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May 14, 2007
Approaching an EU Common Consolidated Tax Base
by Joann M. Weiner

Full Text Published by Tax Analysts®

Document originally published in Tax Notes International
on May 14, 2007.

Since presenting its company tax strategy in 2001, the European Commission has exerted an unprecedented effort to reach its goal of creating an internal market without tax obstacles in the European Union. It hosted high-level conferences in Brussels in 2002 and in Rome in 2003, created the Common Consolidated Corporate Tax Base Working Group in 2004, invited business groups to participate in the Working Group in 2005, and in 2006 called for greater coordination among member state tax systems to achieve the lofty growth and employment goals set forth in the Lisbon Agenda. The latest efforts take place in Berlin on May 15-16, 2007, where the commission, in tandem with the German presidency, will discuss with project "stakeholders" details involved in introducing a common consolidated corporate tax base in the EU.

The commission is in a good position to move the direct tax agenda forward under the German presidency. Germany specifically noted in its work program that the commission's project for introducing a single tax base for company taxation "is to gain further ground . . . so that the Commission can submit its legislative proposal in 2008, as envisaged." These events have one common purpose: To lay the groundwork for proposing a common consolidated corporate tax base (CCCTB) in the EU in 2008 with eventual implementation by 2011.

The commission could not have made this much progress without support from a large majority of EU member states. Twenty economics and finance ministers approved the project at their September 2004 meeting. More recently, at an informal "tour de table" during an ECOFIN meeting last spring, 10 finance ministers confirmed explicit support for the CCCTB, 8 reported being open and expressed readiness to examine a legislative proposal, while just 7 ministers raised doubts or were opposed to the idea of the CCCTB.

However, a majority is not unanimity, as some members make loud and clear. On May 2, the very day that the commission released a communication touting the importance of the CCCTB, the Irish Department of Finance issued a press release stating its continued opposition to the commission's efforts. On a regular basis, the Irish EU Internal Market Commissioner Charlie McCreevy speaks out against the commission's plans, most recently before the Irish Tax Institute in February. At various times, Cyprus, Estonia, Lithuania, Latvia, Malta, Slovakia, and the U.K. have been mentioned as not supporting the commission's plans.

On the business side, many EU multinationals support the commission's efforts to create an optional EU consolidated corporate tax base. UNICE, the "Voice of Business in Europe," informed the EU commissioner for taxation a few years ago that introducing a CCCTB was the only way in the long run to eliminate the tax obstacles to cross-border business integration within the European Union. Krister Anderson, chair of the of UNICE task force on CCCTB, regularly sends technical comments to the Working Group. The American Chamber of Commerce to the European Union also comments.

                Table 1. Selected ECJ Direct Tax Cases

 Year     Case        Name                             Issue

 2000    C-35/98   Verkooijen           Dividend exemption

 2000    C-141/99  AMID                 Cross-border losses

 2001    C-294/99  Athinaiki            Tax on distribution deemed a
                                        withholding tax

 2001    C-397/98  Metallgesellschaft   Taxation of group income; advance
                                        corporation tax
         C-410/98  Hoechst

 2002    C-324/00  Lankhorst-Hohorst    Thin capitalization

 2003    C-168/01  Bosal Holding BV     Participation exemption;
                                        parent-subsidiary directive

 2004    C-315-02  Lenz                 Foreign dividends

 2004    C-319/02  Manninen             Cross-border dividend imputation

 2005    C-446/03  Marks & Spencer      Group relief; cross-border loss

 2006    C-196/04  Cadbury Schweppes    Antideferral and controlled foreign
                                        corporation regimes

 2006    C-170/05  Denkavit             Withholding tax on outbound dividends

 2007    C-292/04  Meilicke             Tax credit for foreign dividends

 Pending C-492/04  Lasertec             Thin capitalization and non-EU

As with the member states, the business community is not unanimous. Among others, the Irish Business and Employers Confederation, the Irish Bankers' Federation, and the Confederation of Business Industry have all expressed opposition in one form or another. Moreover, the EU business community has not demonstrated strong public leadership in moving the commission's project forward.

