Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

An effective corporation-tax system for the EU

Paul Sweeney 4th November 2020

Tax wars have so far denied the EU the unanimity required to stop the race to the bottom on corporation tax.

corporation tax, tax competition
Paul Sweeney

The European social contract is broken. The largest companies are no longer contributing adequately to the provision of the public services and infrastructure they use. If the European project and single market are to survive and thrive, there has to be an effective EU taxation system. The small amounts paid in tax by some of the most profitable companies in the world are undermining citizens’ belief in government, in politicians and in Europe.

The good news is that politicians are aware of these facts and are doing their best to construct a working tax system. Their best is however not yet good enough. 

The European Union has made feasible tax-reform proposals and the Organisation for Economic Co-operation and Development has developed corporate-tax reforms for the world, through its ‘base-erosion and profit-shifting’ process. Both are making progress but this is far too slow in terms of agreement among states. Europe needs fair taxation of companies now, when revenue is so urgently needed.

Political agreement

Corporate-tax reform will not be easy, as several challenges can be identified. But only two relate to the design of reforms: defining the base on which to tax companies and dealing with profit-shifting by multinationals (MNCs), particularly on intangibles. The others come down to securing political agreement. 

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Taxation is a member-state competence and unanimity is currently required for EU action. Yet agreement is unlikely among all 27 member states because a few, such as Ireland, favour ‘tax competition’—in reality, tax wars—among democratic states to attract investment.

These tax wars have led to a fall in average nominal corporation-tax rates, from 35 per cent in 1995 to under 20 per cent today, and they are still falling. Even more importantly, effective tax rates are near zero for some top MNCs. 

Europe has a history of defending secrecy and ‘commercial confidentiality’ for companies, the rich, despots, criminals and money-launderers. The EU has also been the location for wars over other taxes—with states depressing income taxes, social charges and/or capital-gains taxes—which are not even being addressed, though all taxes are inter-related.

Iterative solution

The base on which corporation tax is calculated—what is taxed and what is deductible—would be contested in any state but especially in a union. The solution will be an iterative one after debate but certain issues need to be addressed. What is deemed tax-deductible was once quite simple but the tax wars by states, in competitive pursuit of foreign investment, have led to a great growth in tax breaks (on research, patents and so on) which has undermined the base. 

MNCs trade internally without market prices and can legitimately attribute prices. In a globalised economy this enables profit-shifting to low- or no-tax states, particularly for service and digital companies. It is difficult to police but co-operation among member states in the single market could contain it. 


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

It is not the rate of tax which is the issue but the actual tax paid. The EU should move from seeking ‘harmonised’ tax rates to co-ordinated rates within bands—say between 15 and 25 per cent. This would allow peripheral and poorer countries to set lower nominal rates if they wished. What is needed is to close gaps between nominal and effective rates and eliminate tax breaks.

A single market will not work effectively if one of 27 states can hold a veto on reform of the taxation of companies. The solution is some kind of majority or agreement by the outliers: Ireland, the Netherlands and Luxembourg.

The base, deductions, rates, intangibles and so on can be agreed by the experts, provided they are given permission to do so by political leaders in the member states. Progress on tax at the G20 in November should spur EU action.

Aggressive avoidance

Accounting is important in helping businesses to thrive. But by reducing tax revenue for vital public services, aggressive tax avoidance has turned ‘tax professionals’—among the highest-paid individuals in Europe, remunerated by the beneficiaries of low or no taxes—into value subtractors, taking from welfare rather than adding to it. 

Yet they determine the debate on taxation in many states, excessively influencing policy at many levels with their specialist knowledge, shrouding policy-makers with complexity. The Big Four accountancy and top legal firms also have their professional bodies and taxation institutes to influence opinion, not only via the media and universities but extending to top officials in governments’ finance departments.

The anti-tax lobby has however been too demanding, with corporate taxation reduced to almost zero. It has sparked a fierce reaction from the public which has changed the debate—finally inspiring action.

The EU is not moving quickly or effectively enough, though, in terms of openness and publication of country-by-country accounts. The black economy is almost 20 per cent of European gross domestic product.

Tax agency

Europe should establish a well-funded European tax agency, ‘Eurotax’, with wide powers of investigation into tax evasion and avoidance by wealthy individuals, companies and criminals. Eurotax would implement tax policy, including the co-ordination of tax assessments and collection. With a single market, the EU needs one tax body to oversee taxation in this globalised world. 

The agency would be staffed by experts seconded from each member state, to maximise expertise, co-ordination and co-operation. Eurotax could assist the tax authorities of deficient member states, showing them the latest methodologies in assessments and collection, ensuring no weak links within the union.

The EU must address the need for all 27 states to collaborate on all taxes over time to end tax wars. The process, difficult though it is, is mainly political and must be brought to a conclusion within two to three years.

This is part of a series on Corporate Taxation in a Globalised Era supported by the Hans Böckler Stiftung

inflation,recovery
Paul Sweeney

Paul Sweeney was chief economist with the Irish Congress of Trade Unions for a decade.

Home ・ Economy ・ An effective corporation-tax system for the EU

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube