TCS Daily

Bolkestein Day!

By Tim Worstall - June 9, 2004 12:00 AM

It may surprise you to know that not everything over here in the European Union is run by blithering idiots despite the manner in which, to me, our rulers increasingly resemble the floating bits in a septic tank. Yes, it is true that describing a cucumber as Class I, knowing that it has a curvature of greater than 10 mm in 10 cm of length, is a criminal offense for which the maximum penalty is three months in jail and a fine of 5,000 pounds (c. $ 8,000) and the law books are filled with other such inanities. As a slight balance to this we seem to have a small cabal of the VRWC embedded in the Commission in Brussels, their leader being the delightful Fritz Bolkestein, Commissioner for Taxation and Customs. An incipient Regulation from his office appears to make it physically impossible to levy Corporation Tax at anything higher than purely nominal levels. This isn't what is said of course, but that looks to be what will result.

Europeans pay tax according to their place of residence, not their nationality. So, if you get bored paying 40% of your income for the bloated bureaucracy of the UK you can move to Stockholm and pay 60% for that of Sweden, perhaps more cleverly you can move to Estonia and pay a 26% flat tax. This is rather different from the US system where you pay Uncle Sam wherever in the world you live.

So what does this tax shopping ability have to do with companies? It's a basic requirement of case law from the European Court that companies, being legal persons, should be treated in the same way as natural persons and there has been a preliminary judgment from the Court that companies should be able to move in the same way as individuals. We'll all have to wait another year or so to see whether the full Court upholds that judgment but in the interim we have EC 2157/2001 which comes into effect on 8 October this year.

On the face of it this Regulation simply allows one to register a new form of company, an SE. Think of it as a pan-European version of an Inc. rather than the national versions like SA, GmbH and PLC that we have now. The devil comes in the details as is so often the case. An SE is to be taxed wherever it happens to place its head office. It matters not a whit where the factories are, the design or the research department nor where the sales or the profits are made. Corporation and profit taxes are to be paid where the brass name plate is and when Estonia offers a 0% such rate on retained earnings we might expect to see a few more of them going up on the walls of Tallinn. So, at the very least, we would expect all new investment into the EU to be done via this sort of company.

Inquiring minds will already have asked what happens to existing companies? The national tax authorities are of course loath to allow companies to disappear over the horizon and not leave enough money behind to cover the politician's pensions so they currently make it very hard to change the country of registration of a firm. In essence that company must first liquidate and the re-form in the new location. From the business' point of view the problem with this is that all of those unrealized capital gains, that land for the factory bought 50 years ago, the profits on the stock of this successful subsidiary, all of these taxes become immediately payable. This can amount to 40% - 50% of the total assets of the company which might explain why so few firms actually try to do this. The new Regulation explicitly makes this requirement defunct.

OK, OK, I know you didn't come here for a tax seminar. To cut to the quick, the net effect is that for a large company to escape from the national tax authorities will cost it a few hundred thousand dollars for the lawyers and a few million more to reprint all the stock certificates. They'll also have to hold board meetings in Tallinn but that would be a small price to pay: if BP did it then the UK Treasury would be short $2 billion a year and the shareholders exactly that much better off. The whole process has been made so simple that I would argue that any directors that did not recommend this would be in breach of their fiduciary duty to shareholders, thus I expect to see a rat run of companies out of the high tax jurisdictions.

It is precisely the sphincter tightening and underwear staining that this prospect engenders in the tax men and politicians of Europe (how can we tax them if they can run away?) which is behind recent calls to have EU-wide minimum corporation tax levels and all those cries of "unfair tax competition" emanating from Paris and Berlin. They might even be successful in a couple of years time in imposing such Union wide rates but Fritzy and his boys have already thought of this: an SE can move anywhere in the EU and also anywhere in the European Economic Area, a grouping that includes Liechtenstein. If anyone seriously thinks that Vaduz is going to raise company tax rates to preserve the German model of industrial stagnation then they would do well to take a little more water with it.

This delightful prospect of business finally being able to tell politicos precisely where they can stick their tax rates is theoretically sound of course, for as economists have been telling us for decades companies don't actually pay taxes, they simply collect them on behalf of the government from the returns due to investors.

So I offer you an idea for a holiday for the capitalist classes, one to balance the May 1 frivolities of the hoi poloi. To be celebrated by prodigious quaffing at the Oppressor's Arms, 8 October each year, Bolkestein Day, in honor of the man who made corporate taxation impossible.


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