New code to check tax breaks

Date: 19/06/1997

By Tim Jones

INTERNAL Market Commissioner Mario Monti wants governments to agree to halt the introduction of further predatory tax breaks designed to lure companies from one member state to another.

If agreed, draft guidelines prepared for a meeting of high-level national tax negotiators which takes place tomorrow (20 June) would commit EU governments to reversing the trend towards increasingly aggressive fiscal competition which Monti believes has eroded the tax base of the Union.

His 'code of conduct' would take the form of a political declaration by member states to avoid vying with each other to attract multinational investment by setting excessively low tax rates for companies.

Although the Commissioner is keen to avoid naming names, almost every member state has a complaint against its neighbours for introducing long corporate tax holidays and tax-free status for expatriate managers or inventions made in the host country.

Special low-tax zones approved by the European Commission - such as the increasingly successful Dublin Customs House development in Ireland - have succeeded in enticing businesses away from other EU countries.

Monti's code suggests that the Union needs to establish an effective system of 'peer review' to assess the legitimacy of any new measures introduced with the aim of attracting investment and generating jobs.

At the last meeting of the high-level tax group, most representatives agreed that they should form the review body or clearing house for all new measures.

Over time, this function would be extended back to cover existing tax breaks to judge whether they were 'harmful' to their neighbours.

The rest of the code seeks to pin down a definition of 'harmful' tax competition.

Firstly, the peer review group would consider just how much the firm in question would shave off its tax bill through such measures in comparison with its counterparts operating in the same country and even in the same industrial or service sector.

The Commission has no intention of suggesting a minimum or maximum level of differentiation between the two, but Monti hopes that member states will be keen to establish ground rules for this judgement.

A second guiding principle in determining if a measure were harmful would be whether there were wild differences in the rules applying to a country's residents and non-residents.

For example, most member states apply different tax regulations to the interest income of their own nationals to those imposed on other Europeans who invest within their country but are outside their tax jurisdiction.

Negotiators will also be asked to look at the question of whether transfer pricing - whereby multinationals adjust prices of materials sold by one of their subsidiaries in order to reduce their tax liability in a high-tax country - complies with rules drawn up by the Organisation for Economic Cooperation and Development (OECD).

Acknowledging that the issue of corporate tax breaks and state aid are intimately linked, Monti has asked Competition Commissioner Karel van Miert to attend this week's meeting.