  often  complex  and  lengthy
technical work. The following section reports on the state of play of the
various initiatives (following the order in which they were presented in
the 2001 Communication) and presents some conclusions for the years
to come.6

this  programme  as  announced  and 

3.1.  Guidance on the implementation of the case law of the European Court of Justice

and monitoring the implementation of EU law in taxation

Legal

The  decisions  by  the  ECJ  sometimes  have  asymmetrical  effects.  The

6

Detailed information is also available at the "Company Taxation Pages" of the relevant web-site:
http://europa.eu.int/comm/taxation_customs/taxation/company_tax/index.htm. The web-site is regularly
updated.

6

                                                
developments in
the EU tax
arena must be
accompanied by
a constructive
political
process.

full ramifications of rulings involving just one country’s laws for other
Member  States  are  not  always  clear  and  therefore  each  State  tends  to
revise  its  national  rules  in  different  ways  which  are  not  necessarily
favourable to the objectives of the Internal Market. The Commission, in
its  2001  Communications  on  Tax  policy  and  on  Company  Taxation,
proposed dealing with this problem by way of pro-active co-ordination
of those features of Member States' tax systems that are or are likely to
be in conflict with EU law.

There are
various 'hot'
issues relating
to company
taxation in the
pipeline.

The  Commission  first  adopted  this  approach  with  regard  to  the  tax
treatment  of  occupational  pensions7  and  investment  funds.8  In  the
corporate tax field, a  tentative discussion at working group level  on
the  consequences  of  the  ECJ  decision  in  the  'Lankhorst-Hohorst'
case  [C-324/00]  on  thin-capitalisation  rules  revealed  that  although
support for a co-ordinated approach has increased some Member States
still remain reluctant to go down this path. This is despite the fact that
the decision is generally expected to have far-reaching implications for
most  Member  States’  corporate  tax  systems  and  not  only  for  the
Member State directly involved in this case. Many others are currently
reflecting  on  how  to  re-design  their  thin-capitalisation  rules  so  as  to
comply with the judgment  and  eliminate unequal  treatment of resident
and non-resident EU companies.

This reluctance on the part of certain Member States to co-ordinate their
tax  systems  can  only  lead  to  more  and  more  decisions  by  the  Court
which the Member States concerned might perceive as 'destructive'.  In
any  event  the  Commission  will  continue  to  insist  on  the  unequivocal
respect  of  the  EU  Treaty  in  taxation  and  it  will  design  its  policy  for
launching  appropriate  infringement  procedures  in  a  more  targeted  and
pro-active  way.  The  Commission  hopes,  therefore,  that  its  future
initiatives  to  promote  active  discussions  among  Member  States  on
important  legal  tax  matters  and  to  develop  guidance  on  the  broader
implications  of  ECJ  jurisprudence  will  be  welcomed  with  a  more
constructive  stance.  The  reaction  to  the  forthcoming  Commission
Communication  on  Dividend  Taxation  Systems9  will  be  a  first  test  of
this.

7

8

9

See Communication COM(2001)214 and the infringement procedures launched by the Commission
against various Member States subsequent to the failure of preceding discussions.
Following appropriate discussions with Member States which did not lead to the necessary legislative
changes infringement procedures were launched against various Member States.
Existing ECJ jurisprudence raises questions as to the compatibility with the EC Treaty of certain types
of dividend taxation systems in cross-border situations (e.g. Verkooijen case (C-35/98), Manninen (C-
319/02), Schmid (C-516/99), Lenz (315/02) on free movement of capital).

7

                                                
Current legal issues and pending cases with potentially far-reaching consequences for
Member States' tax systems

The ECJ has recently given its judgment in the case Bosal Holding BV (C-168/01). In a nutshell, it
held  as  contrary  to  the  fundamental  freedom  of  establishment  a  Netherlands  rule  that  made  the
availability of a tax relief for the costs of financing a subsidiary located in another Member State
conditional  upon  such  costs  being  indirectly  instrumental  to  making  profits  in  the  Netherlands.
Many other Member States may indeed have similar restrictive rules, so this decision opens up new
legal possibilities for tax planning and could create further difficulties for Member States. It would
appear  obvious  that  Member  States  could  mutually  benefit  from  an  exchange  of  views  on  the
consequences  of  the  case  and  a  co-ordinated  reaction  thereto.  Another  good  example  where  the
Commission  approach  could  be  expected  to  provide  good  results  is  the  jurisprudence  on  cross-
border  loss  offset  (see  below).  Other  important  issues  and  pending  cases  include  the  case  CLT-
UFA  S.A.  (C-253/03)  on  possibly  discriminatory  corporation 
tax  rates  for  permanent
establishments and the case of De Baeck (C-268/03) on the potentially discriminatory treatment of
sale of substantial participation to foreign company.

Another interesting ongoing debate of relevance here concerns 'exit taxation'. Most Member States
consider a transfer of company's registered offices to another Member State as a taxable event and
either charge exit taxes or tax the unrealised capital gains by assuming liquidation of the company
for tax purposes. However, the Advocate-General's opinion in the pending 'de Lasteyrie du Saillant
case' [C-9/02] favours an ‘unconditional’ understanding of free movement of persons in the area of
personal  income  tax.  If  that  approach  is  confirmed  by  the  Court,  it  cannot  be  excluded  that  a
similar reasoning  would  be  applied  to  corporate  tax.  Moreover,  the  tax  implications  of  company
law cases 'Überseering BV' [C-208/00] and 'Inspire Art' [C-167/01] are currently under discussion
(right of establishment).

3.2.  Revision of the Merger Directive and the Parent-Subsidiary Directive

The Merger
Directive and
the Parent-
Subsidiary-
Directive will
be considerably
improved.

There are still numerous tax obstacles in the Internal Market to business
re-structuring  operations  across  borders  and  to  dividend  payments
between  associated  companies.  Following  intensive  preparatory  talks
with  Member  States,  therefore,  the  Commission  recently  presented
proposals  for  directives  for  the  revision  of  the  Merger  Directive,
90/434/EC,  and  the  Parent-Subsidiary  Directive,  90/435/EC.10  The
amendments  seek  to  extend  the  scope  of  the  Directives,  relax  the
conditions for companies to benefit from them and resolve some of the
shortcomings which have arisen in the application of these Directives.

The tax
problems of
European
Companies are
being

The  amending  proposals  would  also  include  the  European  Company
Statute  (Societas  Europaea  SE)11  and  the  Statute  of  the  European
Cooperative Society (Societas Cooperativa Europaea SCE)12 within the
scope  of  the  two  Directives.  Moreover,  the  revised  Merger  Directive
would  contain  appropriate  tax  rules  for  the  transfer  of  the  registered
office of a SE or a SCE to another Member State, thus addressing one

10

11
12 

COM(2003)462 and COM(2003)613
Council Regulation (EC) No 2157/2001 and Council Directive 2001/86/EC on employee involvement.
Council Regulation (EC) No 1435/2003 and Council Directive 2003/72/EC on employee involvement.

8

                                                
addressed.

of the most pressing tax problems relating to these new legal forms. The
most  immediate  tax  problems  in  particular  for  the  SE  are  thus  being
addressed by the Commission.13

A pragmatic
approach was
chosen with a
view to speedy
progress.

The Commission wishes to emphasise that, in devising the proposals, it
had to strike a balance between the need to provide companies with the
best  possible  fiscal  conditions  to  benefit  from  the  Internal  Market  and
the need to safeguard Member States' legitimate financial interests and
revenue-raising capacities. Therefore, both proposals contain numerous
improvements for businesses but do not tackle all the issues that many
tax  experts  would  consider  relevant  in  this  field.  It  is  hoped  that  this
approach will lead to the speedy unanimous adoption of both proposals
for  Directives,  essentially  in  time  for  the  entry  into  force  of  the
European Company Statute in October 2004.

