Opinion of the European Economic and Social Committee on the Creation of a common consolidated corporate tax base in the EU
Date: 2006-02-14
Institutions: European Economic and Social Committee
Subjects: basis of tax assessment, corporation tax, tax harmonisation

C 88/48

EN

Official Journal of the European Union

11.4.2006

Opinion of the European Economic and Social Committee on the Creation of a common consoli-
dated corporate tax base in the EU

(2006/C 88/12)

On 13 May 2005, Mr László Kovács, member of the European Commission, requested the European
Economic and Social Committee, under Article 262 of the Treaty establishing the European Community,
to draw up an opinion on the Creation of a common consolidated corporate taxation base in the EU.

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 27 January 2006. The rappor-
teur was Mr Nyberg.

At its 424th plenary session, held on 14 and 15 February 2006 (meeting of 14 February), the European
Economic and Social Committee adopted the following opinion by 94 votes to 6 with 4 abstentions.

Conclusions and recommendations

The 1992 Ruding report already established that common rules
were needed to establish the tax base. It also called for the
proposal for minimum/maximum tax rates to be extended.

The EESC sees the fact that a working group chaired by the
Commission is to develop proposals for a common consoli-
dated corporate tax base as a step — at last — in that direction.
The fact that the work will take three years is understandable,
given the complexity of the issue. The group's approach is one
of considerable transparency. All the documents are available
on the Internet so that those who wish to follow the discus-
sions may do so. Reluctance to change in entrenched national
systems must not be allowed to delay the introduction of the
common tax base. The Member States must
show that
EU membership is worthwhile, since a common consolidated
corporate tax base can only be created by the EU. Similarly, the
question of the tax rate must be put to one side for the
moment, in order to reduce the difficulties in coming to an
agreement on the tax base.

Politicians must be the chief architects of tax systems. The
Council of Ministers and the European Parliament need to
develop common rules for company taxation otherwise this
area will end up being regulated by the EC Court of Justice's
legal decisions. Similarly, it is important that the discussions
take place in cooperation with the social partners and civil
society generally.

The common corporate tax base is a question of ‘nothing is
settled until everything is settled’. Where there is a big risk of
delays, however, it should always be considered whether the
parts on which there is agreement can be introduced gradually,
through daughter directives.

The deliberations that are needed are partly legal, partly tax
technical, and partly economic. The Committee would urge the
Commission and the Member States — despite the large

number of technical details and the big differences between
countries — to nevertheless be guided by the economic advan-
tages that can be secured through a common consolidated
corporate tax base.

Our discussions to date can be summarised by the principles
for a common consolidated corporate tax base which we set
out in the final section. At the same time, the Committee calls
on the Commission to follow at all times the principles we set
out as a beacon for working out the technical details. We have
chosen to focus on reasons of principle as we believe that once
these principles are accepted,
it is easier to choose between
different technical solutions.

1. Background

1.1
On 13 May 2005 Commissioner Laszlo Kovacs asked
the EESC for an exploratory opinion on a common consoli-
dated corporate tax base. The Commissioner pointed out that
such a tax base would remove many of the problems that firms
operating in several EU countries come up against. There is
wide support for the proposal within business and from many
governments.

Since 2001 the Commission has produced several
including a

1.2
communications and reports on corporate tax,
major report on company taxation in October 2001.

1.2.1
Following a July 2004 ‘non-paper’ on a common
consolidated corporate tax base and a Council of Ministers
discussion, a special group was set up comprising experts from
the Member States. Until 2007 the group will look in detail at
all the practical aspects of introducing a common tax base. As
with this opinion, the discussions only deal with the basis for
calculating corporate tax, and not with corporate tax rates.
Neither is the issue of ‘home-state taxation’ addressed. This
could perhaps be a temporary pilot project, whereas the
common tax base is an overarching project.

11.4.2006

EN

Official Journal of the European Union

C 88/49

1.3
The debate does not focus exclusively on creating a
common tax base system, but also on the fact that it must be a
consolidated one. This specifically concerns companies that are
active in several Member States. For a common tax base to
work best, such companies need to be able to pool their tax
base and calculate profits for the group as a whole. The calcula-
tions would be consolidated. This will therefore require systems
for sharing profits between the different parts of the company.

— allocation of capital gains or losses when companies reorga-

nise across borders

— compensation for losses within a company operating in

several countries, and

The debate only deals with corporate tax, not with all
1.4
types of company taxation. There are many types of company,
e.g. voluntary organisations and associations, and these differ
between Member States. If a common tax base is introduced
for limited companies, the relationships between these compa-
nies and other types of companies and activities change as
regards taxation of profits. There could therefore be a case for
national corrections in the area of taxation of profits for other
types of companies and activities. The above-mentioned group
involving the Commission and the Member States does not
address this issue, and neither does this opinion.

