Franco-German tax harmonization efforts are Quixotic

SUMMARY:

A proposed Franco-German tax pact is aimed at making Europe more competitive. We can’t see how this works, in anyone’s wildest dreams.

quixotic - via wikimediaNews reaches us that the French government is attempting to resurrect past murmurings of broad brush European tax harmonization as a way of creating a more level playing field for European tech companies. It starts with a Franco-German tax pact.  Bloomberg says:

“Europe must learn to defend its economic interest much more firmly — China does it, the U.S. does it,” [French Finance Minister Bruno] Le Maire said. “You cannot take the benefit of doing business in France or in Europe without paying the taxes that other companies — French or European companies — are paying.”

The push reflects mounting frustration among some governments, regulators and, indeed, voters, at the way international firms sidestep taxes by shifting profits and costs to wherever they are taxed most advantageously — exploiting loopholes or special deals granted by friendly states.

France is emboldened by the fact it is working on an agreement with Germany ‘and other partners’ that paves the way towards tax harmonization:

“The objective is a common corporate tax with Germany in 2018 which should be the basis for a harmonization at the level of the 19 member states of the euro zone,” Le Maire said.

Taking aim at tech companies

Media reports see this as another attempt to get companies like Apple, Google, Amazon and Facebook to pay much more in tax than they already pay.

I tend to the view that Uncle Sam has first dibs on the profits these and many other companies shelter through the use of elaborate transfer pricing techniques across European legal entities and which may end up being repatriated to the U.S. under much anticipated, although as yet far from settled, tax holiday arrangements in the upcoming U.S. tax and spend proposals.

Past failure

Past tax harmonization efforts have failed and for good reason. Corporate tax rates are set according to country specific circumstances. Tax harmonization in Europe might sound great in theory but just as we have seen in the the recent past, economic differences among nation states make even a holding of the line on debt extraordinarily difficult. It is, for example, a stretch to imagine that countries like Portugal, Italy, Greece and Spain – the so-called PIGS (or PIIGS if you include Ireland) are likely to agree following the hardship effectively imposed by Germany in the 2009-15 bailouts.

Franco-German tax pact

The French position is driven by a government that will be up for re-election within 5 years, the time horizon over which this latest proposition is aimed. French prime minister Macron has set expectations of a French corporate tax rate of 25% as a key plank in initiatives to make France more competitive on the world stage. In short, it is French domestic economic policies that are driving the Franco-German alliance and very little to do with European aspirations. As Fortune points out:

German Chancellor Angela Merkel made positive noises about Macron’s plans for reform of the eurozone after his election, but Berlin has traditionally guarded its tax-making powers as jealously as any other EU country.

Quite how France thinks it will harmonize with Germany is a mystery given that Germany imposes combined corporate tax rates of 30-33%. Even if France gets that far, anyone in France genuinely believing that tax policy alone is the arbiter of success is tilting at Quixotic windmills.

This excellent article from Quartz amply demonstrates the numerous obstacles that Paris – let alone the rest of France – faces, and the way in which the French government needs to work around a slew of issues.

In the meantime, Apple, with the support of Ireland, remains embattled with Europe over $14.5 billion in taxes the EU believes were avoided via unfair tax treatment. Let’s see how that works out.

Image credit - via wikimedia

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