Opinion of the European Economic and Social Committee on Tackling the corporation tax obstacles of small and medium-sized enterprises in the Internal Market — outline of a possible Home State Taxation pilot scheme (COM(2005) 702 final)
Date: 2006-05-17
Institutions: European Economic and Social Committee
Subjects: European tax cooperation, corporation tax, multinational enterprise, single market, small and medium-sized enterprises, tax harmonisation, tax system

C 195/58

EN

Official Journal of the European Union

18.8.2006

Opinion of the European Economic and Social Committee on Tackling the corporation tax obsta-
cles of small and medium-sized enterprises in the Internal Market — outline of a possible Home
State Taxation pilot scheme

(COM(2005) 702 final)

(2006/C 195/14)

On 23 December 2005 the Commission decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on

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 28 April 2006. The rapporteur
was Mr Levaux.

At its 427th plenary session, held on 17 and 18 May 2006 (meeting of 17 May), the European Economic
and Social Committee adopted the following opinion by 143 votes to 0 with 6 abstentions.

1. Conclusions

importance for job and wealth creation in the EU has been
repeatedly highlighted, inter alia in the Lisbon Action Plan.

1.1
The EESC notes that it supports the harmonisation of
tax rules in the EU in the long term. However, unfortunately
many obstacles still stand in the way of harmonisation and
consequently the EESC:

— reiterates its approval for the Commission's guidelines and
efforts to foster the development of SMEs, but questions the
effectiveness of the proposed scheme and its limits;

The European Economic and Social Committee has been
2.2
consulted on a number of occasions since the end of the 1990s
on proposals, recommendations and communications addres-
sing this or related subjects. Below, it refers to its recent consul-
tative and own-initiative opinions dealing with, inter alia, the
concept of the ‘European company’ as applied to SMEs and the
tax simplifications that are needed to quickly remove the obsta-
cles faced by SMEs:

— feels that it would be more relevant, for a pilot experiment,
to propose more detailed provisions, which build on experi-
ence gained in the field, are based on voluntary commit-
ments by Member States and SME business organisations
and limit the trial period to five years, in order to obtain
useful and replicable information;

— in an own-initiative opinion delivered in 2000 (1) on the
European Charter for Small Companies, the EESC, as one of
a dozen or so proposals, requested that:
‘The taxation
system should be further simplified, and micro-businesses
with a very small turnover should be exempted from exces-
sive tax obligations’;

— suggests that, in the longer term, the Commission draws
from the various opinions cited below to formulate long-
term guidelines that would serve as a basis for coherent
solutions for SMEs, including ones advocating the drawing
up of a European SME Statute.

2. Summary of previous EESC opinions

2.1
After several proposals in recent years, the Commission
is presenting the communication under discussion here as a
new initiative in the tax area — in particular corporate tax —
which is designed to provide new opportunities for the devel-
opment of small and medium-sized enterprises (SMEs), whose

— in an opinion issued in 2001 (2) on the Communication
from the Commission on Tax policy in the European Union
— Priorities for the years ahead, the EESC stated that it was
‘…generally supportive of
the Commission's tax policy
objectives particularly in the need to coordinate corporate
taxes to eliminate difficulties particularly for SMEs arising
from national variations’;

— in 2002 the EESC delivered an own-initiative opinion (3) on
a European Company Statute for SMEs which would enable
SMEs to ‘… be treated on an equal footing with bigger
companies … offer them a European label to facilitate their
activities in the internal market,’ and ‘… remove the risk of
multiple taxation, etc.’;

(1) OJ C 204 of 18.7.2000, p. 57.
(2) OJ C 48/73 of 21.2.2002, p. 73.
(3) OJ C 125 of 27.5.2002, p. 100.

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— in its 2002 own-initiative opinion (4) on Direct company
taxation,
the EESC supported ‘… proposals aimed at
speeding up measures to avoid double taxation ... estab-
lishing common principles to encourage an internal market
where fair competition would prevail’ and stressed that ‘the
objective of a harmonised tax base for all EU companies is
compatible with the tax sovereignty of the EU's Member
States and regions because it preserves their power to fix
the level of tax’;

— in point 3.4, that ‘A common European tax base is an

important first step’;

— in point 3.7, that ‘The EESC is once again urging on
Member States, the main influence, the need for an
agreement which will allow and encourage SMEs espe-
cially to expand outside their home country and in the
process create jobs, SMEs being the main creators of
new jobs’.