2. Previous EESC opinions on a corporate tax base

A number of EESC opinions have addressed the
2.1
problems caused by the existence of different tax bases for
corporate taxation in the EU countries. The EESC is working to
create free and fair competition that encourages cross-border
activity without undermining the national base for company
taxation (1). The EESC would prefer to start by trying to find
solutions for a common tax base for corporate tax, and only
then to discuss tax rates (2).

2.2
A common corporate tax base could reduce or even
eliminate most of the existing obstacles to cross-border activity
for companies in the European Union. The problems include:

— double taxation

— internal pricing for cross-border transactions

— different approaches to marketing when companies in

different countries merge

(1) Tax policy in the European Union - Priorities for the years ahead. EESC

opinion – OJ C 48/19 of 21.2.2002, p. 73.

(2) Taxation in the European Union: common principles, convergence of tax
laws and the possibility of qualified majority voting. EESC opinion – OJ
C 80/33 of 30.3.2004, p. 139.

— different rules on taxation of investments.

2.2.1
Although corporate taxation is important to creating a
favourable climate, it should be remembered that there can also
be many other crucial factors, both in terms of cross-border
trade and where the activity is carried out (3).

2.3
The EESC has also pointed out that the problem is not
just tax base differences. There are also a number of practical
regulatory differences relating to, for example, tax collection,
accountancy arrangements and procedures for settling disputes.
Some of these problems could be reduced by implementing the
practical rules that must accompany a common tax base (4).

For companies the biggest practical advantage of a
2.3.1
common tax base would perhaps be that they would only need
to be familiar with a single set of rules and how to implement
them. Instead of keeping separate accounts for the different
sections of the company, combined accounting can be used. In
addition to creating a more level playing field, a common tax
base could provide efficiency gains not just for companies but
also for the tax authorities (5).

2.4
The EESC has also called for the common tax base
debate to be extended from the core issue to encompass cross-
border problems. When a common tax base is created it must
not only facilitate matters for companies that operate across
borders, but also for those that are only active in the home
market. The main objective — to create fair competition for
companies that operate in several countries — must not be
allowed to produce new differences between these companies
and companies with only domestic activity.

2.4.1
The aim here is also to facilitate matters for small busi-
nesses, almost all of which are active in the home market only.
Attempts to create simple, clear tax rules are of crucial impor-
tance in this context, too (6).

(3) Fiscal competition and its impact on company competitiveness. EESC

opinion OJ C 149/16 of 21.6.2002, p. 73.

(4) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p.

75.

(5) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p.

75.

(6) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p.

75.

C 88/50

EN

Official Journal of the European Union

11.4.2006

2.5
The EESC has previously stated that a common tax base
cannot be voluntary, i.e. offer the option to choose between
remaining with a national tax system or opt for a special
system for companies with cross-border activity. The EESC
therefore considers that when a common tax base is created for
corporate taxation, it must be mandatory (7).

the latter and a residual national
tax base calculation that
applies to domestic companies — would, moreover, create a
situation in which the Member States, rather than companies,
would have to deal with several tax systems.

2.6
The EESC has consistently championed the case for
dovetailing — insofar as possible — the rules for the common
tax base with International Accounting Standards. The
Committee is aware that the IFRS for international accounting
only can be used as a starting point for the common tax base
rules.

2.7
An unwelcome effect of the Council of Ministers' and
the European Parliament's inability to reach a decision on a
common corporate tax base is that the positions that have to
be adopted anyway end up in the EC Court of Justice. As long
as differences exist there will be a need for legal decisions
relating to the different tax systems. Member States tax systems
are then affected by the Court's decisions relating to the
internal market, despite the fact that no political decisions have
been taken (8). (9)The ‘Marks and Spencer’ case that was recently
decided at the EC Court of Justice provides a clear illustration
of this.

2.8
The EESC's wish to consider corporate taxation in a
broader political perspective means that tax neutrality must be
considered not just in relation to company tax, but also to the
two production factors — labour and capital. However, this
position of principle is largely contingent on the tax rate
chosen (10).

Integration and increased competition go hand in hand
2.9
and can enhance efficiency and increase growth. However, this
means that those unable to cope with increased competition
cannot compensate for poor productivity by lowering corpo-
rate taxation. If the positive effects of integration are to be
achieved, those aspects of corporate taxation that can distort
competition must be eliminated (11).

