Tax Harmonization Disharmony

Imagine your company does business across a union of some dozens of states each of which sets its own profits tax rate - but they all use the same formula for calculating profits. Now imagine life in a similar union where not only are the tax rates different, but every state has wildly different sets of rules for calculating taxable profit.

Which would you prefer? Of course it's a no-brainer: you prefer the simplicity and transparency of the first model. Wrong!

The USA has the first model, the European Union the second, and some member states, notably the UK and Ireland, are desperately trying to hold on to their individual tax-base calculation methods as the European Commission rather reasonably suggests that business would benefit enormously from a standard set of rules.

This is strange, especially given that the UK has been an enthusiastic leader in building international consensus on financial reporting standards for listed companies (IFRS). The EU's proposed 'CCCTB' (Common Consolidated Corporate Tax Base) would have a lot of similarities to IFRS.

Yet responses from UK and Irish professional bodies to the EU's plans, as evidenced once again this week, typically reach for the dreaded 'H' word, complaining that the CCCTB will lead to harmonization of tax rates at higher levels, and greater compliance costs. “The more you harmonise taxes, the more tax rates will rise, the more compliance costs will rise and the more unemployment will rise," said one Irish professional body. How so? State corporate income tax rates in the US vary from zero to 12%, generally with a downward trend, and there is fierce competition between the states for corporate investment.

It is fair to assume that such groups of experienced professionals don't get confused by the difference between the tax base and tax rates. So why are they trying to convince us that a harmonized tax base will lead to higher taxes, against all the evidence and against all economic logic? Is it possible that they have some agendas of their own which they are not telling us about?