EU’s Low Effective Tax Rates Leads To Unhealthy Tax Competition

; posted on
January 24th, 2019

The Greens European Free Alliance released a report on "Effective Tax Rates for Multinational Companies in the EU". The report suggests that tax competition among EU countries has allowed multinationals to pay tax at rates well below the statutory corporate rate, which in some member states is more than double the effective tax rate (ETR).

Lowest and Highest ETR in EU

According to the report, financial accounts reported by members of multinational groups corroborate concerns about tax competition among EU countries. In the EU more than other countries, ETRs are significantly lower than nominal tax rates.

The report reveals that the gap between ETR and nominal tax rate are due to the incentive given, such as patent boxes for intellectual property income and other measures, to attract large and mobile multinationals. Based on the available data, the report concludes that the larger the MNE, the lower the ETR.

Among other countries, Luxembourg’s ETR of 2.2 percent was the lowest in the EU by a large margin, followed by Hungary at 7.5 percent and Cyprus at 9.6 percent. Luxembourg has a statutory corporate tax rate of 29 percent. The report suggests that tax rulings granted by Luxembourg — which were the subject of state aid investigations by the European Commission involving Fiat, McDonald’s, and Engie predecessor GDF Suez — may be responsible for the wide divergence.

In contrast, within the EU, Italy and Greece have the highest ETR (30.4% and 28.4% respectively), with the third and fourth highest being Spain and Slovakia (21.8% and 20.2% respectively). The significant gap of ETR may lead to the harmful tax competition, as the rate will distort the MNE’s decision in investing and conducting business.

Action from European Commission

In the past years, the EU has proposed key reforms to reduce the tax avoidance of big multinational companies in Europe - such as public Country-by-Country Reporting and Common Consolidated Corporate Tax Base - but these are blocked in Council by the member states. The Greens/EFA group in the European Parliament calls on the EU member states to end this blockade and approve the necessary reforms without any further delay.

In the view of extremely low corporate tax rates in some EU member states, the European Commission should make a proposal to introduce minimum effective corporate tax rates in the EU to stop the existing race to the bottom and end the unhealthy tax competition in the European Union.

Source: The Greens European Free Alliance

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