Some companies in Europe are playing a game – one that runs counter to the principle of fair play. Let us call it ‘Tax me if you can’. The goal is simple: to avoid paying their fair share of tax.
Some companies are more adept at the game than others; some play it more ruthlessly than others. Today, we are acting to change the rules of the game, to ensure fair play and a level playing field for all companies in the interest of jobs, growth and investment.
Tax avoidance costs EU countries billions of euros of public money. It distracts them from growth-friendly tax policies, as they compete for corporate profits.
For those that do pay their share, the knock-on effects of corporate tax avoidance are dire.
Smaller and more local businesses pay a high price for the abusive tax practices of their larger competitors.
Businesses that don’t dodge their taxes are at a competitive disadvantage when compared to those that do.
In short, the system is too easy to bypass for those companies that want to avoid tax, and too burdensome for those that want to operate, invest and create jobs across the EU.
People understandably refuse to accept that some of the world’s most profitable companies pay little or no tax, while their own taxes have risen due to the crisis.
This lack of fairness in the tax system threatens the social contract between governments and citizens and undermines our European economic model.
The EU is working hard to boost jobs, growth and investment and corporate taxation should be contributing to these efforts. However, that is not always the case today.
Addressing these problems calls for a radical and holistic overhaul of our corporate tax framework. Our tax rulebook dates from the 1930s; it desperately needs to be modernised. Loopholes and legal bypasses must be closed.
Governments must recognise that isolated tax policies and unfettered tax competition do more damage than good.
If we want to clamp down on avoidance and create the right tax environment for growth and investment, Europe needs a new, united approach to corporate taxation: one which fits the modern economy; enables fair and effective taxation and supports all businesses in the Single Market.
Multinationals should pay no less and no more tax than domestic companies.
The European Commission’s action plan for EU corporate tax reform, presented today, rests on three fundamental principles, which must be the bedrock of all future tax policy.
First, companies that make profits in the EU must pay tax in the EU.
The practice of multinationals shifting profits around our single market and out to tax havens in order to escape paying taxation must end.
The system is too easy to bypass for those companies that want to avoid tax and too burdensome for those that want to operate, invest and create jobs across the EU
Second, the level of tax that companies pay in the EU must be fair and linked to where they actually do business. Corporations must not be able to exploit legal loopholes and preferential tax regimes to pay a negligible amount of tax on their entire EU income.
Third, corporate taxation must support, not hinder, Europe’s agenda for jobs and investment.
This means removing tax obstacles to a level playing field for all companies in the Single Market – big and small.
It also means broadening tax bases and creating the right incentives for real investment activity.
At the heart of the action plan is the revival of the Common Consolidated Corporate Tax Base (CCCTB) proposal, which the European Commission had first proposed in 2011.
The CCCTB provides companies with a single rulebook – rather than 28 – to calculate their taxable profits in the EU. It promises to be a boon for SMEs as well as multinationals.
Cross-border businesses could save €1 billion in compliance costs and countless hours of paperwork.
Furthermore, by combining all the profits made by a company in the countries where it does business, the CCCTB offers a chance to end the opportunities for corporate tax avoidance. Incentives for companies to shift profits between EU countries will disappear.
Negotiations between governments on this proposal have been stuck, largely due to its sheer scale.
So instead, the Commission is drawing up plans for a mandatory CCCTB that should allow step-by-step progress towards the same ultimate goal.
In the meantime, we must address the most urgent problems that exist in our corporate tax systems.
We want to revise corporate tax legislation, limit low/no tax schemes and reinforce our anti-abuse armoury.
We will also improve the transfer pricing rules in Europe and oversee new limits on tax breaks for intellectual property, which account for 70 per cent of profit shifting in the EU. This needs to end.
We also want to strengthen the single market for multinationals that do play by the rules: in those cases when such companies are still taxed twice by different member states, they need effective support to change this.
Finally, we continue to fly the flag for tax transparency, which is key for fairer and more open corporate taxation. In March, we proposed the automatic exchange of information between EU countries on their tax rulings.
We now want to push this transparency agenda a step further, extending it beyond the EU. In particular, we need a clearer and more unified EU approach to tax havens, to better address external threats to government revenues. So, today, the Commission is publishing a list of the Top 30 non-EU countries blacklisted by EU governments. This will be a potent deterrent for non-cooperative jurisdictions and will help forge the way for a more robust EU stance in tackling them. Collectively, these steps can improve dramatically the corporate tax environment in Europe, making it fairer for citizens and better for businesses.
But success depends on EU governments climbing on board to back these new initiatives.
We will put all our efforts into starting a new game based on fair and transparent rules and a level playing field in the interest of jobs, growth and investment across Europe.
If 2014 was the year of corporate tax controversy, 2015, must be the year that will signal that it is Game Over for corporate tax avoidance.
Valdis Dombrovskis is vice-president of the European Commission for the Euro and Social Dialogue. Pierre Moscovici is European Commissioner for Economic and Financial Affairs, Taxation and Customs.