2.10
A common — and hopefully mandatory — tax base
would provide greater scope to monitor tax payments as the
authorities only need to be familiar with a single system and
can communicate with each other more easily. It would also
make it easier to deal with tax evasion to some degree. A non-
binding common tax base — where one can choose between

(7) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002, p.

75.

(8) An internal market without company tax obstacles – achievements,
ongoing initiatives and remaining challenges. EESC opinion OJ C
117/10 of 30.4.2004, p. 41.

(9) In 2003 and 2004 the ECJ ruled on 25 cases relating to direct taxa-

tion.

(10) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002,

p. 75.

(11) Taxation in the European Union: common principles, convergence of tax
laws and the possibility of qualified majority voting. EESC opinion OJ C
80/33 of 30.3.2004, p. 139.

3. Some facts about corporate tax

3.1
Tax receipts from companies vary according to which
country the tax is collected in. The most important reason for
this is different tax rates (between 12.5 % and 40 %) but as the
tax base varies it is not always clear how much the situation
actually depends on differences in tax rates (12).

3.2
The Commission has compiled information on what is
known as the ‘implicit tax rate’, which is meant to explain the
proportion of corporate profits actually paid in tax, whereas
the debate usually focuses on comparisons of tax rates alone.
The latter can be misleading; for example, a high tax rate can
give small tax receipts if there is wide scope to make deduc-
tions. Tax receipts can also vary depending on how effective
collection is and the control measures in place. The extent of
corporate resources devoted to corporate tax payment also
depends on whether taxation arrangements are efficient or
bureaucratic (13).

3.3
In 1990 the OECD noted that 60 % of world trade takes
place within corporate groups. Differences between national
tax systems are therefore a problem for companies, as they
apply to these corporations.

3.4
It is difficult to calculate the economic impact of a
common corporate tax base. A recent study puts it at between
0.2 % and 0.3 % of GNP. The calculations only cover the
common rules for the tax base; consolidation and administra-
tive savings are not taken into account. This should also be
seen in light of the fact that corporate taxation as a whole
accounts for approximately 3 % of GNP (14).

3.5
Nowadays major companies account for the majority of
cross-border activity. Differences in corporate taxation are
therefore a problem for them. Those that operate in several
countries have, however, acquired the necessary expertise and
managed to cover the additional costs. However, it is probably
differences in tax systems that impact most on those small and
medium-sized firms that have considered but thought twice

(12) Direct company taxation. EESC opinion OJ C 241/14 of 7.10.2002.
(13) Taxation in the European Union: common principles, convergence of tax
laws and the possibility of qualified majority voting. EESC opinion OJ C
80/33 of 30.3.2004, p. 139.

(14) Economic effects of

tax cooperation in an enlarged European
Union, Copenhagen Economics 2004 (Copenhagen Economics
(2005) p. 36).

11.4.2006

EN

Official Journal of the European Union

C 88/51

about setting up outside their national borders. Common rules
would lower the bar considerably for firms wishing to start up
in several countries. There is considerable scope here for
greater integration and increased competition, which could be
one of the biggest gains from a common system for calculating
the corporate tax base.

4. Common decisions taken thus far on corporate tax

(90/435) establishes

4.1
Only three directives have so far been adopted in the
field of corporate taxation. The Parent companies/subsidiaries
Directive
the dividend from a
subsidiary in one country will be tax free in the Member State
of
the parent company. Tax-free status can, however, be
replaced by a rule allowing tax paid in the subsidiary company
country to be deducted from the tax due in the parent
company country.

that

of work ahead of them before they can produce a common
proposal.

5.2
The tax base system must be competitive so as to create
a favourable climate for investment in the EU. The tax system
must not, however, generally influence the type of investment
or the choice of Member State in which it will be located. Prof-
itability is the crux of the matter, not how funding can be
found for an investment. Clearly there must be potential to
encourage
it
environmentally-friendly investment or
towards neglected regions, but this can be done more appropri-
ately using resources other than the corporate tax base.

steer

5.2.1
Similarly it is important to maintain a clear line of
demarcation with income tax. Distribution of stockholder divi-
dends is a matter for income tax and must not be drawn into
discussions about taxation of corporate gains. Moreover, this is
not an issue that affects decisions on the corporations' location.

4.2
The Mergers Directive (90/434) regulates taxation when
companies re-organise. Although there is no civil law covering
cross-border mergers and split-offs, they are still not covered
by the directive, which chiefly regulates sell-offs.

4.3
A third, recently adopted directive deals with taxation of
interest and royalty payments between associated companies
(2003/49). The directive eliminates withholding tax in such
cross-border transfers.

