Taxing Multinationals in Europe

Abstract

Cross-border spillovers and other vulnerabilities of the corporate income tax (CIT) framework have long been recognized, generating calls for reforms. Europe, a key player in the ongoing global reform discussions, has been debating European options of CIT harmonization to tackle tax spillovers in the region. The main concerns with the current CIT arrangements originate in international spillovers resulting from cross-border profit shifting by multinational enterprises (MNEs) and tax competition between jurisdictions, both undermining the corporate tax take and the integrity of the tax system. This departmental paper discusses options for European CIT harmonization to address CIT spillovers while at the same time further advancing the EU project to build an integrated market in capital, labor, and goods and services. European economies are deeply connected, thereby aggravating corporate tax spillovers in Europe. The common market in the EU-with the free movement of factors of production-and close economic relations with non-EU neighbors (including Norway, Switzerland, and the United Kingdom) has generated large trade, investment, and financial flows among European countries and significant economic benefits. This deep interconnectedness, however, has raised the sensitivity of each country's CIT base and rate to that of other countries, magnifying CIT spillovers. Recent economic and technological developments have further intensified corporate tax challenges. First, the MNE business model has evolved to produce for the global economy through complex global supply chains and a heavy reliance on intragroup trade in hard-to-price services and intangible assets. This model challenges the idea that production and business can be easily separated by national borders and complicates efforts to combat profit shifting. Moreover, the increased "digitalization" of the economy raises issues about the allocation of taxing rights among countries-that is, how and where to tax MNEs?