The single market of the European Union (EU) should enable companies to buy from anywhere, produce from anywhere and sell from anywhere without being hampered by double taxation and tax discrimination issues arising from Member States' corporate taxes (CTs) (European Commission 2015). Capital gains arise when profits are retained in the company, which pari passu increases the value of the company's stock.
Taxing profits (equity income)
As an exception, Slovakia, Sweden and the UK do not impose a withholding tax on dividends, while Bulgaria, the Czech Republic, Cyprus, Malta and the Netherlands do not tax capital gains. Interest is not subject to withholding tax in Bulgaria, the Netherlands, Sweden and the UK. Seven member states do not limit interest deductibility through a debt/equity ratio or EBITDA percentage (but may apply other restrictions on interest deductibility).
In short, not all Member States tax income from corporate sources comprehensively at the corporate level. Imputation systems used to dominate the CT landscape in the EU, especially in the 1970s and 1980s. However, over time, they were considered too complicated, while their cross-border implications were considered discriminatory.21 In 2016, the UK abolished its imputation system, which allowed a deemed tax credit of only 1/9 of the net dividend. , and replaced it with a PT dividend exemption of £5,000.
Taxing profits and interest (capital income)
Further, capital gains are taxed twice in Finland and Sweden to the extent that the CT levied on retained earnings is not taken into account. As shown in Table 2, they impose a final withholding tax (WHT) at the corporate level on interest paid to residents or exclude interest altogether from PT (Bulgaria, Croatia). Dividends are also subject to final withholding (or exempt as in Slovakia) and are not taxed under PT.26 However, these CBITs are not clean because the effective tax rates differ for different types of capital income.
Retained earnings are taxed at a lower rate than distributed earnings, while interest tends to be taxed at rates similar to the CT rate. With some exceptions, this is also true for capital gains, although the deferral means that the effective rates are lower.
Taxing economic rents
Belgium introduced the ACE system to stimulate the self-financing ability of companies, but did not extend it to unincorporated companies and private investors.30 The ACE in Cyprus is equal to the yield on 10-year government bonds plus 3%. By excluding the normal return on capital, the ACE scheme does not affect real investment. Comparing the ACE system with CBIT, Bond (2001) believes that in a world of increasing mobility of physical capital, user capital costs may no longer be the only route through which CT affects the level of domestic investment.
Assuming equal returns, the statutory rate should be higher under the ACE tax, which would distribute corporation tax payments to relatively profitable businesses. In addition, the ACE approach maintains inflation neutrality because the interest rate is set at the full nominal level. The author also estimates an approximately 3% increase in the level of (financial) investments due to the introduction of the EKV.
Taxing capital gains and closely held corporations
Sweden Dividends, capital gains Active shareholders Prescribed amount taxed at 2/3 of fixed capital income tax rate; excess taxed as employment income United Kingdom Capital gains 5% ownership and voting rights. Specifically, the capital income component of profits is calculated by applying an assumed rate of return to the value of all business assets, called the gross method (Norway), or to the value of all assets minus liabilities (equity capital), referred to than the net method (Finland).33 The amount thus calculated is deducted from total profits, and remaining profits are considered labor income. Tax arbitrage is less of a problem under the gross method because the assumed rate of return is.
33 Under the gross method, the deemed return is reduced by the actual interest paid to calculate the taxable net capital income. In addition, the gross return is subtracted from the total profit (plus interest actually paid) to calculate taxable income from work. In contrast, with the net method, the assumed capital income is deducted directly from the net profit (ie, excluding the interest actually paid) to determine the taxable income from the labor.
Intra-EU capital income flows
In this case, the WHT rates for dividend, interest and royalty payments to holders of shares, debt and patents in the Member States most likely to provide FDI have been inserted into the table. UK (NL:4)' means that WHT on dividend income paid by a UK company to a portfolio shareholder in the Netherlands is 4% instead of 5% (the main rate). As is well known, the residency principle allows capital export neutrality (CEN), which means that the tax system does not affect the choice between investing at home or abroad (Musgrave 1969).
