Tax treatment of losses in cross-border situations (debate) 
President
The next item is the report by Mrs Kauppi, on behalf of the Committee on Economic and Monetary Affairs, on the tax treatment of losses in cross-border situations.
Piia-Noora Kauppi
rapporteur. - Mr President, I would like to start by emphasising what my report, which is being debated today, is essentially about. While the report is nominally about taxation, the real issue at stake here is the proper functioning of the internal market of the EU.
The global economy is developing in a way that puts an increasing amount of pressure on Europe to maintain its competitiveness, a fact that has been underlined and widely agreed upon in various instances, notably in the Lisbon Strategy and its revisions. We must be proactive in rising to the challenge and I believe that a fully-functioning single market is the first priority in achieving this.
In addition to the freedom of movement of goods, people and services, this implies, crucially, a level playing field for European companies to establish business in any location in Europe as if it were a single country, a home market - a genuine home market - where decisions are based according to a real economic advantage, not a distorted one created by red tape.
Obstacles to this freedom do not only lead to suboptimal economic choices but also prevent European businesses from expanding. The fact that some such obstacles still remain is regrettable, as a Europe-wide home market is a stepping stone to growth for European businesses and a precondition for creating more European world leaders.
Cross-border consolidation of losses - the subject of this report - is a step towards such a working home market. Currently, in this respect, the tax treatment of a group operating within a single Member State is heavily preferential compared to a cross-border situation. Within a single Member State a company can usually offset losses incurred by its branches and subsidiaries in the taxation of the parent company. However, in the case of branches and subsidiaries in other Member States, the national legislation varies considerably.
In most cases, if consolidation of losses for tax purposes within the same group is possible, it is nevertheless granted with considerable and varying delays. This discrepancy has grave consequences for the proper functioning of the internal market. It distorts investment decisions, constituting a barrier to entering some markets while tending to unfairly favour the large markets where losses can more easily be absorbed. It particularly hampers the SMEs' capacity to expand, as they frequently incur start-up losses that they cannot immediately absorb - even the time factor is very relevant to SMEs. The existence of differing Member State legislation obviously also increases compliance costs, ill afforded by SMEs and conducive to tax engineering with larger companies.
Finally, delays in loss relief are understandably costly and burdensome to all European companies. There is a considerable cost burden involved when capital that is legitimately recoverable is tied up, often for years, because the current national loss relief legislation will not allow consolidation without delays.
The report promotes a remedy to this by promoting the possibility to offset losses in the same tax year, which would transfer the unreasonable time burden away from the company and to the public sector. It would also level the playing field, at the same time lowering companies' compliance costs. It would also mean that the tax domain is one where there is still work to be done to make the most of the internal market. This does not imply harmonising tax rates, rather that tax competition is a healthy feature of the European economy. However, it does mean legislating to facilitate cross-border business, to establish a level playing field where investments are based on undistorted economic benefits.
I therefore welcome the Commission's activities in this area in promoting cross-border loss relief measures. I would like to see Parliament support this urgently needed legislation, and I am grateful for the messages of support we have received during the process. I think that Parliament's opinion on the question will also be very timely because the European Court of Justice has called for political guidance on the issue as well.
I would further like to encourage the Commission to push ahead with the CCTB as a longer-term solution, which I hope will also be supported by this House in this report. However, the CCTB is a long-term project, the realisation of which lies far in the future. In the mean time, cross-border laws, relief and consolidation of losses are urgently needed as an intermediate remedy to some serious problems encountered within the functioning of the internal market.
László Kovács
Member of the Commission. - Mr President, some weeks ago, as you remember, we discussed the contribution of taxation and customs policies to the Lisbon Strategy of growth, jobs and competitiveness. Cross-border loss relief is one key element for establishing a competitive internal market without obstacles and thus contributing to growth and employment.
Let me explain the importance of granting cross-border loss relief for the internal market. Imagine a small or medium-sized enterprise which is operating successfully in its domestic market. Once it plans to expand its operation to other Member States, to the internal market, it will not only run into problems regarding additional compliance costs. Thus, in many cases, this SME will not be able to set off any start-up losses against profits which it may continue to generate in its Member State of residence.
