Corporate income taxation and COVID-19 – time to think about a European tax?

By Frederik Heitmüller


In the aftermath of COVID-19, the exercise of international taxation may become more difficult. With a reinforced need to act in unity at the European level, it’s time to think about a unified European corporate tax.

The reform agenda of international taxation has for many years focused on trying to align the taxation of multinational enterprises better with the places where they create value. This is by no means easy, but some workarounds have been found. For example, rules to define the residence of a company have focussed on proxies like the place where the meetings of the board take place. Or rules to define where the profits from research-intensive businesses should be taxed consider the place where this research was conducted. But where is the place of business when the board meetings are held via videocalls? And where is it when researchers collaborate across borders on one project?

The corona crisis has demonstrated that not all businesses can run in a fully digital way yet, and that without significant physical production of certain goods countries can find themselves in trouble. Yet, one can suppose that the crisis leads to a further deterritorialisation of business, making the exercise of pinning down a physical place where a multinational enterprise creates value even more difficult. Besides these challenges to the feasibility of corporate taxation based on national territories, the crisis has also brought forward the need for cross-national solidarity with more urgency. Any country can be affected, no matter how wealthy it is. Very different on the other hand, are the abilities of countries to deal with the crisis. The availability of high-quality medical facilities and sufficient organisational and logistical capacities can mean the difference between life and death. In addition, the severity of the looming economic downturn will depend to a significant degree on the ability of governments to support their economy.

In this situation, more than ever, solidarity should not stop at the border. This has inspired many to call for further integration of public finances at the European level. A group of influential tax academics across Europe, for example, has called for more supranational integration of taxation power. Last week, the EU Commission came up with a proposal (although still vague) to introduce a new tax on large multinationals levied by the EU, in addition to its 750 Billion euro recovery package.

So the train of financial integration has departed, but what should be its destination? Although many technical details would need to be figured out, I think the next logical ‘station’ could be a transfer of the ability to levy the corporate income tax at the EU level. Corporate income tax revenues of Member States amount to around 3% of the EU’s GDP. Transferring these to the EU would mean a significant increase in the EU’s financial resources, while representing a still manageable loss for Member States. Of course, we will have bigger and more controversial debates about how European funds should be spent exactly – but we have seen that there are challenges common to all of us.

Before the crisis it was already difficult to pin down where ‘value is created’ and allocate corporate taxes among countries. The possibilities for (legal) arbitrage that arose due to this difficulty meant that way too much human energy (and money) was spent on figuring out how to arrange your corporate affairs in order to pay less tax. It’s time to think about dismantling this corporate tax parochialism in Europe and start collecting funds together. These could be spent on things that matter to all of us, and that will help us to become more resilient in time for the next crisis.


This blog has also been published on the LeidenLawBlog: https://leidenlawblog.nl/articles/corporate-income-taxation-and-covid-19-time-to-think-about-a-european-tax

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.