The European Commission’s Idea of Small Business Tax Neutrality

Abstract

The European Commission recently announced a competition policy of what might be called ‘small business tax neutrality’ in several of its state aid rulings. Simply put, states may not grant tax benefits that create a tax advantage to multinational firms in comparison to small and medium enterprises (SMEs). As explained in detail here, the United States (US) is engaged in tax competition yielding a structural advantage in favour of US multinationals against European SME’s including by facilitating the avoidance of European tax, which also notably reduces the foreign tax credit offset upon repatriation of earnings to the US. Also, US tax laws grant US multinationals tax incentives on US earnings including special incentives for R&D and domestic manufacturing which are incremental to the lax enforcement of US tax laws on corporate audits especially with respect to transfer pricing. The anticompetitive effect is that US multinationals enjoy a significant trade advantage against their competitors of all stripes and are able to seize market share from European SME’s (just as also occurred in US domestic markets where SME’s were significantly reduced as competition in the US domestic markets over the past decade). Several policy options are provided herein to reduce the competitive advantage of US multinationals in the respective European markets and particularly with respect to European SMEs.