EU Company Tax Reform: Two Views

Despite these unprecedented efforts, it may appear that the commission is destined to end up back at the drawing board. Many argue that EU member states will never be able to agree on the relatively easy aspects of the project, such as various deductions and investment allowances, much less agree on the more difficult aspects of the project, such as how to define the corporate group and to divide the common consolidated tax base among the member states.

Furthermore, even if the Working Group were able to reach agreement on the technical details, many member states would still oppose the project for political reasons. The opposition derives largely from three sources:

  • a concern that adopting a common EU tax base is the first step to a common minimum EU corporate income tax rate;
  • a reluctance to take a first step that may lead to replacing individual member state company tax systems with an EU-level company tax; and
  • a view that the European Commission should not set company tax policy for the member states.

Overcoming these political obstacles may prove significantly more difficult than overcoming the tax obstacles to cross-border investment in the European Union.

Despite rather strong opposition from some areas, the commission views the outlook for comprehensive EU company tax reform as considerably brighter than ever before.

Why has the outlook changed?

As with opposition to EU company tax reform, support for reform has many sources. In particular, the commission has involved EU business groups from the beginning of the project and invited them to participate in "extended" sessions with the Working Group, thus ensuring that business has a voice in the process of shaping any future EU company tax system.

Specific factors that EU business cites in support of EU company tax reform include:

  • growth in cross-border trade and investment that exacerbates the difficulties in applying the transfer pricing rules to cross-border transactions in the EU;
  • failure of the separate accounting with an arm's-length pricing system to reflect EU business structures; and
  • desire to avoid the large compliance costs that arise when complying with up to 27 different ways to calculate profits in the European Union.

The European Court of Justice is also aiding the commission's cause. Speaking at the CFE Conference in Brussels in April, Michel Aujean, director of the European Commission's taxation and customs union directorate, referred to the ECJ as a "major ally" of the commission. (For prior coverage, see Tax Notes Int'l, Apr. 30, 2007, p. 426.)

   Table 2. Activities of the European Commission Working Groups on
                          Company Tax Reform

 Working Group and Subgroups                Key documents

 Common Consolidated Corporate  Progress to date and future plans for the
 Tax Base Working Group         Common Consolidated Tax Base
                                Tax treatment of financial institutions
                                Administrative and legal framework
                                Issues related to business reorganizations
                                Personal scope of the CCCTB
                                Related parties in the CCCTB
                                Summary record of the meeting of the CCCTB on
                                December 13, 2006


 1. Assets and depreciation    Overview of issues

 2. Provisions and reserves    Overview of issues

 3. Taxable income             Taxable income

 4. International aspects      International aspects in the CCCTB
                               Overview of issues
                               The territorial scope of the CCCTB
                               Overview of issues

 5. Group taxation             Issues related to group taxation
                               Overview of issues
                               WP\048 and WP\053

 6. Sharing mechanism          The mechanism for sharing the CCCTB
                               Overview of issues

 Note: All documents are available on the Taxation and Customs
 Union Web site at:

Recent rulings in Marks & Spencer, Denkavit, and Cadbury Schweppes, among others, are forcing member states to make their tax systems compatible with the EC Treaty. (See Table 1.) These decisions help eliminate the tax barriers that prevent companies from operating in the most efficient location. As does the ECJ, the commission finds that tax provisions that favor domestic investment over foreign investment or operations are particularly offensive.

Moreover, while opposition by some member states may hinder moves toward company tax reform in the European Union, unanimity is no longer required for a group of member states to take a policy forward. Under the provisions on enhanced cooperation (Articles 43-45 of Title VII of the Treaty on European Union), as few as eight member states may work together to adopt a common policy, as long as those efforts, among others, do not discriminate against nonparticipating member states, and as long as the policy is used as a last resort.

Perhaps feeling that with his term expiring in 2009 he has arrived at the last resort, EU Tax Commissioner László Kovács has recently indicated that the commission may be ready to move ahead under enhanced (reinforced) cooperation. The EC Treaty requires that the commission propose legislation designed for all the member states, but if the council feels that it cannot reach unanimity on the proposal, then it may ask the commission to consider a proposal for enhanced cooperation. Kovács firmly believes that a few member states should not hold the other member states hostage.

