Implications of the common consolidated corporate tax base introduction on tax revenues (case study on Romania).

• Author: Pirvu, Daniela
• Position: POLSCI PAPERS - Case study

Introduction

Nowadays, the approach on the corporate income harmonization is the most important issues of debate on the agenda of the European Commission and in the theoretical approaches of specialists. The extreme diversity of these approaches is a eloquent indicator of the complexity of problems that prevent the formulation of solutions widely shared, even in theory and independent of considerations of political feasibility.

The coordination of tax systems for companies with cross-border activities from European Union member countries recorded important steps in early 1990s with the adoption of the "Mergers Directive", the "Parent-Subsidiary Directive," the "Arbitration Convention ", the "Directive on taxation of savings income in the form of interest payment" and the "Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States". These directives have failed to fully regulate the taxation of corporations and solve all the problems facing the Member States and companies with cross-border activities.

Recent guidelines towards a common corporate income taxation are based on a common purpose--to simplify and increase the efficiency of the tax system to ensure a better functioning of the single market. The specific objectives of the new tax system are: reducing associated compliance/administrative costs of the corporate taxation (both supported by companies and tax administrations), facilitating the cross-border business expansion in the European Union and minimizing distortions caused by national differences in terms of investment and bases tax allocation.

To eliminate barriers generated by the existence of 27 different tax systems on the on the efficient functioning of the internal market, the "Common Consolidated Corporate Tax Base" was highlighted by its benefits. The project was promoted by the European Commission and was supported by several Member States of the European Union, the European Parliament, the Economic and Social Council and the European business community.

The "Common Consolidated Corporate Tax Base" system is an ambitious goal of the European Commission. Technical discussions related to this system were launched in September 2004, when was formed a working group to help the Commission to prepare a legislative proposal in this regard (Matei and Pirvu, 2010). Common tax base involves establishing a single tax base for activities of a transnational company, and consolidation means that the income, the expenditure, respectively, the taxable profits to be calculated in one state (the one in which is the company--parent), then the tax to be collected in that state and afterwards to be distributed to other states where the company has activities. Expected benefits of introducing this model are many (European Commission, 2001):

--the significantly reduction of the compliance costs;

--the disappearance of the double taxation problem within the EU;

--the removing of a major obstacle to free movement of capital and unrestricted exercise of the right of establishment, due to cross-border clearing (but only within the European Union) tax losses by reducing the taxable profits of parent companies;

--the disappearance of the tax avoidance practices by using "transfer pricing", because intra-firm transactions prices can not affect the distribution of taxable income on tax jurisdictions;

--the comparability of effective tax burdens in each jurisdiction (in terms of a single base, the nominal rates are perfectly comparable), with the consequent of quality investment decisions improvement and hence resource allocation to the whole EU.

The advantages of the "Common Consolidated Corporate Tax Base" could create the preconditions for achieving important goals of the EU fiscal policy:

--supporting the success and the common market development by allowing all Member States to compete fairly and to take the benefits of the internal market;

--sustainable reduction of overall tax burden in the European Union, by ensuring a balance between the tax reductions, the investment in public services and sustaining the fiscal consolidation.

Since Romania joined the EU recently, most studies have assessed the impact of the introduction of some measures to coordinate the corporate income taxes in the European Union failed to capture their effect on the tax revenue in Romania. As representatives of the Romanian Government have expressed so far, no pro opinions or views against the European Commission proposal we believe that an evaluation in this regard is useful.

Main issues in the "Common Consolidated Corporate Tax Base"

The "Common Consolidated Corporate Tax Base" system involves consolidated determining of taxable companies with cross-border activity income, as accounting rules. Concrete actions for building this system started at the ECOFIN Council in September 2004, when most EU Member States have accepted the usefulness of some progress towards creating a common tax base and have decided to set up a working group of experts representing the Member States and chaired by the European Commission, which to examine in detail the possible solutions to implement this database.

The main objectives of the Common Consolidated Corporate Tax Base Working Group--CCCTB WG, established in 2004, are:

--to discuss on the principles that will govern the "Common Consolidated Corporate Tax Base" system;

--to examine the technical definition of a common consolidated tax base for companies doing business within the European Union Member States;

--to establish fundamental structural elements of a consolidated tax base;

--to formulate a mechanism for allocating the consolidated tax base between entitled Member States.

The resulting documents from discussions in the working group are prepared by the Directorate General for Taxation and Customs and are published on the Web site of the European Commission after each meeting. Until now there were 13 working group meetings.

In the late of 2008, the European Commission hoped to achieve the working group work in a legislative proposal, with effect from 2010, but this objective has not yet been reached (Matei and Pirvu, 2010).

Legislation on...