Corporate Tax Harmonization for the Single Market:What the EuropeanUnion Is Thinking
Bottom Line Issues for American Business
Charles E. McLure, Jr. is a senior fellow at the Hoover Institution at Stanford
University. Previously, he was with the National Bureau of Economic Research,
Rice University, and the U.S. Treasury Department where he was responsible for
developing the proposals that became the basis of the Tax Reform Act of 1986.
He has also worked for the Council of Economic Advisers, as a consultant to
various agencies of the U.S. government, and as an adviser to the World Bank,
United Nations, International Monetary Fund, and InterAmerican Development Bank.
He was recently a member of the OECD's Technical Advisory Group on Taxation
of Business Profits. He holds a BA in economics from the University of Kansas
and a MA and PhD from Princeton.
When corporations operate in several jurisdictions that impose income taxes, it is necessary to divide taxable income among them. The Commission of the European Communities proposes that the European Union shift from individual national accounting to dividing the income of groups of corporations operating in multiple EU Member States according to an agreed formula. Adoption of the Commission's proposals, politically difficult because EU tax rules require unanimous approval, would have important implications for American corporations operating in the EU. These could include simplification, the ability to offset losses incurred in one Member State against profits earned in another, greater neutrality toward corporate form and cross-border reorganizations, reduced double taxation, perhaps lower tax liabilities, and greater opportunities for expansion into and within the EU. The proposals, however, would also entail transition costs, reduced opportunities for tax planning, and greater uncertainty regarding tax treaty issues. This paper describes and appraises the Commission's proposals and their implications for U.S. firms. 1
1 A companion to this article, which contains more extensive documentation, will appear in Tax Notes International, November 29, 2004.