Common tax base seductive, if it wasn't a 'Trojan horse'

The Treasury has been looking for ways of persuading corporates that things aren’t so bad they need to set up offshore. And now some suggest an unlikely opportunity - a common corporate tax base.

The rationale is that a common base means multinationals will face lower compliance costs and will therefore feel less inclined to ship out overseas.

Until recently the prospect of a common consolidated corporate tax base seemed a distant one, but renewed enthusiasm has emerged.

Supporters, like the French, say it reduces administrative burdens for, and creates greater transparency and competitiveness between, EU states.

‘Accountants would be able to concentrate on making maximum profits rather than playing around with the tax system,’ said Richard Murphy of Tax Research UK.

However, Professor Michael Devereux, of Oxford University’s Centre of Business Taxation, believes this might not be the case. He insists there would be an issue over monitoring transfer pricing of goods moved between member countries and then shipped out of Europe.

‘This is an administrative issue that has not yet been resolved. It has the potential to increase rather than reduce compliance costs,’ he said.

There are some other big stumbling blocks, not least how to apportion the profits of a multinational across the various states where it operates. Factors that would need to be taken into account include where the company’s sales, employees and physical assets lie.

Countries such as the UK, Spain and Sweden would see their revenue increase by about 2% if all 27 member states were forced to participate, according to the Centre of Business Taxation’s research. But member states with low corporation taxes, such as Bulgaria and Ireland, would see their revenues drop dramatically.

The EU is proposing the scheme be adopted on a voluntary basis, so even if the UK decided to take part, British multinationals could choose whether or not to participate. ‘It means companies will need to model the effect of going in or staying out. This will be a big exercise for tax departments,’ said Chris Morgan, head of KPMG’s international tax group.

The Treasury has remained resistant to the idea because it believes it could erode the UK’s sovereignty. ‘The big fear is that it is a Trojan horse for introducing a harmonised tax rate,’ said Morgan.