3.3.  Cross-border loss-offset

Offsetting losses
cross-border
may be difficult
to accept for
Member States
but it remains
very important
for businesses

The current limits to cross-border loss relief within the EU, in particular
as  regards  subsidiaries,  can  lead  to  (economic)  double  taxation  and
constitute significant obstacles to economic activity  in  more  than  one
Member State. However, experience shows Member States are reluctant
to  consider  any  EU  initiative  in  this  area.  The  Commission  has
withdrawn  its  proposal  of  1991  on  cross-border  loss  compensation
which the Council was not willing to adopt and which, after more than a
decade, was, in some respects in need of technical revision.

… and the EU
Treaty must
also be
respected in this
respect!

A Commission
initiative is
planned for
2004.

The  Commission  is  nevertheless  still  committed  to  organising  a  new
round  of  technical  preparatory  meetings  with  Member  States  with  a
view  to identifying innovative ways  of  dealing  with what  continues  to
be  considered  a  fundamental  obstacle  to  the  proper  functioning  of
the  Internal  Market  in  the  tax  field.  The  Commission  services  have
started  their  internal  analysis  of  the  existing  legislative  options  in  this
area  and  a  Commission  initiative  in  this  field  is  now  scheduled  for
that  recent  and
2004. 
forthcoming  developments  before  national  Courts14  and  the  ECJ15
will provide additional clarification of the legal situation and contribute
to  an  increasing  acceptance  of  the  need  for  action  in  this  area  among
European tax policy makers. The Commission initiative will therefore
concentrate on deepening the analysis of the issue and try to develop
guidance on Member States' respective obligations under the EU Treaty.

the  Commission  hopes 

In  particular, 

EU group
taxation may be

EU group taxation based on the example of the 'Danish 'joint taxation
system'  is  still  among  those  models  which  deserve  attention  from  a

13

14

15

The scope of the recently adopted Interest & Royalty Directive (49/2003/EC) will also be amended
accordingly.
For instance, Pirelli [UK High Court case n° HC01C02529] and Ö VwGH [Austrian Administrative
High Court -Reference number 99/14/0217]
For instance, in the decided cases Futura [C-250/95], Baars [C-251/98], AMID [C-141/99], Mertens [C-
431/01] and the pending cases Ritter [C-152/03] and Marks&Spencer [C-446/03].

9

                                                                                                                                                        
the way
forward.

Commission perspective. This system enables, in certain cases, Danish
parent  companies,  their  branches  and  also  their  foreign  subsidiaries  to
be  taxed  jointly  in  Denmark,  thereby  enabling  the  parent  to  take  into
account losses incurred not only by their foreign branches but also their
foreign subsidiaries.  Some other ideas have also been presented by tax
experts. For example, it has been suggested that extensive use could be
made of a  credit mechanism  for  devising  a  Europe-wide  consolidation
system  in  the  form  of  a  'European  Tax  Allocation  System'  (ETAS).16
The Commission will also consider these ideas.

3.4.  The 'EU Joint Forum on Transfer Pricing'

Progress is
under way in
the transfer
pricing field.

The  "EU  Joint  Transfer  Pricing  Forum"  announced  in  the  2001
Communication  has  been  created  and  it  is  working  intensively.  The
Forum  has  established  a  working  programme  until  2004  and  several
meetings  have  already  taken  place.  The  Commission  considers  this
genuinely new type of mixed working group consisting of high-level tax
experts  from  Member  States'  administrations  and 
the  business
community to be a promising and successful development.  It is indeed
the first time that such a joint tax working  group at EU level has been
established.

An  intermediate  report  by  the  Forum  on  its  activities  so  far  and  on
pragmatic,  non-legislative  recommendations  to  solve  the  problems  in
the application of the Arbitration Convention and the mutual agreement
procedures under double taxation treaties is planned for early 2004. The
Forum  also  discussed  the  practical  problems  for  companies  resulting
from the fact that the Arbitration Convention has not been in force since
1  January  2000  because  not  all  Member  States  have  ratified  the
Prolongation  Protocol  signed  in  1999.  Future  work  will  focus  on
documentation  requirements  and  on  possible  preventative  measures  to
avoid  double  taxation  in  the  area  of  transfer  pricing  (e.g.  Advance
Pricing  Agreements).  While  the  Commission  is  satisfied  with  the
constructive and professional atmosphere characterising the work of the
Forum,  it  is  somewhat  concerned  about  the  relatively  slow  progress
compared to the work programme agreed by the Forum itself in 2002. It
is hoped that it will be possible to accelerate the pace of the future work
on the remaining items on the Forum's work plan.

3.5.  Double Taxation Treaties

The  Commission  services  are  looking  closely  into  the  varied  and
complex problems  relating to the bilateral and multilateral double
taxation  treaties  in  the  Internal  Market  and  are  in  the  process  of
assessing  the  various  options  set  out  in  the  2001  study  for  tackling
these. An initiative in this field, which will provide a legal analysis and

16

Hernler, Jörg, ETAS – Das European Tax Allocation System für eine einheitliche Ertragsbesteuerung
Europäischer Unternehmen, in: Der Betrieb 2003, p.60-65.

10

                                                                                                                                                        
Double taxation
Treaties will be
a priority in the
coming years.

interpretation  of  the  relevant  ECJ  rulings,17  is  planned  for  2004.
Possible  approaches  for  advancing  in  this  area  include,  inter  alia,  the
development  of  an  EU  model  tax  treaty  or  the  conclusion  of  a
multilateral tax treaty between all EU Member States. .  Moreover, it is
noteworthy  that  many  of  the  targeted  measures  are  to  some  extent
interlinked.  This  could  have  repercussions  for  Member  States'  double-
taxation treaties.

Particular attention will need to be paid to the enforcement of the equal
treatment  principle  of  the  Treaty,  which  seems  to  conflict  with  the
current distinction between residents and non-residents in many treaties,
also  in  relation  to  Member  States'  double  taxation  treaties  with  third
countries  (“limitation  on  benefits  clauses").  The  same  goes  for
triangular cases. It will become necessary to examine in detail whether
some  form  of  'most-favoured-nation'  clause  between  EU  Member
States might be required at some stage in the future. First discussions
with  Member  States  on  these  issues  at  working  group  level  will  be
held shortly.

The  double-taxation  agreements  of  Member  States  will  continue  to  be
subject to review by the ECJ. In particular, the problems resulting from
the  current  lack  of  co-ordination  in  this  area,  notably  in  triangular
situations  and  with  regard  to  third  countries,  will  increase  even
further.  Without  Community  action,  there  may  be  important  political
and  economic  repercussions  for  Member  States'  policies  in  this  area.
Therefore,  the  Commission  hopes  that  its  approach  of  gradual  and
measured  co-ordination  of  treaty  policies  will  eventually  gain  support
and meet with a constructive attitude from Member States.

Co-ordination
is the way
forward.

