1. DG Taxation and Customs Union - 07/09/04 Slide: 1 European Commission - DG Taxation and Customs Union Conferenza Torino, 15 novembre 2005 La tassazione delle imprese in Europa: dalla competizione al coordinamento fiscale Carola Maggiulli Commissione Europea Analisi e Politiche Fiscali

2. DG Taxation and Customs Union - 07/09/04 Slide: 2 European Commission - DG Taxation and Customs Union The Institutional Context lEach Member State is sovereign in determining the appropriate size of its budget on both expenditure and revenues side (limit: close to the balance or in surplus) lArt. 94 – 308 of the Treaty (direct taxes): lApproximation of legislation by means of directives wherever this is necessary to improve the functioning of the Single Market or meet other Community objectives lUnanimity

3. DG Taxation and Customs Union - 07/09/04 Slide: 3 European Commission - DG Taxation and Customs Union Why is tax competition an issue? 1.Impact on the overall level of government revenues: mPutting a break on the "Leviathan"? mPutting at risk the "European social model"? 2.Impact on the structure of tax systems: mShift of the tax burden towards less mobile bases such as labour (unemployment); mEquity concerns.

4. DG Taxation and Customs Union - 07/09/04 Slide: 4 European Commission - DG Taxation and Customs Union Evolution of statutory corp. tax rates

5. DG Taxation and Customs Union - 07/09/04 Slide: 5 European Commission - DG Taxation and Customs Union Statutory and effective tax rates (EU15)

6. DG Taxation and Customs Union - 07/09/04 Slide: 6 European Commission - DG Taxation and Customs Union Race to the bottom lGeneral Government total revenues (tax revenues and social contributions) have been practically stable at around 41% of GDP on average in the EU-15 in the last decade. lCorporate tax revenues in the EU 15 have increased from 2.0% to 2.8% of GDP from 1995 to 2000 and decreased again to 2.2% in 2003.

7. DG Taxation and Customs Union - 07/09/04 Slide: 7 European Commission - DG Taxation and Customs Union Evolution of corporation tax revenues

8. DG Taxation and Customs Union - 07/09/04 Slide: 8 European Commission - DG Taxation and Customs Union Harmonisation and coordination lHarmonisation: replacing national provisions in one area by a common EU legislation (VAT 6th Directive); lCoordination: keeping legislation at national level but rendering those national legislations compatible with the Treaty and compatible one with another.

9. DG Taxation and Customs Union - 07/09/04 Slide: 9 European Commission - DG Taxation and Customs Union Reasons for coordination lA number of pieces of national tax legislations are creating major difficulties from an EU single market perspective: double taxation, double non-taxation, tax avoidance, tax evasion lThese measures often give rise to tax cases before the ECJ: obstacles to one or more of the four freedoms or discrimination lHarmful tax competition

10. DG Taxation and Customs Union - 07/09/04 Slide: 10 European Commission - DG Taxation and Customs Union Corporate taxation and Internal Market lExistence of tax barriers is an obstacle to the realisation of the Internal Market and to the competitiveness of the EU business lExisting tax barriers mainly consist in: -double taxation, -compliance costs, -cost involved in business restructuring. lCompliance costs related to taxation represent an amount equivalent to 1.9% of taxed paid for large companies and a considerable higher amount for SMEs.

11. DG Taxation and Customs Union - 07/09/04 Slide: 11 European Commission - DG Taxation and Customs Union Commission proposals lShort-term targeted solutions aimed at removing single tax barriers. Long-term comprehensive solutions aimed at offering a global liberalised framework. Long-term comprehensive solutions aimed at offering a global liberalised framework.

12. DG Taxation and Customs Union - 07/09/04 Slide: 12 European Commission - DG Taxation and Customs Union Targeted solutions (1) lAim: to propose to the European firms a more efficient and not discriminatory taxation framework. lBy: -reduction of extra-costs which constitute a pure deadweight loss (transfer pricing); -removal of tax measures which can inefficiently penalise firms willing to operate cross-border (cross-border loss compensation).

13. DG Taxation and Customs Union - 07/09/04 Slide: 13 European Commission - DG Taxation and Customs Union Targeted solutions (2) lParent-Subsidiary and Merger Directives amended (abolition of withholding tax on dividends and deferred taxation of capital gains for restructuring companies); lInterest and Royalties Directive adopted; lCommission Communication on cross-border losses (2006); lCommission Communication on Double Taxation Treaties (2006); lJoint Transfer Pricing Forum working: following a report of 2005, proposal for a Code of Conduct on a common approach to transfer pricing documentation (before the end of 2005).