Even if it is possible to agree on a common tax base, it
5.3
must include different rules for certain sectors. For example,
special rules on reserves might be required for certain sectors,
such as the banking and financial sector, particularly the life
insurance industry, where reserves are often particularly impor-
tant. Another example is the forestry industry, where in
extreme cases revenue can come in at up to hundred-year inter-
vals.

4.4
for
Since 1997 there has been a code of conduct
company taxation, according to which the Member States shall
not attract investment through harmful measures in the tax
area. The code requires the countries to undertake not to intro-
duce new harmful taxes and to review their existing provisions.
The code has been supplemented with a list of 66 tax measures
that are deemed to be harmful. These are currently being elimi-
nated.

Another aspect concerns whether the firm is mainly
5.4
funded through loans or through own capital.
interest
payments on the loans are tax-deductible, then only a small
part of the firm's income is taxed in the form profits on the
few shares.
If there are no loans and everything is funded
through in-house shares then everything is taxed as profit.
Corporate tax should, as far as possible, not be allowed to influ-
ence choice of funding.

If

5. Discussion of the technical details

5.1
The rules governing deductions that may be made from
the tax base before tax is calculated are the tax base calculation
area where differences between countries are greatest, and this
is therefore an important issue for Member State discussions. In
this connection, the Committee would stress in particular the
need to aim for a broad base for corporate taxation. It must be
remembered, however,
that a broader basis may require a
review of the tax rate.

Unfortunately, the discussion needs to start with the basics.
Expenditure can already be treated differently if it is to be
classed as ordinary expenditure and therefore be included in
the calculation of the tax base, or if it can be deducted from
profits because the tax base is fixed. Tax experts still have a lot

5.5 When it has been established what deductions can be
allowed, it only remains to decide when and how this can be
done. The biggest difference between Member States is whether
each type of investment can be written off individually or
whether all
investments can be pooled together. Firms find
pooling easier to handle, as there is no need to make calcula-
tions for individual machines or equipment.

In order to introduce a consolidated tax base where
5.6
profit is calculated for an entire group of undertakings, a defini-
tion is needed for the latter. The alternatives for such a defini-
tion are: a percentage of ownership in each part of the busi-
ness; or for activity in each part of the business to need to be
connected with the parent company's activity. It would seem
necessary to choose a combination of these, since there is no
reason to create a consolidated tax base for commonly-owned
companies, where these exist, within separate sectors.

C 88/52

EN

Official Journal of the European Union

11.4.2006

5.7
Once there is agreement on the tax base for calculating
corporate taxation, the problem of consolidation remains: how
are profits for companies active in several countries to be
distributed between the various countries? A common tax base
is not enough to avoid tax systems being used to move profits;
there must also be a simple,
logical system for distributing
profits between the Member States (and consequently between
countries with different tax rates). When profits are amalga-
mated in this way between different parts of a company in
different countries,
tax authority cooperation also needs to
move up a gear.

5.7.1
In light of these requirements, we might usefully look
at the system used in Canada (half of the profit is distributed
according to the proportion of
the workforce and half
according to the proportion of the sale).

6.2 Neutrality

A common corporate tax base must be neutral with regard to
different investment alternatives and not distort competition
between sectors. Genuine economic considerations must decide
where companies choose to locate and where the technical tax
base will be. A neutral tax base helps to create free and fair
competition between companies.

6.3 Simplicity

Simplicity, clarity and transparency must be the hallmark of
any common rules. For the sake of simplicity, and where
appropriate from a taxation stand, there must be a tie-in with
international accounting standards, which are already used by
many companies. Simpler systems are also created when the
same rules apply to when and how payment is to take place.

5.8
If profits distribution is to be a simple matter in practice,
more rules than just those governing calculation of the tax base
need to be uniform. For example, calculations should be made
on a half-yearly basis and tax payments made at the same time
in all countries. Standardised electronic transfers should be
another requirement.

6.4 Efficiency

5.9
One of the most important consequences of a common
tax base is that the system would be transparent. For the
layman,
this is currently only the case with tax rates. To
demonstrate how misleading this can be it is useful to compare
corporate tax rates and corporate taxation as a share of GDP.
The lowest share of GDP (0.8 %, 2003 figures) is in Germany,
with a tax rate of 39.5 %. This is probably partly a reflection of
the problems in defining what constitutes the tax base. In the
‘new’ Member States, the figure is on average 2.7 % of GDP,
with tax rates that vary from 35 % to 15 %. Most of the ‘old’
Member States have a figure of circa 3 % of GDP, but with tax
rates that vary from 38 % to 12.5 % (15). It is important that
such unexpected variations should be visible, not
for
companies but for the sake of electoral democracy.

just

6. Principles for a common consolidated corporate tax

base (16)

6.1 Broad bases

The objective of taxation is to finance public welfare. The tax
levy base should therefore be as broad as possible. Broad bases
also keep distortion of the economy to a minimum, since they
make it possible to keep tax rates down.

