Small firms’ tax code could offend governments

By Anna McLauchlin

Date: 24/11/05

European small- and medium-sized enterprises (SMEs) with operations in more than one member state would stand to benefit from a new simplified tax regime under a proposal to be published by the European Commission on Wednesday (30 November).

But hostility from many member states means it may never become a reality.

A five-year pilot scheme laid out in the proposal, which has already been downgraded to a non-binding communication rather than a proposal for a binding directive or regulation, would allow two or more member states voluntarily to agree to recognise each other's tax rules.

This would mean that a company with cross-border operations in those countries could calculate the tax due on the profit in each of the countries according to the rules in its home state rather than the different regimes in each. Rates would remain unchanged.

"Prohibitive tax compliance costs are a major obstacle, which discourages small businesses from operating cross-border," said Hans-Werner Müller, secretary-general of the European small business association UEAPME.

"The proposed home- state taxation scheme would reduce these punitive costs and help SMEs overcome one of the major remaining barriers to the internal market."

According to UEAPME, the average cost of complying with cross-border tax systems is up to 2.5% of turnover for SMEs, compared with just 0.02% for larger firms. As a result of the burden, few small companies are branching out elsewhere in the EU.

Some member states are sensitive about the idea of any type of tax harmonisation.

Though next week's communication would only apply to smaller companies, some member states see it as the thin end of the wedge and part of the Commission's already declared intention to introduce a consolidated corporate tax base.

Tax commissioner Lászl- Kovács last month announced that he would launch a proposal for a common EU corporate tax base within three to four years, which would allow interested countries to take part voluntarily under the EU's enhanced co-operation procedure.

The issue has divided the EU's internal market and tax commissioners. Internal market commissioner Charlie McCreevy is opposed to the idea and on 11 November said that it would be virtually impossible to garner agreement on the various issues involved in calculating a common tax base.

Any non-voluntary tax proposal must be approved by unanimity and five member states - the UK, Ireland, Estonia, Latvia and Lithuania - are staunchly opposed.

Even those member states who have previously said they might be in favour of a consolidated tax base - Germany, Austria and France - have concerns.

Article anticipates the adoption on 30 November 2005 by the European Commission of a Communication setting a simplified tax regime for European small and medium-sized enterprises (SMEs) with operations in more than one Member State. Under the five-year pilot scheme laid out in the non-binding proposal two or more Member States would voluntarily agree to recognise each other's tax rules.