Is EU Coordination Needed for Corporate Taxation?

Is EU Coordination Needed for Corporate Taxation? Albert van der Horst (Central Planning Bureau, Netherlands)

and Response: An Irish Perspective Frank Barry (TCD).

Proposals by the EU Commission for a common, consolidated corporate tax base (CCCTB) have generated considerable controversy. A study by Albert van der Horst (of the Netherlands Central Planning Bureau) examines what effects might be expected if such proposals were implemented. His findings suggest that there would be little if any gain in terms of economic efficiency at the European level from the implementation of a CCCTB. Some countries would gain, but there would be counterbalancing losses elsewhere. If, however, consolidation of the tax base were combined with a harmonised tax rate, there could be small aggregate gains at the EU level (of the order of one tenth of one per cent of GDP). Even then, the effects vary across countries, with some countries gaining, and others, including Ireland, losing from such a reform. Responding to the paper, Professor Frank Barry (TCD) welcomed it as one of only a few studies to examine the economics of the common consolidated tax base proposals. A consolidated tax base would reduce compliance costs for multinational enterprises (MNEs), but would, as the study shows, cause firms to shift real production activities across borders in order to continue to reap the benefits of differences in tax rates. It would therefore aggravate tax competition. The inefficient reallocation of real activities across borders, as the paper suggests, could only be tackled by harmonising tax rates alongside consolidation of the tax base. However, this outcome is unlikely as each EU country retains a veto over any such proposals in the new EU treaty. Even if it were possible to get agreement by every country, this harmonisation with consolidation approach would, it is estimated, yield only a relatively small welfare gain to the EU as a whole (with some countries such as Ireland losing out), but this finding arguably ignores two key characteristics of global tax systems. The first is that larger, richer and less peripheral countries in Europe are particularly attractive to investors, and these countries exploit this factor by levying higher corporation tax rates than countries like Ireland or the new member states of Central and Eastern Europe. There are good reasons why some countries choose high tax rates and others choose low ones. Once this is recognised, it is clear that harmonisation could be detrimental to both groups of countries. A further related point concerns the specifics of the US tax system, which is particularly important for Ireland as it is the single most important source of inward FDI. The United States taxes income on a residence basis, meaning that American corporations owe taxes to the US government on all of their worldwide income. In order to avoid subjecting American MNEs to double taxation, the US provides a tax credit for aggregated income taxes paid abroad. There are no rebates for taxes paid abroad at rates in excess of the US rate however. This means that the existence of a low-tax jurisdiction like Ireland reduces the disincentives that US firms face in investing in high-tax economies such as Germany. This strengthens the earlier point: if EU countries have reasons to choose different corporation tax rates, then a low tax jurisdiction facilitates the higher tax jurisdiction in maintaining its inflow of FDI. Recent empirical evidence, which shows that the firms most likely to initiate operations in low-tax countries are those with growing activity in nearby high-tax regimes, supports this proposition.