The non-consideration of foreign losses results in double taxation and discourages many SMEs from investing in other Member States. With the new initiative on cross-border loss relief, large enterprises - but also SMEs in particular - could more easily extend their activities abroad and enjoy the full benefits of the internal market.
The initiative on cross-border loss relief constitutes a targeted solution in the short to medium term and represents an intermediary step. But please note that this initiative could in the future be complementary to the common consolidated corporate tax base (CCTB), notably for companies that are not covered by the CCTB.
The initiative on cross-border loss relief is more limited in scope than the consolidation of the tax base under the CCTB would be, as this provides automatic and comprehensive off-setting of all profits and losses within a group of companies.
I highly appreciate the strong support expressed in Ms Kauppi's report for the Commission's initiative in the field of cross-border loss relief, for the coordination approach and of course also for our work on the CCTB.
Like you, I am persuaded that we should continue our efforts to dismantle tax barriers in the internal market.
Zsolt László Becsey
on behalf of the PPE-DE group - (HU) Thank you, Mr President. I would like to thank the Commissioner and Mrs Kauppi for this report. They have dealt with an important issue eliciting sensitive and contrasting emotions.
Two comments. On the one hand, I feel it is important that from the standpoint of the internal market there should be no danger that a parent company and a subsidiary are at a disadvantage simply because they are operating in two different Member States, compared with companies operating in only one Member State.
So I urge that double taxation is ruled out, as the Commissioner has said, perhaps through the mechanism of electronic cooperation. Given time factors, we could encourage efficient cross-border activity by the economic players and employ credit and exemption methods.
At the same time I feel we must be concerned when a subsidiary makes a profit and a parent company makes a loss. Mrs Kauppi, in the new Member States, for example, this is of more interest from our point of view.
My second point about scrapping double taxation concerns the common consolidated tax base. We still have to debate this but I have reservations. I do not want to champion tax sovereignty but I cannot yet see clearly the effect of the common consolidated tax base. I am also fearful that there will be a lot of political pressure for a minimum level, just as with VAT or income tax. The proposals suggested by the Socialist and Communist, and perhaps the left-wing representatives too, demonstrate this, although the Maastricht criteria, I believe, put a stop to this.
But my fear here is that I do not know what the effect will be on the new capital-poor eastern European Members in the light of the flow of capital in the internal market. Where will the administration be? And will it be possible to keep individual tax concessions to counterbalance a disadvantageous infrastructure situation?
For these reasons I will abstain from these sections but I wish to thank the Commissioner and the rapporteur again. Thank you, Mr President.
Donata Gottardi
on behalf of the PSE Group. - (IT) Mr President, Commissioner, ladies and gentlemen, the motion for a resolution that we are to vote on tomorrow is symptomatic of the need for a fiscal policy at EU level.
This does not mean emasculating or curbing national tax policies; no one doubts the competence of individual Member States in this field. It does however mean flanking and coordinating them, especially when, as in the case of corporate losses in cross-border situations, merger and relocation decisions taken by companies within and outside of Europe transcend national borders.
Clearly, not only national regulations but also bilateral agreements are insufficient, given that in this age of globalised financial markets and globalised production such phenomena occur in large numbers and exceed the confines of individual countries. The content of the motion is the result of a consensus on many points and I shall just recall the main ones, with heartfelt thanks to the rapporteur for her constant willingness to cooperate.
Twenty-seven different tax systems hamper the smooth operation of the internal market and constitute an obstacle for businesses, especially small ones, as Commissioner Kovács has said. The first assertion made in the text is self-evident, expressing the gravest concern over the negative impact that the different treatment of cross-border losses by Member States has on the functioning of the internal market.
The proposed solution is still transitional and temporary because the only perfect solution is a Common Consolidated Corporate Tax Base (CCCTB). That is why we support the Commission communication as an important step in addressing the situation, while calling for adequate coordination among Member States as regards timing and solutions: I am quoting from paragraph 4.