— in 2003 the EESC issued an opinion (5) on the Proposal for
a Council Directive amending Directive 90/435/EEC of 23
July 1990 on the common system of taxation applicable in
the case of parent companies and subsidiaries of different
Member States in which it endorsed the Commission's
efforts ‘aimed at eliminating, or at least reducing, the legal
and economic double or multiple taxation of profits distrib-
uted by subsidiaries in the country in which the parent
company is established’;

— in an own-initiative opinion issued in 2003 (6) on Taxation
in the European Union: common principles, convergence of
tax laws and the possibility of qualified majority voting, the
EESC called for three issues to be addressed, including the
introduction of ‘a common company tax base ...’ and the
use of ‘qualified majority voting to establish minimum
levels for the corporate tax rate’;

— in 2004, the EESC delivered an exploratory opinion (7),
drawn up at the request of the Commission, on the Ability
of SMEs and social economy enterprises
to
changes imposed by economic growth in which it reiterated
the need ‘to reduce world trade barriers for SMEs and SEEs,
especially excessive administrative burdens and legal obsta-
cles’;

to adapt

— in 2004 the EESC issued an opinion (8) on the Communica-
tion from the Commission — An internal market without
company tax obstacles — achievements, ongoing initiatives
and remaining challenges in which it stressed:

— in point 3.2, the need to eliminate distortions in the
internal market by ‘consolidating the arrangements for
corporate tax (…) for SMEs do not have the resources
to cope with 15 (soon to be 25) different rules’ ;

— in point 3.3, the ‘merit in the possibility of 'Home State
for SMEs perhaps with a turnover

(HST)

Taxation'
ceiling’;

— in point 3.3.1, that ‘the Commission pilot project on
'Home State Taxation provides a solution for cross-
border activities of SMEs, making their fiscal administra-
tive burden lighter. A test of an HST system could start
on a bilateral basis and could eventually be widened to
the whole of the EU following a positive evaluation’;

(4) OJ C 241 of 7.10.2002, p.75.
(5) OJ C 32 of 5.2.2004, p. 118.
(6) OJ C 80 of 30.3.2004, p. 139.
(7) OJ C 120 of 20.5.2005, p. 10.
(8) OJ C 117 of 30.4.2004, p. 38.

In citing extracts from eight of its opinions stretching

2.3
back over five years, the EESC wishes to:

— highlight the importance of its contributions;

— enumerate the appropriate measures to provide SMEs with
the means to play an increased role in the EU internal
market;

— to underline that the Commission's persistent efforts in this
field attest to its determination to find successful solutions.

2.4
However, the EESC regrets that five years have elapsed
without the emergence of effective arrangements for addressing
it urges the Parliament and the
these issues.
Council to take a decision to finally remove the clearly identi-
fied obstacles.

In addition,

3. The Commission's proposals and the EESC's comments

3.1 Whilst it feels that its previous opinions largely antici-
pate the Commission's proposals, the EESC would like to make
some additional comments on a number of points.

3.2
In its communication, the Commission states that the
participation of SMEs in the internal market is considerably
lower than that of larger companies, not least for tax reasons.
It argues that action is needed to foster the cross-border expan-
sion of SMEs and recommends a solution based on the ‘Home
State Taxation’ approach. As regards company taxation, espe-
cially corporate tax, the Commission suggests that Member
States and companies test the Home State Taxation concept by
means of an experimental pilot scheme.

3.3
The EESC has already advocated and agreed in principle
to such an initiative. However, it would point out that only a
small number of SMEs plan to expand across borders; more-
over, a pilot scheme of this kind could only take place with the
participation of a limited number of companies who have a
strategy, based on their geographical
location or business
purpose, aimed at establishing in another country. Looking
beyond this shared position in principle, the EESC would like
the Commission to provide more detail on the following:

— what is the approximate number of SMEs who are poten-
tially interested in the implementation, in the near future,
of the proposed scheme for the calculation of the corporate
tax base;

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— what is their economic ‘weight’ in the EU;

— which economic sectors are most affected?

The aim of

3.3.1
the initiative is to foster growth and
employment by making it easier for SMEs to operate. In view
of the limited budgetary resources available at EU level, the
EESC feels that spreading resources too thinly should be
avoided and that priority should be given to a limited number
of measures to promote efficiency. Therefore available statistical
data should be used to ascertain the effectiveness of
the
proposed measure and to compare its effectiveness with other,
potentially more relevant measures. The EESC is surprised that,
because of the lack of adequate information on this matter, the
Commission is unable, in its impact study, to measure the costs
associated with the implementation of the proposed measure.

3.4
To back up its proposal, the Commission draws on the
results of a survey of SMEs and business organisations it
conducted in the 25 Member States in the second half of 2004.
Only 194 questionnaires were returned to the Commission,
and 168 of these were from German companies (see appended
document).

The EESC notes that the number of responses to the
3.4.1
survey is not significant given the fact that there are several
million SMEs in the EU, some two million of which are in the
construction sector
is
alone. Moreover,
surprised that no information is given on the contributions
made by business organisations and the social partners. The
EESC would ask the Commission to forward these contribu-
tions to it for information, provided they are not confidential.

the Committee

The EESC feels that, as the survey offers very little
information, the Commission should not have drawn

3.4.2
useful
conclusions from it which could be inadequately founded.

