Part 1 - AL-Tax

Chapter 810. That is, with taxation at both the corporate and shareholder levels without tax relief.11. Following the 1971 Resolution from the Council asking the European Commission to proposemeasures regarding the harmonization of certain types of taxes which may have an influence oncapital movements within the Community, the European Commission launched in 1975 a proposalfor a directive that concerned both the harmonization of corporate taxation and withholdingtaxes on dividends. In particular, the Commission proposed a single corporate tax rate on alldistributed and nondistributed profits, set at between 45% and 55%, and called for a 25% withholdingtax on dividends.12. In addition, the holding threshold from which the Parent–Subsidiary Directive applies was loweredfrom 25% to 10% and the Merger Directive was changed to cover the conversion of permanentestablishments into subsidiaries.13. The European Commission favors a consolidated and optional method (European Commission,2006c). Note also that Home State Taxation (solution d) is proposed for SMEs, as this solution ispolitically easy to implement and just requires mutual recognition (European Commission, 2005a).However, several Member States are reluctant as this solution carries potential economic andtechnical problems.14. In particular, it seems that some Member States fear that harmonization of the tax base will bedone in such a way that the agreement would lead to small tax bases, forcing these countries toraise their rates to keep revenues constant. However, it is clear that for efficiency reasons thebest option is a broad tax base. In addition, the level of taxation has not been, and will not be,part of the discussions. The European Commission has no plan to harmonize rates or impose aminimum statutory corporate tax rate. These elements are recognized in European Commission(2006c), which can be consulted for further information on recent developments in working outa CCCTB.15. It is important to note, however, that the first preoccupation does not preclude the second, andthat the profit-shifting issues are taken into consideration in the works of the CCCTB.16. That is, a 1% increase in the host-country tax rate decreases FDI by 3.3% and 2.4% respectively.For the USA, Hines (1999) reported a ‘consensus’ elasticity of 0.6. In the case of Europe, Gorterand de Mooij (2001) found that intra-EU investment is more responsive to taxes than investmentbetween the USA and Europe. Bénassy-Quéré et al. (2005) found nonlinearities in the impact oftax differentials as only positive tax differentials matter (i.e. disincentives) and, whilst exemptionsystems result in a linear reaction to tax differentials, credit systems provoke nonlinear reactions.Finally, Desai et al. (2004) and Buettner and Wamser (2006) showed that FDI is also very sensitiveto other taxes faced by multinationals, including indirect taxes.17. Several studies showed that the effect of adopting IFRS will be a broadening of the tax base(European Commission, 2001a, b; Haverals, 2005; Jacobs et al., 2005).18. In the sense that they represent ‘levels of lifetime utility’, i.e. a long-run equilibrium – but themodel does not include dynamic strategic interactions.19. Conceptually, the welfare gain in percentage of GDP and the GDP gain are different. However, inthe absence of a specific estimate for the former, the GDP increase can be used as a proxy.20. The ex-ante estimates by Cecchini et al. (1988) gave a potential of between 3.2% and 5.7% GDPincrease.21. Their estimated macro semi-elasticity of reported profits with respect to the statutory tax rate is1.43. Weichenrieder (2006) found similar results for Germany.201