14. DG Taxation and Customs Union - 07/09/04 Slide: 14 European Commission - DG Taxation and Customs Union Increasing importance of the ECJ in the direct tax field lStarting point: the four fundamental freedoms - free movement of services, goods, persons; freedom of establishment lMember States must not discriminate against foreign EU nationals/residents or restrict free movement/ establishment lDevelopment of EU Tax Law has largely taken place via these Treaty provisions as interpreted by the ECJ in cases referred by national courts (preliminary rulings) lThe ECJ has taken a “firm” line lThe number of cases have increased significantly in recent years and trend continues

15. DG Taxation and Customs Union - 07/09/04 Slide: 15 European Commission - DG Taxation and Customs Union Comprehensive solutions (1) Comprehensive solutions (1) lAim: To strengthen competition in the Internal Market by a better allocation of resources, notably physical capital investment, thus contributing to the process of optimisation of firms. lBy: Simultaneous removal of tax obstacles.

16. DG Taxation and Customs Union - 07/09/04 Slide: 16 European Commission - DG Taxation and Customs Union Comprehensive solutions (2) lCommission legislative proposal on a "Common Consolidated Tax Base" (tailored more specially to big enterprises) ;  A multinational group can opt for computing its tax base according to completely new harmonised EU rules. lCommission Communication on "Home State Taxation" (tailored to SMEs).  A multinational group can opt for computing its tax base according to the rules of the Member State where its headquarter is based.

17. DG Taxation and Customs Union - 07/09/04 Slide: 17 European Commission - DG Taxation and Customs Union Home State Taxation (HST) Based on the mutual recognition by Member States of each others tax rulesBased on the mutual recognition by Member States of each others tax rules A group of companies can choose to calculate their tax base according to the rules of the Member State where its headquarters is based – the 'home state'A group of companies can choose to calculate their tax base according to the rules of the Member State where its headquarters is based – the 'home state' Each Member State then taxes its share of the overall taxable group profits at its own tax rateEach Member State then taxes its share of the overall taxable group profits at its own tax rate Bilateral or multilateral agreement between Member States having a similar tax baseBilateral or multilateral agreement between Member States having a similar tax base

18. DG Taxation and Customs Union - 07/09/04 Slide: 18 European Commission - DG Taxation and Customs Union Common (Consolidated) Corporate Tax Base lConcept mAdditional EU tax base that is available as option for internationally active group mFormulary apportionment of tax base to MS with subsequent application of national tax rates mCoherent and systematic approach from industry perspective lPotential drawbacks mDeveloping a completely new EU tax base is a complex and time-consuming task mMember States would have to administer two tax systems mPossible discrimination problems? mPotential technical problems (double-taxation agreements with third countries; treatment of minority shareholders)

19. DG Taxation and Customs Union - 07/09/04 Slide: 19 European Commission - DG Taxation and Customs Union CCCTB Working Group lInformal ECOFIN Council of September 2004 m In discussion of Non-Paper only a minority of MS opposed work on CCBT m Support for creation of CCCTB working group lCCCTB technical working group m Commission chair; participation of all 25 MS m Initially mandate for three years m Tentative work programme agreed m Meetings +/- every three months m Several sub-groups chaired by a Member State m Full information on COM website

20. DG Taxation and Customs Union - 07/09/04 Slide: 20 European Commission - DG Taxation and Customs Union Apportionment of the EU consolidated tax base lMacro apportioning (factors aggregated at national level, as GDP); lFormulary Apportionment (factors deemed to generate the group income, as payroll, property and sales); lThe Value added option.

21. DG Taxation and Customs Union - 07/09/04 Slide: 21 European Commission - DG Taxation and Customs Union Conclusions l lShort term targeted measures – good progress; some initiatives already implemented l lComprehensive initiatives – slower progress, but it is long term project mHome State Taxation - Communication planned for 2005 mCommon Consolidated Tax Base – CCCTB working group active with three year mandate; progress report in 2006 lNo EU action on tax rates lFor more information: Company Tax Website http://europa.eu.int/comm/taxation_customs/taxati on/company_tax/gen_overview/index_en.htm