It is important to have recalled the existence of common European institutions such as the 'European company' and the 'European cooperative society', as well as EU procedures concerning Community-scale groups of undertakings. These must be built upon, because they enable us not only to evoke the link with industrial relations, and hence the effects on employment, but also to acknowledge the formation of Community-scale groups of undertakings that are stable. After all, what we aim to foster is the development and implantation of a system of production with Europe, and not the individual Member State, at its heart, a system of production that does not follow the siren voices and decide tactically to diversify into other countries on the grounds of tax advantages, offsetting charges and losses wherever convenient. The production system must be able to rely on equal treatment and avoid differential accounting according to whether the controlling undertaking is based in just one country or has a presence in various countries.
This result cannot be achieved without appropriate rules and uniform conditions. Acknowledging that profitable tax competition would fundamentally undermine the content of this proposal does not amount to waving an ideological flag in opposition to it.
Olle Schmidt
on behalf of the ALDE Group. - (SV) Thanks to Piia-Noora Kauppi for a good report. She gives a balanced account of the problems and difficulties which arise on the internal market when we have 27 different tax systems. Globalisation, which has been mentioned, has after all increased still further the need for a common approach to tax matters in the EU so that obstacles to competition can be avoided. Different rules and bureaucracy also mean a loss of economic strength to companies and a loss of jobs in the EU. We need clearer rules and an approach which favours enterprise, such as Mrs Kauppi proposes. Perhaps some of us also need to remove the blinkers from our eyes.
Taxes, as we know, are a very sensitive subject. The keywords here are tax competition and freedom of countries to determine their tax rates. The long-term goal of the Commission is to achieve a consolidated corporate tax base. As this is not attainable, targeted measures should be pursued within those areas which are conducive to effectiveness in the internal market.
The report reviews various possibilities for action and shows how individual countries have chosen different approaches, which is good but not enough. It is in principle also reasonable for businesses to offset losses across frontiers within a company or between companies in a consortium. In order to facilitate such an arrangement a common approach is needed to what has to be taxed, in other words a consolidated corporate tax base. We in the ALDE Group think that this is the right way to go. Introduction of the common CCTB will not in itself prevent tax competition, rather the contrary. The tax base will be common, and transparency will be better. This new system will improve the possibilities for small and medium-sized enterprises in particular to offset their losses. Worried finance ministers - and there are many - can rest assured. Your power to tax will stay in place.
Regarding Amendment 1, our Group would like a split vote the first part of which can deal with excise duties separately. As regards the rest, we are inclined to abstain in the vote on Donata Gottardi's amendment to recitals E and F in order to facilitate a broad consensus and broad support in the House for this excellent report.
Dariusz Maciej Grabowski
on behalf of the UEN Group. - (PL) Mr President, the rapporteur deserves credit for her work, but this is a controversial report. We shall be voting against it and I shall now explain why.
This is an attempt to unify tax regimes within the Union, and to impose tax solutions on the Member States. Furthermore, it also amounts to favouring cross-border companies over SMEs, and that would in turn oblige many domestic companies to set up branches and subsidiaries in other countries with no economic justification, simply to benefit from the provisions applying to cross-border companies.
I would just like to point out that for many years cross-border companies took advantage of the lack of qualifications and corruption of officials in the post-Communist countries, resorting to tax and accounting fiddles to declare losses and avoid paying tax. The Union condoned this. The new provision would allow such behaviour to continue and put it on a legal footing. I am particularly surprised because there would be negative consequences for the countries of the old Union, as their taxes would be reduced.
I believe it is necessary first to resolve the problem of tax and accounting fiddles by cross-border firms within the Union and improve the fiscal apparatus, especially in the new Member States. This would assist in the prevention and detection of tax offences.