(15) Structures of the taxation systems in the European Union, Copen-

hagen Economics (2005 edition).

(16) The order in which the principles are presented does not imply any

ranking of these principles.

Tax must be levied efficiently,
including in the sense that it
must be easy to monitor so that tax errors can be prevented
and tax fraud combated.

6.5 Stability

It is important that tax systems should be stable. Company
investment has to be motivated by a long-term perspective and
since tax systems are a factor in investment decisions they
cannot be subject to a barrage of changes.

6.6 Legitimacy

The design of the tax system must be accepted by those directly
affected,
i.e. by the social partners and by the public as a
whole, as it is used to fund the public sector.

6.7 Fairness

Distributing the profits calculated under a common corporate
tax base between the Member States provides the basis for a
fair system. Fair distribution enhances Member States' freedom
to determine their own tax rate levels.

6.8 International competition

When establishing the tax base,
company tax systems must also be considered.

its relationship to non-EU

11.4.2006

EN

Official Journal of the European Union

C 88/53

6.9 Mandatory

In order to avoid new differences in tax treatment being
created within the Member States, in an optimum system the
tax base rules must be mandatory both for companies with
cross-border activity and for those operating in one country
only. If a common system follows general principles and is
sufficiently simple and competitive for firms, then the argu-
ment for a mandatory or for a voluntary system will be largely
academic. The design of the system will determine whether or
not a mandatory system is called into question

6.10 Interim/transitional rules

However, allowing companies the freedom to choose could be
an acceptable interim system. A major change such as that

Brussels, 14 February 2006

introduced by a common corporate tax base might also require
transitional
rules
option would make for a more flexible implementation of a
common system.

rules. An interim system or

transitional

6.11 Smooth decision-making procedures

Despite the need for a long-term, stable taxation system for
companies, there must also be potential for change in order to
be able to respond to changes in the world around us or to
plug ‘gaps’ in the system. This could be a matter of whether the
system creates any unintentional effects, for example. Any deci-
sion on a common system therefore needs to include rules to
enable adjustments to be made smoothly.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

Opinion of the European Economic and Social Committee on Energy Efficiency

(2006/C 88/13)

In a letter dated 7 June 2005, the European Commission asked the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, to draw up an opinion
on Energy Efficiency.

The Section for Transport, Energy, Infrastructure and the Information Society, which was responsible for
preparing the Committee's work on the subject, adopted its opinion on 31 January 2006. The rapporteur
was Mr Buffetaut.

At its 424th plenary session, held on 14 and 15 February 2006 (meeting of 14 February), the European
Economic and Social Committee adopted the following opinion by 78 votes to 2 with 1 abstention.

1. Conclusion: Promoting Energy Efficiency

already been adopted whose implementation must still be
assessed.

The search for energy efficiency has become a necessity
1.1
for enterprises; accordingly,
in most cases, voluntary agree-
ments should be able to cope with the major challenges of
increased energy costs.

1.2
The European Union could play a particularly useful
role by systemising information on best practices and innova-
tions in this field. DG Energy could become an information
hub for energy efficiency.

Public awareness campaigns can also play a useful role.
1.3
To be successful, these campaigns must take place as close as
possible to end consumers and to the professional sectors
concerned. It is, therefore, up to the national and local authori-
ties to take responsibility for such action.

1.4
Lastly, recourse to regulation should be the exception
rather than the rule given that several legal instruments have

1.5
Energy efficiency isn't simply a slogan, a luxury or a
gadget. From an international perspective, where the demand
for energy will continue to grow, particularly due to the rapid
development of emerging economies such as China, India or
Brazil, it is in the best interests of the public, businesses and
the EU Member States. The International Energy Agency fore-
casts that world energy demand will increase by 60 % by the
year 2030, whilst the European Union — which is 80 % depen-
dent on fossil fuels — will see its energy imports rise from 50
to 70 % over the same period. However, compared with
energy-producing countries and other large energy consumers,
the European Union is not a united player on the world energy
market. It is for this reason that during the informal Hampton
Court summit last October, Tony Blair, as president of the
Council, advocated the creation of a common energy policy.