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April 29, 2004

EU Tax Cartel ?

As always, Tyler Cowen is interesting this morning. Two pieces that caught my eye, one about Tuvalu and the .tv addresses. From memory before the internet bubble the major source of foreign exchange was selling stamps to collectors...this comes from a little piece of family lore passed on by a distant uncle (mother's cousin) who had been a pre-independence Governor of the then Gilbert and Ellice Islands. More on where he got the idea from in a later post.
The more substantive point is made about the EU being a tax cartel and this comment :

Speaking only days before 10 new member states join the EU on May 1, most of them from eastern Europe, Chancellor Gerhard Schröder said tax rates, often less than half those in Germany, were "not the way forward" in a united Europe.

This isn't just the usual complaints about the guys next door. There's an issue here that is going to prove crucial in the future development of the EU.
First, understand that corporation tax in Ireland is 10 %. In Estonia, 0 %. Somewhere around 35 % in Germany.Second, commonly in Europe, corporation tax is not levied on profits of overseas subsidiaries. Only if the money is brought back to the home country, and then used to pay dividends and the like, is it subject to taxation. Third, if a company decides to change its domicile, that is to stop being a German company and start being an Estonian one, the German tax man will demand all the taxes the company might pay in the future now. There's actually a complicated way of calculating this but it would include all unrealised capital gains and at least a portion of the assets of the company. There's nothing very unusual in this, the US Govt does this to those of its citizens who decide to give up their passports and lose that citizenship. So, companies tend not to move their domicile as the costs are so high.
You can imagine that a company like, say, BP, could save a few billion off its tax bill by moving from a UK to an Estonian registration. They lift oil in Nigeria, sell it in the US, and when they pay dividends from that the UK taxman has his bite.
However, there is one huge spanner in the works here. Recently there was an initial judgement from the EU court on the subject. While not yet confirmed by the full court it states that such taxation when changing domicile is a restriction on the free movement of capital within the EU. And thus cannot stand. So the effect seems to be ( although everyone is waiting for the confirmation ) that a German company can up and re-register in Estonia, kiss off the German taxman and live in a tax free nirvana. They don't have to move the factory or anything, a brass nameplate and a secretary is enough.
That is what has the high tax states worried. Not that new investment will go to the low tax states, but that all companies will go and tax receipts from corporation tax will go to zero.
On this point the EU can go one of two ways. It can accept that its previous agreements on the free movement of labour and capital are correct, and accept the consequences ( like faster economic growth, more wealth blah blah blah ) or it can try and restrain the effects of what it has already agreed to, and the most likely method is to harmonise tax rates across the EU. Indeed, we already see a move to do just that, and the German Chancellor above was just adding his voice.
I, of course, would like to see competing tax rates, as there are good arguments that corporations do not actually pay taxes anyway, and other better ones that they should not. That's not the way the high spending politicians want it to go of course.

April 29, 2004 in European Union | Permalink

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