Since the Treaty of Rome, the scope and intensity of EU policymaking has steadily increased. The shift of power is unidirectional and exhibits two characteristic features. First, failure of EU interventions did never shake the general faith in delegating further competencies to the EU. Second, the self-interest of the European bureaucracy in expanding its discretionary powers was a main driving force of the centralization. Today the EU possesses vast supranational powers and the principle of subsidiarity, which was a fundamental pillar for the original idea of a Europe to be “united in diversity,” has been continuously diluted. Despite the extension of powers, however, the direct fiscal role (budget) of the EU has only grown comparatively slow and so far remains limited. When listening to Jean-Claude Juncker (Sept. 13) and Emmanuel Macron (Sept. 26) outlining their visions for the future of Europe, however, there can be no doubt that with the envisioned further centralization, the fiscal rule of the EU will greatly increase – including, sooner or later, giving the EU the power over corporate taxation.
Being aware of these general developments is crucial for grasping the implications as well as assessing the likelihood for one of the pet-projects of EU-centralists to be enacted, the Common Consolidated Corporate Tax Base (CCCTB). When I started writing for Cayman Financial Review about three years ago, I focused on highlighting the negative implications of the CCCTB – outlining that its adoption would be equivalent to the death knell of tax competition in Europe. I specifically outlined why formulary apportionment type of profit allocation, which is the defining feature of the CCCTB, is based on nothing but a political decision about a “fair” distribution of profits among EU member states. Attempting to defend the arm’s length approach to transfer pricing, which is based on replicating (simulating) market process to distribute profits among related companies, I explained that CCCTB, which completely disregards the value creating processes within multinational companies (i.e., neglecting the value contributed by intangibles), is conceptually ill-suited to ensure that the place of value creation coincides with the place of taxing respective profits (at least when adhering to more “conventional” notions about value-added).
A rather arrogant response to my previous article from one of the kingpins among the advocates of the CCCTB, has motivated me to complement my earlier writings with an updated analysis of the political state-of-play regarding the CCCTB. In his valiant effort to mock my earlier warnings against the CCCTB, this self-proclaimed father of the CCCTB wrote: “If Herr Treidler and the Cayman Financial Review were the only obstacles to progress I think we’d be over the finishing line on this campaign very soon. As it is, I think things will take a little longer than he predicts. But he’s got one thing right in his article: public CBCR and the CCCTB are going to happen. Of that I am sure.”
I was tempted to thank him for confirming that my analysis, and warning, is pretty much on target. As we agree that CCCTB is indeed likely to be adopted, I want to focus today on reviewing the recent statements of Mr. Juncker and Mr. Macron which illustrate just how close to the finishing line we really are.
Let’s start with some on the comments made by Mr. Juncker in his state of the Union Address which sum-up the centralists agenda: “Our 27 leaders, the Parliament and the Commission are putting the Europe back in our Union. And together we are putting the Union back in our Union.”
One can readily see what the Eurocrats have learned from Brexit. Nothing. The unidirectional extension of powers certainly featured prominently among the reasons for the Brexit. There is no trace in Juncker’s statement, however, to suggests even the slightest deliberation about a more flexible architecture for Europe – strongly suggesting that the five “scenarios for Europe” presented in a White Paper in March were nothing but elaborate window-dressing. There can be no mistake, Juncker is all about the United States of Europe. A demand that was loudly echoed by Martin Schulz, the poster boy Eurocrat and runner-up in the German elections, in mid-December. In view of the imminent coalition talks between the social democrats and the conservatives this casts can be interpreted as a first stab at nudging Germany foreign policy into alignment with France (see below).
Focusing on taxation, Juncker specifies his centralist agenda: “I am also strongly in favor of moving to qualified majority voting for decisions on the common consolidated corporate tax base, on VAT, on fair taxes for the digital industry and on the financial transaction tax.”
Of course, “qualified majority voting” would virtually ensure adoption of the CCCTB. With the U.K. being a non-factor, only the Netherlands, Ireland, Luxembourg, Malta and Cyprus (all of which are treated like “tax-outcasts” for their policies already, especially by Competition Commissioner Margrethe Vestager) seem likely to cast a no-vote. In other words, it is pretty much a certainty that the required 55 percent of EU countries or at least 65 percent of the total EU population vote in favor of the CCCTB. The German Ministry of Finance, realizing that Germany, being export oriented and having local companies with plenty of intangibles, would be surrendering a great chunk of tax revenues to other member states when adopting formulary apportionment, was also not completely hooked on the CCCTB. With the German government being in limbo and Mr. Schulz putting the United States of Europe on the agenda, it is difficult to guess what stance Germany would eventually take in a respective vote. Ultimately, it would not matter under qualified majority voting – which is the lesson to be learned here.
