Harmonizing tax systems: KU economist advises EU Parliament

In recent years, European initiatives on corporate taxation have focused in particular on combating tax avoidance. These activities were curbed with the introduction of the global minimum tax. The EU now wants to focus more on removing tax obstacles in the internal market. At the hearing of the Committee on Fiscal Affairs (FISC) on February 13, 2024, entitled "Combating tax obstacles in the internal market and the role of tax policy in promoting economic growth", Professor Langenmayr explained that taxable profits are calculated according to different rules in each country. She suggested that in the long term, the aim would have to be to standardize these rules: "No matter in which EU country, companies would calculate their tax base according to uniform rules. Like this, it would be easier to invest across borders."

At the same time, such a system could give member states the leeway to grant additional deductions in order to promote investment in their preferred sectors. "While such additional tax incentives would have to comply with state aid rules, member states would retain the flexibility to use the tax system to provide incentives in line with their national policy objectives." Langenmayr is certain that small and medium-sized enterprises in particular would benefit enormously from such a procedure: "These smaller companies do not have large specialized tax departments and the fixed costs are more significant for them when it comes to understanding a new tax system in another country."

According to Langenmayr, a uniform corporate tax base could therefore facilitate the economic integration of the member states into the EU and thus strengthen economic growth in the Union. The EU's current proposal to standardize tax rules only for large corporations, on the other hand, falls short of achieving these goals, according to the economist: "The introduction of separate tax rules for large multinationals is hardly a simplification of the tax system. The aim of having common rules for determining the tax base is commendable. However, these rules should apply to all companies in the EU instead of having a second additional set of rules for some."

As the introduction of a uniform corporate tax base in all EU countries is a long-term project to remove barriers to the single market, Dominika Langenmayr also discussed reform options that could be implemented in the short term: On the one hand, she advocated cross-border loss compensation. Until now, it has hardly been possible for companies operating across borders to offset losses incurred abroad against domestic profits. This makes investing abroad less attractive. "A common approach to cross-border loss compensation could motivate companies to invest in projects in other countries that are risky but beneficial for the EU economy." She also advocated a simplification of the tax system. "With the global minimum tax, we now have a comprehensive measure against international tax avoidance. This makes some older measures aimed at curbing international profit shifting superfluous.  These could thus be abolished for companies that fall under the global minimum tax."

Other experts who took part in the European Parliament hearing were Prof. Dr. Jost Heckemeyer, Professor of Business Accounting and Corporate Taxation at the University of Kiel, Christian Kaeser, Head of the Global Tax Function at Siemens AG, and Dr. Enrico Letta, President of the Jacque Delors Institute.