Sahra Wagenknecht
on behalf of the GUE/NGL Group. - (DE) Mr President, ladies and gentlemen, we can to some extent agree on one thing: the present situation in the EU, where there are 27 different tax systems operating alongside one another in an integrated single market with completely free movement of capital, is fatally flawed. This is where unity really comes to an end. Tax competition is tax dumping for the rich and the powerful and only imposes a greater tax burden on the shoulders of normal earners and consumers. It is hardly surprising that this situation is particularly pleasing to the property owners and big companies.
What is really astonishing and alarming, however, is that this reality is still being talked up here in this House, which should really be representing the interests of more than just the elite few. In spite of all its nuances and nuanced assessments, the Kauppi report is still just a typical piece of spin. That goes for the position being adopted on the alleged positive impact of tax competition just as much as for the manner in which it deals with the actual subject matter, namely the tax treatment of losses in cross-border situations.
It is an open secret that companies regularly use cross-border loss relief to reduce their tax bill by moving their profits to low-tax zones and low-tax countries. They are very successful in doing this, as the statistics show: such virtual loss offsetting has in fact meant that over the last 20 years the amount of tax paid on the profits made by the multinationals has fallen continuously. The rulings of the European Court of Justice have only served to make this tax arrangement easier and have therefore intruded massively into the fiscal sovereignty of the Member States. All this simply fuels the race to dump corporate tax.
Those who support this development clearly want to see a Europe in which untold wealth is able to accumulate at the top of the pile, while down at the bottom poverty levels increase and the former middle classes have to survive on incomes that are falling in real terms. We want to see a different Europe and we want a socially just taxation policy. For this reason our Group will be rejecting the present report.
John Whittaker
on behalf of the IND/DEM Group. - Mr President, the rapporteur claims that this initiative will encourage small and medium-sized enterprises to expand their cross-border business. But I have little doubt that it has been heavily promoted by the large multinationals, because it is they that stand to benefit most. In my country, in Britain, the vast majority of businesses are small, and they provide for some 70% of employment. Only a tiny proportion of these have any interest in foreign operations. But my main objection is that it is more meddling by the European Union in taxation matters. Judging by the EU's record of value added tax, there will be endless changes to the law. We have had eight directives on VAT so far, and it is still a mess and prone to fraud.
Businesses operate best when there are simple, well understood rules, as Mr Schmidt has just said. The EU knows how to do only one thing, and it does it to perfection. And that is to make things complicated. So, contrary to the views of other Members, a much better plan would be to encourage tax competition. Then those nations that have the lightest and simplest taxes will attract the most businesses.
Elisa Ferreira
(PT) Mr President, the different treatment of losses by the various Member States distorts competition in the internal market, is unfair and encourages poor fiscal practice. We therefore welcome the Commission's initiative to propose a minimum level of harmonisation of these rules and hope that the Council will agree with this proposal. This is an area in which better regulation is essential, particularly to eliminate the associated legal uncertainty, which has resulted in repeated recourse to the Court of Justice of the European Communities and which has contributed to increased uncertainty in economic relations, thereby harming companies and SMEs.
It is absolutely essential to ensure that the various fiscal practices are compatible with the effective functioning of the internal market. The quality of the report prepared by the rapporteur, Mrs Kauppi, has enabled a broad consensus to be reached among the main political groups on its fundamental elements. However, certain non-essential aspects of the report, in its initial version, may hinder this agreement. In particular, in the Socialist Group's opinion, this process is not compatible with the open defence of tax competition practices. These practices encourage artificial movements of companies, capital and persons. Such movements frequently result in signs of breakdown both socially and environmentally and in the productive fabric. Furthermore, in some economies, tax competition causes severe problems for the macroeconomic balance with varying consequences, particularly in terms of the level of quality and quantity of public property made available by these countries to their citizens.
The Socialist Group in the European Parliament believes that, on a subject of such strategic importance, it would be highly advantageous to present to the Commission and Council a European Parliament position with a broad basis of support. In the area of this initiative, the European Union still has a long way to go, particularly in terms of creating the oft-mentioned CCCTB or Common Consolidated Corporate Tax Base. We must create the political conditions for this future work.
