In Stratfor's 2018 Annual Forecast, we wrote that this year the European Union would discuss a series of economic and institutional reforms and we anticipated that the debate would cause member states to clash. Tax harmonization is one of the topics on the agenda, and recent developments show disagreements arising between low-tax and high-tax countries because of plans to develop a single set of rules for the Continent.
The Irish government is getting ready for a tough debate with its peers in the European Union about how companies are taxed in the Continental bloc. This year, the European Commission wants to introduce a single set of rules to calculate the taxable profits of companies operating in EU member states. This controversial plan, known as "tax harmonization," would allow the union to impose tax rules on its member states, which currently all have their own tax policies. From Brussels' perspective, having a common set of rules would reduce bureaucracy, combat tax avoidance and offer companies a predictable tax environment across the Continent. But for Ireland, this is a direct attack on its economic model, which is based on low corporate taxes and benefits for multinational companies.
The bloc has been considering the idea of introducing a tax harmonization plan, or Common Consolidated Corporate Tax Base (CCCTB), for two decades. But the commission has grown increasingly eager to approve the proposal in the wake of the emergence of digital companies, which in some cases hold legal seats in low-tax countries such as Ireland while paying very little in taxes in the other member states where they operate. Countries with high corporate tax rates, including France, Germany and Italy, support the commission's plan, and in fact, tax harmonization was one of French President Emmanuel Macron's campaign proposals.
But implementing the plan is easier said than done, because all EU members must unanimously approve any bloc-wide tax reforms. And Ireland is not alone in its rejection of tax harmonization: low-tax countries such as the Netherlands, Malta and Luxembourg are similarly concerned about the commission's proposal. In addition, on Jan. 4, Hungarian Prime Minister Viktor Orban said that Hungary also supports Ireland's position. In a joint press conference with his Irish counterpart Leo Varadkar, Orban said that taxation is a key element of competition. According to Orban, "We would not like to see any regulation in the EU, which would bind Hungary's hands in terms of tax policy, be it corporate tax, or any other tax."
The issue of tax harmonization versus tax competition lies at the heart of this debate. From the European Commission's perspective, tax harmonization is a necessary step in the federalization of Europe, because it would bring the bloc closer to becoming a fiscal union. But low-tax countries such as Ireland or Hungary see the CCCTB as a way for the union to reduce their competitiveness with high-tax economies such as France or Germany. (For perspective, Hungary's current corporate tax is 9 percent, compared to 33 percent in France.) The upcoming debate is likely to create even more divisions in a union that is already split on several other issues.