In practice, the source principle is easier to apply than the residence principle because the taxable income originates in the Member State collecting the tax. The residency principle (ie capital export neutrality) thus appears to be a more important efficiency objective to pursue than the source principle (ie capital import neutrality).36. However, the principle of subsidiarity favors source country taxation over the country of residence of the source income of companies in the EU.
Some important findings
Accordingly, EU member states apply the principle of source and residence in the taxation of corporate income. Under conditions of complete capital mobility, the residency principle equalizes rates of return before taxation; in other words, at the frontier, the cost of capital is the same in different countries. Moreover, much of the tax literature favors not taxing the capital return barrier in the form of ACEs.
40 Like double taxation on dividends, the tax treatment of pension premiums in Germany interferes with capital mobility across the EU. Most pension premiums are deductible from taxable profits in Germany only if they are held in the firm as so-called book reserves. This section takes a closer look at the different options for CT reform and coordination in the EU.
Dual income tax (DIT)
With regard to interest and royalties, the level of creditable or final withholding tax at corporate level may vary provisionally from Member State to Member State in the light of domestic and international policy considerations (eg its effect on foreign inward investment). For the time being, the (final) withholding tax rates may be lower than, for example, the CT rate and not apply to foreign interest recipients for fear of discouraging incoming capital flows. Presumably, full (and final) withholding tax on interest and royalties paid to foreign bondholders and intellectual property owners would require EU-wide coordination.
Finally, the concern of some Member States regarding the lower taxation of capital income compared to labor income could be addressed by adopting a resident net wealth tax. This would increase the effective tax burden on domestic (mostly wealthy) residents, without affecting non-residents and thus internal capital flows.
Comprehensive business income tax (CBIT)
If the reform were revenue neutral, nominal CT rates could be reduced, while average tax rates could probably be allowed to fall due to overall efficiency gains. In an important contribution to the tax literature, De Mooij and Devereux (2011) conclude that their applied general equilibrium model for the EU suggests that “if governments adjust statutory corporate tax rates to balance their budget , gain shifting and discrete location make CBIT more attractive. for most individual European countries."46.
Formulary apportionment (FA)?
In an important contribution to the tax literature, De Mooij and Devereux (2011) conclude that their applied general equilibrium model for the EU suggests that “if governments adjust statutory corporate tax rates to balance the budget of their, profit shifting and discrete location make CBIT more attractive. for most individual European countries."46. affecting the interstate distribution of income) and the measurement of factors in the formula (exact definitions are crucial).48 The harmonization of the tax base seems less urgent than the coordination of tax rates. Perhaps for this reason, the sharing of the form should be left to two or more Member States to deal with, as is the case in the US and Canada.
Allowance for corporate equity (ACE)
To be completely neutral, the ACE system would require the transformation of PT into a personal consumption tax, which completely exempts the normal return on capital.50 Based on these arguments, Mintz (2015) rejects an ACE for Canada. He also points out that an ACE would increase tax losses, make the corporate form even more attractive for protecting earned income, and run afoul of the US tax credit system (a point also made by Griffith et al. 2010).
Destination-based cash flow tax (DBCFT)
In order to prevent double taxation, resident states would then have to give up their right to tax residual income in the form of dividends, interest and royalties. Some reflections on the ACE and CBIT proposals, and the future of the corporate tax base, chapter 7. Cnossen (Ed.), Taxing capital income in the European Union: Issues and options for reform (pp Cash flow taxes in an open economy, CEPR Discussion Paper, no 2017).Exchange rate implications of Border Tax Adjustment neutrality, Discussion Paper, Economics No. 1981).Final Report of the Committee of Inquiry into the Australian Financial System.
Cnossen (Eds.), Capital Income Taxation in the European Union: Issues and Prospects for Reform (pp. 180–213). 2016a).Proposal for a Council Directive on the Common Base for Corporate Tax. 2016b). Taxation trends in the European Union: data for EU member states, Iceland and Norway. From Global Income Tax to Double Income Tax: Recent Tax Reforms in the Nordic Countries. International taxes and public finance.
