Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


Harmonization of the European corporate tax base – not such a great idea

The European Commission has recently relaunched the proposal for a common system for calculating the tax base of businesses operating in the EU. According to the officials, the aim is to significantly reduce the administrative burden, compliance costs and legal uncertainties that businesses in the EU currently face in having to comply with up to 27 different national systems for determining their taxable profits.

The Commission provides estimations, according to which the Common Consolidated Corporate Tax Base (CCCTB) will allow benefits up to €3 billion in savings from reduced compliance costs and consolidation and, moreover, the firms are free to choose if they want to switch to the new tax base system or not.

At the first glance, this proposal seems very attractive and business friendly. Or is it?

Well, it is not. It is instead highly probable that the proposal is a kind of Trojan horse, aimed to clean the road for further (and complete) tax harmonization within the EU. The Commission is stating, indeed, that all of the proposed remedies were to be implemented, “they would not address the fundamental problem of dealing with up to 27 different tax systems”. But even if they had affirmed (and they have not) that no tax rates harmonization will follow, ever, why should we believe them? It seems useful to remind here that in almost every country in the world, the income tax has first been introduced as something exceptional, temporary and at a very low rate (2% in France in 2014) and ended permanent, high-rated and, as they say, unavoidable like death.

Another argument that comes easily to mind is that the CCCTB proposal is a conspiracy against tax avoidance. It is true that the existence of 27 different tax systems makes things complicate for the firms. But it makes them even more complicate for fiscal authorities that are tracking them. A harmonization of the tax base will make fiscal controls easier and probably reduce tax avoidance.

Moreover, If matters will be simplified for the companies choosing that statute since they will have to declare only one consolidated profit for their operations in various countries, what will be complex (and arbitrary) will be to share the taxes between the various countries where the company operates.

The issue is actually similar with the pro-euro campaign a decade ago. The European Commission vaunted the merits of a common currency, mostly on the grounds of the transaction costs savings that it will generate. But they ignored completely the disadvantages of the lack of flexibility that this system is right now proving to induce. The same thing is valid for taxation, and now that we’ve lost monetary policy autonomy, it is even more important to fight to preserve fiscal autonomy (see here).

The Commission states that the “current framework with 27 different national corporate tax systems impedes the proper functioning of the Internal market”. But what the current market is all about? Isn’t it about trade and competition? If there is anything that economics teaches us it is that trade and competition are made possible by divergences – in skills, in tastes, in endowments, in rules -not by harmonization.

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