The European Commission wants to change the international tax treaties that govern the rules on cross-country tax payments on profits. Keep in mind they created these treaties with each other so that companies would only pay tax on the revenue they earned in each country. At the time it was considered fair and it was to promote economic activity across Europe. It makes sense that if 10% of your sales are in Germany you would pay the German tax rate on 10% of your earnings, not 100%. If you had to pay 100% in each country, you would never have enough money to pay the tax to each country and you would not sell your products in all countries.

Each company pays income tax in their home country on their full earnings with credit for tax paid in other countries that corresponded to the percentage of sales in the other country. In the end, each company pays tax in each country it conducts business, in proportion to the revenue generated in the country. This is considered fair and has been upheld in the Treaty of Rome in court in 2006. The court decision was clear, that if a company has “genuine economic activity” within a country, the company can register in the country and pay the respective tax in that country. Over the years this has resulted in many global companies registering the corporate office in the country that charges the lowest corporate tax rate. The company still pays tax in each country in an amount that is in relation to the economic activity within each country. Then the tax payment of the overall earnings of the company is paid in the registered country. This has upset some because companies have concentrated in areas where the tax is the lowest. It appears to mostly upset the countries that have increased corporate tax rates the most. It is no surprise that companies have moved their headquarters from high tax locations to lower tax countries.

In an effort to increase tax collection, some countries want to collect tax on the overall corporate profits regardless of where the company is registered. This goes beyond collecting tax on earnings that relates to their individual country. They believe the lower tax country is “cheating” the system and creating inequalities between countries. A solution to the problem is being discussed at the European Commission. They wish to modify the treaty so that if a company is registered outside of a European Commission governed country and pays a lower tax in that country, the company can be charged with tax abuse and fined. This would bring additional revenue to the European Commission member countries and equalize the tax landscape so that “tax haven” countries do not have an advantage.

Now where have I heard the term great equalization act before? Maybe I will ask John Galt?