4.  ADVANCES TOWARDS A CONSOLIDATED CORPORATE TAX BASE FOR THE EU-WIDE 

ACTIVITIES OF COMPANIES

4.1.  A new impetus to the debate in the EU

An intense
debate on the
reform of EU
company
taxation
continues as a
result of the

The general need for a fundamental reform of company taxation in the
EU  and  in  particular  Commission  pressure  for  some  form  of  common
consolidated tax base in the EU is now one of the single biggest issues
dominating  the  debate  in  the  EU  tax  arena.  The  European  Company
Tax  Conference18 organised  by  the  Commission  in  April  2002  gave
rise  to  a  constructive  discussion  on  the  relevant  issues.  It  marked  the
beginning  of  a  series  of  similar  events  organised  by  expert
federations19  and  research  institutes.20  Moreover,  the  Commission

17

18

19

E.g. in the case Saint-Gobain [C-307/97] See also the pending case D. v. Rijksbelastingdienst [C-
376/03]
For more information (programme, papers, summary, etc.) see:
http://europa.eu.int/comm/taxation_customs/taxation/company_tax/conference.htm
For example: Round Table "Company Taxation and Europe – Today and tomorrow" organised by the
European Federation of Accountants (FEE) on 16 October 2002 and the CFE Forum on "Direct

11

                                                                                                                                                        
Commission
strategy.

concepts  have  been  broadly  taken  up  in  tax  expert  literature  and
independent working groups.

The
Commission has
supplemented
its strategy with
concrete
initiatives.

"The devil is in
the detail" –
also as regards
the common EU
tax base.

Since  early  2002,  work  has  been  carried  out  on  various  concrete
initiatives  in  order  to  advance  with  this  longer-term  project.  The
Commission services have consulted widely on two important issues in
this field.21 These concern

(i) 

(ii) 

the possible experimental application of "Home State Taxation" to
small and medium-sized enterprises in the EU and

the implications of the introduction of International Accounting
Standards (IAS) for the introduction of a consolidated tax base for
companies’ EU-wide activities.

Despite the considerable interest and the  intense debate,  differences  of
views  remain  on  the  details  of  how  the  common  consolidated  EU  tax
base  can  be  reached.  However,  there  is  a  convergence  of  views  as
regards  specific  points  or  projects  (e.g.  the  'Home  State  Taxation'
pilot scheme). Even among business representatives and within industry
opinions  still  differ  on  important  questions.  Work  on  the  technical
aspects  of  the  longer-term  EU  tax  agenda  therefore  needs  to  be
intensified.

4.2.  Home State Taxation as a way forward for small and medium-sized enterprises 

(SMEs)

Small and
medium-sized
enterprises
should be
allowed, in a
test phase, to
apply the home
state company
tax rules
everywhere in
the EU.

The Company Tax Study of 2001 identified one of the four models for a
common  EU  tax  base  under  consideration,  "Home  State  Taxation"
(HST), as a possible solution that would be particularly beneficial for
SMEs22  and  floated  the  idea  of  launching  in  an  initial  phase  a  pilot
scheme  which  would  apply  this  approach  to  SMEs  as  a  test  case.  The
purpose  of  such  a  possible  pilot  scheme  is  simplification  and  the
reduction  of  tax  compliance  costs  for  companies.  The  idea  won
considerable support in the discussions following the presentation of the
Commission  strategy.  The  Commission  services  therefore  organised  a
workshop and held a public consultation on the issue. These initiatives
provided significant technical input and revealed  broad  convergence
on  the  basic  rationale  and  desirability  of  the  pilot  scheme  idea.
Detailed  reports  on  the  outcome  of  these  activities  are  publicly
available.23

20

21

22

23

Taxation: IAS - a way to harmonize taxation in Europe?" organised by the Confédération Fiscale
Européenne on 10 April 2003 (both held in Brussels).
For example, the related events and working parties organised by the Centre for European Policy
Studies (CEPS).
Detailed information is available on the following web-site:
http://europa.eu.int/comm/taxation_customs/taxation/company_tax/consultations.htm
see for instance section IV.B.11.1 and section IV.C.15.6 and 16.5.2.
For detailed information see:
http://europa.eu.int/comm/taxation_customs/taxation/consultations/home_state_sme.htm

12

                                                                                                                                                        
"Home State Taxation" for small and medium-sized enterprises in the EU - basic rationale of
the pilot scheme and potential benefits for SMEs and EU economy

The  concept  of  "Home  State  Taxation"24  applies  the  Internal  Market  principle  of  mutual
recognition  to  company  taxation.  It  provides,  in  simple  terms,  that  the  profits  of  a  group  of
companies active in more than one Member State should be computed according to the rules of one
company tax system only, the system of the Home State of the parent company or head office of
the group. Each participating Member State would continue to tax at its own corporate tax rate its
share of the profits of the group’s business activities in that State.

This  approach addresses  precisely  the tax issues  which  hamper  SMEs  most  in  their  cross-border
activities. Compliance costs (resulting from tax formalities, bookkeeping requirements etc.) appear
to be regressive to company size and are thus often disproportionately high for SMEs. Similarly,
the difficulties with the cross-border offsetting of losses hit SMEs particularly hard, especially as
regards  start-up  losses  that  occur  almost  by  definition  in  the  first  years  of  an  international
investment. Many of the problems linked to the Home State Taxation approach are in practice less
important if  not  irrelevant  for  SMEs  (e.g.  on  double  taxation  treaties). Tax  planning  is  not to  be
feared as it is usually easy to identify the “Home State” in the case of SMEs and possible changes
in the Home State regime are less likely.

SMEs  which  are  currently  only  active  in  their  domestic  market  and  wish  to  expand  for  the  first
time  in  another  Member  State  would  benefit  most  in  relative  terms  from  the  introduction  of  the
pilot  scheme.  Moreover,  these  cases  would  be  easier  to  handle  for  both  administrations  and
businesses and avoid transition problems. Therefore, the scheme would de facto essentially target
SMEs which 'go international' for the first time. There is, however, no systematic reason to exclude
SMEs which are already active in more than one Member State from the possibility of participating
in the scheme; this could even be considered discriminatory.

The
Commission
will try to take
the pilot scheme
further.

The  pilot  scheme  project  is  quite  enthusiastically  supported  by  the
interested  parties  and  federations  and  academics  are  very  willing  to
co-operate  actively.  These  parties  generally  emphasise  the  efficiency
and simplification gains of a pilot scheme for SMEs. This strengthens
the Commission's determination to go ahead with the scheme and to
endeavour  to  win  the  support  of  Member  States  on  the  issue.  Such
action  is  also  in  line  with  the  employment  guidelines  on  job  creation
and entrepreneurship which call for initiatives to focus on simplification
and reduction of the administrative and regulatory burden for SMEs.  A
particular  example  in  this  respect  concerns  R&D  activities  which  are
often pursued in small companies.

Are there really
discrimination
issues?

There  is,  however,  a  risk  of  discrimination  and/or  competition
problems  with  the  pilot  scheme.25  The  Commission  services  are
studying  this  issue  in  depth,  in  particular  in  order  to  resolve  potential
State Aid issues.

A pragmatic

On the basis of the contributions received and the information gathered,

24

25

Lodin, S.-O. and Gammie, M., Home State Taxation, IBFD Publications, Amsterdam, 2001.
Some observers even refer to possible constitutional problems in specific Member States.

13

                                                
approach is
needed.

the Commission considers it preferable to devise a relatively narrow
but realistic pilot scheme rather than 'overloading' the experiment
and  thus  jeopardising  its  prospect  of  acceptance  and  success.  It
concludes  that  a  pilot  scheme  in  this  field  could  be  usefully  designed
along the following lines:

 Key points for the design of an HST pilot scheme for SMEs

1)  The pilot scheme must be designed as a practical test. Only work with real-life data would

allow experience to be gained and justify the efforts involved in the pilot scheme.26

2)  The scheme's scope should be defined by the existing EU definition of SMEs.27 However, the
Commission is mindful of the fact that Member States would probably prefer a somewhat
smaller scope for a scheme. Therefore, thought could be given to proportionate reduction of the
figures in this definition.

