A spectre is haunting Europe: multinational enterprises are taking advantage of globalisation and free movement of capital within the European Union to arrange sophisticated tax planning structures. Knocking down their fiscal burdens and thus allegedly giving rise to a massive tax avoidance operation, and violating the principle of fair taxation by jeopardizing the finances of the countries in which they actually operate.
The injustice, spread and danger of such a behaviour – taken for granted by the vast majority of people – is the reasoning upon which governments and institutions all over the world have been designing changes and reforms to the international tax system over several years. In Europe, the overwhelming consensus on the matter has gradually shifted from how to tackle “harmful tax competition” – as the OECD puts it – to whether it is appropriate to do so. The latter is a crucial question, and the answer not quite so straightforward.
In 2011, the European Commission proposed the introduction of a compulsory EU-wide tax code called Common Consolidated Corporate Tax Base (CCCTB) that multinationals operating within the EU could use to calculate their taxable profits. This was to allow them to comply with just the one system, rather than all the different rules for each Member State in which they operate. At the same time, the CCCTB is designed to serve as a powerful tool against corporate tax avoidance, by removing the current mismatches between national systems and fixing common anti-avoidance provisions. The proposal put forward by the European Commission may seem reasonable at first sight but on a closer look, it raises concerns and shows a number of critical weaknesses and inconsistencies.
Centralisation by its very nature is discriminatory and liberticidal. The CCCTB is no exception: for one, the alleged benefits of tax coordination would not affect different countries equally; and harmonising tax systems would result in a significant limitation of States’ national autonomy, arguably incompatible with the provisions of the EU Treaties. Actually, the CCCTB appears to want to adjust reality to its provisions, rather than the reverse. Its criterion for determining the companies’ tax base, in this respect, is emblematic. Indeed, the CCCTB would calculate a multinational company’s taxable income across the EU according to a single apportionment formula that would depend on a combination of turnover, wage bill, number of employees and physical capital, and then assign shares of it to the different member states where that company operated. In doing so, it would not necessarily lead to a complete homogenisation of corporate tax rates among the Member States. However, the CCCTB’s formula does not take account of intangible assets in its tax base share evaluation.
Until some decades ago, an enterprise’s most valuable property was made of physical assets, such as factories or inventory. Nowadays, this is almost never the case. Facebook’s data, Google’s algorithm or Apple’s brand are tremendously valuable; yet, they are not part of the CCCTB’s formula. They are excluded on purpose. Indeed, due to their extreme mobility, intangibles are often transferred from multinationals’ European subsidiaries to their Irish, Dutch or Luxembourgish one, so as to pay taxes at a lower tax rate. Excluding intangibles from its formula, the CCCTB aims to deny their value, thus artificially raising the tax burden applicable to multinational companies, especially in the digital sector.
The ultimate goal of tax harmonisation – including policies such as the CCCTB – is to prevent countries with lower tax rates from attracting capital at the expense of the others. But that is a precise description of tax competition: allowing people to ‘vote with their feet’. This triggers a continuous institutional face-off between the countries involved in order to attract investments and workforce, thus allowing local governments to offer citizens and firms different tax and expenditure bundles.
Is the game worth the candle? There is no question that tax competition – combined with trade integration, capitals’ mobility and digitalisation – have actually given rise, in the last thirty years, to a “race to the bottom” of corporate tax rates among OECD countries. They have reduced by more than 20% on average, especially in Europe. Therefore, one could assume that in line with the fall of tax rates, tax revenues must have been reduced proportionately. Yet it is actually the opposite: within the OECD area, a sustained decline in tax rates has been offset by a growth in tax revenues, from 2.4% of GDP in 1981 to 3.5% in 2008, down to 2.8% during the outbreak of global crisis and nevertheless rising again since then.
Tax competition is alleged to be inefficient and distortive, taking away potential revenues from the countries with higher tax rates to the ones with lower rates in the absence of worthy industrial reasons. Yet empirical studies do not indicate that tax competition results in large revenue losses, but in fact the opposite, even with regard to the former countries. Even if this was not the case, there are several factors determining the choice of a company’s location, such as the regulatory framework, the infrastructure or the availability of skilled workers. It is quite incomprehensible why the fiscal policy of low-tax economies – and not that of high-tax economies – should be deemed as distortive.
Even if tax competition were to lead to some adverse effects, it can be questioned whether tax coordination is the appropriate answer. The issue is separating lawful tax competition within the European Union from illegal tax evasion.
The revival of the CCCTB, in this regard, seems a rather rushed solution to the issue of tax evasion, while there is a concrete risk of throwing out the baby with the bathwater, that is, of getting rid of tax competition in full, intentionally or not, in the name of harmonisation. Eliminating fiscal competition would remove any incentive to limit the levying of taxes, as high-tax countries would no longer face competitive pressure from the low-tax countries. Therefore, it is likely that tax rates would align with the current high-tax countries’ rates, thus giving up any efficiency criterion.
In any case, getting rid of competition could not do very much to fight tax evasion and fiscal frauds in the absence of other, more relevant factors. A clearer definition of “unfair” and “harmful” competition is essential, without assuming low tax rates are necessarily part of it.
