Right question, wrong answer

The push for a common corporate tax base ignores the real problem of tax competitiveness in the EU, writes Europe Correspondent Ann Cahill

THE battle over Ireland’s corporation tax rate is set to spill over into an all out war about just how fairly countries are competing with one another for business in Europe.

The latest figures released by a number of sources including the World Bank show that the tax world is indeed a murky place where what you see is not necessarily what you get.

And while Ireland has been the one under pressure to increase its 12.5% tax rate, research by the European Commission and others show that it is in fact among the fairest and most transparent in the union.

This is one of the arguments that the EU’s taxation commissioner, Algirdas Semeta, will be making today when he unveils his proposal for a common consolidated corporate tax base (CCCTB).

His message will be that Ireland has nothing to fear from this method of collecting and distributing company tax and that in fact it will force other countries to be more transparent too.

The official tax rate in most countries is vastly different to what companies actually pay according to various studies because the tax rules can bring the rate way down.

One study suggests that France has an official corporate tax rate of 34% but companies in fact pay just over 8%.

This is because France — like most other countries — has a whole series of allowances allowing companies to offset their income against to reduce the amount of money they have to pay tax on. For instance French-based companies can disregard income arising from outside its borders, unlike Ireland or Germany.

Brian Keegan, who carried out a study for Chartered Accountants Ireland, says that the French tax system is almost unique. “Their system is comparable to Ireland’s in the 1980s when we had a 50% corporation tax rate but if a company could not get that down to between 10% and 20%, they were not trying hard enough.”

However, he cautions against some of the tables comparing official and effective rates and he choose instead to look at what percentage of a country’s GDP was made up of corporate tax, using official Eurostat figures. And here he discovered that Germany, despite its relatively high 29.8% rate, gets only 1.1% of GDP from corporation tax. The French take more than double this at 2.8% of GDP, just less than Ireland’s 2.9%.

Germany has some interesting allowances such as when a dividend is paid, the company retains 25%, but rather than paying it over to the revenue commissioners as happens in Ireland, the company retains it as a credit against its tax bill.

“There are a lot of similar things happening which makes it very difficult to compare like with like when comparing tax.”

The commission’s findings are similar. “Ireland’s corporation tax system is among the fairest and most transparent we have looked at,” explained Mr Semeta’s spokesperson Emer Traynor.

The Chartered Accountants agree. “Irrespective of whether you are manufacturing circuit boards or socks, you are treated the same under Ireland’s tax regime — companies know where they stand and they are not relying on qualifying for various allowances to reduce their tax,” said Brian Keegan.

The commission will argue that having Ireland involved in the CCCTB scheme — which will be optional — would force everyone else to apply their full advertised tax rate. Each country could only apply the opt-outs and allowances permitted under the CCCTB, and not their own. As a result once companies based in France are faced with paying 34% tax, it would put the country under a lot of pressure to reduce their rate.

Under the EU proposal, the commission argues that companies would benefit from a one-stop-shop system for filing their tax returns, saving businesses across the EU 7% or €700 million in compliance costs. Offsetting losses in one country against profits in another under the scheme — cross-border tax relief — would save companies €1.3 billion.

It would be much easier, they say, than companies having to deal with each tax authority in each country in which they are based.

Businesses looking to expand cross-border would benefit by up to €1bn in savings and overall it would make the EU much more attractive for foreign investors.

It would not harmonise tax rates as once the tax is collected, it would be distributed to the countries where the companies are located according to where the assets, labour and sales are and be taxed according to that country’s rate.

It would be optional for companies to use and optional for countries to adopt.

But Brian Keegan still believes that a common consolidated corporate tax base is not a runner.

He explains that it’s the wrong answer to the right question — that of tax competitiveness in the EU as a whole.

The idea of having a single tax system for a corporate group located in different member states arose first more than a decade ago when two problems were prevalent — trapped losses and transfer pricing.

The first was resolved by the European Court of Justice that has obliged member states to legislate so companies can offset losses in one member state against profits in another.

The second has been resolved by pressure from the OECD and most of their member countries, which includes Ireland, have introduced legislation to deal with this.

But the concept of CCCTB is fatally flawed, Mr Keegan believes, because he argues that if a corporate group has one company outside the EU, the system will not work. And finally, he says, with tax revenue falling because of the financial crisis, this is not the time for the EU to begin experimenting with new corporate tax structures.

The method devised to distribute the tax take would not, he argues, benefit Ireland. The country would not win under the division by capital and assets, it would certainly lose out of the sales section because we do not have the population size but it would gain under the employment heading for goods and services produced in the country. “We do not know how much Ireland would lose out but we believe we have significantly more to lose under it,” he said.

While the EU may decide in the end not to introduce the CCCTB, in the meantime the whole discussion and the rhetoric from France and Germany is having a bad effect on Ireland’s reputation, he warns. “Our members are telling us this is dangerous because firms are asking how long will with 12.5% tax rate continue for.”

Europe does have a problem on the world stage when it comes to making it easy for companies to pay their tax — Ireland is rated number seven in the world according to the World Bank, and is the only European country in the top 10.

But Mr Keegan says that introducing the CCCTB is not the way to resolve it. The EU has already devised a structure to solve such problems with the Code of Conduct for business tax it set up some years ago. It is time that the group responsible for implementing this code now reviewed the tax system in each country, not just the tax legislation but the whole system of allowances and how companies qualify for them, said Mr Keegan.

Mr Semeta has said he will review this code, but whether he will have the courage to do it in the way the Chartered Accountants of Ireland suggest is another question.