Analysis Materials 7 December 2005 12:05 (UTC +04:00)

Though THE European Union (EU) has unified market of goods and services, 25 tax administrations function in its territory with peculiar tax policy. The multinational companies frequently fall under the jurisdiction of different countries and greatly suffer of that.

The governments of some countries of the united Europe complain that the taxes paid by the corporations have so less to do with the public assets such as legal system, qualified workforce, roads. The European Commission warns that simultaneously functioning obstacles on the way of development of the European market, which deprives them of assets.

Last month the commission stated it is will increase its efforts in harmonizing corporate taxes, but not tax rates. EU member-countries will remain free in defining the amount of taxes, while the board resolutions will be taken into consideration in defining the types of mutual taxes. The companies will calculate unified common European profits basing on unified rules. It is taxable profits, which can be further distributed among member-countries in accordance with the weight of the company in every country. However, not all European Commission member-countries share this idea. Last week Charli MacKriwi, a commissar on foreign markets, warned against the measures which could strongly hinder to the realization of an idea on harmonization of tax rates. He stated that the notion of tax rate could not be isolated from the tax base. According to analysts, MacKriwi was absolutely right in one detail: tax rates and tax base were interrelated. As the rates rise, the base has a tendency for cut. The company more and more decide to make profits in other countries. IN accordance with the EU’s current tax regime the foreign daughter companies of the multinational companies should be autonomous. They should take into consideration all allocated by the mother company.

But the transference prices applied in different countries by different bodies of the company, are arbitrary and manipulating. The prices help the companies to transfer the losses from part to another part through artificial increase of purchase prices and artificial exaggeration of the cost of foreign assets. In 2003 Erik Bartelsman from Free University of Amsterdam and Roul Bitom from the University of Amsterdam, studied the ways for manipulating the companies through transfer prices. They stated that the companies benefit the added cost in concrete spheres of industry throughout the world and expenses.

The analysts say if the European Commission carries out its idea, it will be very difficult to implement the above said tax tricks. In this case the corporation will design unified set of figures in line with the European rates of corporate taxes. Thus, it will be absolutely indifferent which foreign daughter company obtains profits and which one suffers losses.

However, the government of Ireland apprehends that harmonization will not resolve general problems of the tax isolation of the EU. How much is the apprehension justified? The analysts think that even after the harmonization of the corporate tax the EU countries can frequently rival with each other in attracting more part of harmonized tax. The European profits of company can be distributed among the countries and in compliance with the approximate calculation of assets of the companies in every country. Establishment low tax rates the government of Ireland could enable the competitive company to increase sale in their own country, as major part of incomes would fall on Ireland. It is rather easy to group the incomes of the company in the paper than to distribute. So, if an idea of the European Commission is implemented, the taxation base in the EU countries would be more inertial than that the analysts guess. The modern companies are mobile enough to reply to any changes in the tax legislation. If the tax base is harmonized, it could bring bigger results than the harmonization of rates, the analysts think.