Is harmonization of corporate tax systems necessary
in the European Union? If needed, how to pursue it? That is the question that
European policy makers have been trying to answer over a fifty-year-old debate.

1960s-1980s

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The corporate tax system that is in place today
was conceived during the first half of the twentieth century, at a time when most
companies were industrial and used to sell tangible products, as opposed to the
virtual ones that we are now interacting with every day. Therefore, the
corporate taxation system based on this premise has been adequate until the times
changed CTO1 and
the global transformation process radically transformed the traditional
business models.

In fact, the debate on European fiscal integration
started in the 1960s, when there already were problems in the completion of the
Single Market.i

Some studies carried out in this decade, such
as the Neumark Report of 1962, already stressed the necessity to achieve, at
least, a limited degree of harmonization of the corporate tax system.ii

The Commission followed this advice by making its
first attempts to introduce the problem with three different directives between
1975 and 1985. However, these were all withdrawn since the Member States, at
that time, were deeply reluctant on the issue.iii

1990s

In 1990, a Committee of independent experts was
requested by the European Commission to conduct a study on the Internal Market,
in order to understand whether or not the differences in corporation tax caused
distortions. The Committee’s final conclusion was that distortions were
effectively present in the European market, despite the fact that a positive
convergence had started to be observed among the different Member States.

The Committee insisted that the Member States
could not solve the problem through different national approaches, but an
action was needed at a higher level instead.3

The main guidelines given by the Committee were:
removing obstacles to cross-border business investment and shareholding,
setting a minimum level for statutory corporation tax, creating a common set of
rules for a minimum tax base and encouraging transparency. The two focuses of
the European Union should have been the corporation tax, to prevent tax
evasion, and the suppression of the double taxation of cross-border income
flows. However, it was not recommended to aim at a “total harmonization”
framework, since it was considered a long-term objective to be reached
progressively through intermediate steps.

Therefore, in 1990, the Commission started to
take measures. Since it was impossible to make the existing initiatives
advance, a Communication proposed that every initiative should pass through a
consultative process among the Member States.iv
This premise let to the adoption of two directives and one convention: The Merger
Directive, the Parent-Subsidiary Directive and the Arbitration Convention.

The Merger Directive aimed to create a common
taxation system for mergers, divisions and reorganisations, in order to
eliminate the fiscal barriers that impeded these operations for companies
placed in different Member States.v

The Parent subsidiary directive, that was then
improved in 2003, aimed to remove the fiscal obstacles for profit distributions
among companies’ groups, especially “preventing double taxation of parent
companies on the profits of their subsidiaries.”vi

The Arbitration Convention was also established
with the aim of resolve controversies on double taxation.vii

A second huge step was made in 1997 with the
Tax package and the Code of Conduct for business taxation. This initiative would
allow every Member State that adopts it to remove the fiscal measures that
created harmful tax competition, making the countries work in parallel on the
same issue.viii

2000-2010

In 2001, a Commission’s Communication on the coordination of direct
taxation systems in the internal market was released, containing new plans for company taxation. The
communication restated the need to remove all fiscal barriers and to fight
against the harmful tax competition. It also underlined the fact that, to do
so, it is not necessary to adopt a full-harmonisation, but just an alignment,
since each Member State must maintain its freedom to choose the tax system it
retains most appropriate.ix

Two years later, another Communication took stock of the 2001 announced
strategy. It ensured that the strategy was being followed and contained the
initiatives that were being made to realize it. In particular, it included
proposals of a “Home State Taxation pilot scheme” that could be used by small
and medium companies to calculate their EU taxable profits based on their home
state taxation system. The companies using it would benefit from a deep
reduction of tax compliance costs and a simplification of the taxable profit
calculation process.x

In February 2005, the Commission
relaunched the Lisbon Strategy in order to create better jobs. The principal
aim was to adapt the economy to the changes occurring both in the environment
and in the population. The political measures proposed concerned three areas:
the innovation for growth, the improvement of Europe’s investing and working
attractiveness, and the creation of higher-quality and higher-quantity jobs.

The
Commission also stressed the Member States to find financing for the creation
of a prosperous
competitionCTO2 , even though it had not been possible to find an
agreement on financial perspectives for the immediate following years.xi

2011: The turning point – The Common Consolidated Corporate Tax Base

It was finally in 2011 that the
action to concretely start to eliminate the obstacles impeding the achievement
of the Single Market started to take place with the introduction of the Common
Consolidated Corporate Tax Base (CCCTB).xii

This ambitious and revolutionary project
was the culmination of a work that lasted more than ten years to develop. It
was achieved with the collaboration of experts from national administrations,
the business world, and companies’ associations.

