THE THEME of harmonisation of taxes across the European Union has surfaced regularly, but as yet without any obvious success. Now the European Commission has arrived at a proposal for a common system for calculating the tax base of businesses operating in the EU. Even though some have expressed qualified support for aspects of the plan, the general stance in Slovakia is negative.
“Taxes are a sphere which, in our opinion, must remain in the hands of countries,” said Prime Minister Iveta Radičová as quoted by the SITA newswire, adding that if a country does not have an independent currency, tax policy is the only significant economic tool it controls.
In mid March the European Commission proposed a common system for calculating the tax base of businesses operating in the EU, aiming to significantly reduce the administrative burden, compliance costs and legal uncertainties that businesses in the EU currently face in having to comply with up to 27 different national systems for determining their taxable profits.
As the EU states on its website, the proposed Common Consolidated Corporate Tax Base (CCCTB), would mean that companies would benefit from a ‘one-stop-shop’ system for filing their tax returns and would be able to consolidate all the profits and losses they incur across the EU. Member states would maintain their full sovereign right to set their own corporate tax rate.
The EC estimates that the CCCTB would save businesses across the EU €700 million in reduced compliance costs, and €1.3 billion through consolidation each year. In addition, businesses looking to expand cross-border would benefit from up to €1 billion in savings. The EC believes that the CCCTB would also make the EU a much more attractive market for foreign investors.
“The CCCTB will make it easier, cheaper and more convenient to do business in the EU,” said Algirdas Šemeta, commissioner for taxation, customs, anti-fraud and audit, as cited in an EC press release. “It will also open doors for small and medium-sized businesses looking to grow beyond their domestic market. Today’s proposal is good for business and good for the global competitiveness of the EU.”
The CCCTB would be optional only for companies. This means those that feel they would benefit from a harmonised EU system could opt in, while other companies could continue to work within their national systems.
The proposal is attracting a mixed response across the European Union, with nine countries, including Slovakia, already announcing that they disagree with it, SITO wrote in mid July, SITA wrote in July.
In Slovakia the only public institution to come out in favour is the central bank, which said that Slovakia should maintain the eurozone even at the cost of deeper integration.
Jozef Makúch, the governor of the National Bank of Slovakia (NBS), speaking at a cabinet session on September 7, opined that the euro cannot function without the creation of a fiscal union in the long run and that the measures adopted so far are only short-term solutions. Prime Minister Radičová conveyed Makúch’s words after the cabinet session, SITA wrote.
According to the NBS, Slovakia should try to remain part of the monetary union even if this were to entail harmonisation of taxes.
With regards to integration tendencies within eurozone countries “it should be an effort by Slovakia to remain part of a bigger economic whole also in the case of initiatives to deepen economic integration of the eurozone. In this respect it is possible to expect strengthening of economic management of the eurozone and harmonisation of policies of member countries also in the field of direct taxes,” the central bank wrote in its statement, as quoted by SITA.
The Slovak government is rejecting wider integration at the level of taxes for the time being. Finance Minister Ivan Mikloš has restated this several times and Prime Minister Radičová repeated after the cabinet session on September 7 that taxes are a sphere that must remain under national control.
The Finance Ministry also pointed out that the EC’s proposal is at odds with the cabinet’s programme for its four-year term. In the part dedicated to taxes and levies that programme reads that the government will not agree to European harmonisation in the field of income taxes.
“Even though a certain degree of progress in work on the CCCTB draft was achieved and the proposed system contains elements in some parts that are comparable with inter-state income tax systems implemented in EU member states, the Slovak Republic has not become confident about the advantageousness of this project,” the Finance Ministry wrote, as quoted by SITA.
The Slovak Finance Ministry is not convinced that benefits resulting from such a common system would exceed the costs linked to its implementation and operation. Simultaneously, it believes that if the system were to be implemented it would tend to benefit member states that are home to corporate headquarters.
“Thus, we pursue an opinion that risks linked with implementation of the CCCTB are bigger than the real benefit and effects of harmonisation of tax bases,” the ministry wrote, as quoted by SITA.
The Committee on European Affairs of the Slovak Parliament also responded negatively. In May it adopted a reasoned opinion on the proposal stating why it considers that the draft in question does not comply with the principle of subsidiarity.
Ivan Štefanec, the chairman of the committee, explained to The Slovak Spectator that its main objection is the loss of internal competitiveness within the EU, something that is an important spur to future growth.
