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Brussels’s misguided campaign against tax breaks

par Valentin Petkantchin
mardi 27 février 2007.

Article published by the Financial Times on February 23, 2007, p. 13.

The European Commission seems to recognise no limits in its drive to impose tax harmonisation across Europe. Having issued a sanction against Luxembourg last July for its preferential tax regime pertaining to holding companies, Brussels is now trying to put pressure on countries even outside the EU by targeting Swiss cantonal tax competition and their tax breaks and low business tax rates.

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The European Commission seems to recognise no limits in its drive to impose tax harmonisation across Europe. Having issued a sanction against Luxembourg last July for its preferential tax regime pertaining to holding companies, Brussels is now trying to put pressure on countries even outside the EU by targeting Swiss cantonal tax competition and their tax breaks and low business tax rates.

Such a move, if it succeeds, will hurt not only the Swiss, but all taxpayers in Europe.

Tax competition indeed gives you – as entrepreneur or citizen –not only the opportunity to escape fiscal pressure from your own government by moving to jurisdictions with more favourable tax regimes. It gives strong incentives for all governments to lower taxes, allowing taxpayers to keep more of their money and making markets less distorted.

Such tax competition has existed for some time in Europe and is being intensified by globalisation. Luxembourg and Switzerland, for example are considered in a sense as tax heavens in its heart, benefiting not just European but world taxpayers. These benefits are being undermined by current Brussels’ campaign to condemn places with favourable tax regimes.

Any pretext is used. Thus, the Commission considers such regimes to be “state aid” and unfair subsidies to attract companies. For example, according to a report from KPMG, the average corporate tax rate in Switzerland is 21 per cent but in the cantons of Obwalden and Zug they are respectively 13.1 per cent and 16.4 per cent. Such rates are much lower than those in Germany (38.3 per cent), France (33.3 per cent) or the UK (30 per cent).

In the Commission’s view, tax systems have to be harmonised in the name of free competition and pressure put even on other jurisdictions to stop such “subsidies”, claimed in this case to be contrary to the 1972 free-trade agreement between Brussels and Switzerland. But even if many British, French, German and US companies have established their international headquarters in Switzerland, the argument that tax relief or lower tax rates are a threat to free competition, as the Commission suggests, is senseless.

First of all, the Commission has a very strange concept of free trade.

It is easy to grasp how public subsidies to business – which involve confiscating resources from some parties and giving them to others – should be regarded as “state aid”. But how can the fact that certain taxes are not levied be placed on the same footing ?

Tax relief indicates that government is actually leaving wealth in the hands of its creators. It is absurd to suggest that, if some companies are not paying income tax or are paying lower tax rates than in some EU member countries, they are being “assisted” by government. Even if – by twisting the meaning of words – it is deemed that this really does amount to assistance, it would be the only “state aid” compatible with free competition because it respects property rights. Public authorities are merely allowing creators of wealth to hold on to it as legitimate owners.

In addition, the very notion of “corporate income tax” is a silly idea. Corporations are legal entities consisting of a nexus of contracts. Even if taxes apply in theory to a company, they are always paid in reality by individuals, whether as shareholders (through lower dividends), consumers (through higher prices) or employees (through smaller pay packages than would otherwise be the case). Corporate income tax ends up obstructing the process of producing goods and services and makes companies less competitive. Seeking to repeal the relief on certain taxes merely worsens the situation.

Finally, this harmonisation logic will inevitably lead EU bureaucrats to attack other regimes that benefit taxpayers, be it in the EU or outside. In Ireland, for example, the corporate tax rate is lower than in Swiss cantons and in Estonia undistributed corporate profits are simply not taxed. When can we expect pressure on Ireland to raise its rates or on Estonia to repeal its system, which has contributed to the country’s economic dynamism ?

If the Commission truly wished to promote free competition, it should, on the contrary, have supported tax relief of the sort provided in Ireland, Luxembourg, Estonia or Switzerland. Or it ought simply to let tax competition play out across Europe. This remains an unrivalled way of encouraging governments to reduce tax pressure, which weighs down taxpayers’ purchasing power and European companies’ competitiveness. It would also lead to greater economic prosperity.

Valentin Petkantchin, Institut Economique Molinari



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FT.com / Comment / Opinion - Brussels’ misguided campaign against tax havens
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Mis à jour le : 23 février 2007




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