Insight: In Europe's tax race, it's the base, not the rate, that counts

Mon Feb 18, 2013 5:37am EST
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By Tom Bergin

LONDON (Reuters) - In late November, members of the American Chamber of Commerce gathered at the Four Seasons hotel in Dublin for a Thanksgiving lunch of roast turkey and pumpkin pie and a declaration of hospitality from Ireland's finance minister.

"We're a friendly country for investors and one of the key elements of the friendliness of the package is the 12.5 percent tax rate," Michael Noonan said. "I want to tell you once more, that's not negotiable."

Noonan's comment alluded to attempts by some fellow European Union countries to persuade Ireland to increase its official corporation tax rate, one of the lowest in the developed world. The 12.5 percent rate, Irish politicians often say, is core to Ireland's ‘brand' as an investment location.

But low headline taxes are just one reason companies like to base themselves in Ireland, and not even the most important. Many of the multinationals gathered at the Four Seasons that day pay far less than 12.5 percent tax, their accounts show. Ireland helps them do this by generously defining what profit it will tax, and what it will leave untouched.

And it's not just Ireland. The amount of profit a country taxes - commonly known as the tax base - has been shrinking for multinationals in many European countries over the past decade or so, experts say, a fact easily lost in talk about headline rates. Countries have found that reducing the base - agreeing to not tax some profits that a company makes - helps attract firms and, they hope, jobs. But as recent protests against corporate tax avoidance in Britain highlight, voters are beginning to question that tactic. If taxpayers see governments helping companies to avoid taxes, it could hurt their ability to tax everyone else.

That is a point made by the Organisation for Economic Cooperation and Development, a Paris-based club of rich economies, which last week called for an overhaul of the entire international corporate tax system.

Most national tax rules pre-date the widespread rise of multinationals, it said, and desperately need to be updated. Perhaps the most pressing concern is the tax base.

"The problem of the tax base is clearly more important than the tax rate," says Sven Giegold, a German Member of the European Parliament (MEP) for the Green Party and a member of the EU parliament's Committee on Economic and Monetary Affairs. "And that's, interestingly, exactly the opposite of the public debate."   Continued...

The Petrusse river is seen in this general view of the city of Luxembourg in this November 20, 2012 file picture. To match INSIGHT TAX-CONTEST/EUROPE REUTERS/Francois Lenoir/Files