Sustainability-oriented EU Taxes as Genuine Own Resource to Finance the EU Budget: The case of a CCCTB
Nerudová, D., Soliová, V., Dobranschi, M.
One of the most serious criticism of the status quo with respect to the EU budget represents the lack of the link between the EU policy and the system of own resources. Non-existence of the link between reaching smart, sustainable and inclusive growth and EU budget is resulting into the existence of sustainability gaps in the European Union. The research revealed that the introduction of CCCTB could be an important contribution to close existing sustainability gaps. To research a CCCTB revenue potential, the model based on surcharge system was designed. The system expects replacement of VAT-base own resource (resp. GNI-based own resource) by the transfer of a part of the corporate tax revenues from CCCTB raised on national level to the EU budget. The results of the research show that CCCTB-based own resource would be able to replace VAT-based own resource fully, with the only exemption, which is Cyprus. However, CCCTB-based own resource cannot be considered as sufficient resource to fully replace GNI-base own resource. Therefore we recommend to consider CCCTB only in connection with the replacement of VAT-based own resource.
After the long history of unsuccessful harmonization efforts in the area of corporate taxation, the European Commission introduced in 2001 four possible harmonization models of corporate taxation. One of them represented the suggestion of Common Consolidated Corporate Tax Base system (hereinafter as CCCTB), which was at the end selected as a long-term strategy for the harmonization scheme in the area of corporate taxation. To design the system, European Commission established in a working group in 2004. The task of the group was to establish a common definition of the tax base for corporations with European activities, to design the basic tax principles, structure of common consolidated tax base and the apportionment mechanism. Even though the draft of the text of the directive was finished already in 2008, the public discussion after its publication shown that there are still areas, which need detailed definitions and therefore the draft were sent back to working group to amend the text.
In connection with the change in Commissionaire responsible for taxation, CCCTB was granted the highest priority and the final draft of CCCTB directive was published in March 2011. It is necessary to mention, that the implementation of the CCCTB is connected not only to the grouping for taxation purposes and consolidation but also to the problem of the tax-sharing mechanism, which has raised much discussion. The directive proposal suggests the allocation formula – i.e. the consolidated tax base should be shared among the members of the group based on micro factors. That new allocation rule would have an impact on EU Member States’ budgets and therefore turned out to be the most difficult part of the negotiation of the CCCTB Directive. Therefore, CCCTB has been a subject of many studies aimed at the simulation of budgetary impacts on individual EU Member States as well as on welfare and the basic macroeconomic indicators (e.g. Fuest, Hemmelgarn and Ramb (2007), Van der Horst, Bettendorf and Rojas-Romagosa (2007), Devereux and Loretz (2008), Cline et al. (2010), Domonkos, Domonkos, Dolinajcová and Grisáková (2013), Nerudová and Solilová (2015), and others).
However, in relation to the discussion on the reform of EU budget and searching for the new own resources was not yet debated. A reference to the concept of European Union corporate income tax (hereinafter as EUCIT) and the concept of common consolidated corporate tax base can be found in the study by Cattoir (2004). Later Begg et al. (2008) warned against the fact that EUCIT would generate much smaller tax base than the value added tax. Cattoir (2009) is estimating the tax revenues from EUCIT on 3 % of GDP, and Schratzenstaller (2013) expects that EUCIT less than 2 % might generate tax revenue of EUR 15 billion in the European Union.
The aim of this paper is to research the revenue potential of mandatory CCCTB implementation in the EU28 and the possible replacement of VAT-based own resource and GNI-based own resource by CCCTB-based own resource. This paper presents the results of the research within the cross-disciplianary H2020 EU project FairTax No. 649439, “Revisioning the ´Fiscal EU´: Fair, Sustainable, and Coordinated Tax and Social Policies”.
2. The need for reform and the options
The main characteristics of current system of own resources are the fact that they accrue to the EU automatically without the necessity of decisions on the level of the EU Member States. Concurrently, lacking the fiscal sovereignty, EU is not allowed to levy any own taxes or to incur debt. The above mentioned is regulated by the Art. 269 of Amsterdam Treaty and by the Art. 310 and Art. 311 of Treaty on the Functioning of the European Union.
