Handelsblatt Exclusive

EU: Shut Tax Havens With Minimum Rate

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Let the battle commence. Germany and France are demanding an end to corporate tax havens set up by Ireland and Belgium, among others. The European Union is stuck in the middle.
  • Why it matters

    Why it matters

    A minimum tax threshold would mark the first-ever step to harmonize tax policy in the 28-nation European Union. Germany and France have long felt disadvantaged by smaller E.U. partners that have lured companies with ultra-low corporate rates.

  • Facts

    Facts

    • Berlin and Paris have led calls for a minimum corporate tax rate across the European Union, while nations like Ireland and Luxembourg are opposed to the idea.
    • Last year’s “Luxleaks” scandal, in which Luxembourg lured multinational companies with secret ultra-low tax deals, has prompted the European Union to rethink the issue.
    • The European Commission and a special committee of the European Parliament are conducting investigations into corporate tax havens within the European Union.
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    Audio

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The European Union is considering introducing a minimum corporate tax rate across the continent, Handelsblatt has learned.

It is a controversial move that pits smaller and larger E.U. countries against each other and would mark the first concrete step toward harmonizing tax policy across the 28-nation economic bloc.

Corporate tax rates vary widely in the European Union, with France at the high end at 34.4 percent and Ireland at the low end at 12.5 percent. Aside from the official rates, some smaller countries also offered multinational companies tax rebates of up to 90 percent to attract their business.

The plan, the first elements of which could be unveiled as early as next month, would answer the demands of Germany and France for Brussels to finally crack down on controversial corporate tax havens set up by smaller E.U. countries like Luxembourg and Ireland.

Germany and France are not stopping at tax policy. The E.U.’s two largest economies have also launched a broader push for deeper integration of the 18-nation euro currency bloc that forms the core of the European Union, according to France’s Le Monde newspaper.

Their ambitions directly contradict efforts led by Britain’s Prime Minister David Cameron, whose country does not use the euro, to loosen the E.U.’s ties and hand more sovereignty back to the member states.

Harmonizing taxes has long been rejected by E.U. countries as an infringement of their cherished fiscal authority. A rethink apparently began after revelations last year that Luxembourg had been quietly luring multinational companies for years by offering them ultra-low tax deals. Other countries including Belgium and the Netherlands have since admitted they brokered similar deals.

The new plans stemming from Brussels could provoke a major battle between the European Union’s smaller countries, which have long relied on such tax havens to lure foreign businesses to their shores, and the E.U.’s larger members that are now calling for the tax system to become more harmonized.

“Germany and France are demanding a minimum threshold value: We are reacting to that,” said one source close to the Commission.

The aggressive push by Germany and France could take European tax policy in an entirely new direction.

The Commission’s President Jean-Claude Juncker, himself embroiled in the tax-haven scandal from his time as prime minister of Luxembourg, plans to discuss corporate tax reform with his fellow commissioners as early as Wednesday.

The E.U.’s executive body intends to unveil an initial plan on June 17. The proposed reforms will include, among other things, the possibility of setting a minimum tax rate across the 28-nation bloc, said insiders in Brussels who stressed that the project is still in its infancy.

The Commission is also considering a rule that would require corporations to list in their annual reports the profits and taxes they paid in each country. Businesses are strongly opposed to such country-by-country reporting.

The German government’s demands have been made clear. Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union, said he could imagine establishing a minimum corporate tax rate throughout the European Union.

“The discussion of tax rates has begun,” said one finance ministry official.

The aggressive push by Germany and France could take European tax policy in an entirely new direction.

Until now, the European Union had only considered harmonizing the basis of assessment of corporate income tax, leaving the actual tax rates up to the individual nations. Each government was to retain the right to set its rates as it saw fit.

But now Germany and France are rethinking the issue, prompted by the “Luxleaks” scandal. Late last year, the government of Luxembourg was forced to admit that it had lured companies like the U.S. online retailer Amazon to the country with extremely favorable, special tax conditions – to the detriment of other E.U. countries.

Other U.S. companies that have reportedly benefited from such special tax deals include McDonalds, Starbucks and Apple.

Germany and France are no longer willing to accept this practice. While tax competition is good in principle, Berlin officials argue that such extremely low tax rates lead to unfair competition.

