EU divided over tax policies

When global leaders gathered for the G20 summit in Mexico earlier this summer to iron out trifling matters such as the Euro Zone crisis, British Prime Minister David Cameron appeared to have other priorities.

His French counterpart Francoise Hollande, who came to power in May, was already considering introducing a top rate of income tax of 75 per cent, and Cameron made clear he hoped to make the most of it. In controversial remarks to a group of business leaders at the summit he pledged to “roll out the red carpet” and “welcome” French businesses to Britain.

Cameron’s badly timed comments highlight a weakness in Europe’s recovery strategy — the lack of a concerted, united approach to taxation, leaving individual member states free to compete with often struggling neighbour states.

Britain’s approach to taxation during the financial crisis has been conflicted to say the least: on the one hand, there’s been strong rhetoric against attempts at tax avoidance and evasion, with Chancellor of the Exchequer George Osborne labelling both as “morally repugnant.” At the same time, remarks such as Cameron’s in Mexico highlight the country’s eagerness to attract business at a time when other European neighbours may be less able to do so.

RACE TO THE BOTTOM

And it’s a strategy that seems to be working. In August, WPP, the advertising titan headed by Martin Sorrell, which moved its global headquarters to Ireland in 2008 over taxes, announced it would be returning to the UK, following reforms in the last budget exempting profits made by foreign subsidiaries under certain circumstances from facing UK taxes.

Since coming to power, the government has also cut the headline rate of corporate tax from 28 per cent to 24 per cent, and it will fall further to 22 per cent by 2014, well below the level of many European nations, including Germany and France.

The package of reforms is prompting a further 20 companies over the next year-and-a-half, and a further 20 beyond that, to shift either global or regional headquarters to the UK, according to a report published by Ernst & Young earlier this month.

While welcomed by businesses, the moves have also sparked concern and anger, coming at a time when the country has embarked on deep cuts to public spending in a bid to reduce the fiscal deficit.

Thousands gathered in London for a protest against austerity on Saturday as unions called for a general strike, with coffee chain Starbucks coming under fire over allegations of tax avoidance. To campaigners, its paltry tax bill over the past few years has come to symbolise the problems, and loopholes, inherent in Britain’s tax system.

Britain (and the US) were attempting to “run a modern, high technology, prosperous 21st century knowledge economy without the requisite tax base,” US economist Jeffrey Sachs argued in a recent piece in the Financial Times , warning of a global race to the bottom.

Britain is far from the only European state to do so. Ireland, for example, has resisted calls from European member states to raise its 12.5 per cent corporate tax rate when it received the IMF-European bailout in 2010.

“Luxembourg, Cyprus, Malta, Ireland, Netherlands all have a business in tax competition, with beggar thy neighbour policies,” says Markus Meinzer of the analysis and advocacy group, the Tax Justice Network.

EU TAX FRAMEWORK

The impact on the rest of Europe can be profound. “Countries like Spain and Italy are trying to increase tax revenues at their corporations but citizens can simply relocate or appear to relocate, or move their businesses,” says Sony Kapoor, managing director of EU think tank Re-Define, who argues that this will continue unless a proper framework is put in place to prevent a race to the bottom.

“While it is important to have flexibility at a national level, …in a reality where increasing amounts of economic activity is cross-border and where the externalities that one country can impose on others are very large and increasing, it is absolutely necessary to have a framework within which these actions that may have negative consequences can be addressed.”

Meinzer says that the situation in Europe has been worsened since 2006 following a ruling by the European Court of Justice in a case against Cadbury Schweppes by British tax authorities.

The court knocked down attempts to subject two of the company’s subsidiaries based in Ireland (and its far lower corporate tax rates) to UK-controlled foreign company legislation.

“From that moment countries could no longer apply national controlled foreign company legislation, with the burden of proof falling firmly on the tax administration to prove that the structure was purely an artificial arrangement, which is very difficult to do.”

Rates of taxation vary widely across Europe: according to recent data gathered by Europe’s statistical office Eurostat, though tax rates have risen slightly in the past year (average corporate taxes across the 27 member states have risen to 23.5 per cent in 2012 from 23.4 per cent in 2011) they’ve fallen dramatically over the past decade (in 2000, the average was 31.9 per cent).

Current rates range from 36.1 per cent in France, and 30 per cent in Greece to as low as 10 per cent in Cyprus and 12.5 per cent in Ireland. The top rate of personal income taxes also varies widely (56.6 per cent in Sweden, but 10 per cent in Bulgaria).

The potential implications of Europe’s widely differing rates have not gone unnoticed and there have been several attempts at more harmonisation, so far with little success.

European Commission plans for a common consolidated corporate tax base for the entire region by creating uniform rules for calculating EU-wide profits for firms, without dictating the rates in individual countries, were launched back in 2006, but are yet to move forward, facing staunch opposition from some member states.

Little has been heard of plans for a common corporate tax rate for France and Germany since the announcement by former French President Nicholas Sarkozy and German Chancellor Angela Merkel last year.

Re-Define’s Kapoor is unsurprised by the lack of progress. “Part of the problem is that when every country has a veto and you have tax havens within Europe, it significantly hampers progress on this. You are caught in a situation where action on this is increasingly necessary but tax havens have continued to exercise their veto, and knowing that they will veto the proposals, Europe has taken the view that there is no point pushing ahead with it.”

( >blfeedback@thehindu.co.in )

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