3)  The test run period should be sufficiently long to allow it to be analysed thoroughly and to
justify the changeover cost. The Commission considers at least 5 years as a suitable
timeframe.

4)  Other types of limitations (e.g. to specific regions) do not appear to be desirable or

necessary.28 Third-country income would fall outside the scope of the pilot scheme and would
have to be accounted for under the normal rules.

5)  Special rules for exceptional cases would be necessary (e.g. change of ownership, business
fluctuations, business expansion). A business which, while participating in the pilot project,
organically grows beyond the limits set out in the SME definition should not for this reason be
excluded from the project.

6)  Given the technical difficulties it seems that partnerships could only, if at all, be included in

the scope of the scheme in exceptional cases.

7)  Taxes other than corporation taxes (notably VAT and local profit taxes) should not be
included in the scope of the scheme.29 However, Member States could continue to apply
national (profit-related) surcharges on the corporate tax as established under the conditions in
the pilot scheme.

8)  As such, the pilot scheme would conflict with existing national tax incentives for SMEs, and

these could be transformed into tax credits.

9)  For the purpose of the relatively small-scale pilot scheme it seems that a simple formula,
either payroll (or alternatively the number of employees) or perhaps a three factor formula
(1/3rd each for payroll, sales, property of the SME in the countries concerned), could be
applied for apportioning the tax base between the participating Member States on a trial basis.
The ongoing research efforts in this area (see below) will also provide additional insights in
this respect.

10) Participating companies should be obliged to file a tax return only in their home state,

although the other states concerned should receive copies. Tax audits would be carried out by
the home state authorities, if need be jointly with the partner administration. The general rules
for mutual assistance in the EU would apply.

26

27

If desired, additional economic simulations could be carried out at Member State level as only national
tax administrations have access to the data needed for an exercise of this kind.
Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small
and medium-sized enterprises. This definition distinguishes between:
medium-sized enterprises [headcount < 250 / turnover ≤ € 50 million or balance sheet total ≤ € 43
million]
small enterprises [headcount < 50 / turnover ≤ € 10 million or balance sheet total ≤ € 10 million]
micro enterprises [headcount < 10 / turnover ≤ € 2 million or balance sheet total ≤ € 2 million]
Moreover, enterprises which are part of a larger grouping, and could therefore benefit from a stronger
economic backing than genuine SMEs, do not fall under the scope of this definition.

14

                                                
The basis for
further
technical work
has been laid.

The  above  key  points  are  obviously  only  a  first  guide  to  further
discussions  with  interested  parties  and  Member  States.  Moreover,  in
some areas the technicalities of the solutions would have to be refined
further,  for  instance  as  regards  the  allocation  formula,  double  taxation
treaty  issues,  tax  incentives,  opt-in  and  opt-out  clauses  for  companies,
record  keeping  and  the  link  to  company  law  requirements  (e.g.
concerning financial accounts).

Mutual
recognition and
soft law can
help to
implement the
scheme.

In  principle,  Member  States  could  apply  the  principle  of  mutual
recognition  embedded  in  the  Home  State  Taxation  approach  in  a
bilateral or multilateral framework. However, the Commission is of the
opinion that an EU framework for the pilot scheme is necessary. This
could  usefully  be  done  by  "soft  law"  in  the  form  of  a  Commission
Communication  or,  following  an  appropriate  Commission  proposal,  a
Recommendation by the Council and the European Parliament. Member
States'  tax  administrations  could  then,  via  an  appropriate  "enabling
clause"  in  their  respective  tax  law,  invite  companies  to  volunteer  to
participate in the 'pilot scheme'.  In any event, no Member State  would
be obliged to take part in the scheme.

 Economic data on SMEs and the potential effects of the HST pilot scheme

SMEs  constitute  one  of  the  key  drivers  in  economic  growth  and  job  creation  in  the  EU.  The
implementation  of  the  pilot  scheme  would  improve  their  business  conditions  and  foster  their
survival rate (e.g. via cash-effective possibilities setting off foreign losses against domestic profits)
and development possibilities (e.g. via cross-border expansion) in the Internal Market. This would
over time generate economically beneficial growth and employment effects. General Commission
research on SMEs in the EU,30 and in particular the preliminary findings of the European Network
for SME Research (ENSR) survey on the internationalisation of SMEs,31 show that only very small
numbers of SMEs are currently active in other Member States than their own.

The revenue consequences of the scheme for Member States would depend on its precise design,
the number of participating SMEs and, not least, the details of the apportionment system chosen. It
is  true that  a  reduction of the tax liability  could  theoretically  occur  due  to  differences  in  the  tax
base  according  to  the  different  Member  States'  rules  and  sometimes  also  due  to  quicker
compensation of start-up losses. However, reducing the tax liability of SMEs in a lasting way is not
the  objective  of  the  scheme  and  given  the  characteristics  of  the  approach,  notably  the
apportionment  mechanism,  this  effect  should  not  occur  systematically.  Based  on  the  statistical
figures of SMEs which are internationally active and bearing in mind the very small proportion of
corporate taxes  paid  by  SMEs  domestically,  the  amount  of  tax  ‘at  stake’  for  Member  States  can
safely be expected to be very low. It is therefore very hard to see why the scheme should not  at
least be tested by Member States. It could provide potentially important economic benefits at a cost

28

29

30

31

For instance, there is no need for the exclusion of specific sectors except those which are subject in any
case to specific tax rules, e.g. shipping, banking and insurance.
The Commission is nevertheless working on other similar specific initiatives in order to facilitate
compliance in the field of VAT mainly for SMEs, see for instance Commission Communication
"Review and update of VAT strategy priorities" COM(2003)614
‘SMEs in Europe, including a first glance at EU candidate countries’ No 2, DG Enterprise publications.
For more information see the "Observatory of European Enterprises" run by DG Enterprise of the EC
Commission: http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/observatory.htm
EIM Business & Policy research, Overview of the ENSR Enterprise Survey 2003, EIM Zoetermeer,
August 2003 (survey held in the framework of the 8th Observatory of European SMEs)

15

                                                                                                                                                        
that could be very low! The Commission services  intend  to intensify  their  research  work  on  this
issue when the pilot scheme is conceptualised in more detail.

Continuous
monitoring of
the pilot scheme
is of paramount
importance.

From the start of the pilot scheme, the Member States concerned would
need  to  monitor  their  operations  and  should,  in  due  course  (e.g.  after
three years), provide the Commission with an evaluation report. For this
purpose, a monitoring group should be created to consider all issues of
relevance to the pilot scheme and to discuss the evaluation reports. This
group, chaired by the Commission, should consist of representatives of
all Member States and acceding countries.

A firmer
Commission
initiative could
be envisaged in
2004.

The Commission wishes to establish close co-operation with interested
parties  and  Member  States  in  order  to  discuss  its  conclusions,  and  the
above-mentioned  key  points,  concerning  experimental  application  of
"Home  State  Taxation"  to  small  and  medium-sized  enterprises  in  the
EU. It will therefore take appropriate steps, involving representatives of
business  and  interested  Member  States,  in  order  to  address  any
remaining technical issues and to develop the detailed arrangements of a
pilot  scheme.  On  this  basis,  a  political  initiative  in  this  field  could  be
envisaged for 2004.

