France and Germany in plot to harmonize taxation

By Dana Spinant and Peter Chapman

Date: 13/05/04

FRANCE and Germany are plotting a voluntary zone of harmonized corporate taxes within the European Union, to bypass the British veto over tax harmonization, European Voice can reveal.

Many economists reckon low taxes on capital and company profits are the best way to guarantee a healthy economy - with a higher share of the burden shifted to consumption.

But sources say that France and Germany are fed up with years of fierce competition on tax rates - deployed to devastating effect by countries such as Ireland to attract large investments from rich multinational companies

They fear EU expansion and the entry of countries such as Estonia, which charges zero rates for many firms, will lead to a 'race to the bottom', where rates are trimmed to the bone, with public finances unable to keep pace.

"We are reflecting, with Germany, on plans for an 'enhanced cooperation' on corporate taxes. We realized that it is either this, or nothing," a senior French official said.

Four countries could take part in this in the beginning - Belgium, France, Germany and Spain, but "the objective would be to extend it to the whole eurozone".

The official admitted that most EU leaders open to discuss this idea say tax harmonization "should be done with all member states or should not be done at all".

Otherwise, those states that do not participate could take advantage of not being tied up by a single tax.

"There is a risk of tax dumping from those who stay outside of this enhanced cooperation, of course," the Frenchman said.

"But we know that either we do it like that, with fewer members, or we don't do it at all, as there is no chance of scrapping the national veto over taxation."

He argued that converging taxes are going to benefit the countries that sign up to them.

In theory, this could make matters easier for companies operating in more than one member state by making their tax calculations less complicated and more transparent.

"It would offer incentives of security and predictability to those who invest in this zone of harmonized taxes," he said.

The European Commission says corporate taxes in the EU declined from an average of 46% in 1980 to 32% in 2003 - partly as a result of competition between member states. But the average is driven lower by new member states, where rates currently average 24%.

However, despite the Franco-German fears, Robert Verrue, the Commission's senior tax official, says there is little evidence, to date, of a future race to the bottom. He said the ratio of corporate tax revenues to gross domestic product remains fairly stable in most countries - at around 3% "as a consequence of the broadening of the tax base accompanied by an increase of corporate profits as a share of national income".

EU leaders at their spring summit in Brussels agreed that the Union must "tackle harmful tax measures and remove barriers to the internal market created through the fiscal system".

French government officials have already held talks with Frits Bolkestein, the commissioner responsible for taxation, about the plan.

His spokesman Jonathan Todd confirmed the Dutchman was studying the possibility of some countries using enhanced cooperation to move more quickly towards a common tax base for companies, but added that the commissioner has had no chance to discuss this idea with finance ministers.

"It is about harmonizing the bases of assessment - ie how you define companies' income that you tax," he explained.

Todd said Bolkestein is doubtful about the logic of these countries deciding among themselves to harmonize actual rate of taxes.

He commented that "no one can stop them, but there is no point. It is self-defeating".

"But the problem as far as they are concerned," Todd added, "is eastern European countries and Ireland [with low corporate tax rates] - and they are never going to sign up to enhanced cooperation on tax in a million years."

A senior French official says France and Germany are considering plans for using the 'enhanced co-operation' procedure to create a voluntary zone of harmonised corporate taxes.