Kovacs Defends Corporate Tax Base Harmonisation

by Ulrika Lomas, Tax-News.com, Brussels

06 March 2006

The European Union's Commissioner for Taxation, Laszlo Kovacs, has argued that it makes "no sense" for member states who support tax competition to simultaneously oppose harmonisation of the corporate tax base as companies have no effective yardstick with which to measure the broadness of the tax base.

In an interview with the Financial Times, published on Friday, Mr Kovacs repeated his strong support for new legislation that will harmonise the basis of corporate taxation, and he stated his aim to have proposals drafted by 2008 despite opposition from several member states, notably Ireland and the United Kingdom.

These member states fear that harmonisation will erode sovereignty over tax legislation and would be the first step towards a centrally-determined single European corporate tax rate by the back door.

On the other side of the argument stand France and Germany, which are seeking to limit tax competition - and a stream of companies switching investment to low-tax Eastern European member states - by imposing a minimum corporate tax rate.

However, Mr Kovacs told the FT that he was a passionate supporter of tax competition within the EU, and that harmonisation of the tax base would help strengthen tax competition by making national tax systems more comparable and transparent to businesses.

"With all my due respect to tax sovereignty, I believe that competitiveness is at least as important as tax sovereignty, if not more," he stated.

“The harmonisation of the tax base would not reduce competition. On the contrary, it would make competition more transparent," he added.

Mr Kovacs argued that there is "simply no sense" comparing, for example, Ireland's 12.5% corporate tax rate against Spain's 25% rate or Hungary's 16% rate if businesses have no idea how broad the corporate tax base is.

The tax commissioner told the paper that he would proceed with new legislation on an "enhanced cooperation" basis, which allows certain member states to form a core group in support of new proposals.

Nevertheless, the Commission itself also appears not to be singing from the same hymn sheet on the vexed question of tax harmonisation. Charlie McCreevy, Ireland's former finance minister and now the EC's Internal Market Commissioner, has also expressed fervent support for tax competition, but on the issue of tax sovereignty, seems to be standing on the other side of the fence from Mr Kovacs.

In a foreword to a new paper from the Centre for Policy Studies, Mr McCreevy argued that Europe can be "greater still" with tax competition and lower business rates, echoing a strongly-worded speech in Brussels last November when he remarked that “tax harmonisation is not on the agenda."

However, McCreevy also used that speech to state how he is "emphatically opposed to tax harmonisation - be it by the front door or the back".

“To establish a common tax base we will need first to get agreement on what constitutes taxable profits," McCreevy noted.

"Assuming we can agree on [this] during our lifetime, we will probably then have completed one third of the journey. The harder bit comes next," he suggested.

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