Corporate debt bias: Economic Insights and Policy Options

European Commission – Speech | Brussels, 23 February 2015 | Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.

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Mesdames, Messieurs,

Je vous souhaite la bienvenue à cette conférence organisée conjointement par mes services et le Fonds Monétaire International. Cet événement est un bel exemple de collaboration entre nos deux institutions pour lesquelles la croissance, la création d’emplois et l’investissement sont des priorités essentielles.

Je vous remercie d’être venus si nombreux en ce début d’après-midi et je salue tout particulièrement le Directeur en charge des questions fiscales au Fonds, Vitor Gaspar, qui dans un instant participera à l’ouverture de ces deux jours de réflexion et de débats.

C’est un plaisir pour moi d’être présent aujourd’hui pour parler de fiscalité. Rapprocher la surveillance des budgets nationaux et la collecte des recettes, relève d’une grande cohérence. Et représente à mes yeux une première pierre à la construction d’un futur Ministère européen des Finances, à l’image de nos gouvernements nationaux, à l’image d’une Europe plus intégrée.

La fiscalité est un domaine complexe, souvent jugée trop technique par beaucoup d’entre nous. Et le diable est dans les détails – le sujet d’aujourd’hui en est un exemple. Autre particularité de la fiscalité (européenne) : la lenteur de son histoire, due essentiellement à la règle de l’unanimité fixée par les Traités. Mais en tout état de cause, il s’agit de ne pas se décourager. Et là, je cite Jaurès, qui dans son discours à la Jeunesse de 1903 rappelait que “l’Histoire enseigne aux hommes la difficulté des grandes tâches et la lenteur des accomplissements, mais elle justifie l’invincible espoir“. Mon espoir est de proposer les bases d’une fiscalité des entreprises adaptée aux réalités du XXI^ème siècle. Une fiscalité transparente et juste mais aussi propice à l’emploi et à l’investissement.

The problem

Over the last few years there has been increasing concern at the international level about tax malpractices. Uncovered cases of tax evasion and tax avoidance have gained extensive press coverage, and the tax affairs of well-known multinational corporations and wealthy individuals have been widely debated, as shown again recently by the HSBC scandal.

This has occurred during a period of severe economic crisis in which governments are struggling to put public budgets back on a sustainable track, not only through difficult spending cuts, but also by increasing tax revenues.

In this context, governments have increasingly asked citizens to make additional efforts to contribute to fiscal consolidation, while at the same time these citizens can see that some economic actors are able to play with the rules so as to avoid paying their fair share of taxes.

At the very root of the problem is the fact that the rules of the international tax system – developed in the 1920s to avoid double and multiple taxation – have not kept pace with changes in the economic environment.

Factors of production – capital and labour – are more mobile due to technological change and the opening of borders. The emergence of the digital economy is one of most important developments of the last two decades. Intangible assets have become a key value driver for corporations. All these changes have improved the allocation of resources across the Union. However, the rules on taxation have not seen the same degree of unification and integration.

The international tax system has become increasingly complex and opaque. Non-taxation has increasingly replaced double-taxation. Tax evasion and tax avoidance opportunities have spread and taxation has become a tool for corporations to test the boundaries of the rules and to exploit differences in definitions.

Another major problem with the current structure of the international tax system is that it, implicitly, provides incentives to countries to compete with one another to secure their own bases, making the system even more complex. The resulting patchwork of national measures hinders the consistency of the European tax system, and increases compliance and administrative costs for businesses.

The corporate debt bias is an important feature of traditional corporate tax systems. It stems from the distinction between debt and equity embedded in tax law. This feature may generate large costs in terms of economic volatility and financial stability. In addition, it has also facilitated tax planning by multinationals which are able to exploit differences between tax rates and between definitions of debt and equity across countries.

At the European level, the increasing complexity and opaqueness of the tax environment for businesses, as well as the harmful tax practices followed by some countries acting in their own interest in order to attract investments and profits, hamper the Internal Market and reduce the attractiveness of Europe in the global arena.

The policy response

The public outrage following media coverage of multinationals’ tax affairs – coupled with more stringent fiscal consolidation efforts after the financial crisis – led politicians in many countries to step up the fight against tax evasion and tax avoidance practices which threatened their national tax bases.

At the international level, several initiatives have been launched to increase the transparency of the global tax system and to make it more robust to tax evasion and tax avoidance. An example of this is the initiatives for the automatic exchange of information.

In 2013, mandated by the G20, the OECD launched an ambitious action plan to combat base erosion and profit shifting. Since then, a considerable amount of work has been carried out.

The European Commission fully embraces the initiatives at the OECD/G20 level. However, the work of the Commission goes beyond these efforts.

First of all, we need to deliver on Member States’ expectations.

In this respect, in recent years the Commission has actively supported Member States in their efforts to secure their domestic tax bases against aggressive tax planning and tax evasion, by framing a coordinated approach.

