Hungary and Ireland build front to say no to EU tax harmonisation plan

After last week, any effort from the European Union to harmonize corporate tax rules across the bloc will have to deal with a new opposition front. Last Thursday, Prime Ministers from Hungary and Ireland met separately in Budapest and expressed a firm rejection to any plan from Brussels to finetune regional tax regulations, saying that such moves would damage competition in the single market. The two leaders, who run two of the countries with the lowest corporate taxation in the 28-member bloc, also shared common views on other European affairs and are likely to lead a sort of “no front” in the future.

Background

Since the early 2000s, there has been a wider debate in the European Union on whether tax rates should or should not be harmonised across the region. Indeed, from a tax-policy standpoint, the European Union does not exist as a single market, and the 28 EU member states still operate their own national corporate income taxes. Despite a long history of initiatives and plans around the harmonisation of corporate income taxes within the bloc in the past 15-18 years, co-ordination between member states is still very minimal and corporate taxation rates of around 9% coexist with 35% peaks.

Major tax reform

The focus on tax harmonisation has been at the centre of the EU’s current executive branch, with direct plans to prevent tax avoidance by business players – mainly large scale firms – operating in the EU. In 2016, on October 25, the European Commission announced the intention to proceed with a major corporate tax reform, to overhaul the way in which companies are taxed in the Single Market, “delivering a growth-friendly and fair corporate tax system”.

An official EU statement explained publicly that the EU’s plan was to create a Common Consolidated Corporate Tax Base (CCCTB), a sort of level-playing field for multinationals in Europe, “by closing off avenues used for tax avoidance”. Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: “Companies need simpler tax rules within the EU. At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change”.

Internal disagreement

However, it’s not a secret that, for some EU member states, tax competitiveness has become a key success factor for attracting big multinational companies and so for strong economic growth. Countries such has Ireland, the Netherlands and Malta especially, with some of the lowest corporate tax rates in the region, would clearly find the introduction of the CCCTB definitely not convenient. For this reason, when Viktor Orban and Leo Varadkar, leaders of Hungary and Ireland respectively, spoke to reporters in Budapest at the end of their meeting last Thursday and rejected any effort to harmonise corporate and other tax rules across the EU, they did not surprise anyone.

Firm rejection

“Taxation is an important component of competition”, Hungarian Prime Minister Viktor Orban said. “We would not like to see any regulation in the EU, which would bind Hungary’s hands in terms of tax policy, be it corporate tax, or any other tax,” Mr. Orban also said. “We do not consider tax harmonization a desired direction”, he added.

Ireland’s Taoiseach Varadkar echoed him and said the two leaders agreed that the European economy was strongest where there was competition among member states. “We share a view as governments that we should continue to have competition among member states in terms of tax policy”, Mr. Varadkar said. “We are very much of the shared view that countries should set their own taxation rates. Both for corporation taxes and income taxes”, he added.

Hungarian-Irish front

Hungary and Ireland are amongst the countries with the lowest corporate taxation in Europe. Hungary, which made foreign investment the key-element to power its economy in recent years, runs indeed the EU’s lowest corporate tax rate at 9%, while Ireland’s 12.5% rate is also among the lowest in the 28-member bloc. According to the joint press conference given in Budapest last week by Irish and Hungarian Prime Ministers, Ireland and Hungary also shared common views in several European affairs, such as budget, enlargement and Brexit.

The decision by Ireland’s PM – who has anyway said his views on other points such as migration still diverge from those of his Hungarian counterpart – to meet with Mr. Orban last week, looks like a direct consequence of the plan by the Commission to bolster a CCCTB. Finance Commissioner Pierre Moscovici is actually one of the main backers of the plan, and his words last November, when he called for member states to adopt a CCCTB in an effort get transparency on taxes, sounded like a direct warning for the Irish government.

Next steps

Although the idea of CCCTB emerged almost seven years ago as a draft directive and already collapsed several times, tax harmonisation within the EU is a topic that is by all means gaining momentum. The “French front”, with Commissioner Moscovici championing the proposal and the plan by French President Emmanuel Macron to tax digital companies based on revenues generated in EU countries, is indeed pushing for a change, and it looks that it will eventually bring results. According to Reuters, last November Mr. Pierre Moscovici said that the Commission was considering using extraordinary powers to strip EU states of their veto power on tax matters to break resistance over blocked legislation.