The CCCTB is a single set of common
rules created to calculate the tax base for companies in the EU. It would allow
all European enterprises to respect a single regulation, instead of taking into
account 28 different schemes. However, the Member States’ power to apply their
own corporate tax rates would not be affected by the measure, which priority
aim is, instead, to make the national taxation systems more coherent.

The CCCTB designed at that time
would have been optional and available for all societies in the European Union,
regardless of the size of the company.

The CCCTB would take into account
for taxation the whole profit that a group creates in the EU. After which, the
consolidated tax return would be distributed between the Member States in which
the company operates, following an apportionment formula based on three
factors: fixed assets, labour costs, and sales.

Unfortunately, the project was
perceived as too ambitious, and was therefore declined due to a lack of
unanimity of the Members’ States. However, the advantages that the project
would bring to the companies in the EU has largely been recognized, and that is
why a follow up took place in 2015.

2015: The Action Plan

In June 2015, the Commission
adopted an “Action Plan on fair and efficient tax system in the European
Union”, which contained a reform initiative on the issue, in order to fight
against fiscal evasion, to ensure durable profits, and to reinforce the
internal market.xiii

After having restated that the top priority
for the EU was the complete realization of the Single Market, it became clear
that a framework for the concrete completion of a fairer and more efficient
corporate taxation of profits could not be avoided any longer.

Over the years, a situation of
general discontent had been growing among the policy makers, the inhabitants,
and the companies of the European Union. On the one hand, the lack of fairness
and the recurring profits shifting cases contributed to create public dissatisfaction,
while on the other hand, the double taxation issue kept irritating the
companies.

The lack of coordination was considered
the major obstacle in pursuing the realization of the Single Market. It was
only due to the non-unanimity among the Member States, which wanted to act in
their best interest, going to the detriment of global needs; and only
contributed to increase the harmful and aggressive use of corporate tax
systems. This status quo, in addition with the opposed issue of double taxation,
created an unbearable situation that had been taking place for many decades.

Moreover, another major issue
concerning the tax competition was affecting the Member States, which were
stressed by the strong tax competition. In fact, some countries gradually
lowered their national corporate tax rates in order to raise their business
attractiveness. This, together with fiscal avoidance, led to a lower income for
the governments from profits taxation that some countries compensated through
an increase of tax burden on settled companies and on labour. This measure
compromised the efficiency of taxation system, as well as negatively impacting
not only on their growth, but also on work. In fact, a higher fiscal pressure
results in a disincentive for employment and investments. Naturally, the
companies that were not able to aggressively compete in tax planning were
undergoing many disadvantages.

Therefore, the 2015 Action Plan
identified five key areas or pillars to focus on:

1.     Implementing
and relaunching the CCCTB project, through a step-by-step initiative, in order
to reduce discontentment. The Commission also announced an important
innovation, by making it mandatory instead of optional, at least for
multinational companies;

2.     Ensuring an
equitable fiscalism at the place where profits are generated, meaning that
profits need to be taxed where the value is effectively created;

3.     Creating a
better environment for business through measures aiming for the suppression of
fiscal obstacles in the Single Market, in order to make it become more
attractive for a company to expand in another country;

4.     Improving
fiscal transparency to better fight against abuse and evasion;

5.     Improving
the coordination among the EU and optimize the existing ways of cooperation, as
a first essential step to successfully address the fiscal avoidance and fiscal
evasion issue.

2016:
The Corporate Tax Reform Package

In September 2016, a Corporate Tax Reform
Package was published. It obviously included the CCCTB, but proposals were also
made on two different subjects.xiv

The first one addresses the need to
definitively solve the double taxation issue, while the other tackles the ways
to avoid asymmetries existing with third countries.

As far as the CCCTB is concerned, the last step
that has
been made so far was its relaunchCTO3 .
This is planned to happen with a two phases process: first, the common base needs
to be implemented, at
a second time it will be consolidatedCTO4 .

In its definitive version, the CCCTB is mandatory
(at least for the largest companies). It will focus on the supporting of
Research and Development (R), as well as representing an encouragement to
stable financing.

2017: Fair and Efficient Tax
System in the EU for the Digital Single market

Referring to the Introduction, the Commission published, in September 2017, a
communication on “A Fair and Efficient Tax System in the European Union for
the Digital Single Market.” This should be the basis for debate between Member
States in order to grant, on the long-term, a fair and equitable tax on digital
economy, which represents one of the top 10 priorities of the work-programme of
the Commission.xv

The
main difficulties on digital taxation for the policy makers lie in the choice
of the taxation place for a dematerialised economy. Three objectives guide this
approach to digital economy: ensuring competitiveness of European companies,
reinforcing the integrity of the Single Market, and granting the durability of
this fiscal system.

The
principles contained in the Communication are expected to be followed by
legislative proposal next Spring. Some other “faster” ways to act are also
mentioned, such as the adoption of specific tax on advertisement messages.

x

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