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Analysis/Comment Last Updated: Feb 22, 2012 - 7:15 AM

Germany and France push ahead of EU with tax harmonisation
By Richard Asquith, head of tax, TMF Group
Feb 22, 2012 - 7:04 AM

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Mario Draghi, president of the European Central Bank, Michael Noonan Irish finance minister and Wolfgang Schäuble, German finance minister, Brussels, Nov 29, 2011.

On Tuesday, Germany and France announced new plans to bring together their business tax regimes as they progress their plans for full fiscal union.  The aim will be to align their tax systems, starting in 2013.

The proposals also support the recent Euro Plus Pact, which sets out the rules for future economic and fiscal co-ordination between the EU members, excluding the UK, Sweden, Czech Republic and Hungary which did not join the new treaty.  One early potential change will be France cutting its main corporate tax rate. 

The tax reforms accelerate France and Germany ahead of similar proposals from the European Commission, which has struggled to gain consensus across all 27 EU member states. This was held up at the end of last year by Bulgaria, Ireland, Malta, the Netherlands, Poland, Romania, Sweden and the UK, which all see tax harmonisation as a way to force them to raise their own low tax rates.

The plans will also hit the Big-4 accountancy and tax law firms which provide large amounts of tax advice for companies doing business under the different regimes.  These proposals will eliminate much of the requirement for these services, including the highly lucrative advice around transfer pricing, which covers the taxes on cross border trade.

European Commission Plans Blocked

The European Commission proposed a single tax base in March 2011. This included an obligation for all 27 EU member states to adopt the same tax base and calculation methodologies.  Known as the Common Consolidated Corporate Tax Base (‘CCCTB’), it would enable EU and non-EU companies to present their financial results across the region to a single, nominated tax authority, and have one tax calculation prepared under a common set of rules.

The computed tax would then be distributed under a complex apportionment methodology - - including location of assets, employees and where the revenues were generated - - amongst the countries where the company trades.  This would help simplify the whole taxation compliance regime for Europe, saving multinationals billions by rationalising their large tax departments and outside tax advisors.

However, several countries voted against the proposals in October 2011.  Whilst not enough to block the progress of the measures, it served to slow down progress.

Germany and France head towards bi-lateral fiscal union

Following this, President Sarkozy and Chancellor Merkel called for a “true economic government”.  They set up a joint committee to create a “common corporation tax by 2013”.  Tuesday’s announcement at ECOFIN, the committee of European finance ministers, is a confirmation by François Baroin and Wolfgang Schäuble, the finance ministers of France and Germany respectively, of the plans to commence the merger in 2013.

Key measures from the joint German and French ‘Green Book’ include:

  • Group taxation
  • Corporate income tax rates
  • Rollover and offsetting of losses
  • Write offs for depreciation and amortization
  • Tax on dividends
  • Taxation on partnerships

The biggest change so far announced will be a potential reduction in the French corporate income tax rate, which is 6% higher than the corresponding German rate.

The new proposals will be of particular disappointment to Ireland, which has fought hard to defend its prized ultra-low business tax rate of 12.5% whilst still requiring last year’s €85bn banking crisis bailout from other member states.  Many countries, such as Germany and France, which made large contributions to the  Irish bailout, were accused of trying to use the CCCTB to eliminate low-tax competition in the EU.

Richard Asquith, head of tax, TMF Group concluded:“The reluctance of many low-tax countries to back a unified tax system for Europe has been enough to push Germany and France into moving ahead alone.  Whilst the UK was always going to be the usual vociferous opponent, this will set up a potentially dangerous fission between Ireland and the core EU countries.  With the ongoing risks around Ireland’s debt position within the current Euro crisis, this will build the pressure. ”

TMF Group is a multinational business services firm.

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