As part of its European Union budget plan for the next cycle (2028-2034), published on 16 July, the European Commission proposed several new revenue sources. Most of these proposals are reasonable, with one notable exception: the so-called Corporate Resource for Europe (CORE).
CORE would require companies with a net turnover of at least €100 million to make annual fixed payments into the EU budget, ranging from €100,000 to €750,000 depending on their turnover bracket. Both EU and foreign companies with a permanent establishment in the EU would be obligated to pay.
The rationale behind CORE is to ensure that the corporate sector, which significantly benefits from the EU’s single market, contributes to the common budget.
Levies on net turnover
Levies on net turnover are straightforward to administer and less susceptible to profit-shifting, offering more stable and predictable revenue compared to profit-based taxes. However, they are also inefficient and distortive because they tax revenue rather than profit, disregarding firms’ costs.
Such levies impose an equal burden on firms with vastly different profit margins. For instance, financial services, oil and gas distribution, and semiconductor equipment have net profit margins of 20% or above in the EU, while sectors such as chemicals, food wholesalers, and retail services have margins close to zero. Some companies may not be profitable at all.
A 0.1% turnover tax equals a 0.5% profit tax for companies operating with a 20% margin, but a 5% profit tax for companies with only a 2% margin.
Tax cascading
Moreover, because such levies in effect tax each production stage without allowing deductions for inputs, they create a phenomenon known as tax cascading. This occurs when the tax burden compounds as goods move through the supply chain, leading to several risks: higher consumer prices, discouragement of specialization, and encouragement for firms to integrate vertically to minimize tax liability.
This undermines competition and reduces economic efficiency.
Regressive within each bracket
Although the proposed CORE lump-sum amounts are progressive in that they increase with turnover brackets, they are strongly regressive within each bracket. The effective rate declines sharply as turnover rises.
For example, companies with turnovers between €100 million and €250 million would all pay a levy of €100,000: a 0.1% effective rate for a company with €100 million in turnover, but just 0.04% for a company with close to €250 million in turnover.
As the top bracket, starting at €750 million in turnover, is open-ended, the differences in effective rates for large companies would be even starker.
New instruments for EU budget revenues
New instruments to raise EU budget revenues are justified only if they help achieve EU policy objectives and do not introduce distortions.
Other European Commission proposals for new budget resources, such as levies on tobacco and non-collected electronic waste, are more promising in this respect.
A defence spending shortfall levy would also foster EU objectives by being calculated on the basis of national underspending in defence, given the need to raise military spending.
CORE, on the other hand, would create distortions and should therefore be scrapped.
Crucial issues in the next multiannual EU budget
The discussion around CORE should not distract from the crucial issues in the next multiannual EU budget: its size and composition, which must be determined by spending priorities.
Ultimately, the bulk of the EU budget is financed by national taxpayers.
Whether the funding comes from new revenue sources or from the default gross national income-based contributions will determine the distribution of the financial burden across EU members.
Implications for businesses
The implementation of CORE would have significant implications for businesses across various sectors.
Companies with higher profit margins would be relatively unaffected, while those with lower margins or operating at a loss could face substantial financial strain.
This disparity would not only affect the profitability of these companies but also their ability to invest in innovation and growth.
Fixed nature of CORE payments
The fixed nature of the CORE payments means that companies would not benefit from cyclical fluctuations in their turnover.
In economic downturns, when turnover might decrease, companies would still be required to pay the same fixed levy, exacerbating their financial difficulties.
Conversely, in periods of economic growth, companies with stable or increasing turnover would not see a proportional increase in their contribution to the EU budget, potentially leading to underfunding of EU programs during periods of economic expansion.
Potential for tax cascading
The potential for tax cascading is another critical concern.
By taxing each stage of production without allowing for input deductions, CORE would create a cascading effect where the tax burden increases as goods move through the supply chain.
This would lead to higher prices for consumers and could discourage specialization, as firms might seek to integrate vertically to minimize tax liability.
This vertical integration could reduce overall economic efficiency and competition, ultimately harming consumers and the broader economy.
Regressive nature of CORE
The proposed structure of CORE, with its progressive increase in lump-sum payments based on turnover brackets, aims to ensure that larger companies contribute more.
However, within each bracket, the effective tax rate decreases as turnover increases.
This regression within brackets means that companies on the lower end of a bracket face a higher effective tax rate than those at the upper end, potentially disadvantaging smaller companies within the same bracket.
This regressive nature could stifle economic growth and innovation, as smaller companies would bear a disproportionate burden relative to their larger counterparts.
En contraste, otras propuestas de impuestos, como los sobre tabaco y basura electrónica no recogida, están más alineados con los objetivos políticos de la UE. Estos impuestos se centran en áreas específicas donde el ingreso adicional puede apoyar objetivos más amplios, como la reducción del consumo de tabaco y la promoción de la sostenibilidad ambiental. Un impuesto por falta de gasto en defensa también estaría alineado con los objetivos de la UE al abordar la necesidad de aumentar el gasto en defensa, especialmente en el contexto de los desafíos geopolíticos actuales.
La discusión sobre CORE debe enfocarse en las implicaciones más amplias para el presupuesto de la UE y sus mecanismos de financiación. El tamaño y la composición del presupuesto multianual de la UE de la próxima UE serán cruciales en determinar las prioridades de gasto de la UE. Si el financiamiento proviene de fuentes de ingresos nuevos o de las contribuciones basadas en el ingreso nacional bruto del país, tendrá un impacto significativo en la distribución del peso financiero entre los estados miembros de la UE. Garantizar una distribución equitativa y equilibrada del peso financiero es esencial para mantener la cohesión y la eficacia de la UE.
Además, la introducción de nuevas fuentes de ingresos debe ser evaluada con cuidado para asegurarse de que no introduzcan distorsiones que pudieran dañar el crecimiento económico y la competitividad. La UE debe priorizar las fuentes de ingresos que no solo generen ingresos estables y predictibles, sino que también apoyen sus objetivos políticos más amplios. Al enfocarse en estos temas clave, la UE puede asegurar que su presupuesto sea tanto sostenible como eficaz en alcanzar sus objetivos a largo plazo.