Global governance

EU Commission ideas for taxing multinationals almost unworkable

  • 6 October 2011

Company tax experts have lodged early objections to proposals floated by the European Commission to use International Accounting Standards (IAS) as a starting point for an EU-wide tax base for multinational companies.

In a policy statement sent to the Commission, the International Chamber of Commerce maintained that tax authorities should respect the differences between taxation and financial accounting rules and refrain from using companies’ financial results for tax adjustments.

The ICC statement, drawn up by corporate experts serving on the world business organization’s Commission on Taxation, said: “Taxation and financial accounting serve different purposes, have different objectives and are based on different principles.

“Although both sets of rules are used to measure the annual results of an enterprise, differences in the results (profits) or methods applied (e.g. valuation) have to be accepted. Financial accounting looks at the enterprise as an economic entity (group) whereas taxation is normally based on a separate entity approach”

Business concern about the direction EU tax policy might take was aroused by a Commission consultation paper issued in March. The paper looks at ways of removing individual tax obstacles to cross-border trade in the Internal Market, which are now being considered by the EU Commission and member governments.

Options included home state taxation – allowing a multinational group to calculate taxable profits for all its EU operations according to the tax rules of the country where it has its headquarters – and a common tax base applicable across the EU, using the IAS as a staring point for the calculation of the taxable EU group result.

The consultation paper says: “All listed companies, including banks and insurance companies, will be required to prepare their consolidated accounts in accordance with the IAS from 2005 onwards. The challenge is to plan how this development can be exploited for taxation purposes.”