Diego Zuluaga // 25.10.2015

Here in EPICENTER, our authors have consistently opposed the Commission’s proposal for a Common Consolidated Corporate Tax Base – better known in EU policy circles by its rather Soviet-looking acronym, CCCTB. In a 2014 briefing, we argued that the scheme, which would assign Member States a share of multinationals’ taxable profits according to a pre-set formula, was arbitrary. We said that it discriminated against intellectual property and was designed to artificially raise firms’ payable taxes; and that it would undermine tax competition across the EU, which has been credited with disciplining governments to make better use of taxpayers’ money, thus leading to better public policy.

Then, when the proposal was re-launched – with some modifications on the original plan – I gave five reasons why it was still a bad idea. Corporation tax is supposed to be a tax on profits, not an arbitrary figure calculated on the basis of a firm’s turnover, wage bill and physical capital. And it still doesn’t address the fundamental problem behind corporation taxes, which is that only people pay taxes and so any government attempt to obtain revenue from a non-person legal entity is going to be highly inefficient. And sure enough, studies consistently find that corporation taxes fall to a large extent on workers, making them less productive by discouraging capital investment.

So much for the awful economics of the CCCTB proposal. But, given that we’re talking about a hypothetical tax measure applicable across the EU, and that each Member State has veto power over tax policy, how likely is it to ever be implemented? Many of the policy experts I’ve spoken to who are familiar with the EU corporation tax debate think it’s a non-starter. To begin with, countries like the UK, Ireland and the Netherlands, who are keen to establish themselves as low-tax countries that welcome multinational investment, would oppose any attempt to undermine tax freedom and competition between Member States.

And, even if some Member States wanted to move forward on their own and implement the measure – a procedure known as enhanced cooperation and which is being tried for the ominous (and never-quite-agreed-upon) Financial Transactions Tax – it is not clear that it would ever become law. This is because the CCCTB is inherently a redistributive measure. It takes profits normally taxed in relatively enterprise-friendly jurisdictions such as Ireland (or Germany, for that matter) and reassigns it to jurisdictions where firms are not headquartered but where they operate, such as Italy or Spain. So, many ask, does anyone really expect Germany to ever agree to share its tax base with other countries? And if we take this argument to its logical endpoint, each Member State would progressively withdraw from the initiative until only the very unfriendly jurisdictions remained, if at all. And in that situation, what would be the point of a CCCTB?

So, the political dynamics of corporation tax policy in the EU seem to make the CCCTB unlikely. However, I’m not as sanguine as other observers. First, it wouldn’t be the first instance of economically and rule-of-law strong countries granting concessions to weaker Member States (see European structural funds, the Common Agricultural Policy, even the Eurozone crisis). Germany may now be more sceptical of EU risk-sharing than it was a couple of decades ago, but it might still see a point in centralising corporation tax policy, particularly if it is sold – as President Juncker and Commissioner Moscovici are selling it – as part of a wider Eurozone “deepening.”

Second, corporation tax systems in each individual Member State are so complex now – riddled with loopholes, tax breaks, surcharges, exemptions, incentives and all manner of other distortions – that it is hard to tell which countries are actually tax-friendly and which are not. Sure, France and Germany have high headline rates of corporation tax – but what is the effective rate for the average multinational? In the case of Germany, how relevant is national corporation tax policy when Länder enjoy substantial tax autonomy? The point is that, with such impenetrable tax codes and in the face of an added layer of complexity in the form of a CCCTB, it may be hard for the people making the decisions to tell whether the scheme would be good or bad for their countries. This in turn could lead to countries’ agreeing to take part in it, when they would have rejected it (as per above) had they been better-informed.

My conclusion is that implementation of the CCCTB is more unlikely than likely, but that it could still very well happen – particularly in the context of policy uncertainty regarding the scope and scale of Eurozone risk-sharing in the future, as well as intense popular and political pressure to extract more tax revenue from multinational enterprises – misguided as these sentiments may be. Furthermore, the Commission this time appears keener than before to see it through, and past experience tells us that it’s not a good idea to bet against the Commission in the long term. All in all, those of us who favour tax competition and free enterprise should be worried and alert to this very dangerous proposal.