Brussels, 10/01/2006 (Agence Europe) - At the end of December, the Commission adopted a communication describing a pilot scheme for corporate taxation intended to facilitate the cross-border activities of small and medium-sized enterprises (SMEs). The system functions thanks to mutual recognition of tax rules between the EU Member States and would not require any specific legislative initiatives at European level. Initially lasting five years, the scheme will remain optional not only for Member States but also for companies, and will not affect the rate of taxation that remains the prerogative of Member States. Although SME associations are convinced that such a system can work, Member States appear particularly reticent.
According to the system of taxation based on the rules of the State of residence, the profits of a company established in several Member States would be calculated according to the rules of a single Member State - that in which the company has its registered office. Once the tax base has been determined, a key for breakdown would allow taxable profits to be attributed to the different Member Sates in which the company concerned has set up subsidiaries. Each Member State will thus be able to apply its own rate of taxation to its share of company profits.
According to the conclusions of the Commission inquiry into taxation in Europe, cross-border activities make corporate costs rise if companies are to come into line with the different national rules applicable in the field of direct taxation and value added tax (VAT). Such costs are proportionally higher for SMEs than for multinationals. The Commission therefore suggests that the new system apply to SMEs as defined in Recommendation 2003/361/EC, that is, companies employing fewer than 250 persons and whose turnover does not exceed EUR 50 million. The system would not apply to SMEs whose registered seat is established in a third country, or to the activities of a European SME carried out in a third country. Also excluded are companies that are active in financial services (banking, insurance), energy and agriculture.
In the eyes of the Commission, this system has advantages. It would diminish costs for bringing companies into line, it would reduce the double taxation phenomenon and problems relating to transfer prices or to the absence of cross-border compensation for losses. Bilateral, or even multilateral, agreements, between Member States would suffice to set the new system in place and it would not be necessary to adopt legislative texts at European level. These agreements would stipulate that each party should mutually recognise the taxation legislation of the other and define the key for the necessary sharing of taxable profits between parties. According to the Commission, the conclusion of such agreements is possible as the legislation of many Member States that allow the taxable profits of a company to be calculated are relatively close. Also, in order to prevent possible abuse, joint audits could be conducted especially in the context of the future Fiscalis 2013 programme (see EUROPE 8936).
The nature of the key used for breaking down the taxable base is highly significant for the viability of the system. The Commission points out that a company's real estate assets, sales made or salaries paid may be used. A combination of several criteria is also foreseeable in order to find the most suitable formula. Examples of similar initiatives are currently being carried out in the United States, Canada and Switzerland. Within the European Union, Germany and the Netherlands have already signed a protocol and a bilateral agreement intended for companies close to their common border. Unlike the system proposed by the Commission, the taxable profits are not shared between Germany and the Netherlands as only one of these countries benefits from the taxation.
The taxation system according to the State of residence differs from the Common Consolidated Corporate Tax Base (CCCTB), whose presentation is expected for 2008 (see EUROPE 9045 and 9057). At this stage it is not a matter of harmonising the rules within the EU but of promoting mutual recognition of national systems.
The European Association of Craft, Small and Medium-Sized Enterprises (UEAPME) welcomed the system proposed in a press release saying it is a “vital initiative” for allowing SMEs to really benefit from the internal market. It states that it comes as no surprise that only 3% of SMEs operate in Member States other than their country of origin, and calls on Member States to introduce this pilot system without delay. UEAPME nonetheless considers that the ultimate solution would consist in introducing the CCCTB if the EU hopes to come to grips with its competitiveness problems.