4.3.  Developing a common EU tax base

The application
of IFRS could
help pave the
way for a
common tax
base

the 

from 

IFRS/IAS  Regulation.32  Although  only 

The  above-mentioned  Company  Tax  Communication  and  Report  in
2001  highlighted  the  move  towards  common  accounting  standards
arising 
the
consolidated  accounts  of  some  7  000  companies  are  directly  affected,
the  IFRS  influence  is  much  wider.  All  the  subsidiaries  of  the  7  000
companies will have to maintain IFRS records, credit institutions can be
expected to press for  IFRS style information, some Member States are
already  permitting  wider  usage  and  national  accounting  standards  are
confidently  expected  to  converge  towards  IFRS.  This  emphasis  on
common  accounting  standards  and  consolidation  together  with  the
demands for a common consolidated tax base have raised the possibility
of  linking  the  new  tax  base  directly  to  the  IFRS  accounts.  If  EU
companies  are  reporting  profits  according  to  a  common  standard
why  not  use  this  common  measure  of  profitability  as  a  starting
point for taxation purposes? Over the last two years the Commission
Services have examined this idea in some detail, including by way of a
public  consultation  for  views.  The  results  of  that  consultation  have
already been published separately.

32

The compulsory use of International Financial Reporting Standards (IFRS) from 2005, formerly known
as International Accounting Standards (IAS), was introduced by Regulation (EC) No 1606/2002 (OJ L
243, 11 September 2002) (“IFRS Regulation”)

16

                                                
Public Consultation on the tax implications of the application of International Accounting
Standards (IAS)/(IFRS)33

In  February  the  Commission  launched  a  public  consultation  on  the  application  of  IAS  and  the
implications of introducing a consolidated tax base for companies’ EU-wide activities. On the basis
that  the IFRS  accounts would  represent  at most  a  starting  point  for  arriving  at  a  tax  base,
and not the tax base itself, a number of areas of particular interest were identified for comment.
These included inter alia questions concerning: the general principles of IFRS and their relevance
and  applicability  to taxation, the  number  of  companies  likely  to  adopt  IFRS,  the  possible  use  of
consolidated financial statements, the mutual dependency of accounting and taxation, the possible
legislative framework for introducing a common tax base and the possibility of a pilot project for
the Societas Europaea (SE).

Over  40  written  responses  were  received  expressing  a  range  of  opinions  on  the  specific  issues
raised and in some cases covering more general aspects of EU tax policy. In general, support for
the concept of a common tax base was widespread but opinion was divided as to how useful IFRS
could  be.  However,  it  was  also  stressed  that  IFRS  could  provide  a  neutral  starting  point  around
which discussions on the base could be developed.

There is a need
to establish a
more formal
framework for
progressing
discussions

Before the possible detailed provisions of a common tax base can be
agreed  a  framework  for  these  discussions  must  be  established.  In
principle  two  main  approaches  can  be  distinguished.  The  ‘IFRS
approach’ starts with a common accounting position and seeks to define
what  adjustments  would  be  required  to  arrive  at  the  tax  base.  An
alternative  is  to  attempt  to  reach  agreement  in  isolation  on  tax
principles, and only subsequently to address the issue of how to ensure
their application.

The current
review of some
IFRS should not
be an excuse for
delaying work

The  IFRS  route  is  complicated  by  the  fact  that  the  rules  are  new  for
many  companies  and  under  the  IFRS  Regulation  only  apply  to  the
consolidated  accounts  of  a  limited  number  of  companies.  The  current
wide  ranging  review  of  the  existing  IFRS  by  the  IASB34  further
complicates the analysis of the tax implications of individual accounting
policies.  It  has  been  suggested  that  further  work  should  be  suspended
until  companies  and  Member  States  have  implemented  and  gained
experience of IFRS reporting. Although it might be tempting to ‘wait
and  see’  this would risk IFRS being implemented in  a  fragmented
manner  across  the  Community,  which  could  make  it  even  more
difficult to establish a  common  tax base  in  the future, particularly
as  regards  the  ‘dependency’  issue.  On  the  other  hand,  the  ‘tax
principles’  route  might,  at  first  sight,  appear  to  provide  the  ‘perfect’
solution but risks becoming a long drawn out academic exercise which
fails to provide a pragmatic and workable solution within an acceptable

33

34

The Consultation Document and a summary of the results are available on the following web-page:
http://europa.eu.int:8082/comm/taxation_customs/taxation/consultations/ias.htm
IASB – International Accounting Standards Board, the body which issues IFRS

17

                                                
Some general
IFRS principles
require
particular
attention

In principle the
consolidated tax
base should be
available to all
companies,
which means all
companies
should be able
to use IFRS

time scale.

Some  aspects  of  IFRS  require  particular  attention.  The  general
principles of materiality and substance over form are clearly not entirely
in  keeping  with  existing  tax  principles  and  adjustments  would  be
required  in  order  to  arrive  at  the  tax  base.  Materiality  in  accounts  is
essentially  defined  as  a  threshold  or  cut-off  point  beyond  which  an
omission or misstatement could influence economic decisions taken by
users,  but  for  tax  purposes  more  precision  would  usually  be  required.
Giving greater precedence to the substance of a transaction rather than
its  legal  form  (for  example,  concerning  leased  assets)  is  common  in
accounts  but  this  principle  is  not  so  uniformly  applied  for  taxation
purposes.  Both  principles  might  require  adjustments.  Similarly,  where
‘fair value’ accounting applies (for example, where assets are re-valued
to  market  value  and  the  increase  in  value  treated  as  ‘profit’)  these
unrealised  gains  should  not  be  subject  to  taxation  and  thus  further
adjustments  would  be  required.  More  generally,  the  work  on  the  tax
base possibilities of IFRS has highlighted a question which concerns all
possible forms of a common tax base: the relationship between financial
accounts and taxation, commonly known as ‘dependency’.

Although  a  common  consolidated  tax  base  could  be  introduced  in  a
series  of  steps,  perhaps  initially  as  a  pilot  scheme  and/or  without
consolidation (i.e. it would be available on a national basis within each
Member State), it would have to be available in the longer term to all
companies.  For  a  base  derived  from  IFRS  this  would  mean  that  all
companies would have to be able to use IFRS. There is generally wide
support for the extension of IFRS beyond the consolidated accounts
of the approximately 7 000 companies to which the Regulation applies.
Indeed, some Member States have already indicated that they will make
the option available to all companies. Even where the use of IFRS is not
permitted  the  national  standards  are  expected  to  converge,  leading  to
‘de facto’ common IFRS reporting. This would not only ensure that any
derived  tax  base  was  available  to  all  companies,  thereby  avoiding
discrimination  and  ensuring  equal  treatment,  it  would  also  enable
groups to apply a single set of accounting standards across the Internal
Market.  In  this  context  it  is  also  important  to  note  that  the  IASB  is
currently  actively  looking  into  possibilities  to  address  concerns  about
the  particular  problems  which  the  application  of  the  IFRS  might  pose
for small and medium-sized enterprises.

The relationship
between tax and
accounts
(dependency) is
key to any
common tax
base

Regardless of  whether  IFRS accounts form the starting  point  or  not,  a
common  tax  base  requires  a  detailed  re-assessment  of  the
relationship  between  a  company’s  statutory  accounts  and  its  tax
accounts (dependency). Currently, as Member States have different tax
bases and accounting bases they can choose whether or not to permit or
require  adjustments.  However,  once  a  common 
tax  base  were
introduced  each  Member  State  would  have  to  arrive  at  the  same  tax
base. In theory this could be achieved by the existing methods: either by
adjusting the accounting base to arrive at the tax base or by establishing

18

Companies
should not be
expected to
apply more than
one set of
accounting
standards

an accounting base which equals the tax base. However, for companies
permitted to use IFRS the latter method would no longer be tenable.

