The Prague Post
October 12th, 2008
Endowment Fund     Business Listings ONLINE      Reservations      Classifieds    Subscriptions
Prague accommodation
Prague Real Estate

Home » Archives » Banking & Finance

Fluttering Away

EC move to simplify corporate taxes could cause revenues to flee country

By František Bouc
Staff Writer, The Prague Post
May 9th, 2007 issue

Illustration by ARTYOM EFIMOV/The Prague Post
enlarge
For once, the Czech Republic and the European Union are dealing with the same issue on the business front: simplifying taxes. And, like the Czech reform efforts, the EU’s plan is raising turmoil.
While the Czechs are currently mulling over reforms that would lower the overall tax burden and increase transparency, the EU is working toward what it calls a common consolidated corporate tax base (CCCTB).
The European Commission says such a base would constitute a comprehensive solution to the tax obstacles that arise when companies carry out cross-border activities within the EU.
“It would be the solution to eliminate existing fiscal obstacles throughout the EU, to help companies improve their competitiveness,” said László Kovács, the EU commissioner for the taxation and customs union.
The CCCTB would give companies a single set of rules for computing taxable income throughout the union, overcoming what the EU describes on its Web site as “the fundamental problem of dealing with up to 27 different tax systems.” In addition to reducing compliance costs for companies with operations in multiple states, the CCCTB would also help avoid many instances of double taxation.
A recent EU report has shown that for small and midsize companies operating in multiple states the costs of complying with local tax systems are excessive. According to the report, compliance costs take up 2.6 percent of the total revenue of small businesses; by contrast, large businesses need only 0.02 percent of their revenue to comply with local taxes.
The EU initiative could allow more small Czech companies to enter other EU markets, said Bedřich Danda, chairman of the Czech Association of Entrepreneurs.
“Different tax legislation and other rules often present key obstacles for smaller Czech firms when they decide whether to expand to other EU markets or not,” he said. “It would be great if there were not only the common tax base all over Europe, but also common tax rates.”
The commission does not intend to introduce common tax rates, Kovács said.
“We want to maintain the sovereignty of member states as far as setting tax rates is concerned,” he said.
At the same time, however, Kovács’ proposal includes a controversial provision requiring only parent companies to pay taxes, stripping the duty of their subsidiaries to pay taxes in the countries where they do business.
That would mean Škoda Auto, the leading Czech industrial company, would not be required to pay domestic taxes, as its parent company, Volkswagen, would be filing in its native Germany.
Wealth transfer
Given the large presence of foreign investors in the Czech Republic, clearing corporate subsidiaries of any tax duties would significantly cut the state’s coffers. Out of concern for this, the Czech government has joined a bloc of some seven other EU member states that are opposing the CCCTB project.
“We categorically disagree with the proposal,” Finance Minister Miroslav Kalousek said. “This country’s government must keep the maintenance of direct taxes as its own agenda.”
Last year, the yield from corporate income tax was 107 billion Kč — the second largest contribution made to the state budget. Only income from the value-added tax, at 163 billion Kč, ranked higher. Individual income tax contributed 98 billion Kč.
Business analysts agree that Kovács’ proposal would result in lower revenues from corporate profits in smaller countries, which could lead to other taxes being increased to offset the loss. It would effectively result in a transferring of resources from smaller countries to larger ones.
“Honestly, the lower corporate taxes here and in the whole of Eastern Europe are among the key competitive advantages of this region,” said Vladimír Pikora, analyst for Next Finance. “The statement that investors are coming here thanks to our better qualified workers is a myth. Taxes represent the dominant incentive for them.”
Pikora insisted the Czech Republic should strive to retain sovereignty in setting its tax policies.
“Otherwise, we’ll lose fiscal independence and there’d be virtually no sense in having a national government,” he said.
Joining the Czech Republic in opposition to the Kovács initiative are the United Kingdom, Ireland, Slovakia, Latvia, Lithuania and Cyprus. Still, the commissioner is not giving up his effort to introduce the CCCTB in at least 12 of the 27 EU member states by 2010.
“I hope we would be able to present a proposal to the European Commission next year, and if we manage to get a decision on ‘enhanced cooperation,’ another two years would be enough for implementation. So it could start working in 2010,” Kovács said.
“There should be nearly two-thirds [of the EU member states] participating, and the door will be left open for others who wish to participate.”
Don’t expect the Czech Republic to sign up, Kalousek said.
“We will vote against it,” he said.

František Bouc can be reached at fbouc@praguepost.com


Other articles in Banking & Finance (9/05/2007):

Browse the Current Issue

If you enjoyed this article, why don't you subscribe to the print version!
We accept secure online transactions provided by PayPal and Moneybookers

Be the first to add a comment!


Full Name: *
City: *
E-mail: **
This comment can be published in the print version of The Prague Post
Enter the text on the right:
 visual captcha
Comment: *
* Required field. In order to be approved for display, comments must have a first and last name and a city.
** E-mails are required and will only be used for internal purposes.

Most visited in Business Listings

Hotel booking
The Prague Post Online contains a selection of articles that have been printed in
The Prague Post, a weekly newspaper published in the Czech Republic.
To subscribe to the print paper, click here.
Unauthorized reproduction is strictly prohibited.