Part 1 - AL-Tax

Chapter 8problems and other tax-related difficulties for companies doing business on aEurope-wide basis.8.7.1 Comprehensive and targeted solutionsThe study used forward-looking marginal and average effective corporate tax ratesfor domestic and cross-border investment in 1999 and 2001 (to analyze the effectof the 2000 German tax reform). It found a wide dispersion of these rates in Europeas the average effective tax rate varies, for example from 10.5% in Ireland to 34.9%in Germany. The report did not study the impact of this dispersion on investmentpatterns in Europe, nor did it assess the welfare effects. However, it provided staticsimulations of the effect of policy changes on the dispersion of the effective rates.Its main conclusion was that effective rates are mainly influenced by statutoryrates and that harmonizing the latter would significantly reduce dispersion. Incontrast, several of the policy changes in the tax base it looked at would have littleeffect in harmonizing effective tax rates and would even increase their dispersion –if, for example, Home State Taxation or the Common Consolidated Corporate TaxBase (see below) were implemented.The European Commission’s policy recommendation was a two-track approachto tackle the tax obstacles to cross-border economic activity in the Internal Market(for an insightful presentation and discussion of the report, see Devereux, 2004).First, some so-called targeted solutions aimed to refresh some pieces of EU legislationin order to deal with specific situations not foreseen by the legislator or towiden their scope of action. For example, the new European Company Statutewas integrated into the 1990 Parent–Subsidiary Directive and the 1990 MergerDirective. 12 Second, the Commission put on the table four so-called comprehensivesolutions for harmonizing corporate tax bases in Europe:(a)(b)(c)(d)An EU corporate income tax (with full harmonization of rates and bases).A compulsory harmonized method to compute the tax base.The same harmonized method to compute tax bases but made optional(Common Corporate Consolidated Tax Base, hereafter CCCTB).The system of Home State Taxation (whereby subsidiaries follow thesame rules as their parent company, wherever they are located).At the ECOFIN Meeting in September 2004, a large majority of Member Statesagreed that it would be useful to progress towards a common base, with an emphasison reducing the administrative burden resulting from the existence of 25 systems.It was decided that a working party, chaired by the European Commission, would189