Daniel Bunn President and CEO at Tax Foundation | Twitter Website
European Commission President Ursula von der Leyen recently addressed the Davos Economic Forum, revealing plans for a unified set of rules across corporate law, insolvency, labor law, and taxation in the European Single Market. This "28th regime" aims to simplify operations for companies within the EU, countering competitive pressures from markets like the United States.
The proposal seeks to reduce compliance costs and stimulate cross-border investment by providing an attractive alternative to current Member State tax policies. Past attempts at harmonization faced challenges due to dual obligations at national and EU levels.
"The '28th regime' must stay true to its promise to provide a real alternative to national rules," said von der Leyen. Previous initiatives like BEFIT were criticized for their complexity and insufficient economic incentives.
A practical example within the EU that could serve as a model is Estonia's and Latvia's distributed profits taxes. These systems rank highly on the European Tax Policy Scorecard (ETPS) for competitiveness and neutrality due to their simple structure. Unlike traditional corporate taxes, they tax profits only upon distribution, not annually.
This approach minimizes penalties on capital investment and eliminates biases between different asset classes. As such, it boosts overall investment by directing it toward productive assets rather than those with tax advantages.
In contrast with traditional systems biased towards debt financing, distributed profits taxes offer neutral treatment of debt and equity financing. They allow investment financed by retained earnings tax-free while limiting excess borrowing as per EU regulations.
Tax Foundation research supports this model, suggesting significant economic benefits if implemented in other countries like Poland or even in the United States. The potential impact includes reduced business tax compliance costs and increased GDP growth.
While Estonia's and Latvia's systems aren't perfect models of cash-flow taxation, they present fewer distortions than existing models in other ETPS countries. Since 2019, Poland has piloted this system for small businesses with plans for expansion.
European policymakers are encouraged to look internally within the EU for efficient tax policy solutions rather than external examples like those from the United States.
