The recent international debate on corporate taxation is very much focused on addressing aggressive tax planning and erosion of the corporate tax base. At the meeting of the Platform for Tax Good Governance that took place on October 16, 2013, several Member States of the EU claimed that international double taxation no longer is a problem within the Union. International double taxation is when a taxpayer is forced to pay tax on the same income in two or more jurisdictions.
The view of these Member States was challenged by business representatives. To prove the contrary, the Pan-European business federation BUSINESSEUROPE approached some of Europe’s largest MNE’s to answer a questionnaire on double taxation. An overview of the responses was provided in a report entitled Double Taxation Cases Outside the Transfer Pricing Area, December 2013 (enclosed).
This study confirms that double taxation remains a problem and an obstacle for cross border trade and investments. In particular, the problematic areas are limitation in interest deductibility, foreign tax credits, permanent establishment issues and diverging qualifications or interpretations. Germany and Italy have been identified as the Member States in which most double taxation cases have occurred.
In addition to the actual cases where double taxation have occurred, MNE’s express concern that double taxation is likely to increase due to a number of new tax proposals in some Member States. Such proposals have been presented in France and Belgium in respect of limitations in interest deductibility and in Germany, France, Spain and Portugal in respect of loss utilization. Furthermore, MNE’s complain that, where double taxation has been avoided, the issue has been very resource intensive and has required restructurings with significant increase in administrative costs. Several MNE’s also bring up that they expect that OECD’s Base Erosion and Profit Shifting project will result in many more cases of international double taxation.
The responses from the large MNE’s are certainly not representative for illustrating the occurrence of international double taxation in Europe. If very large MNE’s encounter the number of international double taxation cases indicated in the report, SME’s can be expected to encounter even more cases. The cost of “getting it right” is in many cases out of proportion to the disputed amount in each transaction. The net outcome may therefore be abstention from cross-border activities as the tax systems act as a deterrent to investment and cross-border activities.
It is therefore crucial that the EU and the Member States keep up with the work on eliminating Double Taxation within the Union and worldwide. Furthermore, amendments in national, EU and international tax legislation must always be designed in a clear way so that the risk of double taxation is kept at a minimum.