An Overview of Corporate Tax Issues Involving the European Community
EXECUTIVE SUMMARY AS THE EUROPEAN Community begins functioning as an economic entity, more U.S. multinational companies will do business there. Among the concerns these companies face is the effect of taxes on operations. * DESPITE ECONOMIC integration in the EC, member countries will continue to have different tax laws and rates. Because all members must approve tax changes, harmonization is unlikely in the near future. * ALL EC MEMBERS levy both indirect and direct taxes. The most common indirect tax is the valueadded tax. Direct taxes include income and profits taxes. * MULTINATIONAL corporations have a powerful incentive to operate in, and shift profits to, lowtax member states. * COMPANIES DOING business overseas also must be concerned with U.S. tax laws, which tax U.S. corporations on their worldwide income. Prudent tax planning involves minimizing the overall effective tax rate worldwide. * AS TRADE BARRIERS are lifted, tax considerations take on added importance in corporate decision making. Familiarity with EC tax issues will make it easier for CPAs to counsel clients. In 1992, considerable attention was focused on the economic integration of member states in the European Community. This integration, designed to create a single economic market, will have far-reaching implications for U.S. multinational corporations. As trade barriers are reduced or eliminated, tax considerations will become even more important in corporate decision making. This month, Caroline Kern Craig, CPA, PhD, associate professor of accounting, Illinois State University, Normal, and Heidi I. Todd, manager, Country Investors Life Assurance Company, Bloomington, Illinois, explain why it is important for all CPAs--not just tax practitioners-to be familiar with the tax issues faced by U.S. multinationals operating in the EC. The movement to integrate the EC into a single market can be traced to 1951 when the European Coal and Steel Community was founded. Further integration occurred in 1957 when the Treaty of Rome established the European Economic Community and the European Atomic Energy Community. These communities combined in 1965 to form what is now referred to as the EC. In the mid-1980s, the EC began a campaign to establish a single economic market, a move considered necessary to compete more effectively in the world marketplace. To that end, the Single European Act, an amendment to the Treaty of Rome, established December 31, 1992, as the target date for completing market integration. The act also formalized a "cooperation procedure" stipulating that only a qualified majority of member states (rather than unanimity) is required to approve legislation on most matters. Interestingly, unanimity is still required on tax matters, which will make harmonization of tax laws particularly difficult. EC TAXATION Given the magnitude of U.S. investment in the EC (over $100 billion in recent years), an integrated European market will undoubtedly affect how U.S. multinationals conduct foreign operations. In particular, as trade barriers are removed, tax differences between member states will greatly influence the structure and location of these operations. Currently, all E C member states have two general categories of taxes: indirect (consumption-based) and direct (income-based). Both affect how U.S. multinationals make business decisions. Indirect taxes. The most common indirect tax, the value-added tax (VAT), exists in all 12 member states. This tax, which is ultimately borne by the consumer of a good or service, is collected as the good or service passes through the production and distribution cycle. (A complicated system of tax credits eliminates multiple taxation and ensures the consumer bears the ultimate burden.) At a given stage of production or distribution, the tax is based on the "value added" to the good or service by that particular stage. …