European law: Harmonisation out of tune

There is actually just such a scheme working its way through the Brussels
machinery. It’s not a pipe dream – but nor is it a panacea.

Legislative proposals for a common consolidated corporate tax base (CCCTB)
across Europe are expected to be introduced to the European parliament by the
end of next year. The idea is that, instead of having to complywith up to 27
separate national tax systems, companies will be able to opt to comply with just
one EU-wide body of tax law, with supposedly simpler transfer pricing
regulations, group loss relief and so on.

If the timetable seems unrealistically ambitious, part of the explanation
lies in the fact that the Commission is trying to base its definitions on those
used in international financial reporting standards, which are thought to
provide a ready-made starting point for calculating taxable profits. For
example, a working group meeting agreed a while ago on a definition of taxable
income which relies on IAS 18 for the recognition of sales of goods and services
and on IAS 2 for the treatment of inventories. It was said that the definition
of expenses should be as “symmetrical” as possible with that of taxable income
(though, just to confuse things, there was no agreement on how to treat expenses
relating to exempted, non-taxable income).

But even if it were somehow relatively straightforward to calculate the tax
base, the problem remains, how to ‘diviup’ the tax revenue between member
states. That simply hasn’t been solved yet. One idea is that each country’s tax
take might be related to its population.

To take an example: a company that has £90m of losses in France and £100m of
profits in Germany, with net profits, then, of £10m.On a population basis,
France would tax, say, £4m while Germany taxes the other £6m, with each member
state applying its own tax rate.

And while one of the Commission’s intentions is to eliminate “harmful tax
competition” within the EU (and address this issue more broadly, within the OECD
in particular), the Commission still stands by a statement it issued in 2001
which said that “a reasonable degree of tax competition within the EU is healthy
and… may strengthen fiscal discipline [encouraging] member states to streamline
their public expenditure”.

There is no explicit intention to harmonise tax rates, though it seems
improbable that different member states can have widely divergent tax rates once
there is uniformity and transparency in the tax base (ie, you can more easily
get away with seemingly different tax rates if there is confusion as to what
exactly is being taxed in each country).

Not all countries are in favour of the CCCTB scheme, however, and the UK is a
leading opponent. Ironically, there are British representatives on the various
working groups, but the government insists that it is not endorsing the scheme.
Hence, multinationals won’t have the option of using the CCCTB regime for their
UK tax bill. Moreover, Britain’s opposition won’t be enough to block the
legislation, which might well be passed by 2011.

So what should companies do at this stage? There is hardly anything they can
do to prepare since the rules are so far from being finalised. But Peter
Cussons, international tax partner at PwC, encourages FDs to keep up to date
with developments and to engage in the debate, making their views known as the
rules are being drafted. Four years from now it will be too late.