On 25 April 2018, Institut Friedland, in partnership with Confrontations Europe, organised a conference in Brussels to discuss the future of European taxation in a global context.
The coexistence of 28 (soon to be 27) different tax systems within the European Union (EU) has led to fierce tax competition between Member States, all of which are striving to attract companies to their countries. Certain companies have turned this situation to their advantage. Revelations concerning tax evasion (Luxleaks, Panama Papers, and more recently, Paradise Papers) have abounded in recent years, emphasising the States’ growing incapacity to counter the aggressive tax planning practices of certain economic players. The United Kingdom’s desire to attract European companies despite Brexit by offering a low corporate income tax (CIT) rate, and the American tax reforms, are also putting pressure on the European tax framework.
The digital transformation of economies is also posing numerous challenges to tax systems developed for “traditional” economic activities.
Such a context reveals the limitations of the current European tax framework and the urgent need for a radical revision of corporate taxation, which “must strike the right balance between the need for fairer taxation and corporate competitiveness”, in the words of Didier Kling, President of the Paris Île-de-France Chamber of Commerce and Industry.
Responses have started to be formulated on several levels.
Firstly, at the international level, the G20 in Saint Petersburg in 2013 mandated the OECD to counter BEPS (Base Erosion and Profit-Shifting) practices and bring international standards into line with the world’s new economic environment. Above all, this project – structured around 15 actions – aims to introduce greater transparency and is gradually bearing fruit at the European level (ATAD Directives), but also at the national level (Country-by-Country Reporting in France, for example).
At the European level, the European Commission has also relaunched the Common Consolidated Corporate Tax Base (CCCTB) project to combat tax evasion practices and improve corporate competitiveness. This project aims to harmonise the rules on determining the taxable profit of companies in the EU. With the CCCTB, companies involved in cross-border activities must conform to a single European system for determining their taxable income, rather than the different national regimes for the countries in which the activities are carried out. In addition, consolidation would give companies the ability to offset their profits and losses in Europe. The CCCTB is an opportunity for Europe to address these different problems and challenges.
But is this the right solution, especially in light of the growing digitisation of the economy? Does this project have a chance of succeeding and what changes should companies expect?
At the invitation of the Institut Friedland and Confrontations Europe, public and private decision-makers, regulators and experts met in Brussels to discuss these issues.
To open the discussions, David Bradbury, Head of the OECD Tax Policy and Statistics Division and Gaëtan Nicodème, Head of the Economic Analysis Unit at the European Commission’s General Directorate for Taxation and Customs Union, outlined the context and changes in corporate taxation over recent years. David Bradbury pointed out the significant progress made at the international level on countering harmful tax practices. Gaëtan Nicodème explained the need to establish a level playing field for companies at the European level.
Both David Bradbury and Gaëtan Nicodème emphasised the fact that competition over CIT rates is likely to increase, all the more so since the American tax reforms (including a significant reduction in the CIT rate and the implementation of incentives to repatriate profits made abroad) are exerting additional tax burdens on countries that continue to impose very high CIT rates. In such a context, the question of implementing a minimum effective CIT rate was raised for discussion.
Regarding changes in taxation in relation to the digitisation of the economy, the representatives of both institutions presented an overview of their respective activities on this issue. After its interim report on “Tax Challenges Arising from Digitalisation” published in March 2018, the OECD is expected to publish its proposed reforms by 2020. David Bradbury considers that it is awkward to talk of a “digital economy” as digitisation is a transition that permeates the entire economy. The European Commission has also taken up this issue, with two proposals for directives submitted on 21 March 2018:
Gaëtan Nicodème considers the proposed 3% tax to be the best way to tackle these issues urgently.
Delphine Siquier Delot, an analyst at Institut Friedland, reviewed the four possible scenarios for tomorrow’s European tax framework.
The day’s discussions reflected the consensus of the different stakeholders (both public and private) on the need for a CCCTB “with three Cs” (scenario 3 above), with consolidation being the key to strengthening the common market and improving corporate competitiveness, which is currently being undermined by the complexity generated by 28 (soon to be 27) different tax systems. Sune Hein Bertelsen, a representative of the Confederation of Danish Industries and a member of Business Europe, gave the example of Danish companies which are spending €2 billion a year on fiscal compliance costs! The CCCTB would, in particular, enable “the convergence of management and reporting systems”, according to Patrick de Cambourg, President of France’s national accounting standards body (Autorité des Normes Comptables).
However, the CCCTB will not solve all the problems… Alfred de Lassence, Director of Taxation at Air Liquide, pointed out that tax competition does not stop at the borders of Europe: “Just because the Member States adopt the CCCTB does not mean that the rest of the world will follow suit and abolish transfer pricing…”.
Alain Lamassoure, a member of the European Parliament and Rapporteur for the CCCTB Directive, insisted on the urgent need to move this project forward: if it stalls, Europe is likely to miss out on this opportunity… But the first stop on the journey towards the CCCTB (with consolidation) could be the CCTB (without consolidation). Wendelin Staats, Head of Unit at the German Ministry of Finance, believes that adopting the CCTB is the best way to attain the CCCTB… Grégory Abate, Director of the French General Directorate for Public Finance (DGFiP), stated that France and Germany were very close to signing an agreement on this matter.
The measures proposed to adapt corporate taxation to the context of an increasingly digital economy have prompted much debate… This is a particularly complex issue due to the technical problems raised and the diversity of the business models and companies concerned. It requires a rethink of the link between taxation and the place where the value is produced.
Paul Tang, a Member of the European Parliament and Rapporteur for the CCTB Directive, mentioned that the CCCTB could breathe new life into companies by introducing a real paradigm change. Eelco van der Enden, President of the Tax Policy group at Accountancy Europe, examined the European Commission’s proposal to introduce a 3% tax on digital services: is it the right response to the challenges? According to Stéphane Pallez, President of La Française des Jeux, this tax is just a starting point… However, Maria Volanen, Chair of the Digital Europe Tax Committee, considers the measures targeting digital sector companies to be inappropriate insofar as the influence of digital technology is felt everywhere, regardless of the size of companies and their business sector.
To close the day’s discussions, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, reasserted his attachment to the CCCTB project with consolidation. He also stressed the importance of a collective strategy in order to make progress on these crucial issues.
Watch the conference videos here: