EU corporate tax plans hit brick wall

Date: 13/04/06

The European Commission's ambition to get an EU-wide common corporate tax base, which it had trumpeted with much fanfare on 5 April, collided with reality two days later and suffered painful injury.

Laszlo Kov�, the commissioner for taxation and customs, has long known that he stands no chance of getting unanimous approval for his plan from the 25 national governments of the EU. Still, he has harboured hopes of near-unanimity, which might allow those who support the scheme to make use of the enhanced co-operation scheme - meaning that some member states press ahead with the idea, while others choose not to participate.

Unveiling the Commission's reworked plans last week, Kov� said that if there was not unanimous agreement by the end of 2007, then the Commission was ready to contemplate enhanced co-operation. But after the battering the idea received at the weekend in Vienna, such a timescale looks wildly optimistic.

After discussion on Friday afternoon (7 April) at the informal meeting of EU finance ministers, Kov� claimed that more than ten states were resolutely supportive, many fewer than ten states were opposed and the rest were cautiously positive.

But other accounts of the meeting suggest that Austria, current holder of the presidency of the EU, which is supportive of the idea, will struggle to advance the cause.

It is true that Thierry Breton, the French finance minister, remains strongly in favour of the plan. Belgium, Germany and Luxembourg are also in the pro-camp. Italy and Hungary were too and their position is unlikely to be changed by their general elections.

The basic idea is to get agreement on what should be subject to corporate taxation and how. The Commission's argument is that a common tax base would complement a European single market by making it easier for companies to operate in different member states.

But there are formidable technical obstacles to comparing and harmonising different national schemes of taxation. Senior Commission officials admit that they have a lot of work to do to prepare the proposal for further discussion by the finance ministers at their June meeting.

The finance ministers showed an acute concern in their Friday discussion for the effect on their exchequer income: how would tax revenue be shared out and would they be worse off? At the moment, the Commission cannot give detailed answers.

Some finance ministers opted for a "wait and see" approach but that does not mean, whatever Kov� might say, that they are necessarily "cautiously positive".

Even if the technical difficulties are surmounted, and if, as the Commission promises, a harmonised tax base does introduce greater transparency, it does not follow that finance ministers will be grateful. Those of them who are shown up as having a tax regime less favourable to business than their neighbours stand to lose out.

Even Pedro Solbes, Spain's finance minister, who as a former European commissioner is temperamentally disposed to be sympathetic to the Commission, was cool in his comments after Friday's discussions, stressing the technical challenges. Portugal, too, was highly sceptical.

Then there are the outright opponents: the UK, Ireland, the Baltic states, Slovakia and Slovenia.

Ivan Miklos, the Slovak finance minister, champion of the flat tax, was withering in his comments.

Miklos warned his fellow finance ministers that, while the Commission proclaimed that it had no interest in harmonising rates of corporate tax, nonetheless harmonisation of the tax base was a necessary prerequisite if rates ever were to be harmonised.

Brian Cowen, Ireland's finance minister, was according to one observer in the room "shooting from the hip". He told his colleagues that whatever the technical challenges, there were issues of principle at stake and he objected in principle to the idea of a common corporate tax base. He was in favour of tax competition.

Asked after the meeting what he thought the odds were of the proposal making progress, Cowen said: "I wouldn't put any money on that because I don't like putting money down on bets that never come in."

Asked to put a timeframe on the proposal, Gerrit Zalm, the Dutch finance minister, said: "Not in ten years and I am being optimistic."

Tellingly, some of the finance ministers raised the issue of taxation the next day, in the Saturday morning debate about the challenge of globalisation. Emphasising the need to complete the single market in services and labour forces and to advance structural reform, they stressed that these tasks were of greater urgency for national governments than the corporate tax base.

Miklos told European Voice afterwards: "It's a waste of time and capacity."

"I am not nervous of it because I don't think it's a realistic objective," he added, pointing out that the Council of Ministers had run into huge problems with much smaller issues, such as reduced rates of value added tax for labour-intensive services. "I do not believe that there is a chance of having a consensus on such a kind of tax," he said.

Kovacs's hopes of achieving enhanced co-operation must be dwindling. Even allowing a core group of countries to go it alone requires approval by a weighted majority of the EU25.

The age of the consolidated corporate tax base has not yet dawned.

Article reports on discussions at the informal Ecofin meeting, 7-8 April, Vienna, where EU Economics and Finance Ministers discussed plans of the European Commission for a harmonised corporate tax base across the European Union. Member States were divided over the issue.