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TAXE committee IW News 17. September 2015

Fair play instead of winning ugly

Tomorrow, Commission president Juncker and the European Parliament's special tax committee (TAXE) will discuss on a better exchange of information between tax authorities. They aim to counter aggressive tax planning by multinational companies. At the same time TAXE starts focusing on national tax regimes in EU member states and their critical tax incentives. That’s a step in the right direction.

The rules of the game are about to change. More transparency in international tax issues and a better exchange of information between the member states shall ensure a fair tax regime in the European Union. Fair play instead of winning ugly is needed. The members of the TAXE committee and president Juncker will discuss this in their exchange on the most relevant international tax issues tomorrow. However, they will not only blame multinational companies for aggressive tax planning. According to the draft version of the TAXE committee, the focus will be more and more on the member states. While especially Luxembourg was already heavily criticised for its tax rulings in the past, a main future issue will be the so-called patent boxes which reflect a specific kind of harmful tax competition.

With the implementation of patent boxes countries like Ireland or the Netherlands try to attract intangible goods of multinational companies in order to shift most of the profits of a multinational company into their respective country. The idea is that intangibles have the highest added value in a value chain and are most important for a company's success. From an economic perspective, most of the taxable profits should be thus allocated to the country where patents and trademarks are registered.

In the European Union, countries like the Netherlands or Ireland offer a discounted corporate tax rate of for example 5 percent for profits that result from intangible goods. These tax incentives prevent a fair tax competition between the member states and, furthermore, put domestic companies at a disadvantage.

Therefore, the TAXE committee is right in looking more critically at the EU member states instead of exclusively challenging tax havens in the Caribbean Sea or American multinationals. Low tax payments by some multinational companies are not only the result of sophisticated tax planning but also of tax incentives by national (EU) governments.

Thus, tax harmonization and more transparency make sense in order to guarantee fair play. The main challenge in this regard will be to achieve the goal of a transparent system without running the risk of disclosing competitive advantages of companies due to too restrictive tax rules. For this reason, the exchange of highly significant information should be restricted to the tax authorities instead of the public. This is also what German politicians should keep in mind when discussing the draft law on the automatic exchange of information between national tax authorities. From a German perspective, according to recent data, profit shifting is not a dominating phenomenon since multinationals significantly contribute to German tax revenues.

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