Agreement on this report is within our reach. We hope that, when it comes to the final vote, the spirit of compromise among the main political groups will enable the consensus reached on its main messages to be maintained so that there is broad final approval. Those secondary aspects that divide us politically to an extent that is not insurmountable must not be allowed to prevent this approval.
We welcome the active involvement in this process of various members of the PPE-DE Group in particular, including its rapporteur, their spirit of compromise and their spirit of openness, which have enabled a consensus to be reached on the fundamental issues of this report. Thank you, Mr President.
Margarita Starkeviciute
(LT) I would like to draw your attention to something that we talk very much about, the various shortcomings of the internal market, and emphasize the fact that the development of the internal market gives us many advantages. This document is important from the aspect of giving advantages to improve the labour productivity of enterprises working in the single market. However another aspect should not be forgotten. I represent a country where the majority of enterprises belong to European multinationals; they are not national. Therefore, sometimes it is very difficult for us to control our economy in the macroeconomic sense as corporate strategies put the aims of the national economy, such as the fiscal balance, etc., into the shade. We need to find an appropriate compromise between the advantages of the development of the internal market and macroeconomic stability. I would like to draw the commissioner's attention to the need to coordinate politics with economic issues and with Mr Almunia once again.
Zbigniew Krzysztof Kuźmiuk
(PL) Mr President, as I take the floor in this debate on tax treatment of losses in cross-border disputes, I should like to highlight the following issues.
Firstly, direct taxation, such as corporate tax, does not fall within the competence of the European Commission. As a matter of principle, therefore, the Commission should not concern itself with it.
Secondly, I am surprised to see that the report contains statements disapproving of the reductions in corporate income tax rates introduced in certain Member States, notably new ones.
Thirdly, I am worried by the Commission's call for work on the introduction of a consolidated corporate tax base within the European Union to be speeded up. The nature of such a tax, its rate and setting the tax base are some of the very few instruments that still remain within the remit of the Member States and can be used to accelerate the economic development of less developed countries.
Fourthly, a study of the Commission's proposals for a consolidated corporate tax base suggests that the aim is to ensure all Member States develop at a rate involving at most a 2% rise in GDP per annum. In such a scenario, how would the new Member States that are 20 or 30 years behind the more developed ones ever manage to catch up?
Katerina Batzeli
(EL) Mr President, Commissioner, the issue of taxation and the possibility of transferring losses for cross-border business groups within the European Union cannot be tackled purely and simply on the basis of facilitating the cross-border operation of businesses. This objective is, of course, important for the smooth operation of the internal market, but when it is a matter of taxing a business, as mentioned in Mrs Kauppi's report, which we are considering today, then it should be placed within the wider context of the debate about greater harmonisation of taxation within the European Union.
Provided that taxation competition does not exist on equal terms and there is no minimum requisite agreement on a common, unified tax base for companies so as to put in place uniform, transparent rules for measuring the tax base, the provision of opportunities such as this regarding tax relief for losses of a cross-border nature at present demands that we adopt a cautious approach. This is because it involves the serious risk of distorting the Member States' taxation and revenue systems, as well as the very operation of the internal market and of competition between businesses.
Olle Schmidt
Mr President, with this new form of debate I could of course use this minute to ask the Commissioner what the current state of play is concerning CCCTB in the Council, because we know that some Ministers of Finance are not very happy. Could you please, Mr Commissioner, tell us how the debate is going on within the Council and what the 27 Member States are proposing today?
László Kovács
Member of the Commission. - Mr President, I have followed the debate with great interest, and it has confirmed my conviction that the introduction of cross-border loss relief is an important factor for the deepening of the internal market.
I fully share the views of Ms Kauppi that on the surface it is about taxation, but in reality it is about the proper functioning of the internal market.
I am particularly grateful for your support with facilitating, in particular, the cross-border economic activities of the SMEs, which is very close to my heart. I would like to thank the rapporteur, Ms Kauppi, for the very encouraging report, as well as the Committee on Economic and Monetary Affairs and the Committee on Legal Affairs for their support. The Commission can agree with most of the conclusions.
