Multinationals and the War Over Taxes
OPINION |

Multinationals and the War Over Taxes

TO TAX COMPANIES ON THEIR WORLDWIDE INCOME (AS ALREADY OCCURS IN THE CASE OF INDIVIDUAL TAXPAYERS) IN THE EU, IT WOULD SUFFICE TO APPROVE THE PROPOSED CCCTB DIRECTIVE, WHICH HAS BEEN LEFT SITTING THERE SINCE 2011

by Carlo Garbarino, Dept. of Law, Bocconi
Translated by Alex Foti


The new trend of EU countermeasures against aggressive tax planning by multinational companies is the use of antitrust tools against market abuse. For example, the incentive scheme applied to certain companies by Belgium for an amount of around 700 million euro in unpaid taxes is being watched. The incentive takes the form of a regime of exemption for extra profits that allows, through a kind of a bargain, a substantial reduction of the tax base of the beneficiaries.

The case of Belgium is an example of the new trend. The previous tax settings were developed according to a purely fiscal perspective that looked to harmful tax competition by analyzing the effective tax rates as well as other factors. The logic of the new initiatives is that instead to identify the tax advantages offered by a member state to special categories of business (possibly by means of pre-emptive private agreements) a hidden form of state tax aid that alters the proper functioning of the Single Market. More specifically, the antitrust objective of this type of initiatives is to eliminate the tax advantage which favors certain companies over others.

From a technical-legal point of view, we can only endorse this approach which goes beyond the perspective of competition on tax rates, since it finally considers the effective fiscal cost as strategic factor in market competition. Each member state is free to exercise its tax sovereignty on condition it does not create unjustified differences in tax treatment determined by where the company is headquartered. Where these disparities exist, they must be eliminated through top-down action by the European Union. But if you take the larger view on taxation in Europe, the above step, though technically feasible shows all its limits, highlighting a problem affecting many policies advanced by the Commission: while technically correct, they do not take hold Europe-wide. Major transnational groups implement aggressive strategies of erosion of the tax base and transfer of profits from high-tax jurisdictions to low-tax jurisdictions, also because the government where the multinational originally resides does not in effect tax the profits produced in other member states. It follows that the way to prevent these forms of strategic opportunism is that the states where multinationals reside cooperate by exchanging information, thus enabling the governments under which the parent company is headquartered to tax their worldwide income themselves (consolidation of the tax base) by granting credits for taxes paid under other jurisdictions. Concretely, each government should submit to taxation its multinationals, as it has been done since the 1950s in the states were companies have to pay taxes on their worldwide income.

This international solution is difficult to implement, not only because it is hard to reach such a wide multilateral agreement, but also because the member states of residence of the multinationals actually have an interest not to tax their foreign income, in order to make these corporations more competitive in the markets where they operate. At the EU level, however, the situation is different, since the EU is in fact an integrated market in which non-EU companies operate, and the solution is at hand through the creation of a common consolidated EU tax base. Since 2011, there exists a proposal for a Common Consolidated Corporate Tax Base Directive (CCCTB), which specifically provides that a corporate group can consolidate its European income, by allocating with an apportionment formula based on capital, labor and sales, the taxable income in the various member States for the application of the national tax rates on the portion assigned to them. With a CCCTB system work, it would not be necessary not to pursue the micro-policies of individual member states, because in any case the tax base would be European. In concrete terms: if a corporation pays less taxes in Belgium, for example, it would still not avoid to pay taxes in the EU, conditionally on the condition that its capital, labor and turnover are all placed therein.

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