Question of the Week: Are fears of relocation of businesses towards lower-tax countries justified?

Date: 06/05/04

THE accession of ten countries to the EU has sparked a bitter debate about tax dumping, with "old" member states criticizing some newcomers' low corporate tax rates. Jürgen Strube is the president of Brussels-based employers' association UNICE. We asked him: Are fears of relocation of businesses towards lower-tax countries justified?

Strube: The risk of relocation for EU-15 growth prospects is naturally a source of concern. Relocation decisions of enterprises that are looking for productive investment could affect not only low-skilled but also highly sophisticated activities.

However, the fear of relocation should not be overestimated. First, enlargement has been a reality for the business community for more than a decade. Second, reallocation of resources is a natural adjustment process towards global efficiency.

Actually, this is more worrying when it reflects a weakening competitive advantage in Europe, resulting from the slow pace of reform implementation in increasingly competitive global markets.

In the area of company taxation, I appreciate the Commission's endeavours to eliminate tax obstacles to cross-border economic activity and thereby create a true common market.

The need for companies to deal with 25 and soon more different tax systems remains the ultimate cause of most of the tax problems within the internal market and of its high compliance costs. In the longer term, the development of a common consolidated taxable base is the most effective way to fully eliminate the remaining tax obstacles.

However, some member states appear to be of the opinion that the development of a common consolidated base goes hand in hand with a minimum or harmonized corporate tax rate within the EU.

The introduction of such minimum rates, or harmonization, is flawed for two main reasons: it firstly negates the interdependency between the different types of tax that member states levy. Secondly and more importantly, such a development would impede tax competition between states - an indispensable counterweight to the upward pressure on government spending.

The question is answered by Jürgen Strube, President of UNICE, the Brussels-based employers' association.

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