At the press conference following the Franco-German meeting on 16 August 2011, a number of high level proposals aimed at achieving greater Euro-Zone financial integration were aired. There was little detail provided. Two tax proposals were floated. Firstly, a proposal for a financial transactions tax for the Eurozone and secondly, a proposal for the harmonisation of the French and German corporate tax systems by 2013. The proposals are being reported in the media as significant from an Irish perspective. In our view they are not. The financial transaction tax has been floated before and rejected by the EU Council of Ministers. This note considers the corporate tax proposal.

French & German Tax Harmonisation: A Summary

The French and Germans have spoken in the past about greater harmonisation of their corporate tax regimes. Looking beyond the headlines, the French President and the German Chancellor have 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 common rate by 2013. What is possible in that timeframe is probably no more than a non binding bilateral agreement to coordinate policy with a view to the long term achievement of the stated aim.  In other words, a grand statement. This is not a new Common Consolidated Corporate Tax Base (“CCCTB”) proposal. Rate harmonisation is not a feature of the EU Commission’s CCCTB proposal and the Franco/German proposal does not have any consolidation (i.e. the allocation of the commonly computed tax base between France and Germany by reference to sales/ assets/employees).

The EU’s CCCTB Proposal: A Reminder

Under the EU Commission’s CCCTB proposals, groups operating throughout the EU could elect to calculate taxable profits for the group using a common consolidated corporate tax base and then allocate the consolidated taxable profit arrived at using these common principles to each EU country in which the group does business. The allocation of the common corporate tax base would be done by means of factors which include sales by destination, labour costs and value of tangible fixed assets. Under the CCCTB proposals, the rate of corporate income tax applied to the profits attributable to each country would be a matter for each country. For example, Ireland could continue to apply its 12.5 percent rate of corporation tax. France could continue to apply its corporate income tax rate of 33.33 percent. The CCCTB in its current form would be available to taxpayer groups at their election. If they decided not to elect to adopt the CCCTB, taxpayer groups could continue to pay corporate income taxes in EU Member States in accordance with local corporate income tax rules and rates of tax. The German Ministry of Finance has expressed its opposition to two aspects of the CCCTB proposals being the consolidation aspect and the optional nature of the proposals. It favours harmonisation of the tax base but retention of local country taxing rights over local country entities. This policy approach seems consistent with the
Franco/German proposals to align their corporate tax base as announced on 16 August.

Some Further Observations on the Franco/German Proposals

The announcement on 16 August does not give details as to the extent of harmonisation of the corporate income tax base and how differences between the French and German corporate income tax systems might be eliminated in order to achieve harmonisation. The announcement indicated an intention to also harmonise rates of corporate income tax between the two countries with a target date for commencement of 2013. This would appear to be a challenging timetable given the starting point of two countries with quite different corporate income tax systems and different policy approaches to the use of tax incentives targeted at corporate taxpayers.

Corporate income taxes in Germany are collected at both the federal and the state level. In addition to federal corporate income tax which applies at a rate of 15 percent (a 5.5 percent solidarity surcharge currently brings the effective federal tax rate to 15.83 percent), German corporate taxpayers are also subject to trade taxes on corporate income which are levied by the German states. The trade taxes broadly apply to the federal tax base of profits but different states apply different rates. For example, the rate of trade tax applicable to a German company based in Frankfurt is currently 16.1 percent, whereas the rate of tax is 14.35 percent in Berlin. The combined result of federal and state tax is a rate of corporate income tax for German taxpayers of approximately 29.5 percent. France does not have a combined system of federal and state taxes but a single rate of corporate income tax which is currently 33.33 percent. It appears that harmonisation of the tax base and tax rate between France and Germany would have to be targeted to include both the federal and state corporate income taxes because confining it to federal taxes alone would still leave substantial corporate income taxes levied on corporate taxpayers by the German states. If the target is to harmonise the combined state and federal tax rates, this presents a potentially greater challenge for the German corporate income tax system as compared with France.

The countries have adopted quite different approaches to corporate tax incentives with France offering a very attractive range of tax incentives to companies that engage in R&D activity in France and a reduced corporate income tax rate of 15 percent for royalties from the exploitation of patents developed in France. Germany offers a more limited range of tax incentives to its corporate taxpayers but incentivises R&D and other targeted investment and activity through grant programmes. Would a harmonisation of tax base result in the re-design of incentives to attract and promote R&D and related activities in the two countries? This would represent quite a change of policy and direction for either Germany or France if a full harmonisation of the corporate tax base was adopted which encompassed an alignment of tax incentives offered by the two countries to corporate taxpayers.

The countries also have different approaches to tax consolidation for corporate taxpayers. German taxpayers participate in corporate tax grouping arrangements that result in a full legal transfer to the appointed head of the tax group of the retained profits of the members of the tax group on an annual basis. Although French tax group arrangements provide for the appointment of a single taxpayer, the group member companies retain their earnings and a separate base of taxable profits. Harmonising the corporate income tax base would represent only a modest degree of alignment of overall tax policy between the two countries. This is because corporate income tax receipts on average represent 5 percent or less of total tax receipts in France and Germany (based on 2009 figures) with both countries collecting substantially more taxes in the form of taxes on labour income (both income tax and social security) and consumption taxes. We will of course keep you up-to-date with the developments (if any) as they arise.

Sharon Burke
EU Tax Centre in Ireland
KPMG in Ireland
T: +353 1 410 1196
E: sharon.burke@kpmg.ie

Shaun Murphy
Head of Tax
KPMG in Ireland
T: +353 1 410 1342
E: shaun.murphy@kpmg.ie