Confusion rules over predatory regimes

Date: 07/10/1999

By Tim Jones

IF THERE is one EU committee that manages to live up to the stereotype, it has to be the snappily named 'code of conduct group' on business taxation.

This collection of 15-plus treasury and European Commission officials has been analysing potentially predatory corporate tax behaviour for the past two years and is due to deliver a report to the December Helsinki summit. The trouble is that nobody is sure what the point of the report should be.

It seemed pretty clear in December 1997, when finance ministers gave the group and the code their blessing. Regimes offering tax benefits only to non-residents, or where the manner in which the profits of a multinational group of companies were calculated departed from internationally accepted principles, were to be searched for and destroyed.

Governments agreed to inform each other of existing and proposed tax measures which could fall foul of the code and to give a high-level group of representatives the task of assessing measures and reporting back.

So far, the team has identified 325 special tax regimes operated by national governments which are expressly designed to entice investment from one member state to another. If they are lucky and work hard, they could whittle this down to 250 in time for Helsinki.

The problem comes afterwards. With 250 predatory regimes in the firing line, what should the EU do? Outlaw them? This is hardly likely given governments' record in this field.

Member states have promised not to introduce new 'harmful' tax measures, and also to re-examine their existing laws and established practices and amend them as necessary, with a view to eliminating any deemed to be damaging.

Yet last December, immediately after the last EU summit to condemn 'harmful tax competition', the Danish parliament signed Bill L53 - a new code allowing domestic firms to pay withholding tax on dividends to non-financial foreign parent companies even if they are located in a tax haven.

The move was an emulation and even an improvement upon the notorious Dutch regime governing the tax treatment of holding companies which has got the French, Belgian and German authorities so worked up.

The upshot is that multinational firms are looking increasingly favourably at Denmark as an investment location, while the Netherlands continues to attract record-breaking numbers of US, Asian and - most worrying of all for the single market - European firms.

The two governments are merely following a trend, although they would hate to admit it in public.

Average EU corporation tax has dropped three percentage points to 36% since 1996, and sweetheart deals for favoured investment proliferate.

It has been the Commission's competition directorate-general, rather than the code of conduct, which has forced changes in the more blatant systems, such as the preferential tax regimes in Dublin's International Financial Service Centre, the wider Irish corporation tax (ICT) system, and the copycat Zona Especial Canaria (ZEC) in the Canaries.

When regimes have been deemed to be disguised as 'operating aid' - subsidies aimed at reducing a firm's current spending - the Commission has forced governments to phase them out. Ireland, for example, was told that it must abolish its special 10% low tax rate by 2002, with an extension to 2010 for companies which signed long-term contracts on expectations that the regime would stay.

But the 'coordination centres' allowed under Belgian law, which permit multinationals to pay corporate tax as low as 5% if they establish a European headquarters in Belgium to carry out management services for the rest of the group on the continent, are still around despite long-running Commission inquiries. The Belgian government has promised to end them by 2003, but only if special tax schemes are dismantled in other member states.

This is hard to imagine, given that new schemes are appearing by the month and adding to the code of conduct group's workload. The Helsinki report will be an interesting inventory of corporate tax breaks, but little more.

Part of a survey 'Challenges for industry', p13-20.