“Nor would the proposal bring a reduction in administration,” Štefanec said. “On the contrary it would increase the administrative burden because it would not be obligatory. From 27 tax systems we would have 28 systems within the EU. In general it could endanger economic growth and contribute in a negative way to the flexibility of EU member states to react to changing economic situations and business environments.”
Štefanec pointed out that even though the proposal has not obtained enough points from national parliaments to get a 'yellow card' – to halt its progress – it has generated significant opposition.
Štefanec said tax harmonisation was unacceptable.
“Harmonisation of direct taxes is not a good step and thus it is not acceptable for us,” he said. “This is not a question of negotiation but the principles of the EU’s operation.”
Radovan Ďurana of the Institute for Economic and Social Studies (INESS) welcomed the stance of the Finance Ministry.
“Harmonisation of tax rates is neither in the interest of Slovak companies nor Slovakia’s state coffers,” Ďurana told The Slovak Spectator. “Representatives of the NBS are not elected in democratic elections and their job is to fulfil the tasks of the European Central Bank, or the cabinet and parliament. Questions of fiscal sovereignty or European integration are beyond the mission of the NBS.”
He thinks that while the CCCTB might mean simplification for companies operating in several EU countries, it is questionable whether they would opt for the scheme, as it would co-exist with the current legislation in 27 countries. He also questioned how the taxes paid would be divided between member states, and suggested the effect might be to decrease Slovakia’s state revenues.
“The disadvantage of this proposal is that it is designed in such a way that it does not provide any significant advantages to the business sector,” Ďurana told The Slovak Spectator, adding that the threat of harmonisation of tax rates still hovers in the air, as is proved particularly by the efforts of France to force Ireland to increase its corporate tax rate.
According to Ďurana, tax-rate harmonisation, with respect to rates in Germany and France, would mean an increase in rates for Slovakia. Moreover, a fundamental political power would be transferred from Slovakia to central authorities in Brussels. Here Ďurana pointed out that the history of the EU is full of examples of so-called salami slicing with the aim of reaching the desired state of affairs, citing the example of repeated referendums in Ireland.
“The proposal for a common consolidated corporate tax base represents a step towards harmonisation,” said Ďurana. “Because this proposal does not bring any obvious advantages, there is no reason to support it.”
Tax experts see more disadvantages than advantages to the proposal. Zuzana Blažejová, manager of tax advisory at KPMG in Slovakia also agrees with the Finance Ministry, perceiving the EC’s proposal as dangerous for small economies.
“The tax system can be a certain motivational factor for development of the economy of a country, as was proved by the tax reform [in Slovakia] from 2003 and 2004,” Blažejová told The Slovak Spectator. “It is also obvious that rules for the CCCTB would be set by the strongest economies within the EU. It is possible to expect that they would be tailored to suit the dominant economies and would not be suitable for small economies. The proposal of the directive is thus a concept that suits countries like France, the Netherlands and Germany, but not countries like Slovakia.”
According to Peter Pašek, the head of the tax department at advisory company Accace, implementation of the Directive on CCCTB would result in what he called a partial loss of fiscal neutrality for Slovakia.
Pašek explained that the state uses taxes and way in which they are calculated as a tool of its fiscal policy, to respond to the development and changes in economic cycles and their negative impacts. By harmonising taxes across the EU the state would thus lose an important tool.
He also identified another disadvantage in the fact that each EU member country has implemented a different tax policy.
“While for some states indirect taxes are the main source of income to the state budget, other countries focus more on direct taxes,” Pašek said. “Such harmonisation cannot embrace all aspects of member countries. Each country is different and has a different preference.”
With respect to tax harmonisation, according to Pašek, it would cause a loss of tax competitiveness between individual countries.
“Slovakia, with its present tax system, is perceived as competitive with respect to other EU member countries,” said Pašek, adding that competition tends to lead to the reduction of tax rates or reduction of the tax burden, and that tax harmonisation might instead result in an increase in taxes.
But Pašek also sees some potential gains that tax harmonisation might bring, pointing out that tax competition currently means that individual countries sometimes fight to attract mobile capital to their countries. Currently there is a tendency to reduce tax rates especially for corporate entities, and for countries to patch up the resulting gaps in their state budgets through higher taxation of private individuals, i.e. labour.
“The advantage of harmonisation is that that there would be no reason to move a company with a higher tax burden into countries with a lower one,” said Pašek, adding that this might stabilise the level of tax burden on private individuals and even hold out the prospect of a reduction.
26. Sep 2011 at 0:00 | Jana Liptáková