The system of own resources underwent long development since 1958, when the expenditures of the EU were financed on voluntary ad-hoc basis exclusively. The system of own resources as such was established in 1970 to make EEC less dependent on the ad-hoc transfers from the member states. At that time own resources represented sugar levies and custom duties (called as traditional own resources). Later in 1979, VAT-based own resource was introduced in the maximum rate of 1 % of a harmonized VAT base. The maximum rate was changed several times, either in reaction due to the rising EU expenditures or in reaction to the introduction of other own resource (GNP contribution). Currently, the cap is set on 0.3 %. In 1988 GNP-based own resource was introduced at a uniform call up rate update yearly to balance the EU budget. This resource has been replaced in 1999 by GNI-based own resource with the cap currently set on 1.23 %.
Despite all the above changes the system underwent as stated by (High level Group on Own Resources, 2014) there has not been any significantly changes in last 25 years and the system has become deeply entrenched. Based on the overview of current literature which gives Schratzenstaller (2013) or Schratzenstaller et al. (2016) , there can be identified five most important points of criticism showing the necessity of the reform.
Firstly, as mentioned by European Commission(2011) and Cipriani (2014), the system which is based on the revenues sources in fact being direct contributions of the Member States leads to the situation of continuous restriction of the EU´s financial autonomy. Moreover, such a structure enables Member States to aim at maximizing their net positions (i.e. decreasing the contributions and increasing the revenues from EU) rather than on value added creation maximization as mentioned by Heinemann, Mohl and Osterloh (2008) and Iozzo, Micossi and Salvemini (2008). Moreover, the share of own resources on overall revenues decreased from 65% in 1976 to 12.9 % in 2016 according to European Comission (2016). This situation according to Adolf and Rohrig (2016) goes against the founding treaties of the European Union, which envisioned a directly controlled funding model. Secondly, there is no link between the system of own resources and reaching the aims set by the EU policy. Schraznestaller (2013) states that the design of the system is not reaching any of the goals of Europe 2020 Strategy – i.e. smart, inclusive and sustainable growth. Thirdly, as mentioned by Fuest, Heineman and Ungerer (2015), the system of own resources can be characterized as very complicated. Not only due to the various temporary or permanent correction mechanisms or due to reductions granted to several Member States, but also due to the complicated method of harmonized base calculation for VAT-based Own Resource. Fourthly, current system of own resources lacks transaprency, especially in relation to EU citizens. As mentioned by Fuest, Heineman and Ungerer (2015), it implies a deficit in democratic accountability and according to Schratzenstaller (2013) it might be a threat to credibility and acceptance of Member State´s contributions to the EU budget. Finally, the construction of the system does not respect the ability to pay of individual Member States. European Commission (2011a) raised this issue mainly in connection with UK rebate and correction mechanism. In this matter Begg (2011) underlines, that those correction mechanisms are motivated by unbalanced EU spending.
Taking into account the lack of link between the EU policy and system of own resources, which can be considered as one of the most serious criticism of current status quo, the most relevant benefit EU taxes can bring in that connection, represents the fact, that they may help to decrease the existing sustainability gaps in tax systems in the EU, as stated by Krenek and Schratzenstaller (2016) and Schratzenstaller et al. (2016). EU taxes can serve as the tools for reaching smart, sustainable and inclusive growth as set by Europe 2020 Strategy. Sustainability gaps were in details defined by Schrazenstaller et al. (2016) as increasing weight of taxes on labor in overall taxation, decreasing progressivity of tax systems, decreasing importance of Pigovian taxes, intense company tax competition, issues with tax compliance and tax fraud.
Obligatory implementation of CCCTB or CCTB (i.e. common corporate tax base) as suggested by the Action plan of the European Commission for fair and efficient corporate taxation in the European Union can effectively help to decrease some of the sustainability gaps. CCCTB implementation in the form of directive (i.e. obligatory implementation) should help to establish fair tax competition – i.e. to decrease the sustainability gap in the area of tax competition. Firstly, harmonization of the rules for the tax base construction will erase the differences between the nominal and effective corporate tax rates (see below stated Table 1). Therefore, all the companies subjected to CCCTB system will have symmetric (same) information about the effective (nominal) tax rate. This situation may prevent harmful effects arising in situation when the companies have asymmetric information stemming from the inequality between the nominal and effective corporate tax rate.