Several initiatives have been launched and important results have already been achieved.

On the legislative level, I would like to mention the important achievements on bank secrecy – with the revision of the Administrative Cooperation Directive – and the strengthening of the Parent-Subsidiary Directive, thanks to the inclusion of anti-abuse measures. New initiatives are already in the pipeline. The inclusion of anti-abuse measures has been proposed for the Interest and Royalty Directive. Moreover, the European Commission will propose legislative changes to the automatic exchange of information on tax rulings that will increase the transparency of the European tax system.

Among the initiatives to improve coordination at the EU level in the field of taxation, I would like to mention the creation of the Platform for Tax Good Governance and the launch of the VAT Forum to enhance business-to-tax authority dialogue.

This is about how the European Commission is helping Member States in their efforts to maintain their tax bases, while at same time ensuring a coordinated approach.

This is the short-term answer.

However, we also need a long term vision. We need to work together as a Union to deepen further the Internal Market. Much work still needs to be done.

Looking ahead, coordination in corporate taxation needs to be stepped up: we need a more common approach in corporate taxation.

The corporate tax base is no longer a purely domestic tax base. Therefore, a modern corporate tax system should reflect this international dimension: we need a European tax system for businesses that is growth-friendly, conducive to investment, resilient to aggressive tax planning and to harmful tax practices, while at same time is open to fair tax competition between Member States.

This is where the European Commission needs Member States’ political will to move up a gear. It is crucial to be ambitious now and to have a vision of what the future European corporate income tax system should be, in order to start moving together now towards this goal with greater determination.

The European Commission tabled an ambitious proposal in 2011, Iaying down common rules for the calculation of the tax base applicable to companies operating in the European Union: the Common Consolidated Corporate Tax Base.

This reform would mean lower compliance costs, reduced costs of cross-border expansion for businesses, tax savings due to the possibility of offseting the profits in one Member State against losses in other Member States, and fewer opportunities for tax planning [by manipulating the prices of the transactions between companies of the same group or by exploiting legislative mismatches between Member States].

Much work has been done on the CCCTB proposal, leading to significant improvements and useful progress.

But we need action to make it happen. We are ready to discuss it further – and Member States need to be serious about it now.

Our collective action should allow us to reform the current system towards a tax system that is less manipulable, more coherent, less distortive, based on sound principles, while still being competitive and supportive to investment.

The topic of today – the corporate debt bias – is an important element of this architecture. Its consequences are far-reaching. The tax incentive for indebtedness pushes our financial and non-financial companies onto fragile ground. It offers avenues for multinational corporations to play with often loose and non-harmonised distinctions between debt and equity to shift profits. It adds to systemic risk in the financial sector and goes against years of efforts to improve equity holding of financial institutions. Last week, the Commission has published its green paper on Building a Capital Markets Union. Amongst the identified barriers to a truly integrated Capital Markets Union, taxation appears as a predominant one. The document stresses that the debt bias discourages the development of loss and shock-absorbing equity markets across the EU. I am confident that these two days will shed light on these mechanisms and offer an informed discussion on the pros and cons of possible solutions.

 

Mesdames, Messieurs,

Il est temps de se retrousser les manches. Les tergiversations doivent désormais faire place à l’action. Une action conjointe. Une action forte.

Nous devons nous retrouver autour de cet agenda en deux temps.

Dans quelques semaines, la Commission mettra sur la table du Conseil un paquet de propositions et de recommandations sur la transparence fiscale. C’est la contribution de la Commission pour aider les Etats membres à protéger leurs assiettes fiscales et à lutter contre la fraude et la planification fiscale agressive. Il est essentiel que les Etats membres s’en saisissent et l’adoptent dans les meilleurs délais.

Viendra ensuite la seconde étape. Avant l’été, la Commission présentera un plan d’actions pour une fiscalité et une concurrence fiscale justes. En particulier, nous ferons la synthèse des discussions sur l’assiette fiscale commune pour l’impôt des sociétés afin de conclure avec une proposition de compromis acceptable pour tous. Les Etats membres seront alors mis devant leurs responsabilités pour adopter une réforme qui est nécessaire, réclamée par la société civile et attendue depuis trop longtemps. Le temps ne sera plus aux discussions. Je fonde l’espoir que les Etats membres saisiront l’importance du moment et adopteront ces propositions.

CONCLUSION
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Mesdames, messieurs,

Il est temps pour moi de conclure. Le sujet du jour est un élément important des questions cruciales que je viens d’évoquer. Il s’agit d’un vrai sujet qui mérite une réflexion commune.

Je vous remercie pour votre attention et me réjouis d’avance de la richesse des débats que nous aurons ensemble au cours des deux prochains jours. Débats et conclusions, qui, j’en suis convaincu, contribueront à la construction d’une fiscalité européenne, juste et concurrentielle.

Content compliments of European Commission