Amazon-DPA
Amazon has seen its tax burden massively reduced in exchange for doing business with Luxembourg and others. Source: AP

 

For decades, the bloc’s two largest economies have often been considered the political drivers behind European integration – what Paris and Berlin says often becomes E.U. law.

But their current push for deeper integration could be putting them at odds with a number of their European peers, and could set up a major clash with fellow E.U. leaders at the bloc’s next leadership summit in June.

In addition to the tax push, German Chancellor Angela Merkel and French President Francois Hollande have reportedly launched a four-point plan to deepen integration of the euro currency area. In a letter sent to Mr. Juncker on Saturday and obtained by France’s Le Monde newspaper, the two leaders argued in favor of a step-by-step deepening of economic and political integration and said they would present their plans at the June summit.

The new integration push puts them at direct odds with Britain’s Mr. Cameron, who has said he will use the very same June summit to outline his pledge to renegotiate Britain’s role in the European Union. Ms. Merkel and Mr. Hollande’s letter also reportedly rejected Mr. Cameron’s call to re-open the E.U.’s existing treaties. They argue that deepening E.U. ties can continue without a wholesale renegotiation.

Mr. Cameron, who earlier this month won re-election in Britain, held talks with Mr. Juncker in London on Monday and is due this week to launch a tour of European capitals, including Paris and Berlin, in a bid to detail his own view of more limited European integration.

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Hatching plans. German Chancellor Angela Merkel and French President Francois Hollande. Source: AFP

 

While Ms. Merkel and Mr. Hollande will have their hands full with Mr. Cameron in the coming weeks and months, it’s not clear they will get their way on taxes either. The push toward tax harmonization remains controversial among many of the E.U.’s remaining 26 members.

Smaller countries, in particular, still consider it a legitimate tool of economic policy to offer foreign investors low tax rates through preliminary agreements known as tax rulings.

Brussels is already looking into whether this practice has gone too far: The widespread use of tax rulings is being investigated both by the European Commission and by a special committee on tax policy set up in the European Parliament following the Luxleaks scandal.

So far the investigations have focused on four countries – Luxembourg, Belgium, the Netherlands and Ireland – but are likely to spread.

Brussels has demanded information from all 28 member countries. Poland, the Czech Republic and Estonia have yet to offer the full details demanded of them.

German parliamentarians across the political spectrum have complained that many smaller E.U. countries have been unapologetic and have shown no desire to clean up the issue.

In Belgium, for example, fiscal policy experts reportedly bragged to lawmakers that they had brokered some of the best “tax rulings” in the world.

“In Belgium, there was no discernible willingness to make any changes to the system,” said Markus Ferber, a lawmaker with the Bavarian Christian Social Union, or CSU, the sister party to Ms. Merkel’s CDU.

“I found these statements surprising,” said Burkhard Balz, a European parliamentarian from Germany’s CDU party.

Belgium has become the latest country to be embroiled in the tax haven scandal in recent weeks. The E.U.’s competition commissioner, Margrethe Vestager, has said that the country has lured multinationals by offering their subsidiaries up to 90 percent off their tax bill. Such deals went too far and merited further investigation, she said.

Although Luxembourg and Belgium have admitted to questionable tax practices, they are of course unwilling to change anything now, reported Sven Giegold, another European parliamentarian from Germany’s Green Party.

With the E.U.’s countries at opposite ends of the spectrum, the European Commission in Brussels has been caught in the middle, and is taking a cautious approach to the issue of minimum taxation.

Brussels could imagine a minimum tax rate in principle, said Commission officials in Brussels, but the definition of this threshold remained completely open. They said the Commission would not be seeking to put a number on it – a minimum percentage level – at this time.

Germany sees things much more clearly, and is demanding hard numbers.

“We need to put numbers to the threshold value. In the end, it will be a matter of solid percentages,” said  German European parliamentarian Mr. Balz, adding that massive political opposition from countries like Ireland and Luxembourg is to be expected.

 

Ruth Berschens is Handelsblatt’s bureau chief in Brussels, while Donata Riedel leads Handelsblatt’s financial-political coverage in Berlin. Thomas Ludwig in Brussels and Christopher Cermak in Berlin contributed to this story. To contact the authors: berschens@handelsblatt.com and riedel@handelsblatt.com 

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