Table 1: Nominal and effective corporate tax rates in the EU in 2014Country / Corporate tax rates in % / Effective average tax rate in % / Country / Corporate tax rates in % / Effective average tax rate in %
CZ / 19.0 / 16.7 / IT / 30.9 / 24.0
AT / 25.0 / 23.0 / LV / 15.0 / 14.3
BE / 34.0 / 26.7 / LT / 15.0 / 13.6
CY / 12.5 / 15.2 / LU / 29.2 / 25.5
EE / 21.0 / 16.5 / MT / 35.0 / 32.2
FI / 20.0 / 18.4 / NL / 25.0 / 22.6
FR / 38.9 / 39.4 / PT / 30.0 / 27.1
DE / 31.0 / 28.2 / SK / 22.0 / 19.4
EL / 26.0 / 24.1 / SI / 17.0 / 15.5
IE / 12.5 / 14.4 / ES / 35.3 / 32.6
Source: Spengel, Endres, Finke and Heckemeyer (2014).
Secondly, the latest development in the area of company taxation shows, that obligatory CCCTB (resp. CCTB) is understood as a tool for the fight with tax evasion and tax fraud. Closing the existent loopholes between the national corporate taxation systems through the implementation of the unified rules (i.e. CCTB), represent an effective tool for decreasing the base erosion and profit shifting. Therefore, CCTB implementation can significantly contribute to the decrease of the sustainability gap in the area of tax fraud. Moreover, completing of the second implementation step (i.e. CCCTB) will have significant impact on tax-planning strategies, for due to the establishment of the consolidation regime, it will not be possible for companies to apply tax-planning strategies through transfer pricing any more.
Finally, the introduction of CCCTB would also contribute to the decrease of tax compliance gap. The draft of the CCCTB directive establishes the institute of one – stop – shop. This means that the CCCTB group (comprising members from different tax jurisdictions) is represented by “single tax payer” and is administrated by “principal tax authority”. The system of one – stop – shop will lead to significant decrease of compliance costs of taxation for the taxpayer, as well to as to decrease in administrative costs for the tax administration.
Taking into the account the fact that CCCTB implementation represent one of the important tools how to prevent base erosion and profit shifting, CCCTB can indirectly contribute also to the decrease in the weight of labour taxation on overall taxation (European Commission, 2015). When the corporate tax bases are not eroded by tax-planning and the value added is taxed in the country, where it has been generated, then the additional tax revenue could create the space for the decrease in taxation of labour. Therefore, CCCTB implementation can effectively contribute to the decrease of 4 out of 6 sustainability gaps defined by Schratzenstaller et al (2016).
2.1 Current situation of corporate taxation in the EU
Currently, there can be find two basic approaches to the calculation of the tax base of the groups of multinational companies (resp. MNEs). The majority of Member States in the European Union is taxing the members of the group as separate entities, i.e. each entity is taxing its tax base in the country, in which it is a tax resident. Moreover, intra-group the transactions have to fulfill arm´s length principle – i.e. the price has to be set as the transaction would be carried out between the independent companies. As mentioned by Jacobs (2011), the allocation of the profit to the branch of the entity, which is from the legal point of view independent company, is sometimes complicated. Kumpf (1976) states that separate entity approach forces entities to behave as independent, even if they are members of the groups. Solilova and Nerudova (2013) mention that MNEs are facing the problem of correctly set transfer price with the impact on taxable profit as well as tax revenues of respective Member States. Moreover Solilová and Nerudová (2013) argued that the changes in economic environment are forcing governments as well as MNEs to define the transfer prices more precisely. However, Picciotto (1992) sustains that the tax administration can adjust the tax base of the entity to better reflect the open market conditions.Second approach towards the calculation of the tax base of the groups represents so called single entity approach. Under this principle, all the group members are treated as one single entity, therefore intra-group transactions are not taken into account. Another element connected with single entity approach represents the allocation mechanism. As mentioned by Weiner(1999), under this approach the group is treated as single entity – all the operations of the individual members of the group are integrated into the single unit. Due to this, the application of such system requires the establishment of the mechanisms for sharing the tax base between the jurisdictions, in which the members of the group are residents. Weiner and Mintz (2002) mentioned that allocation formula represents the tool for cross-border sharing of group tax bases. Mc Daniel (1994) adds that allocation mechanism is based on different assumptions than separate entity approach, therefore has different economic impacts and generates different technical problems.