When discussing the plans that the European Commissioner for Taxation and Customs Union has for a common consolidated corporate tax base, it is important to not only address the implications for Ireland but also to address the implications for the European Union as a whole. It is also important to note that as of now only technical work is under way; the Commission has not made any final proposal, the Council has not considered any proposal and many member states are opposed to or sceptical towards the proposition in general.
The implications of the proposition, as we understand it, are that if such a proposition were implemented, it would offend against the principle of national sovereignty in fiscal matters and create serious potential difficulties at national and EU level. In terms of general principle, the position of the Government is clear and well understood. The right to choose how one is taxed is not a matter only of economic or industrial or social policy but also a civic right of the citizens and taxpayers in a member state. In this way, each member state can decide on its overall level of public expenditure and how this will be financed.
As regards practical implications, greater tax harmonisation could lead to the creation of a less competitive, high tax economic entity in regard to other economic blocks. A less competitive European Union means that business will move out of Europe and the competitiveness of the Union would suffer. Moreover, the most likely "sharing mechanism" under the common consolidated corporate tax base would dole out the taxes from multinational firms not on the current basis of where they are located but on the basis of a formula based on assets, sales and payroll expenses — factors that better reflect "old" rather than "new" types of industry. This would also mean that profits generated through the production of goods and services in, for example, Ireland would be at least partially taxed in other member states — export oriented member states would suffer under such a system.
The common consolidated corporate tax base would be inflexible. It would hamper individual member states from taking account of local needs, while making it extraordinarily difficult for Europe as a whole to adapt to changes in the international business and technological environment in the global business cycle. Under the common consolidated corporate tax base, agreement would have to be reached by all participating member states if one participating member state wished to change any part of its corporate tax rules.
Although it is argued by proponents of the idea that each member state could retain discretion over its national tax rate, the effect of the operation of the "sharing mechanism" would be that each internationally oriented firm would be taxed at a whole range of different rates in different member states — no member state would retain discretion to determine the actual tax rate for its firms. In other words, national tax policy would not be replaced by an EU policy; in fact, there would be no policy at all. This would probably then be used as an argument for an EU level single tax rate.
Additional information not given on the floor of the House.
The other "antidotes" suggested to the inflexibility inherent in the common consolidated corporate tax base proposition are that some decisions would be made in committees by qualified majority voting and even that there might have to be some co-ordinating EU tax authority. These would be ineffective mechanisms in terms of policy flexibility which would further erode national choices. The real antidote to tax policy inflexibility is to retain national discretion.
It should also be remembered that European member states not only compete for FDI with each other but also with countries outside the European Union. Higher corporate taxes and less flexible systems would lead to reductions in foreign direct investment, especially in smaller more peripheral economies.
None of this means that we are opposed to working at EU level to improve the business tax environment through the elimination of barriers to trade within the Internal Market. In common with a number of other member states we actively support the work of the Commission in addressing real priorities such as VAT fraud and place of supply, the work of the "Code of Conduct Group" in relation to harmful tax practices, the removal of financial services barriers, and other areas where the Single Market can be completed to the benefit of all of the European Union.
The Government, in co-operation with other member states, will continue to engage with the European Commission in a constructive and positive manner in regard to tax matters — that is the role of responsible EU members — but we will also uphold the principles in which we and others believe, in terms of subsidiarity, national discretion and competitiveness.