Ireland would lose substantial corporate tax receipts to big EU states under a formula being proposed for a common consolidated corporate tax base (CCCTB) in Europe, writes Jamie Smyth, European Correspondent.
Tax experts from all 27 EU states will gather in Brussels tomorrow to discuss the new formula, which includes a controversial element known as a "sales factor".
This would, for the first time, recognise the role played by consumers in creating demand for a product by incorporating it as an element within a harmonised EU corporate tax base. In other words, the "sales factor" would divert a portion of a company's corporate tax receipts to the EU state where the consumer buys the product, rather than the state where the firm is based.
Fianna Fáil MEP Eoin Ryan said yesterday that the latest proposal from the European Commission on a CCCTB was "ill-conceived" because it favoured big European states with a large number of consumers over smaller EU member states.
"This is a process of introducing tax harmonisation through the back door - and let no one think otherwise . . . It will suck the economic activity of Europe into the larger member states and weaken smaller member states," said Mr Ryan, who has been leading opposition to the CCCTB proposal from within the European Parliament.
Tax commissioner Laszlo Kovacs says his plan would simplify the corporate tax regime for multinational firms working across borders in Europe. However, states with low corporate tax rates such as Ireland and Slovakia fear it could erode tax competition and harmonise tax rates.
The core of Mr Kovacs's plan is that the profits of businesses operating in more than one EU state should be calculated according to a single EU-wide formula, rather than the 27 formulae currently used. Profits would then be reallocated to the countries in which the businesses are active, to be taxed at the tax rates of those countries.
He is also proposing consolidation, which means firms would be able to treat all their European businesses as one business for tax purposes.
The key to the CCCTB proposal is designing a new profit allocation formula that will enable member states to apportion the corporate taxes paid by multinationals. For example, profits may be allocated between countries using measures including size of payroll, value of asset base within a particular country, sales or other measures.
A working document prepared by the commission for tomorrow's meeting supports the prospect of introducing the "sales factor" into the formula.
It concludes that "many experts have expressed sympathy for the inclusion of a sales factor" because of the stability it is likely to introduce into the allocation mechanism. It says that if a "sales factor" is included, it should be based on "sales by destination", which would reflect the contribution of demand to the generation of income.
However, the paper notes that some experts are opposed to this method because the accepted function of corporate taxation until now has been to tax production rather than consumption. Consumption is already taxed in Europe through VAT, it says.
Department of Finance officials are expected to attend the meeting tomorrow and argue strongly against incorporating the "sales factor". But many tax experts expect Mr Kovacs to include it in the commission's final proposal on CCCTB next year.