Context for Company Tax Reform

Tax officials at the commission may believe that more than five years after releasing its report, it is time to take action. Since its first meeting in November 2004, the CCCTB Working Group has met 10 times and prepared more than 50 working papers that address basic tax principles and fundamental structural elements concerning the tax base. All member states participate in the Working Group, while a subset participates in the six different subgroups. The commission provides a summary record and posts the papers discussed at each meeting on the TAXUD Web site.

Table 2 identifies the main documents relating to the Working Group and the subgroups.

The commission's goal is to create a consolidated common tax base that is uniform, simple, and broad. The rules for calculating the CCCTB should be self-standing and not formally linked to international financial reporting standards. To maintain business support, the commission requires that the tax base be optional for companies. The commission emphasizes that it will neither harmonize tax rates nor propose a minimum corporate tax rate.

Step 1 -- Creating a CCCTB

From the start, the commission has emphasized the importance of creating a common consolidated tax base. The commission has the support of the European Parliament and the European Economic and Social Committee in introducing a common consolidated tax base from the beginning rather than starting with a common tax base and then eventually moving to a common consolidated tax base. Without consolidation, the commission's reforms will only go part way, as most multinational enterprises operate in corporate form. Failure to consolidate would leave the majority of transfer pricing and cross-border loss offset issues in place.

To cover as many entities as possible, the Working Group seems to favor consolidation of all majority-owned subsidiaries. This conclusion draws, in part, on data from 238,000 groups in the Amadeus database showing that the vast majority of groups are at least 90 percent owned while only 6 percent are not at least 50 percent owned.1

Following the Italian approach for worldwide consolidation, consolidation would be mandatory and would be based on the principle of "all in/all out" so that all subsidiaries would either be included or they would be excluded. The election would be binding for five years, and only a proportionate share of the foreign affiliates' profits and losses would be combined in the consolidated tax base. (Note that for domestic consolidation, the taxpayer can decide which affiliates to include in the consolidated group and all profits and losses are included, regardless of the share of control of the parent.) (For additional details on the Italian consolidation system, see Marco Q. Rossi, "Using Dual-Resident Companies Under Italy's Tax Consolidation Rules," Tax Notes Int'l, Oct. 16, 2006, p. 205.)

The commission has indicated that the territorial scope of the CCCTB will be limited to the EU water's edge (EUWE). However, the commission has neither established what income will be considered to be earned within the EUWE nor which companies or permanent establishments will be covered by the CCCTB.

In terms of the scope of the CCCTB rules, the commission has raised the issue of whether the CCCTB rules should apply to all tax residents including their activities outside the EUWE and any activity of tax nonresidents regardless of the territory. This approach, however, may lead to cases where the CCCTB applies to activities of companies that are almost entirely outside of the European Union.2

A Few Words About Consolidation

At this point, it is worth mentioning that the idea under consideration in the EU -- consolidation -- is not the same idea that was so controversial in the 1980s -- worldwide unitary combination. Under worldwide unitary combination, a group of related entities combines the income and operations of its businesses that are involved in an integrated, or single unitary, business into a single group for tax purposes. Whereas a company is included in a consolidated group if it meets an ownership threshold, to be included in a unitary group, the business must meet an ownership threshold and have an integrated economic relationship with the parent company. Consolidation applies a simple ownership test, while unitary combination applies a complex ownership and economic relationship test. Determining whether a business operation is unitary with another is a fact-intensive process and one that has led to considerable litigation in the United States without being satisfactorily resolved.

Despite the difficulty in defining a unitary business, some states have turned to the method to counter abusive corporate tax planning. Table 3 lists these states.

In 2004 Vermont became the first state in more than two decades to adopt combined reporting. Since then, another three states -- New York, Texas, and West Virginia -- have adopted combined reporting. The governors in another five states -- North Carolina, Iowa, Michigan, Massachusetts, and Pennsylvania -- have recommended that their states adopt combined reporting. Florida, Ohio, Maryland, and New Mexico have also discussed combined reporting in recent years.

                 Table 3. Selected State Tax Policies

       Policy                        State

 Mandatory           Alaska, Arizona, California, Colorado,
 combined            Hawaii, Idaho, Illinois, Kansas, Maine,
 reporting           Minnesota, Montana, Nebraska, New
                     Hampshire, North Dakota, Oregon,
                     Utah, Vermont (effective 2006), Texas
                     (eff. 2008), West Virginia (eff. 2009)

 Optional combined   North Carolina, New York (eff. 2007)

 Mandated            Delaware, Maryland, Pennsylvania,
 separate entity     Wisconsin

 Notes: Texas adopted a new general business tax as a
 substitute for its corporate income tax in 2006. The Texas tax
 differs significantly from a traditional income tax. Michigan does
 not presently have a corporate income tax.

 Source: Michael Mazerov, "Growing Number of States Consider
 Combined Reporting," State Tax Notes, April 30, 2007, p. 335; and
 William F. Fox, LeAnn Luna, and Matthew Murphy, "Emerging State
 Business Tax Policy: More of the Same, or Fundamental Change?" State
 Tax Notes, May 7, 2007, p. 393.

Step 2 -- Common Apportionment Formula

Suppose EU economics and finance ministers manage to reach agreement on the definition of the common tax base and the rules for consolidation across the European Union. In this case, EU multinational enterprises would have the choice of either computing their EU profits under one set of tax rules or continuing to use the current tax rules in each of the member states where they do business.

Before implementing the common EU tax base, however, EU tax authorities must take a second step. The commission must propose a means to distribute the EU tax base to the member states for taxation at local rates. Absent a sharing mechanism, it would not be possible to allow tax rates to vary across the member states. Thus, after preparing two taxation papers on how to share the tax base, the commission finally opened discussions on how to share the tax base in December 2006.3

The Working Group is examining three ways to share the tax base among member states:

  • apportionment based on macroeconomic variables,
  • apportionment based on value added, and
  • apportionment based on traditional formulary apportionment.

The macroeconomic method would distribute the EU tax base according to national variables, such as gross domestic product. This method would separate the tax liability from the specific company and thus make the tax base less vulnerable to profit shifting. However, it also would make the company's tax bill in a certain country unrelated to the value it created in that country.

The value added method would be a familiar concept to companies and would attribute profits to locations where the group earned its profits. However, it would require that companies monitor internal transactions and thus require that they continue to apply the current arm's-length pricing rules.

The traditional formulary apportionment method would distribute group profits according to the location of the group's business activity as measured by factors such as property, payroll, and sales. The company's tax liability would be based on where it earned its profits.

The traditional method would largely follow the method used in the U.S. states and Canadian provinces.4 Many important differences between the European Union and the United States and Canada, however, limit the direct application of their experience to the EU member states. In particular, state and provincial corporate income tax rates are generally closer to 10 percent than to the 20 to 30 percent rates in the EU. The states and provinces also operate with a federal tax system and can rely on the federal government for important administrative aspects of applying a single tax base within the country.

An Example of Traditional Formulary Apportionment

How might formulary apportionment work in the EU? Consider the German company Merck Group, which has 171 companies in 52 countries and 61 production sites in 28 countries. The financial accounts provide a rough idea of the geographic distribution of the company's group activity, as shown in Table 4.

       Table 4. Shares of Merck Operations in Germany and France

                                 2004      2003      2002      2001

 Shares of Europe (%)

     External sales              20.9%     23.1%     22.9%     26.5%

     Operating assets            64.2      54.1      52.1      52.9

     Number of Employees         56.4      51.1      44.0      51.3

 Average                         47.2      42.8      39.7      43.6

 EBIT in Germany (€ million)

     By financial statements     €317      €(38)     €(41)      €67

     By apportionment             237        97       108       293

 Shares of Europe (%)

     External sales              29.9%     27.1%     26.6%     27.1%

     Operating assets            18.9      18.7      20.0      19.1

     Number of employees         18.0      19.9      17.4      20.8

 Average                         22.3      21.9      21.4      22.3

 EBIT in France (€ million)

     By financial statements     €152      €101      €151      €490

     By apportionment             112        50        58       150

 Note: The figures are proxies for the property, payroll, and
 sales factors used in the traditional apportionment formula. Actual
 apportionment factors used will differ from the factors obtained from
 the financial reports. Earnings before interest and taxes also do not
 necessarily equal taxable income.

 Source: Merck annual reports, 2002 and 2004.

If European income were distributed to Germany according to the average of its business activity as measured by external sales, operating assets, and number of employees in Germany, it would receive around 40 percent of the company's European income. Because the company is headquartered in Germany, it has a relatively large share of its assets located there. Thus, if the formula does not include sales, the share of income distributed in Germany rises dramatically. By contrast, Table 4 also shows that operations are distributed relatively more equally in France than in Germany. France would receive about 20 percent of European income, regardless of which factors are used to apportion income.

The table also shows that as long as the company is profitable overall, the formula will apportion each country some of the overall tax base. For example, Merck reported a loss in its German operations for 2003 and 2002, although the company reported positive profits throughout Europe during those years. Chart 1 shows that under apportionment, Germany would receive a positive share of those European profits each year.

This feature of apportionment leads countries to compete for the tax base and preserves tax competition. It also provides a greater stability to tax revenues than might be the case under separate accounting. The share of activity can never be negative

Chart 1. Merck Financial and Apportioned Income
in Germany and France, 2001-2004

Effect on Individual EU Member States

How might a country with an industrial base like Ireland's fare under EU formulary apportionment? Absent any tax data and a concrete proposal, it is impossible to make an accurate prediction. However, it is possible to construct some potential outcomes.

To do this analysis, consider the distribution of the operations of U.S. multinationals in Europe.5 For illustrative purposes, Table 5 reports data for the majority-owned foreign affiliates of U.S. multinational companies in the EU and in selected EU countries. While these data may not be representative of investment from EU companies into Ireland, they provide a picture of the distribution of multinational operations across Europe.

     Table 5. U.S. MNC Majority-Owned Foreign Affiliate Factor and
      Net Income Distribution in Selected EU Member States, 2003

                           Total      Employee     Sales   Average    Net
                           Assets   Compensation                     Income

 EU share of world total    58.0%       56.6%      46.2%    48.1%     51.7%

 Shares of EU total

     Ireland                 7.7         2.2        8.4      6.2      18.3

     France                  4.8        15.3       11.2     10.9       3.5

     Germany                 8.5        20.7       16.5     14.1       8.6

     Luxembourg             10.0         0.3        0.6      3.6      13.0

     Netherlands            13.9         5.4        9.4      9.5      26.7

     Spain                   2.5         4.4        4.6      4.3       3.1

     United Kingdom         40.8        34.6       31.3     35.7      14.6

 Notes: A majority-owned foreign affiliate is one for which the
 combined ownership of all U.S. parents exceeds 50 percent. In 2003,
 these affiliates accounted for 85 percent of the employment of all
 foreign affiliates of U.S. multinational companies.

 Source: Bureau of Economic Analysis, Direct Investment Data,
 Selected Data for Majority-Owned Nonbank Foreign Affiliates, 2003.
 See also Survey of Current Business, July 2005.

The data in Table 5 also allow comparisons of the business activity in each country with the amount of net income reported in each country. In the EU-15, the two figures are relatively close -- U.S. multinationals earn 51.7 percent of net income in the EU, which is just above their share of business activity in the EU. By contrast, the figures are widely different for some countries. For example, U.S. multinationals report 18 percent of net income in Ireland but locate just over 6 percent of their business activity in Ireland. A similar story holds for Luxembourg and the Netherlands. Other countries, such as the U.K., show the opposite case. The share of physical activity in the U.K. is 35 percent, which is much greater than the 15 percent share of net income. In value terms, the operations in Ireland created $31 billion in net income compared with $25 billion in the U.K. Chart 2 shows data for selected EU member states.

Chart 2. U.S. MNC Majority-Owned Foreign Affiliates
Operations in Selected EU Member States, 2003

These data should not be taken too literally. The actual apportionment factors are likely to differ significantly from the amounts represented above. Furthermore, not only will multinationals use a formula to distribute their income, but also they will consolidate their tax base at the EU level. With these two changes happening simultaneously and without specific tax data, it is impossible to determine in advance how any country may fare under apportionment. Studies that purport to show the revenue consequences of moving to formulary apportionment in the EU are likely to be misleading since the tax data on which apportionment will be based are not available.

Should Ireland Be Worried?

Maybe Ireland is right to be worried about the commission's plans.

As part of their evaluation of Ireland's economic performance, Honohan and Walsh (2002) show that a few enterprises that employ a small fraction of the labor force account for a disproportionately large share of output and profits.6 For example, in 1999 the "other organic basic chemicals" sector, which produces various pharmaceutical-related chemicals, employed about 0.3 percent of Irish employment, but the value added by this subsector made up 8.5 percent of domestic Irish income.

Moreover, employees in this sector are extremely productive. In 1998, each employee in this sector produced net output worth $2.5 million.

The authors attempt to explain this extraordinarily high level of productivity by noting that the sector is characterized by highly valuable patented products with most of the research and development occurring in other countries, especially the United States. However, the authors speculate that many of the profits are located in Ireland as "a natural consequence of the low corporate profits tax" in Ireland. The firms in these sectors are "well placed to take advantage of legitimate tax management within the standard transfer pricing rules."

As the authors explain, since Ireland has one of the lowest rates of corporate income tax in the industrialized economies, transactions with this sector are "often booked at transfer prices that have the effect of locating a very high fraction of the enterprise's global profits in Ireland . . . in many cases, the huge profits recorded by the Irish affiliates have very little to do with the manufacturing activities being conducted in Ireland. The low labor shares in value added should not be interpreted as implying high economic productivity of the labor and physical capital employed by the enterprises in Ireland."7

Tax Planning Under Formulary Apportionment

But maybe Ireland does not need to be too worried.

      Table 6. Corporate Income Tax Rates in the European Union,
                            Selected Years

 EU-15 Member State       1995     2000     2004     2005     2006     2007

 Austria                  34%      34%      34%      25%      25%      25%
 Belgium                  40.2     40.2     34       34       34       34
 Denmark                  34       32       30       30       28       28
 Finland                  25       29       29       26       26       26
 France                   36.7     36.7     35.4     35.4     34.4     33.3
 Germany                  56.8     51.6     38.3     38.6     38.6     38.6
 Greece                   40       40       35       35       29       25
 Ireland                  40       24       12.5     12.5     12.5     12.5
 Italy                    52.2     41.3     37.3     37.3     37.3     37.3
 Luxembourg               35       35       30.4     30.4     30.4     29.6
 Netherlands              35       35       34.5     34.5     31.5     25.5
 Portugal                 39.6     35.2     27.5     27.5     27.5     27.5
 Spain                    35       35       35       35       35       32.5
 Sweden                   28       28       28       28       28       28
 United Kingdom           33       30       30       30       30       30

 EU-10 New Member State   1995     2000     2004     2005     2006     2007

 Czech Republic           41%      31%      28%      26%      24%      24%
 Cyprus                   25       29       15       10       10       10
 Estonia                  26       26       26       24       22       22
 Hungary                  19.6     19.6     17.7     17.5     17.5     16
 Latvia                   25       25       15       15       15       15
 Lithuania                25       25       15       15       15       15
 Malta                    35       35       35       35       35       35
 Poland                   40       30       19       19       19       15
 Slovakia                 40       29       19       19       19       19
 Slovenia                 25       25       25       25       25       25
 Bulgaria                                            15       15       10
 Romania                                    25       16       16       16

 Average EU-15            38.0%    35.3%    31.4%    30.1%    29.8%     28.7%

 Average new EU-10        30.6     27.4     21.5     20.6     20.2      19.6

 Average EU-25            35.0     32.1     27.4     26.2     25.8      25.2

 Note: As of 2000 and until the end of 2008, Estonia exempts
 retained earnings from tax.

 Source: Table II-5.1 in "Structures of the Taxation Systems in
 the European Union," Eurostat (2006).

While formulary apportionment curtails the traditional forms of tax planning, the system provides its own particular forms of tax planning. To the extent that the EU tax base is consolidated, intercompany transactions are eliminated and companies cannot shift the location of profits by altering internal transfer prices. However, under apportionment, companies can shift profits to low-tax areas by locating their business activity in these areas. This shift can occur through relocation of the factors included in the apportionment formula or through a merger or acquisition of a company in a low-tax area. In both cases, the company can assign a greater share of its income to a low-tax area by increasing the share of the apportionment factor in that area. Likewise, a profitable company in a high-tax area can acquire an unprofitable company in another location and reduce its total tax base.

Taxpayers may shift income in other ways, such as by routing income through holding companies or by altering the composition of the corporate group. Some U.S. states, for example, provide favorable treatment of passive income, which encourages companies to establish holding companies in these states where their receipts of passive income will be favorably taxed. These subsidiaries are generally located in a tax-favored area, such as Delaware, and pay little or no tax on the income from their intangible property.

Taxpayers may also shift income by strategically including or excluding an operation from the corporate group. Depending on the threshold used for including a related entity in a group, a taxpayer may reduce its percentage ownership below the threshold to take the entity out of the taxable group, or it may increase its ownership share to bring an entity into the taxable group.

Tax Rate Competition in the EU

Despite fears of upward tax harmonization, the EU member states are cutting their corporate tax rates. The average rate in the EU-15 is now more than 10 percentage points lower than it was a decade ago, and this downward pressure on tax rates has become even stronger with enlargement in 2004 and 2007. The old 15 member states are likely to enact further tax rate cuts as they face competition from the new EU-12, whose statutory tax rates have averaged 8-10 points lower than in the EU-15 over the past decade.

Table 6 shows corporate tax rates for selected years since 1995 in the EU-15 and in the new EU-10 member states plus Bulgaria and Romania, who joined in 2007.


As the commission heads into the final stretch, it appears well positioned to garner enough support to prepare a legislative measure introducing Common Consolidated Base Taxation into the European Union. Although the Working Group must still resolve many technical details concerning the exact definition of that common consolidated tax base, if the commission is able to maintain the support of more than eight member states, it just may decide to pursue company tax reform the easy way, via enhanced cooperation. At that point, if the economic benefits the commission claims that a CCCTB will bring about actually materialize, then the other member states may find that they, too, may benefit from greater cooperation.

Joann M. Weiner is a contributing editor to Tax Notes International.


1 See the summary record of the December 2006 Working Group meeting. Amadeus is a database covering 9 million European companies prepared by Bureau van Dijk Electronic Publishing.

2 The commission distinguishes between tax residents and tax nonresidents. A tax resident is a company in the EU (or a CCCTB jurisdiction) that earns income outside the territory. A tax nonresident is a company from outside the EU or the CCCTB jurisdiction earning income in the EU or the CCCTB jurisdiction. These non-EU member states are referred to as "third countries."

3 See Joann M. Weiner (2005), "Formulary Apportionment and Group Taxation in the European Union: Insights from the United States and Canada," Taxation Paper No. 8, DG Taxation and Customs Union, European Commission; and Ana Agúndez-Garcia (2006), "The Delineation and Apportionment of an EU Consolidated Tax Base for Multijurisdictional Corporate Income Taxation: A Review of Issues and Options," Taxation Paper No. 9, DG Taxation and Customs Union. Both papers are available at

4 For a detailed analysis of this approach in a European context, see Joann Martens-Weiner, Company Tax Reform in the European Union. Guidance From the United States and Canada on Implementing Formulary Apportionment in the EU, New York: Springer Science + Business Media, 2006.

5 The United States provides the most comprehensive data on multinational activity and, therefore, these data are often used when examining the distribution of multinational activity in the EU. The commission has requested EU businesses to provide detailed data for purposes of making these estimates.

6 See Patrick Honohan and Brendan Walsh (2002), "Catching up with the leaders: The Irish Hare," Brookings Papers on Economic Activity, 2002:1, pp. 1-77. The authors refer to these industries as the entrepôt economy.

7 The authors estimate that if these sectors used prices equivalent to the average prices used in comparable sectors in the EU, Irish GDP would be more than 15 percent lower.


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