In search for a model of a truly

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In search for a model of a truly European tax system Salvatore Biasco La

In search for a model of a truly European tax system Salvatore Biasco La Sapienza, Università di Roma 1

The need to find a model for a uniform tax structure • It is

The need to find a model for a uniform tax structure • It is not only a matter of removing "harmful" particularistic regimes • goals: - recovery of taxable revenues, (compensating weaker European countries) - start of a concrete process of substantial tax reduction on labor - identification of revenue sources for an enlarged Union budget. 2

It is not true that any kind of convergence is positive • The case

It is not true that any kind of convergence is positive • The case of Pex (taxation of the holding) sentence of the Court – no European address – tax competition – spread of the regime competition not ended but shifted towards rules on company law • The case of patent boxes (special taxation related to patents) if anything, it remunerates the trading related to existing patents rather than the development of new ones 3

It is not true that any kind of convergence is positive 2 • Taxation

It is not true that any kind of convergence is positive 2 • Taxation of interest receipts by foreign residents • Corporate tax rates - for larger countries widening the tax base may be revenue neutral, but it is not neutral for other consequences 4

Need for grand designs • Three important advances are examined A) the elimination of

Need for grand designs • Three important advances are examined A) the elimination of internal "harmful" competition B) actions to curb the use of tax havens C) the possible adoption of the Common Consolidated Corporate Tax Base 5

A) “harmful” competition • “harmful” and “not harmful” competition (beneficial? , fair? ) •

A) “harmful” competition • “harmful” and “not harmful” competition (beneficial? , fair? ) • With the (uncomplete) removal of particularistic regimes, reduction of rates and narrowing of the tax base have established as the dominant mode of tax competition, particularly in new members countries moved by the example of Ireland. 6

“beneficial competition” • distortion in the structure of taxation • a loss of taxable

“beneficial competition” • distortion in the structure of taxation • a loss of taxable income compensated by increase in taxes on non-mobile factors or in reduction in public spending • incentives for profit shifting, • inefficient level of public goods, • distortion of the market: capital flows where it is taxed less and not necessarily where it is used more productively • general loss of welfare 7

A) What is missing for a “grand design” • harmonization of corporate tax rate

A) What is missing for a “grand design” • harmonization of corporate tax rate as a legitimate mediumterm objective of the Union. • verification on earnings and losses generating differences in the taxation on production and labor at the national level. • As an intermediate step either differences in corporate tax rate should be kept within predetermined ranges, but on common bases or minimum tax rate should be introduced (not less than 25%), • The weaker countries should be helped to compete on the basis of real economic factors and not providing facilities designed to undermine the laws of others; for this (as well as other reasons) an enlarged European budget is necessary 8

B) actions against the use of tax havens • the three facets of the

B) actions against the use of tax havens • the three facets of the problem to be kept distinct from each other • 1) lack of transparency and exchange of information, namely the service of secrecy that tax havens offer • 2) lack of substantial activity associated with location of a company in a tax haven • 3) low or no taxation on relevant incomes (accompanied or not by fence edge schemes). 9

B 1) automatic information sharing • It is a very important program for tackling

B 1) automatic information sharing • It is a very important program for tackling secrecy • Previous approach to get information on specific and targeted request has not been particularly effective (explosion of offshore funds in the last ten years) • tax payer identification number (the example of passports) • monitoring that commitments are actually implemented • effective sanctions for countries that opt out • Withdrawal of the banking license for financial institutions active in promoting tax evasion 10

B 2) Contrast to artificial constructions for tax avoidance • contrast is left to

B 2) Contrast to artificial constructions for tax avoidance • contrast is left to single countries, which apply a guideline of defensive actions (Cfc) • heterogeneity in Europe in the application of the Cfc rules (U. K. has even removed the presumption of tax avoidance) • the defensive approach is not systemic, involves subjective judgments and gives rise to administrative complications, uncertainties, costs and difficulties in compliance or in the proof of evidence to the contrary • a vicious circle 11

Where the defensive approach is impotent • helpless when profits realized in Europe are

Where the defensive approach is impotent • helpless when profits realized in Europe are legally channeled to affiliates located in areas with low or no taxation. • The role of transfer prices and internal payments for services to offshore affiliates • headquarters of MNs are set in countries, such as Luxembourg, Ireland or the Netherlands, where - taxation is low in origin - no withholding tax is charged on payments for intangible and services abroad - these payments are not called into question 12

The case of Apple and of the digital economy • - taxes paid in

The case of Apple and of the digital economy • - taxes paid in European activities amount to 2% of profits - profits are channeled through internal payments from its Irish headquarter to three subsidiaries that have not declared a physical residence in any part of the world, one of which has not published a financial report for years • The digital economy sets similar problems: - companies selling services from a portal can enter the network from any location. Hard to even identify where profits are diverted (to the limit at some platform outside territorial waters). - a permanent establishment may not be needed 13

B A possible way out • charging a withholding tax on sales, thus moving

B A possible way out • charging a withholding tax on sales, thus moving towards a taxation at the source or at the destination, at least for online trade • This assumes that income is generated where logistics centers are located or where the company has significant market shares • Need to rethink the principle of taxation at the origin, based on physical presence and permanent establishment 14

B 2) A true grand design: a unitary taxation • MNs should be asked

B 2) A true grand design: a unitary taxation • MNs should be asked to present a unique consolidated account (according to an agreed accounting standard) in every country where they operate • They should be taxed uniformly according to agreed formulas of apportionment of income that reflects the genuine presence in each country. • The formula weighs labor employed, the value of physical assets (excluding intangible) and sales. 15

advantages • eliding the internal transactions would eliminate at the root any convenience to

advantages • eliding the internal transactions would eliminate at the root any convenience to artificial constructions in tax havens • corporations can offset profits and losses obtained in different countries and reduce the cost of compliance; • tax administrations as do not need to restate company accounts and implement defensive and complex measures • CCCTB can be applied by individual countries even before an international agreement makes it the new standard • Europe should take the lead in its diffusion (Canada and the United States, support the system) 16

C) Is CCCTB as proposed by the Commission a grand design? • Not properly,

C) Is CCCTB as proposed by the Commission a grand design? • Not properly, not yet for 3 shortcomings • 1) It not mandatory, but optional - not the distinctive Union tax system (which at most Union itself might administer by holding for its budget a share of accruing revenue). • 2) it does not provide for any harmonization of the profit tax, so maintaining in life a tax competition - it would be by all means preferable tax harmonization plus the inclusion of some measure of national income weighed in inverse proportional way in the apportionment formula • 3) consolidated profits are only from EU wide activities, leaving the opportunity for excluding affiliates located in tax havens. - anti elusion measures still necessary, although have proved ineffective. 17

Not a bright perpective • Even with this watering down CCCBTB is unlikely to

Not a bright perpective • Even with this watering down CCCBTB is unlikely to get an unanimous vote at the Council of Europe • Without overcoming the principle of unanimity it will be difficult to design organic and truly European projects • The European countries have not lost fiscal autonomy because of globalization, but for the intra-Union competition. • Do we want this: ? - reciprocal subtraction of taxable bases? - de-industrialization of some for the benefit others legitimized? - a group of countries prospering on the difficulties of others without exerting due responsibility? • Is it so difficult to realize that we are dancing on fire? 18