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Should the European Union introduce a common consolidated corporate tax base (CCCTB)? This issue has been discussed for years but only last spring the European Commission has come up with a concrete proposal. Although in 2011 it was overshadowed by the debt crisis, the proposal is already being discussed in the European Parliament and the position of the Council is also expected, where member states are presented.

Like the proposal for a financial transaction tax (FTT), the common tax base has provoked sharp disputes, since ‘pros’ are just as reasonable as ‘cons’. The idea of this proposal is companies operating in several EU countries to be able to calculate their tax liabilities on the basis of a common methodology, which determines both the size and the distribution between countries. The Commission has proposed a formula, comprising of three equally weighted factors: turnover, labour (salaries and staff) and assets. Since the directive does not provide for harmonisation of tax rates, each Member State will apply its own rate to its share of the tax base.

The question is whether this distribution is not actually redistribution and some countries will not lose at the expense of others, especially in such a difficult time for most national budgets. At this point, according to many analysts it is difficult to predict, given that a voluntary implementation of the CCCTB is envisaged, so each company may on its own choose whether to use the new option or continue to use national tax schemes.

Analysts argue that there will be more significant changes if the CCCTB was introduced mandatory. In this case, some countries will benefit at the expense of others and at a European level it will be possible to achieve targets set by the Commission, such as some alleviation for the businesses, reducing tax costs of companies, increasing attractiveness for foreign investors, reducing tax evasion and double taxation etc. At this stage, however, the proposal does not provide for a mandatory introduction of a common corporate tax base. Five years after entry into force of the Directive, the Commission must assess its application, especially for small and medium enterprises, which are the backbone of European economy, as well as the need to harmonise the tax rates too, alongside with the tax base.

Despite all these unclear issues, some countries have already announced that they are firmly against the common tax base - the Netherlands, Sweden, the United Kingdom, Poland, Malta, Slovakia, Ireland, Romania and Bulgaria. The Bulgarian position is that the proposal will create additional administrative and financial burdens for Member States (because they well have to administrate two tax systems – the national one and the CCCTB), it will deprive the country of some important competitive advantages, reduce investment and ultimately contribute to "dissolving the gap" between Member States.

The Budget and Finance Committee in the Bulgarian Parliament has based its position [in Bulgarian] on an analysis of Ernst & Young, saying that if there is an optional implementation of the CCCTB we can expect a small decrease of gross domestic product (GDP) by 0.7%, of employment by 0.1% and of foreign direct investment (FDI) by 0.6%. As already mentioned, the changes would be much significant if there was a mandatory introduction of the common tax base (corresponding reduction of GDP by 3%, of employment by 0.8% and of FDI by 11.7%), but as it currently seems, this option would not be chosen.

The Budget Committee refers to an impact assessment, made by the Commission, according to which the new redistributive mechanism would reduce the corporate tax base by 22.3 percent and the corporate tax revenues in the budget (it is not clear which budget is concerned). The Commission proposal reads: "In fact, the impact on the revenues of Member States will ultimately depend on national policy choices with regard to possible adaptations of the mix of different tax instruments or applied tax rates. In this respect it is difficult to predict the exact impacts on each of the Member States."

"Currently Bulgaria has the lowest corporate tax rate [in the EU] – 10%, as well as an effective tax rate of return on equity 14.5%. In order to compensate for budget losses from the introduction of the CCCTB, it will be necessary to increase the corporate tax rate by 3-4%, leading to further increase of the effective tax rates and increasing the negative effect on investment," Bulgarian MPs argue.

Many famous Bulgarian economists are also against the common tax base, arguing that it would hurt the smaller and poorer EU countries. During the discussion on EU economic governance, organised by euinside in July 2011, Martin Dimitrov (leader of the Union of Democratic Forces and chair of the parliamentary economic committee) said: "What is the benefit of Bulgaria and Eastern Europe from the idea of harmonising the tax base? My strong opinion is that we only lose from such a measure because the trend that is hidden here is towards a tax increase. This is actually the idea! And because they cannot say it in this clear and direct way, it all starts with harmonisation."

During the discussion Georgi Angelov, senior economist with the Open Society Institute-Sofia, said that Bulgaria would lose both from harmonisation of tax rates and the tax base, because "the tax base is half of the tax". "If the formula is set in a way that the tax base to be moved from Bulgaria to France, whatever rates we determine, we cannot in any way influence business."

In an interview from the same period Mr Angelov explained the formula, proposed by the Commission, as follows: "The formula includes, for instance, expenditure on salaries. This means that countries with lower income levels will receive a smaller share of the profits. Another indicator in the formula is the amount of sales - if the company has a plant in Bulgaria, but the majority of its sales is in Germany, most of the tax base will go to Germany, because there are more turnovers. The price of assets has also weight in the formula and because land and buildings are cheaper here, Bulgaria will receive a smaller share of profits to tax with its low tax rate. So even if we make our corporate tax rate 5%, if the profit is taxed primarily in other countries, firms do not have special incentive to come to Bulgaria."

In fact, the Bulgarian position is a priori against any attempt for tax coordination and harmonisation in the EU. Bulgaria declared it was against the proposal to introduce a financial transaction tax (FTT) in the EU. The possibility for coordination in the tax area was the main argument of the opponents of Bulgaria’s participation in the Euro Plus Part. "We say 'Yes' to fiscal discipline, but ‘No’ to any interference in our right to pursue independent tax policy," Foreign Minister Nickolay Mladenov said on the occasion of the 5th anniversary of Bulgaria's accession to the EU. Low taxes were declared a national symbol and advertised as a major competitive advantage of the country, although there are no visible benefits at this stage. The reason, according to some economists and analysts, is that low taxes are just one of the elements evaluated by potential investors, but there are also other, more important elements as business environment, infrastructure, corruption, human capital, etc.

"After the EU funds, Bulgaria has found a new European obsession - the monumental battle against tax harmonisation and western conspiracy against Bulgaria, the investment fright. [...] There is no doubt that the relatively low tax rates and partial harmonisation of tax policy at EU level are competitive advantages for the catching-up economies and should be protected. But turning them into 'a sacred cow' and centring our European policy on this issue is untenable," political analyst Vladimir Shopov commented. He said Bulgaria should seek "the proper configuration of factors to attract investors" rather than focus only on taxes.

euinside believes that the topic is important and worth discussing without excessive dogmatism and populism, because we believe that Bulgarian positions at European level should be meaningful, justified, and a result of extensive public debates. In the Bulgarian section of this website the topic is being intensively discussed by Bulgarian economic experts, observers and other analysts..