- Since the beginning of the century, competition between countries to attract firms has lowered the average tax rate on the continent from 32% in 2000 to the current rate of 23%
The Barcelona Institute of Economics (IEB) and the Societat Barcelonesa Amics del País (SEBAP) held the third edition of the Fiscal Forum this Wednesday in the Palau Macaya in Barcelona, to discuss the harmonization of corporate tax in the European Union. During the forum, the speakers coincided in identifying the harmonization of the tax as an element that can define the future of the EU project. “Today there are 28 Member States and just as many tax administrations, tax rates, etc., which not only hinders the creation of a large unified market, but facilitates tax avoidance by firms”, said IEB researcher, José María Durán.
In his talk, Durán analysed the way in which the EU countries have used tax policy as a tool to attract companies. “In 2000, the mean nominal corporate tax rate in the EU stood at 32%, but by 2016 it had fallen to 23%”. According to the researcher, the countries adopting the most aggressive strategies to attract business are the last to have joined the Union, setting their tax rates below 20%, while the initial 15 Member States continue to tax business activity at rates between 25 and 30%.
According to the researcher, the European Union now faces the challenge of coordinating the Member States so as to consolidate a single taxable base and to agree on what special measures countries can offer to attract firms without changing the rules of the game.
Conflict of powers
However, the researchers all agree that reaching an agreement will not be easy, mainly because of the transfer of powers that that this would represent for the States and the loss of elements of competitiveness and business attraction. “The harmonization of corporate tax is more of a conflict between EU members than a conflict between firms and countries”, reported Clemens Fuest, Professor at the University of Munich and president of CESifo. “The countries of the periphery are unlikely to renounce the powers that allow them to be competitive. Without a fiscal policy, they have no tools to attract firms on an equal footing with the central states of the continent”.
“We cannot moralise about the fact that firms plan their fiscal strategy, because it is legal to do so and, in fact, low-tax countries take advantage of this. In fact, studies show that if a state lowers its corporate tax rate by 10%, business investment in the territory goes up 30%”, said Fuest.
However, the researcher advocates analysing how to avoid tax avoidance by firms, and one of the mechanisms most called for is to require firms to pay taxes where the value is created. “The problem is how to define where the value is created: where it is produced, where it is consumed, where the profits are generated, …?”, he said.
One of the methods most commonly called for by entities that seek fiscal harmonization is for firms to publish their profit statements in each country. Fuest, however, stressed the dangers of this system. “To give an example, Volkswagen today pays 80% of its taxes in Germany and 90% in Europe, but 40% of its sales are in Asia. If they publish these results, countries like China, India or Japan will come and claim their share of the profits, which would go against the interests of the European Union”.