All  Member  States  that  wanted  to  establish  an  accounting  base  which
equalled  the  tax  base  would  in  effect  have  to  establish  the  same
accounting base as for IFRS. Accounting standardisation is developing
via  both  the  IFRS  Regulation  and  the  EU  Accounting  Directives  and
national  accounting  standards  are  expected  to  move  closer  to  IFRS.
However,  it  is  unrealistic  to  expect  that  this  standardisation  will  ever
fully meet the requirements of the tax base. Either adjustments will have
to  be  permitted  (less  dependency)  or  Member  States  will  have  to
continue with their own national accounting requirements in addition to
IFRS and the Accounting Directives. Since many companies will have
to apply IFRS in their own consolidated accounts, or will have to apply
IFRS  in  order  to  supply  their  listed  parent  companies  with  the
appropriate  data  for  consolidation  there  will  be  pressure  to  reduce
accounting  duplication  and  permit  a  wider  use  of  IFRS  in
individual statutory accounts.

IFRS represents
the only
available
neutral starting
point for
discussions

Under  this  scenario  making  use  of  a  common  accounting  base  as  a
starting  point  for  a  common  tax  base  makes  sense.  IFRS  statements
represent  a  neutral  starting  point  for  considering  a  common  tax
base.  Individual  Member  States  are  already  dealing  with  these  issues
domestically  as  the  ‘lists’  of  adjustments  between  financial  and  tax
accounts grows and it makes sense for these efforts to be directed in a
more  co-ordinated  way  across  the  EU  in  order  to  avoid  unnecessary
duplication of effort.

The private
sector status of
the IASB need
not be an
obstacle

Some doubts
have emerged
over
consolidation

But
consolidation
remains the
ultimate aim

A  resolution  of  the  dependency  issue  would  also  remove  one  of  the
objections  to  using  IFRS  as  the  starting  point.  Concerns  have  been
raised  over  the  private  sector  status  of  the  IASB  and  the  hypothetical
implications of that body rather than Member States deciding upon, and
amending, the tax base. However, if IFRS is only the starting point then
any changes to standards would not necessarily affect the tax base itself.
For  example,  if  future  IFRS  were  to  be  unacceptable  for  tax  purposes
they  would  not  necessarily  affect  the  tax  base  but  might  give  rise  to
further  adjustments  as  agreed  by  the  Member  States.  It  is  clear  that,
although the concept of a common tax base for companies operating
in  the  EU  now  seems  to  be  well  established  as  a  long-term  goal  for
EU  tax  policy  and  generally  widely  supported,  some  parties  in  both
business and tax administrations remain totally opposed to it as a matter
of principle. Even  among its  supporters cross-border tax  consolidation
is perceived by some as a step too far to contemplate at present.

Regarding  consolidation  the  Commission  is  still  of  the  view  that  it  is
the  most  efficient  way  of  resolving  tax  obstacles  and  is  an  essential
aspect  of  a  common  tax  base  in  the  long  term.  In  its  consultation
the
document, 
consolidated IFRS accounts could provide a useful starting point for a
tax base but most responses supported the Commission’s view that this

for  views  on  whether 

the  Commission  asked 

19

A tax-specific
method of
consolidation is
preferable to
relying on the
accounting
rules for
consolidation

Conclusions of
this section:

is  unlikely  to  be  the  best  way  forward.  Although  it  might  appear
superficially  attractive,  and  would  of  course  fit  in  with  the  IFRS’s
Regulation  which  applies  only  to  consolidated  accounts,  there  are  a
number  of  drawbacks.  The  definition  of  the  consolidated  group  for
accounting purposes is unlikely to be satisfactory for tax purposes  and
many  consolidated  accounts  would  also  include  the  results  of  non-EU
subsidiaries.  Adjusting  consolidated  accounts 
to  exclude  some
companies  while  including  others,  and  so  on,  would  be  complex  and
time consuming and unlikely to lead to any savings in compliance work.

Providing  for  consolidation  is  one  of  the  most  difficult  aspects  of  a
establishing  a  common  tax  base,  not  least  because  it  requires  an
apportionment mechanism for dividing the EU base between individual
Member  States  (see  below).  Given  the  drawbacks  of  starting  from
consolidated financial accounts a tax specific method of consolidating
group companies’ accounts seems to be the best approach.

The Commission concludes

(cid:1)  Accounting dependency is key to the concept of a common tax base,
regardless of whether or not it is derived from IFRS, and should be
more fully explored.

(cid:1)  Whilst the final basis for a common tax base remains undetermined
the  IFRS  accounts  provide  a  useful  neutral  starting  point  for
discussing  the  tax  technical  issues.  Detailed  technical  work  can
usefully be based around IFRS as a common EU starting point.
(cid:1)  Even  if  it  emerges  that  there  is  another  more  preferable  starting
point  for  a  common  tax  base,  work  done  within  this  IFRS
framework will still be relevant.

Commission proposals for progress in developing a common EU tax base

(cid:1)  Accounting dependency: (Applicable regardless of whether a tax base is defined in

relation to IFRS or derived independently)
A detailed external or internal study (depending on Commission resources) should be
conducted of the relationship between current accounting rules and the tax base in all
Member States. The results should be discussed with a group of Member States' experts
and include discussions on the possible movement away from accounting dependency. The
work of this expert group could be extended to include technical work on the tax
implications of IFRS. This work would address the taxation implications of individual
IFRS under the current tax systems and seek to find a Community solution in place of
fifteen, or twenty five, separate solutions.

the 

through 

(cid:1)  The detailed tax principles to be applied: (Applicable to any common tax base, but to be
viewed 
point)
perspective 
Establish an Expert Group to discuss individual aspects of the tax base, for example, tax
depreciation. Participation in the group to vary depending on the topic to be discussed; in
other  words,  a  sort  of  “revolving  participation  and  representation”.  Each  topic  to  be
discussed  by  experts from  each  Member  State; the accounting  sector  to  be  consulted  for
specific IFRS input.

starting 

neutral 

IFRS 

as 

a 

20

It  should  be  emphasised  that  without  adequate  support  from
Member  States  (who  have  little  to  lose  and  everything  to  gain  from
more  active  participation)  little  progress  can  be  made.  Furthermore,
private sector involvement should be secured by the participation of EU
professional and trade associations in the Expert Group.

4.4.  Allocating the tax base between Member States

A mechanism
for sharing the
tax base is
essential

transaction  between  group  companies 

Central  to  the  establishment  of  a  consolidated  tax  base  is  the
mechanism  for  sharing  the  tax  base  between  Member  States.  This
mechanism  would  have  to  be  equitable  and  transparent  and  be  as
administratively  straightforward  as  possible.  It  would  both  have  to
satisfy sound economic principles and meet with the political approval
of Member States. Currently a group of companies is forced to calculate
a  separate  tax  base  in  each  Member  State.  The  transfer  price  for  each
individual  cross-border 
is
important because it helps to determine the sharing of the taxable profits
and has to be set on a notional 'arm's length basis' and accepted by the
respective  tax  administrations.  The  ‘EU  tax  base’  is  thus  essentially
shared  by  this  use  of  separate  accounting,  under  which  individual
national  tax  bases  are  computed  separately  and  the  cross-border
transactions between the related entities are recorded on an arm's length
basis. One of the potential advantages of a consolidated tax base is the
removal of the need for separate accounting within the Internal Market
as the sharing of the 'EU tax base' between Member States is calculated
in  a  different  way.  The  group  would  establish  only  the  single  EU  tax
base for its EU-wide activities and this overall base would be allocated
or 'apportioned' to the Member States concerned via a simple key. This
formula  would  be  composed  of  economic  factors  the  choice  and
weighting  of  which  is  subject  to  current  Commission  research.  Both
separate  accounting  and  formulary  apportionment  are  vulnerable  to
potentially  inappropriate  manipulation  but  there  is  considerably  less
scope under apportionment and any such manipulation would be easier
to detect.