The support of Parliament is welcome as a factor which may have a positive impact on the subsequent discussion in the Council. As suggested in the report, I can assure you that we are continuing efforts on the CCCTB and on the coordination of Member States' direct tax systems. The CCCTB is also very close to my heart, and the reason is that I am absolutely certain that it would be of greater relative benefit to the small and medium-sized enterprises than the big multinationals.
However, I understand the concerns, and to respond to the question at the end of the debate, I want to tell you that in the Council it is on the table, but not as a concrete proposal. For the time being it is on the table as a concept, and as far as the concept is concerned, some two thirds of Member States expressed their support and less than one third expressed either doubts or opposition.
Any discussion, particularly discussion which would prejudice the current debate on the cross-border loss relief issue, would be premature because there is, for the time being, no concrete legislative proposal. In the legislative work programme of the Commission, however, there is one point which states that, in the second half of the year, we will present a concrete legislative proposal - with the necessary impact assessment - on the CCCTB. Then we can discuss whether the concerns are relevant or not.
One more point: if there is no unanimous agreement - and for the time being I believe that there will be no unanimous agreement - we can resort to enhanced cooperation as a solution. So, no single Member State would be forced to accept the CCCTB and to use it. And, even in those countries that chose the CCCTB, no companies would be forced to use it, because there would be no sense in forcing companies that are not operating in the internal market - that are not doing business in the internal market - to use this common tax base. They can stay with the domestic national base used previously.
So I share your conclusion that, in order to promote coherent development and the proper functioning of the internal market, obstacles deriving from the existence of different company tax regimes in the Member States must be tackled, preferably through common approaches and coordinated actions.
With regard to the loss offset, your report highlights several specific areas where more work needs to be done, such as addressing the particular needs of SMEs, the definition of groups and the scope for automatic information exchange.
My services will study these suggestions and comments and, where possible, bring the issues forward. The SME aspect is already an important part of the work of Vice-President Günter Verheugen. Another aspect, the definition of groups of companies, is an essential element of the work on the CCCTB.
I can also assure you that your recommendations for cross-border loss relief within companies and groups of companies will orient our work in the coming months. There are several references in your report to tax avoidance. Here it may be noted that, last December, the Commission adopted a communication on the application of anti-abuse measures in the area of direct taxation.
The Commission shares the concerns about tax avoidance expressed in your report. Member States need to be able to prevent their tax bases from being eroded because of abuse and aggressive tax planning. At the same time it is vital to ensure that there will be no undue restrictions to the Treaty freedoms. By launching this latest initiative, the Commission seeks to prompt further discussions with the other institutions on how national anti-abuse measures can meet those requirements. Your observations on tax avoidance risk will be taken into consideration.
Finally, as regards the proposed amendments to the report, the Commission would advise against amendments 1, 2, 3, 4, 5 and 6, but it could support amendments 7 and 8, which are in line with the spirit of the communication.
Piia-Noora Kauppi
rapporteur. - Mr President, I will be very brief. I am of course happy to note that most of the groups are going to support the report tomorrow in the vote. My group has suggested abstaining with regard to Amendments 7 and 8. I think that it is in line with the Commission's recommendations as well that 7 and 8 will probably be adopted and that means that we have a very large majority backing the report tomorrow.
I also would like to remember a little bit the past: how difficult it was before we accepted the first company taxation directives - a Parent-Subsidiary Directive and an Interest and Royalties Directive in the 1990s - to speak about these items. But they are now there after serious discussion, and I still believe that we can have all the practical things, like anti-abusive measures, that we can improve the Parent-Subsidiary Directive and that we can improve the workings of the Transfer Pricing Forum, and such initiatives are very much needed.
But, in the end, we need a very large solution and CCCTB. At this time it is the best available option and we must take it seriously. I hope that it will be done during this European Parliament term, before the 2009 elections. Something must be done before the 2009 elections and we cannot afford to wait for Member States to come up with their ratifications and referendums. We must act now and before the time is up for this Parliament.
President
The debate is closed.
The vote will take place tomorrow.