To add some punch to the structural reforms and to pave the way for a more pronounced and discretionary fiscal role of the EU, Juncker continues by proposing: “We need a European Minister of Economy and Finance: a European Minister that promotes and supports structural reforms in our Member States. […]. The new Minister should coordinate all EU financial instruments that can be deployed if a Member State is in a recession or hit by a fundamental crisis […] assume[ing] the role of Economy and Finance Minister. He or she should also preside the Eurogroup […] We do not need a budget for the Euro area but a strong Euro area budget line within the EU budget.”
It does not require too much imagination to assume that a European Minister of Economy and Finance would also wield substantial influence over the realm of taxation, most likely determining the specific features of the CCCTB. How far respective powers are likely to extend can be seen from the speech of Mr. Macron. In his “initiative for Europe”, Macron indeed left little to imagination when he clarified that a “fair tax” is high on his agenda: “France, with its partners, has begun supporting an initiative [aimed at] the taxation of value created, where it is produced, which will allow us to overhaul our tax systems and to stringently tax companies which relocate outside of Europe for the specific purpose of avoiding tax. […] there are common goods to be financed and that all economic actors must play their part […] It is therefore fair and legitimate that when they make profits elsewhere, they contribute to this solidarity where they create value.”
In respect to the CCCTB and the timetable, he is vision is even more explicit: “Efforts are already under way, but we must work faster to harmonize the tax base. And France and Germany should be able to finalize plans within the next four years. We have the opportunity of a clear mandate – let’s move forward with this […] we cannot have such disparate corporation tax rates in the European Union. This tax divergence fuels discord, destroys our own models and weakens all of Europe […] This is why I would like to see a binding rate range that member states must commit to […] I commend the European Commission’s recent initiatives in this regard and, through the efforts of Margrethe Vestager and Pierre Moscovici, its push for certain players and countries to make changes.”
So, the French president is not only committed to implementing the CCCTB, but would like to shift the power to determine tax rates towards the EU – i.e. to new European Minister of Economy proposed by Juncker. Naturally, Macron also does not fail to call for expanding the fiscal role of the EU: “… We need a stronger budget within Europe …. This budget’s resources must reflect its ambition. European taxes in the digital or environmental fields could thus form a genuine European resource to fund common expenditure. And beyond that, we must discuss partly allocating at least one tax to this budget, such as corporation tax once it has been harmonized.”
Note that Macron uses “once” (it has been harmonized), not “if.” Thus, it is fair to conclude that we are indeed close to the finishing line. Centralization and higher taxes go hand-in-hand, with the CCCTB being a convenient vehicle for the EU centralists to fund their ambitious agenda. Once, the power to levy corporate taxes is shifted to the EU, there can be no doubt that tax rates will also exhibit a unidirectional development. Indeed, the EU is already busy to indoctrinate children with the corresponding mind-set. In a truly dystopic educational computer game called “Taxlandia,” the EU asks the kids to “save” a virtual economy from collapse (naturally caused by “low tax rates”). After completing a brief tutorial, the kids are cheerily instructed as follows: “You can start the game by increasing the tax level.”
As it is notoriously difficult to anticipate the timeline for policy proposals in the EU, I have thus far refrained from making a prediction as to when CCCTB may happen. Considering that adoption of the CCCTB will mostly likely follow a further shift towards centralization of powers, a timeframe between four to ten years appears to be a good guess. Granted, the “United States of Europe” (in whatever constellation) will not emerge overnight. In case the proposals of Macron and Juncker gain further momentum, however, the CCCTB will likely be regarded as “low-hanging fruit”; i.e., the adoption does certainly not require too much further centralization. The main reason for the adoption of the CCCTB being virtually automatic in case of further centralization, is that the arm’s length principle together with tax competition in general are defenseless within the EU.
Attending the 5th Symposium of International Taxation, hosted by the German Ministry of Finance in Berlin in the beginning of December, I witnessed a rather symbolic scene. In the closing minutes of the expert panel, a representative of the ministry asked the panelists for their advice on a sensible policy stance on the taxation of intangible property. One renowned German transfer pricing consultant (Reimar Pinkernell) rose to the occasion to give some visionary closing remarks and straight-faced and without any apparent reservations advocated the adoption of the CCCTB. Most of the other panelists as well as the audience (roughly 90 percent business men and woman) nodded along dutifully. If one would have casted a vote, I fear, the CCCTB would have won by a landslide. Why should the ministry of finance hesitate to adopt the CCCTB and agree to the mandatory rates demanded by the Eurocrats? The business community as well as the leading academics keep signaling their approval. Four to ten years it is.