Sharing at the
micro level –
value added or
formula
apportionment

Although the sharing of the tax base could theoretically  be  carried out
on  a  macro  level,  i.e.  at  the  level  of  Member  States,  work  has
concentrated on sharing at the micro level, i.e. at the company level.
At  this  micro  level  two  main  possibilities  exist:  either  a  value-added
basis or a formula-based system.

A value added
basis might
work in the EU

Within  the  EU,  the  opportunity  to  apportion  the  tax  base  on  the
basis  of  value  added  demands  attention  because  of  the  existing
value  added  tax  (VAT)  system.  Much  of  the  information  required  is
already  collected  by  companies  for  VAT  purposes  but  adjustments
would  be  required  for  imports,  exports  and  depreciation.  Similarly,
labour costs would have to be included and a value added system would
essentially  be  an  origin-based  one,  including  exports  in  the  exporter’s
added  value,  rather  than  the  existing  destination-based  VAT  system.
However,  there  is  little  experience  of  such  an  allocation  system  and

21

research is less well developed.

Identifying the
key issues
relating to FA

The  main  focus  of  attention  has  been  the  formula  apportionment
approach,  which  is  already  used  in  several  countries,  the  most
developed example being that used in the USA. Work has centred on
identifying the main principles and areas of doubt which need to be
resolved.

 Further explanation of some of the terms used

Consolidation - The amalgamation of a number of corporate entities into a group. A group may be
defined simply in terms of legal ownership or the definition may also include a management and
control test.

Unitary Taxation and Combined Reporting - A ‘subset’ of consolidation, going beyond the legal
definition of a consolidated group to combine within the consolidated group only those entities or
operations which are economically integrated. The combined entity files a single combined report.

Economic  integration  –  as  part  of  unitary  definition  -  A  subjective  concept  capable  of  varying
definition and interpretation. Business activities must be integrated and/or contribute to each other.
It may require, in addition to economic integration or interdependence, operational integration. It
has also been expressed as ‘the three unities test’ (ownership, operations and use); and extended to
include  in  addition  the  requirement  for  functional  integration,  centralised  management,  and
economies of scale. For example, a manufacturer may have a highly developed treasury operation
which effectively operates as a bank: should all the treasury activities be included in the combined
reporting?

The definition of
the consolidated
group is
complex and
may go beyond
just the legal
ownership

Not all the
income should
necessarily be
subject to
sharing by
formulae

The advantages of consolidation have already been covered in detail in
previous  Commission  documents  but  the  precise  definition  of  the
consolidated  group  remains  open.  Simple  legal  ownership  via  the
establishment of thresholds, for example 50% or 100%, is unlikely to be
sufficient as it is too open to manipulation and additional management
and  control  tests  may  be  required.  However,  the  more  conceptually
attractive  unitary  taxation,  extending  the  definition  to  include  tests
related to the degree of economic integration, introduces an element of
subjectivity  which  could  lead  to  uncertainty  and  complexity  which
might eventually outweigh the advantages.

Beyond  the  group  definition,  the  definition  of  the  income  itself  also
requires  attention.  It  is  not  necessarily  appropriate  to  share  or
apportion  all  income  and  hence  income  to  be  shared  or  apportioned
(business or ‘active’ income) must be distinguished from income which
is  simply  allocated  (non-business  or  ‘passive’  income).  One  example
would be income from intangibles, such  as  patents  which, under some
formula  apportionment  systems,  may  be  allocated  to  the  entity  which
holds the patent rather than shared across the group. Whether this is the
best  approach  or  not,  and  whether  potential  manipulation  can  be
controlled, remains open and is perhaps the most unsatisfactory  aspect
of formula apportionment.

22

The factors and
weightings in
any formulae
will have to the
same across the
whole of the EU

Although the USA  example  illustrates  that  formula  apportionment  can
work  without  standardised  factors  and  weightings,  it  is  now  generally
accepted that  this  is  not  ideal. Accordingly, it is assumed that across
the  EU  the  same  factors  and  weightings  would  be  applied.  This
would  not  mean  that  all  industries  would  necessarily  use  the  same
formulae  but  that  any  sector-specific  formulae  would  apply  across  the
EU. The complexity of the issues involved  also suggests that  although
theoretically  a  world-wide  apportionment  mechanism  might  be
preferable,  research  should  be  directed  towards  an  EU  system
(sometimes referred to as ‘water's edge’). Although this would require a
distinction  to  be  made  between  EU  and  non-EU  activities  it  would  be
unrealistic at this stage to pursue a global system.

The choice of
factors and
weightings
requires careful
consideration

The choice of factors and their weightings is fundamental. Taxation
via  formula  apportionment  is  effectively  a  tax  on  the  factors  and
therefore  must  reflect  the  source  of  income  generation  as  closely  as
possible. The traditional three factor formula – sales, capital and labour
–  presents  a  useful  starting  point  to  examine  the  potential  distortions
which  a  formula  might  introduce.  All  three  factors  represent  the
capacity to generate income, although all three are of course vulnerable
to  potential  manipulation  (as  is  transfer  pricing  under  separate
accounting), and achieving the appropriate balance is difficult.

The economic
effect on
individual
Member States
would have to
be established

Member States
would need to
be able to
compare their
existing share of
the tax base
with their likely
share under any
new system

Even  if  these  issues  were  resolved  on  a  theoretical  basis,  i.e.  if  the
income and the group were defined, and the factors and their weightings
identified,  the  effect  on  Member  States’  ‘shares’  of  the  tax  base
would need to  be  understood. Whereas the effect of different factors
and  definitions,  etc.,  can  be  modelled  on  a  discrete  basis  two  aspects
remain  particularly  difficult  to  research.  One  concerns  the  dynamic
effect  –  how  would  companies  react  and  change  their  investment
strategy  or  corporate  structure  faced  with  different  models  of  formula
apportionment?  The  second,  which  is  partly  dependent  on  the  first,
concerns  how  the  distribution  of  the  ‘EU  tax  base’  between  Member
States would differ as compared with the current distribution.

The first is not a new issue – possible company behaviour in the face of
changing tax legislation already has to be factored into tax policy and,
indeed,  with  a  uniform  system  of  formula  apportionment 
tax
competition  between  Member  States  would  be  more  transparent  and
arguably easier to predict. However, the second aspect – understanding
how  a  move  to  a  new method of  sharing  out  the  ‘EU  tax  base’  would
impact  on  individual  Member  States  –  is  more  difficult.  It  could  be
argued that if a sufficiently fair and robust mechanism could be agreed
then  changes  in  the  distribution  could  simply  be  described  as
corrections  to  the  current  system  based  on  separate  accounting.
However, it  would be unrealistic to  expect  Member  States  to  enter
into  negotiations  on  a  new  method  without  a  comparison  between
the 
(formula
old 
apportionment).

accounting) 

the  new 

(separate 

and 

23

Making the
comparison will
require the
close co-
operation of
companies and
Member States

Unfortunately, to date, it has not been  possible  for  the  Commission  to
make such a comparison. The current distribution of the tax base, at the
individual company level, is not publicly available. Even if it were, the
amount of work required in recalculating real company data to arrive at
the  new  tax  base  distribution  is  daunting.  Some  data  is  available
commercially,  but  part  of  the  answer  seems  to  lie  with  companies
and the Member States themselves. If such data were made available,
and  not  necessarily  on  a  individual  company  basis  by  Member  States
but perhaps by sector, then some progress could be made.

