Franco/German proposals on taxation
Brian Daly comments on last month’s joint proposals on taxation, by President Sarkozy and Chancellor Merkel, which caught the headlines but were short on detail.
Firstly there was a proposal for a European financial transactions tax. This had been floated previously and was rejected by the Council of Ministers. Last year IMF papers rejected the suitability of a ‘Tobin’ type tax which it believed would not solve the problem at hand and made other suggestions for broader taxes on financial institutions, some of which raised their own issues.
Brian Daly
Brian Daly

The latest ‘proposal’ did not contain detail. However, the introduction of such a tax at a European level only could distort the European market compared to other markets around the world and make the European financial services industry less competitive. There were reports that US Treasury Secretary Geithner expressed opposition to such proposals on his attendance at the recent meeting of European finance ministers also.

Franco/German Harmonisation
Secondly, the Chancellor and the President asked their ministers for finance to prepare proposals for greater integration of their corporate tax systems with a view to achieving a common base and a common rate by 2013. This is not some sort of bi-lateral version of CCCTB.

CCCTB did not involve rate harmonisation while this proposal does. Meanwhile a central tenet of CCCTB is consolidation or allocation of the common tax base across countries by reference to factors such as sales, assets and employees. This is not present in the Franco/German proposal, but rather it seems each country would have its own taxing rights over the base, as derived from common rules, but calculated using normal existing transfer pricing norms for transactions between countries.

Significant disparity
The announcement contained no detail on how differences between the French and German corporate tax systems might be eliminated to achieve harmonisation. Given a starting point of two very different corporate tax systems and such a short timetable, this seems an immense challenge.

In Germany, corporate income taxes are collected at both federal and state level and different states apply different state taxes. German companies pay a combined rate of approximately 29.5 p.c. France operates a single rate of corporate income tax which is currently 33.33 p.c.

Therefore harmonisation of the tax rate along with the base would only make sense if both German federal and state taxes are included in the proposal, which would be mean a greater challenge for Germany.

Quite a major area of policy divergence in the past has been the different approaches to the use of tax incentives for companies. For example, France has offered an attractive range of tax incentives to companies engaging in R&D and a reduced tax rate of 15 p.c. for royalties from the exploitation of patents developed in France. Germany is more limited in its tax incentive offering but incentivises such activity through grant programmes.

A movement by either country towards the other’s approach would constitute a significant policy shift. The divergence between the two countries’ approaches to tax grouping is another example of the fundamental differences which exist.

It will be very interesting to observe developments here and see if agreement can be reached from such different starting points.

Signal of intent
Even if France and Germany manage to agree such harmonisation, it would only represent a modest degree of alignment in overall tax policy between the two countries. Based on 2009 figures, corporate income tax receipts on average represent 5 p.c. or less of total tax receipts in France and Germany, while taxes on labour and income as well as consumption taxes contribute much more substantially to the two Exchequers.

Mainly it constitutes a significant statement of intent – Merkel said ‘On economic policy we are ready to show that France and Germany can move closer together and have chosen corporate tax as an example for stronger harmonisation of both tax base and rates.’ It seems the intention is to give a strong signal of economic integration to encourage such integration across wider Europe.

It may be possible that a few other countries will consider joining in – Belgian’s finance minister has subsequently expressed some support. However for now, it is a non-binding bi-lateral proposal on which, in my view, much broader agreement across the EU is not likely to emerge any time soon.
This article appeared in the September 2011 edition.