Macron and Merkel work on plan to align EU corporate tax regime

When Angela Merkel came to Paris last week with her senior ministers for a joint cabinet meeting with Emmanuel Macron, ahead of the great Trump visitation for Bastille Day, the agenda was all about how Germany and France would relaunch the European project together. Or, as the German paper Handelsblatt put it, to craft "a road map to lead the Continent to overcome the self-doubt that has brought the European project to a standstill".

No mean task, but the message was clear - the Franco-German leadership train was back on the tracks.

The talks focused on co-operation on EU reforms, particularly of euro zone governance, defence, enterprise and education. Much of this was apparently destined for initiatives post the looming German election.

But centre stage was the work on reviving a 2012 joint project that had foundered, specifically developing a common line on European Commission proposals for bringing corporate tax regimes into alignment across the EU.

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Thorny subject

Macron said they had agreed on a “project of fiscal convergence for enterprises”. Merkel acknowledged tax convergence was “not a simple subject, it is even a thorny one”, but it would “permit the common market to develop”.

Paschal Donohoe, please take note: Ireland's corporate tax regime is most definitely once again in the firing line. No matter that we keep making nice noises to the OECD about assisting in curbing tax avoidance.

The central pillar of the Franco-German initiative, according to Handelsblatt, "will be a concept for a common corporate tax base, details of which are to be finalised by the end of the year so it can be implemented in 2018, preferably by all EU members, but if necessary as a bilateral move, reflecting the leaders' determination to make progress even if that means members advancing at different speeds".

The two ministers also apparently want to agree on plans by the end of the year for a minimum tax rate for company earnings in Europe, to "ensure" that digital companies such as Google are paying taxes everywhere they do business, not just in low-tax member states where they set their headquarters. Who could they possibly mean?

Resolve strengthened

Macron's resolve will no doubt have been strengthened by last week's surprise Paris court victory for Google, which ruled that the company did not have to pay more than €1.1 billion in back taxes and had not dodged the country's tax laws. Google had been accused of illegally routing sales in France through Ireland to pay a lower tax rate, and only weeks after Brussels had imposed a record €2.4 billion antitrust fine on it.

The common consolidated tax base (CCTB) proposition – it would be mandatory for all multinationals with a consolidated revenue of €750 million – has a long tortured history in the EU, but was put firmly back on the agenda last year by economic affairs commissioner Pierre Moscovici.

Countries such as Ireland are concerned that it is in effect, by the back door, a means of removing from member states their prerogative to set their own corporate tax rates, and their veto on EU tax measures (it operates on a legal base that allows qualified majority voting).

Split the proposal

A key change in the European Commission’s latest approach is to split the proposal into two separate draft laws. One would set common rules on the calculation of taxable profits – in theory the less contentious part of the plan – while the other “consolidation” part, the key to combating tax avoidance through transfer pricing, would detail where those profits should be taxed. That is most alarming for Ireland, which grudgingly supports the former.

In 2016, the ESRI warned that introduction across the EU of CCTB could cost Ireland 1.5 per cent of annual GDP, seriously damaging investment flows, undermining the State’s tax revenues and sparking a swift rise in unemployment.

The OECD estimates that some $100-$240 billion (€87-208 million) of revenues are lost each year due to gaps in international rules that allow corporate profits to be artificially shifted to tax havens.

But, of course, we’re not a tax haven. Ho, hum.