Commission proposals for progress in developing a mechanism for allocating the tax base
between Member States

Research should be extended to include the possibilities of a ‘share out’ based on value added.

Research into formula apportionment should be continued, in particular into:
(cid:1)  Group and income definitions
(cid:1)  Formula factors and weightings

This research should include the construction of a theoretical economic model.

Discussions with Member States and companies on how ‘real’ data can be obtained on the current
EU tax base distribution should be started.

The financial implications of various mechanisms should be modelled using the above theoretical
model with ‘real’ data.

4.5.  A European Tax regime for the Societas Europaea?

Initial reactions
to a pilot
scheme for the
European
Company were
very positive …

… but now a
more complex
assessment of
pros and cons
emerges.

At  the  above-mentioned  European  Company  Tax  Conference  in  April
2002 the Commission's idea of piloting the common consolidated EU
tax  base  with  the  European  Company  Statute/Societas  Europaea
(SE) appeared to win considerable support. First, the view seems to be
that the application of the new system to a limited group of companies
would  allow  useful  practical  experience  to  be  gained  before
consideration of far-reaching general implementation. Second, business
representatives almost unanimously argue that without proper EU tax
rules the  European  Company Statute  will be  unlikely  to  be  of  any
practical benefit.

The ensuing debate, notably via the workshop and the consultation on
the  suitability  of  the  IAS  for  the  development  of  such  a  tax  base,
revealed a more divided picture, ranging from outright rejection of the
idea  as  a  matter  of  principle  to  cautious  support.  In  particular,  many
observers  felt  that  the  choice  of  the  SE  for  the  pilot  scheme  was
somewhat  arbitrary  and  not  justified  by  any  substantial  feature  of  the
new  legal  form.  Companies  which  factually  or  legally  cannot  easily
transform themselves into an SE would be discriminated against. There
are  nevertheless  several  advantages  to  the  pilot  scheme  idea  which
remain largely undisputed. While  the  issues  to  be  resolved  are  exactly
the  same  for  an  SE  as  for  any  other  company,  in  particular  as  regards

24

Still, there are
attractions to
the idea.

The
Commission
services are
examining
potential
discrimination
issues in
various facets.

the  necessary  allocation  mechanism,  it  is  acknowledged  that  the
transitional  issues  should  be  easier  to  deal  with  for  a  new  legal  form
which  in  many  respects  will  have  to  start  with  a  "clean  sheet".
Moreover, the possible avoidance of consolidation issues could provide
a practically important advantage in the context of the pilot scheme.35

Potential problems with competition and discrimination issues could
'make-or-break'  the  pilot  scheme  for  SEs.  However,  whether  or  not
such  situations  really  occur  and  if  so,  whether  this  gives  rises  to  legal
problems, are essentially open questions. Again, opinions in the debate
and in tax literature vary significantly. This is why the Commission has
contracted out an external study which is expected to provide a detailed
legal expert opinion on these issues and all the relevant ramifications.36
In  particular,  it  is  important  to  ascertain  whether  a  scheme  that  is
optional could avoid these problems. The result of this study is expected
by early 2004.

The pilot
scheme and
option for a
common tax
base would not
be available to
the SE right
from the start …

… but the idea
will be pursued
further

The  Commission  continues  to  believe  that  the  idea  of  a  suitably
designed  pilot  scheme  which  would  provide  companies  created  under
the European Company Statute with a common consolidated tax base at
EU-level deserves to be analysed further. Advances will now depend,
on  the  one  hand,  on  the  technical  progress  in  other  areas  (notably  the
devising of the tax base rules and possibly an apportionment key) and,
on the other, on the Commission's final assessment of the discrimination
issue.  This  means  that  it  will  effectively  be  impossible  to  have  fully
developed and operational EU tax base rules in place by the entry into
force  of  the  European  Company  Statute  on  8  October  2004  and
decisions  in  this  respect  must  be  postponed  to  2005.  It  would
therefore be premature to commence detailed work on the practicalities
of a possible pilot scheme at this stage.

… and the
creation of
European
Companies will
be facilitated by
EU tax law.

Nevertheless,  as  confirmed  above,  European  Companies  will  be
facilitated  as  far  as  taxation  is  concerned,  subject  to  the  Council
assuming its decision-taking responsibilities, by appropriate technical
adaptations of the  current body  of EU company taxation law by 1
January 2005. A certain delay on the 'grand design' solution will thus
not hinder or put at an undue disadvantage this new legal form.

5.  CONCLUSION AND PRIORITIES FOR COMING YEARS

In an overall assessment of its strategy the Commission concludes that
its 'two-track' company tax strategy after two years of work remains
the  best  approach  to  the  current  tax  problems  in  the  Internal  Market

The overall

35

36

An SE could operate as a single entity across the EU without needing to produce separate branch
accounts for consolidation.
It goes without saying that the study will by no means prejudge any position or decision to be taken by
the Commission in this area, in particular as regards the compatibility of a future SE tax regime with the
Treaty rules.

25

                                                
assessment of
the 'two-track'
company tax
strategy
presented by the
Commission is
positive …

and the Commission has delivered the actions and initiatives that were
promised.  The  targeted  measures  are  'on  track'  and  progress  with
these  now  depends  to  a  significant  extent  on  the  other  EU  institutions
and  in  particular  the  Council.  The  remaining  issues  will  be  tackled  in
2004. This concerns, in particular, initiatives on double-taxation treaties
and on the cross-border offset of losses. Moreover, the Commission will
pay increasing attention to the developments before the European Court
of Justice and strengthen its related policy initiatives.

but ultimately
its success
depends on the
willingness of
all players to
contribute
constructively.

The  longer-term  work  on  the  'comprehensive'  approaches  has
understandably  progressed  at  a  slower  rate.  This  is  partly  due  to  the
reluctance  by Member  States  which are understandably  cautious  about
such  relatively long-term  and  far-reaching  plans.  Technical  difficulties
relating  to  some  of  the  concepts  advocated  by  academics  and/or
representative  business organisations  in 2001 still need to be  resolved.
The  Commission  still  believes  there  will  be  no  major  breakthrough  in
the  immediate  future  but  advances  in  specific  areas  may  now  be
possible (e.g. the HST pilot scheme for SMEs) which would allow for
technical  refinements  and  the  acquisition  of  practical  experience.  The
the  common
technical  work  on  this 
consolidated EU tax base will continue to be developed and depending
on  the  degree  of  political  support  could  even  be  stepped  up.  In  this
respect, developing 'enhanced co-operation'37 mechanisms between  a
subgroup of Member States could facilitate further progress. When the
relevant  proposals  are  more  elaborated  it  may  well  be  that,  when
agreement  between  all  twenty-five  Member  States  is  not  possible,
'enhanced cooperation' will  prove useful for the implementation  of  the
measures.

long-term  objective  of 

In  this  light,  and  bearing  in  mind  the  economic  importance  of  EU
company tax reform for the improvement of the EU Internal Market as a
whole,  and  for  promoting  economic  growth  and  employment  creation,
the Commission remains committed to a continuing thorough technical
analysis and constructive political debate. Both elements will be key to
achieving satisfactory progress.

37 

Art. 43-45 EU-Treaty ("Nice Treaty") and Art. I-43, III-322-329 of the Draft constitutional Treaty.

26