What Is the Cost of Aggressive Corporate Tax Planning for Europe? - "No Truly Reliable Figures Exist for Revenue Losses"

The European Commission has launched another attempt to tackle aggressive tax planning by multinationals. Its action plan for reforming corporate taxation in the European Union intends to stop practices that, although not illegal, constitute unfair tax avoidance on the part of large corporations. Has the EU Commis¬sion found the right instrument to nip profit shifting in the bud and to dry up tax havens? Prof. Dr. Christoph Spengel, ZEW Research Associate and corporate taxation expert from the University of Mannheim, argues that the Commission's proposed Common Corporate Tax Base will result in less bureaucracy and a definite increase in transparency.

Aggressive corporate tax planning may not be illegal, but it takes unfair advantage of profitable tax regimes, loopholes, and gaps in national tax law systems. Is it possible to estimate the foregone tax revenues on account of aggressive tax plan­ning by companies?

The answer is no: no truly reliable figures exist for revenue losses from "aggressive" corporate tax planning. The lack of specific understanding about the true dimensions of revenue losses is a serious problem in the on-going debates within the G20, the Organisation for Economic Co-operation and Develop­ment (OECD), and the EU. To begin with, it would be important to distinguish between tax planning and tax evasion, and this is possible to some extent. Next, we would have to separate "aggressive" from "normal" tax planning. The latter is to be seen as a consequence of differences in tax levels between individ­ual states. However, making this separation proves difficult. Our studies have found that internationally linked corporations in Germany pay around nine billion euros less in taxes when com­pared to non-affiliated companies. But this difference is only related to overall tax planning and thus includes "normal" tax planning. Not only is this figure small, but it also fails to provide a true estimation of the extent of "aggressive" tax planning. Giv­en these low numbers, policy-makers should act with greater restraint.

The European Commission hopes that its action plan will make for greater fairness and efficiency in corporate taxation. Is the proposal for a Common Consolidated Corporate Tax Base (CCCTB) a step in the right direction?

The introduction of a CCCTB would place limitations on tax planning in the usual sense by consolidating corporate income within a group of companies. However, for the time being, the Commission has excluded the additional steps of consolidation and formula apportionment of profits. Instead, for good reasons, it is only proposing a Common Corporate Tax Base (CCTB), that is, only harmonising the rules for determining income. This still leaves room for tax planning.

An additional regulation in the EU action plan targets effec­tive taxation at the site of value creation. Can such a regulation prevent fiscal losses from profit shifting?

Compared to existing tax law, a Common Corporate Tax Base alters nothing about the location where corporate profits will be taxed. Today's prevalent corporate structures and business mod­els place little emphasis on the site of value creation. A CCCTB, which would include consolidation of individual profits and a formal breakdown of profits, would come closer to accomplish­ing such a change.

One obstacle is the heterogeneity of specific provisions in the tax laws of EU member states. Will the Commission's plan generally accommodate national legislation or will it conjure up a bureaucratic monster?

A Common Corporate Tax Base will not create a bureaucratic monster. Quite the contrary: a CCTB will ensure greater trans­parency for corporations operating across the EU, thereby re­ducing their tax compliance costs. In addition, the system is meant to be compulsory and could be implemented across all legal forms in Germany. These changes would have major ad­vantages for the common market.

Tax sovereignty in the European Union lies primarily at the level of the national states. Is the European Commission at­tempting to assume additional competencies through its proposal?

In fact, EU member states would not lose important tax-relat­ed competencies as a result of a Common Corporate Tax Base. The proposals have been guided by the prevailing law in the member states so that the the CCTB can be introduced in a rev­enue-neutral way. In addition, the major tax rate sovereignty will continue to rest with the member states. Our Mannheim research group has long supported such a harmonisation path.