No to EU-Wide Common Tax Rate

Editorial | March 11, 2011, Friday // 18:19|  views

The tax drama has returned to Europe after a decade of escalating tensions and for what does not appear like a final round of resolution. The old demons around corporate tax increases are having a small field day of their own, getting businesses in countries like Bulgaria and Ireland on the verge of freaking out.

Calls against EU-wide tax harmonization moves are gathering speed in Bulgaria as a key meeting of European Union leaders opened on March 11 in Brussels. The draft document, which will be discussed in Brussels is provisionally called a pact and mentions a proposal for the introduction of the Common Consolidated Corporate Tax Base (CCCTB), a move towards harmonized corporation tax.

Bulgaria is one of the European Union member states, whose businesses will be hardest hit by tax harmonization moves. The process of tax harmonization is in fact even dangerous for a country like Bulgaria. We have already seen the excise duties skyrocketing each year, translating into high prices for fuels, cigarettes, alcohol.

If Brussels pressures Bulgaria into raising its comparatively low corporate tax rate, the country will lose one of few - or may be its sole advantage - to the rich and developed European economies in the eyes of investors.

Take away the low taxes and you will see foreign companies getting more and more discouraged to move base or invest here. For what else could the country offer to make up for the bureaucratic chaos, which is wreaking havoc across the country? How can Bulgaria bottom out of the crisis if it is forced to increase its taxes?

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.

A change to corporate tax rules could involve the EU setting a minimum corporate tax rate of more than the 10% charged by Bulgaria, and introduce a new harmonized tax system known as the Common Consolidated Corporate Tax Base (CCCTB).

Low taxes, a 2-lev initial capital, low costs and low social security contributions have been so far a sufficient condition for foreign companies to set up companies in Bulgaria or relocate here.

A taxation level of 10% on corporate income and income is one of the lowest in the EU. Adding 62 double-taxation-agreements with other countries and further tax exemptions as well as investment incentives make Bulgaria a business place to be.

Opposite to Tax-Heavens, Bulgaria offers the full advantages of the European Internal Market: Freedom of Establishment, EU Parent & Subsidiaries' Directive, 6th directive on VAT to name just a few.

As taxation is low in Bulgaria and there are clear advantages of a young, emerging market, a slight rise of taxes alone will not destroy confidence. But Bulgaria has with Cyprus and other EU places strong competitors. While an increase of taxes among other problems is not fully solved sufficiently, it will get more difficult to attract foreign investors to move to Bulgaria.

True, taxes are not the only key reason for choosing the right place to do business. Consumer markets, legal framework, corruption and working skills are also top factors taken into consideration by investors. But in today's fast paced world, companies move to a country or invest in a country that offers the lowest taxation and best preconditions as easily and fast to incorporate a company.

A lesson learned from Nokia in Germany was, that even a large production site will follow the taxation and subsidiaries, in this case to Romania, a country, which is fighting comparable problems to that in Bulgaria.

The big players in Europe however do not seem to find the concept of tax competition particularly appealing. They must get vexed at the new member states. How do they dare compete with the developed economies? A touch of this vexation can be found in the speeches of bureaucrats, while not in the official policy of the countries.

Does this mean that (tax) competition is a dirty word within the united block of the European Union? Why should the united block be united in things that stifle market freedom?

The simple truth is that (tax) competition is the only means for poorer countries to get ahead. And it should be preserved.

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Tags: Union, European, EU, europe, Brussels, social security, European Union, France, Germany, tax, income, corporate, personal, Czech Republic, Finland, Poland, Portugal, Cyprus, ireland, Bulgaria, CCCTB, Common Consolidated Corporate Tax Base


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