In a Communication adopted yesterday, the Commission proposes a
voluntary trial of its “Home State Taxation” scheme, due to run for
five years from 1st January 2007.
At present, businesses engaging in cross-border and
international activities are required to comply not only with the
tax rules of their home state, but also with the requirements of
every other state in which they are based, and with which they may
be unfamiliar.
According to the Commission, these compliance difficulties hit
Small and Medium Enterprises (SMEs) particularly hard. For
instance, tax compliance costs in an international context seem to
be regressive in relation to the size of the company and are often
disproportionately high for SMEs. In addition, the administrative
tax formalities and book-keeping requirements are relatively more
difficult to sustain for SMEs than for larger enterprises.
While the Commission would prefer to solve these difficulties by
establishing a common consolidated tax base for the EU, political
problems make it unlikely that such a system will be adopted soon.
It is therefore proposing an interim solution for SMEs.
The proposals
The concept of Home State Taxation presented by the Commission
is based on the idea of voluntary mutual recognition of tax rules
by EU Member States. Under this concept, the profits of a group of
companies active in more than one Member State would be computed
according to the rules of one company tax system only, i.e. the
system of the Home State of the parent company or head office of
the group.
An SME wishing to establish a subsidiary or permanent
establishment in another Member State would therefore be able to
use only the tax rules with which it is already familiar.
The definition of an SME would be that commonly used in the EU –
companies with less staff than 250, with a turnover of €50 million
or less and/or with a balance sheet total of €43 million or
less.
The Home State Taxation scheme would not mean taxation in the
Home State only. It would simply mean that an SME's tax base (i.e.
taxable profits) would be calculated in accordance with the rules
of the Home State. Each participating Member State would then tax
at its own corporate tax rate its share of the profits determined
according to its share of the total payroll and/or turnover.
According to the Commission, introducing the scheme on a pilot,
time-limited basis would test the practical merits of the concept
for SMEs and its broader economic benefits for the EU while
limiting the administrative costs and potential risks for Member
States.
The Commission's Communication provides detailed elements of
such a Home State Taxation pilot scheme.
It provides that Member States agreeing to introduce the scheme
could do so via a bilateral or multilateral agreement, by
temporarily supplementing existing double taxation treaties or
multilateral conventions, or by concluding a new multilateral
convention.
"Heads of Government and Member States last March highlighted
the important role of SMEs in the economic development of the
European Union" said László Kovács, EU Commissioner for taxation
and customs. "I urge Member States, therefore, to take this
opportunity to eliminate some of the tax complications that inhibit
SMEs from participating in the Internal Market".
The proposals were welcomed by UEAPME, the European small and
medium business organisation. Gerhard Huemer, UEAPME Director of
Economic and Fiscal Policy, said: “With the costs of complying with
cross-border taxation systems as high as they are, it is little
wonder that only 3% of SMEs have operations in states other than
their country of origin."
He continued: "The proposed scheme on Home State Taxation would
greatly simplify the process of operating cross border for small
firms in the EU and help to slash the prohibitively high costs
associated with heterogeneous tax systems in the different Member
States.”
