GEWINN, PROFITTO, profit, ganancias, zysk, or wynst. “What profit a man..?” But what is a profit? Not an easy answer in any language. And not one to which there is any single answer. It depends on where you are and for what purpose the question is being asked – financial reporting or tax assessment. But the EU is all about getting one answer to such questions, instead of 27, and once again this week it emerged that the commission is set to raise the hare of a common consolidated corporate tax base (CCCTB), in essence a common definition of “profit”. “The Commission will take steps to improve the co-ordination of national tax policies, notably by proposing a directive introducing the CCCTB,” a draft communication promises.
The response here was predictable. Government and business united in opposition. The promises of the Lisbon referendum were recalled and Brussels was reminded that common rules on “direct taxation” and harmonisation of tax rates remain a dimension of European integration that is a bridge too far for Ireland.
The commission has been pressing the issue on and off since 2001. It insists a CCCTB is not the same as harmonisation of tax rates and does not substantially impinge on national sovereignty over direct taxation. Transparency would facilitate tax competition between states and reduce costs, easing decision making for businesses now confronted by up to 27 models of corporate tax assessment. The need to comply with a multiplicity of regimes is a significant barrier to market entry and a distortion of the internal market.
There are several forms of possible CCCTB, ranging from a minimalist approach, simply an agreement on common accounting definitions for tax purposes which would still allow member states to set taxes and levy them separately; to the more radical, that would see the tax base of companies assessed EU-wide and then reallocated to member states by some agreed formula to tax as they see fit. The commission’s preference is unclear.
The first would reduce compliance costs and enhance tax competition across the EU while largely leaving matters to member states. However, it would not do away with problems associated with the use by multinationals of transfer pricing to avail of favourable tax regimes, or with double taxation problems, or difficulties in seeking relief for losses incurred by associated companies located in other member states. And in setting down common rules on incentives or credits, it might be seen as constraining the tax autonomy of national governments. Dublin might well embrace the transparency, but not the latter. The more radical alternative would eliminate both the transfer pricing and double taxation problems, but takes a firm step over the verboten line of “common taxation”. As such it is completely anathema to Ireland.
Both approaches, or any variation, are likely to be resisted strenuously by Dublin and like-minded capitals. The commission’s threat that, if unsuccessful, it may proceed with the CCCTB with a coalition of the willing should not cause undue concern. Ireland’s competitive advantage, if there is one, would remain unaffected.