A Common Tax Base for Multinational Enterprises in the European Union

In the previous chapter deficits of the current tax system applicable to multinational enterprises in the European Union have been highlighted. The coexistence of different national tax systems has been identified as a source for significant compliance costs, which may prevent enterprises from doing business abroad. The method of separate accounting under the arm’s length principle has been judged to be inconsistent with the economic characteristics of multinational enterprises. As a consequence, transfer pricing is burdensome and entails the risk of double taxation and scope for profit shifting. Further deficits are associated with the coexistence of the source and residence principle. Given different national tax burdens, the coexistence of the source and residence principle distorts business decisions in various respects. In order to protect their tax bases against strategic tax planning of multinational enterprises member states restrict the deductibility of losses and interest expenses and levy exit taxes on business restructuring operations. These measures are not consistent with the principles of equity and neutrality. Furthermore, they are difficult to enforce in a way consistent with the requirements of the EC Treaty.