3.5

The EESC feels that the Commission should:

— try to find out the reasons for the lack of interest shown by

companies in the survey;

— consider earmarking adequate funds for such surveys to be
carried out by specialist organisations. Their task would be
to establish beforehand whether the subject of the survey,
its target and the content of the questionnaire itself are rele-
vant. At the same time, direct contacts with SMEs that
already have subsidiaries in other Member States would
make it possible to better evaluate what kind of difficulties
they encounter in reality;

— avoid distributing questionnaires solely via the Internet, as
this method does not seem particularly well-suited to the
needs of SMEs but is more suited to organisations which
regularly visit the Commission's web site.

3.5.1 Moreover, could it perhaps be the case that some SME
managers who have the firm intention of setting up business in
other Member States do not consider the way they will be
taxed to be one of their main concerns, but prefer instead to
find locally-based sales teams, invest in marketing and even-
tually earn profits?

3.5.2 Maybe other SME managers take the view that when
they are planning to set up in another Member State they are
confronted with numerous administrative, legal, social, tax and
other problems of such complexity that the way in which their
subsidiary would be taxed is a marginal and premature concern
to them, and they prefer instead to set up a joint venture with
a local company (a positive step from the point of view of
European cohesion).

The scope and objectives set by the Commission for the

3.6
proposed pilot scheme are as follows:

— the pilot scheme would be applied on a broad basis to all
than

enterprises with

including micro

less

SMEs,
10 employees;

— calculation of the taxable profits for the parent company
together with all its qualifying subsidiaries and permanent
establishments
States
according to the tax base rules of its home state;

in other participating Member

— the tax base thus established would then be allocated to the
Member States concerned in accordance with their respec-
turnover. Each
tive share in the total payroll and/or
Member State would subsequently apply its national tax
rate;

— relief for cross-border losses.

Thus the costs for SMEs associated with the plethora of
national corporate tax rules, which usually makes it necessary
for SMEs to resort to expensive specialist services, would be
reduced.

3.7
The EESC notes that the proposed scope and objectives
correspond to those envisaged earlier. It therefore reaffirms its
endorsement of the scheme while at the same time recom-
mending that, if the experiment proves successful, a European
system be swiftly put in place for monitoring and, if necessary,
controlling fiscal dumping so as to prevent companies, for
their parent
from relocating the head office of
example,
company in a Member State where the calculation of
the
company tax base would be more favourable to them.

3.8
The Commission asks Member States to negotiate and
conclude bilateral agreements establishing the practical arrange-
ments for implementing the pilot scheme, taking into account
the Commission's general and non-binding guidelines. Support
and assistance would be available from the Commission
services in preparing and running the agreements.

The EESC understands that there are limits to action and
3.9
involvement by the Commission and welcomes the fact that
the Commission's role is confined to one of making suggestions
and providing encouragement. This will enable interested SMEs
to conduct pilots on an experimental basis as part of the bilat-
eral agreements concluded between some EU Member States.
On the basis of the results of the experimental pilots, the
Commission will, in due course, propose the prolongation of
the most successful pilots.

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3.10
The EESC agrees with the Commission that the vast
array of national rules is a major obstacle for SMEs. As the
bilateral agreements concluded between 25 Member States
would, in theory, all differ from each other, this will make it
necessary for SMEs to restrict themselves to a limited number
of such agreements. The diversity of the agreements would not
therefore bring SMEs the hoped for simplification.

3.11 Moreover, the EESC is concerned about the practical
consequences of the Commission's stated desire not to lay
down more detailed provisions for the proposed pilot experi-
ment. How will it be possible to harmonise tax rules (which is

desirable in the long term) after
the implementation of
numerous bilateral agreements, if agreement has not first been
reached on certain basic convergence criteria?

3.12
Finally, the EESC notes that no detailed research has
been undertaken to determine whether schemes already exist in
the Europe between states or regions, such as Switzerland, Lich-
tenstein or the Vatican, or with principalities such as Monaco,
San Marino, Andorra, etc., to eliminate or reduce the impact
on companies (especially SMEs) of the plethora of national,
regional and local tax rules.

Brussels, 17 May 2006.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

Opinion of the European Economic and Social Committee on the Amended Proposal for a Council
Regulation establishing a Cohesion Fund (Codified version)

(COM(2006) 5 final — 2003/0129 (AVC))

(2006/C 195/15)

On 28 February 2006 the Council of the European Union decided to consult the European Economic and
Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-
mentioned proposal.

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 28 April 2006. The rapporteur
was Mr Grasso.

At its 427th plenary session, held on 17-18 May 2006 (meeting of 17 May), the European Economic and
Social Committee adopted the following opinion by 146 votes to one with two abstentions.

The European Economic and Social Committee supports the Commission's initiative to undertake the

1.
codification of Council Regulation (EC) No 1164/94 establishing the Cohesion Fund.

2.
The EESC confirms its opinion, previously expressed on several occasions, that the codification of EU
rules helps to bring the European public closer to the EU's instruments. This is all the more important in
the case of cohesion policy, which is central to the process of European integration.

Brussels, 17 May 2006.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND