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March 12, 2007
Kovács Optimistic on CCCTB Despite Opposition
by Chuck Gnaedinger and Lisa M. Nadal

Full Text Published by Tax Analysts®

Document originally published in Tax Notes International
on March 12, 2007.

EU Tax Commissioner László Kovács on March 5 expressed optimism that the common consolidated corporate tax base (CCCTB) could become reality despite the well publicized opposition of some EU member states.

Speaking in Washington at a conference cosponsored by Tax Analysts, the transatlantic Business Dialogue, and the Center for Strategic and International Studies, Kovács said that if one or more member states veto the CCCTB draft legislation to be released in 2008, the European Commission will seek adoption of the plan by the enhanced cooperation procedure.

Enhanced cooperation is a specialized approach for a subgroup of member states to adopt EU legislation if unanimity is unachievable. For enhanced cooperation to be available, three strict conditions would have to be satisfied. Kovács contends these conditions have already been met, meaning that opposition from the likes of Ireland and the United Kingdom would not derail the project.

The first condition, Kovács said, is that there must be no EU legislation currently in place. The CCCTB meets that condition. Second, at least one-third of EU member states would need to approve the legislation. Kovács claims that as many as two-thirds of member states would support the CCCTB. Third, participation in the scheme must be open to member states other than the ones that first approve the measure. That condition would also be met, Kovács said. "The door would be left open," he said.

Kovács spelled out an approximate time line for moving forward on CCCTB, which includes two years for internal discussion after the legislation is introduced, hopefully in early 2008. Therefore, the CCCTB could be a reality by as early as 2010.

Kovács offered an informal scorecard on EU member states' positions on the CCCTB, which sorts the countries into three distinct camps. He claims that 12 member states have expressed firm support for the CCCTB "and even urged us to go forward and to complete the process as quickly as possible," during round table discussions held during the Austrian EU presidency in 2006. The 12 member states include Germany, France, Italy, Spain, Austria, and Belgium.

Another eight member states occupy a second group that has "expressed cautious support" for the plan, which Kovács describes as an "openness" to examining a legislative proposal "without any prejudices."

The final group is comprised of the remaining seven member states, each of which has expressed concern or opposition to the CCCTB. Within this camp, only the United Kingdom and Ireland reject the plan outright, saying it would infringe on national sovereignty. Slovakia is included among the opponents because it fears the CCCTB could be narrower than the current tax base tied to the country's popular flat tax, Kovács said. A subset of opponents, mostly Baltic States, believes the CCCTB plan is a mechanism for harmonizing company rates.

 EU Commissioner for Taxation and Customs László Kovács gave the keynote address at the "Driving Transatlantic Competition" tax conference. (Photo by Chris Quay)"We do not want to harmonize tax rates," Kovács said. Tax rates "should be in the competency of the member states." He disagrees strongly with the U.K. and Irish position that the CCCTB plan would infringe on national sovereignty because, he said, member states could set any rates they choose.

Kovács said the need for a CCCTB arises because EU tax rules in many ways discourage businesses from undertaking cross-border investment and operations. Among the obstacles for the member states are:

    • twenty-seven different tax systems in 27 member states;
    • huge administrative burdens and compliance costs;
    • double taxation and treatment of cross-border losses; and
    • nontransparency.

Kovács labeled the CCCTB the Commission's "most ambitious and most comprehensive" tax proposal to date. He added that all member states are involved in preparatory work on the project, and emphasized that the Commission's work is transparent.

Savings Tax Directive

At both the tax conference and a press conference earlier in the day, Kovács discussed the status of the EU savings tax directive. He focused particular attention on the bilateral agreements with non-EU member states Switzerland, Liechtenstein, San Marino, Monaco, Andorra, and the U.K. and Dutch dependent territories. Those bilateral agreements allowed the savings tax directive to be implemented across the EU itself.

"The Commission recently got a mandate from the EU Council of Economic and Finance Ministers to launch exploratory talks with three major international financial centers outside Europe," Kovács said at the press conference, referring to possible participation in the directive by Singapore, Hong Kong, and Macau. He said the Commission has sent letters to Singapore and Macau about savings tax talks, without receiving an answer.

Kovács informally mentioned the savings tax directive to a Hong Kong official a year ago, and found "no reluctance but some openness as far as Hong Kong is concerned."

Kovács reflected on the EU experience with the directive, recalling that "right after we agreed with countries like Liechtenstein and Switzerland on the taxation of savings," some bank deposits were withdrawn to tax haven banks in the Far East. He implied that as many banking centers as possible should be included in U.S. and EU agreements to exchange information on the cross-border savings of individuals.

Kovács emphasized that the United States and the European Union should jointly demand good governance when pursuing economic cooperation with developing countries, such as participation in EU partnership and cooperation agreements. Good governance for the European Union's part means tax transparency, exchange of tax information, and fair tax competition, he said.

Kovács said that in relations with the rest of the world on trade and in the fight against terrorism, "bilateral and multilateral cooperation are more effective than unilateral action."

Low Rates, Broad Base

Preceding Kovács's keynote address, a panel of EU and U.S. government tax officials discussed recent trends in European tax reform including the steady decline in statutory corporate tax rates across the continent. Chris Bergin, president and publisher of Tax Analysts, pointed out the average corporate rate in the European Union decreased by almost 10 percentage points from 1996 to 2005 -- from 35 percent to 25.9 percent according to data provided by the European Commission. The trend continues as Germany is on the verge of radically reducing its corporate rate, and France may soon follow.

Tax Analysts' Chris Bergin, Michel Aujean and Robert Verrue of the European Commission, U.S. Treasury's Eric Solomon, and former U.S Treasury Assistant Secretary for Tax Policy Pamela Olson (from left) took part in a panel discussion. (Photo by Chris QuayMost of these rate reductions were accompanied by measures designed to broaden each country's tax bases, keeping to the conventional wisdom that low rates combined with a broad base translate to sound tax policy.

Meanwhile the U.S. corporate tax rate has stood still. Congress hasn't tinkered with the corporate rate since 1993, when it raised the top marginal rate to 35 percent. The obvious question is why so many EU governments have been able to succeed at lowering corporate rates while the United States has failed.

Michel Aujean, director of analyses and policy with the European Commission, suggested the decreasing rate phenomenon is compelled by Europe's unique circumstances. There is "more systematic rate competition" within the EU due to the number of small countries, said Aujean.

Aujean observed that the lower rates have not yet had a major effect on corporate tax receipts. He attributed that to a trio of "evolutionary" factors: base broadening, increased corporate profitability, and a distinct European preference for "incorporatization," that is, increased incorporation of business entities to avail themselves of low tax rates. By contrast, many U.S. firms actively try to avoid corporate legal status by taking advantage of partnerships or LLCs.

Aujean warned that the rate-cutting trend might not be sustainable in the long run and the EU could be approaching a stage that some would call "a race to the bottom."

Do the relatively high U.S. corporate rates place America at a competitive disadvantage? Not necessarily.

Aujean said the U.S. is not confronted with the same evolutionary process as the EU and has maintained its corporate rate structure without market forces leading to delocalization. "There is a large difference between what happened in the EU and the situation in the U.S.," concluded Aujean.

Eric Solomon, Treasury's assistant secretary for tax policy, said that while the U.S. has been able to maintain its high corporate tax rate because of a "buoyant economy," the U.S. tax system creates many distortions not reflected by a simple analysis of statutory tax rates.

He mentioned the debt-equity distinction as one problematic area. "A lot of time is spent trying to decide what is debt and equity," said Solomon, explaining that corporations generally prefer debt because of the available interest deduction. In this way the tax code functions as an inducement for U.S. corporations to be highly leveraged, "which can lead to financial difficulties in difficult times," said Solomon.

Solomon noted the isolated preferences built into the U.S. tax system such as the manufacturing deduction and the research credit. "We need to figure out whether it's possible to lower rates by eliminating preferences," said Solomon.

Pamela Olson, former assistant secretary for tax policy and currently a partner with Skadden Arps, offered an optimistic response when asked if the U.S. could follow the Europeans. Her quick answer was "yes, assuming they don't start raising their corporate rates."

Olson agreed with Solomon that the preferences built into the U.S. tax base had to be carefully examined. "There is much to be said for a broad base and lower rates, rather than the preferences that are difficult to administer and provide questionable value," she concluded.

CCCTB, Anyone?

The discussion soon turned to the ambitious CCCTB proposal and the many obstacles it faces in the years ahead. Robert Verrue, director general of the European Commission's Taxation and Customs Union Directorate, said the concept for the CCCTB grew from a reaction to complaints that the compliance costs for corporations operating in the EU were too high due to the fact that they have to cope with separate tax systems in each member state.

For a large multinational corporation, the compliance costs of operating in the EU may be a small percentage of total costs, but for small or medium-size enterprises (SMEs) the percentage of total costs is a serious problem, Verrue said. The compliance burden is especially troubling since SMEs traditionally account for a high percentage of economic growth and job creation in the EU.

Bergin asked Aujean and Verrue how the EU was going to get 27 member states to agree on the CCCTB proposal, given that unanimity is required for any new tax directives. Verrue said that so far, a strong majority of member states are in favor of the CCCTB. "Who's behind it will depend on the proposal itself and there are many issues on which the states will be divided," he added.

Asked whether the CCCTB could be a "Trojan horse" that inevitably leads to harmonized tax rates, Verrue suggested quite the opposite. The project may ultimately lead to lower marginal rates, he predicted, but the ultimate effect is unknown. A harmonized base makes precise tax costs to companies much more transparent, he added, drawing more attention to tax rates because it's what governments could still control.

Aujean agreed that a harmonized tax base could lead to more rate competition, but gauged that "the final effect is hard to predict, which is part of the reason some countries are being so cautious." There will be winners and losers, Aujean acknowledged. "We will have to convince the losers that there is something to win," he said.

Asked whether new international accounting standards could function as a corporate tax base, Aujean said that the Commission has concluded it cannot be done. Accounting income could be used as a "departure point" for the tax base, but there cannot be a direct link because some accounting concepts cannot be imported to tax base determination.

Moreover, he said it is important for the tax base to be politically independent of accounting decisions. Asked about apportionment of the common base, Aujean replied that the Commission is looking at methods other than formulary apportionment, such as allocation based on value added.

When asked about the timetable for the CCCTB, Verrue said the Commission is working to produce an initial proposition "as early as possible in 2008."

Robert Goulder, international editor-in-chief with Tax Analysts, asked the European officials how foreign-source income would be treated under the CCCTB. Aujean said the topic was one of the most difficult issues the project faced, and that a number of member states have expressed a preference for a territorial system that exempts foreign profits.

At the same time, the Commission is concerned with protecting the European tax base from abusive tax schemes. In sum, "we have not come up with a solution," Aujean said.

Chuck Gnaedinger and Lisa M. Nadal are with Tax Analysts. E-mail: and

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