In accordance with the European Union Treaty, Member States have a full autonomy in the direct taxation, including corporate income taxation. This autonomy may be limited only if the domestic taxes are not compatible with the EU law. In principle, the national tax legislation should not create obstacles to cross-border economic transactions. In fact, the existence of 27 corporate income taxation national systems is a significant obstacle to the proper functioning of the Single Market. The main difficulties generated from the lack of common rules on corporate taxation refers to the costs of knowing the tax legislation in each Member State, monitoring of the transfer pricing, the risk of double taxation, the general inability to offset the losses in one Member State with the revenues in another state and the possibility of transferring the tax base from countries with high tax to countries with low tax levels.

In this context, efforts have been made to ensure a better coordination of international corporate taxation. For solving the existing corporate income taxation problems, the European Commission proposed the introduction of measures for coordination, solution contested by some Member States but supported by most specialists, many organizations representing the interests of employers and public authorities in countries affected by migration of capital located in their territory under the influence of tax competition manifested in the European Union. A decision regarding the setting of the framework for coordination of corporate income taxes has not yet been taken, but were made important steps in this direction.

The “Common Consolidated Corporate Tax Base” system is an ambitious goal of the European Commission. Technical discussions related to this system were launched in September 2004, when was formed a working group to help the Commission to prepare a legislative proposal in this regard (Matei and Pirvu, 2010).
Common tax base involves establishing a single tax base for activities of a transnational company, and consolidation means that the income, the expenditure, respectively, the taxable profits to be calculated in one state (the one in which is the company – parent), then the tax to be collected in that state and afterwards to be distributed to other states where the company has activities. Expected benefits of introducing this model are many (European Commission, 2001):
 -the significant reduction of the compliance costs;
 -the disappearance of the double taxation problem within the EU;
 -the removal of a major obstacle to free movement of capital and unrestricted exercise of the right of establishment, due to cross-border clearing (but only within the European Union) tax losses by reducing the taxable profits of parent companies;
 -the disappearance of the tax avoidance practices by using “transfer pricing”, as intra-firm transactions prices can not affect the distribution of taxable income on tax jurisdictions;
 the comparability of effective tax burdens in each jurisdiction (in terms of a single base, the nominal rates are perfectly comparable), with the consequent of quality investment decisions improvement and hence resource allocation to the whole EU.
The advantages of the “Common Consolidated Corporate Tax Base” could create the preconditions for achieving important goals of the EU fiscal policy:
 supporting the success and the common market development by allowing all Member States to compete fairly and to take the benefits of the internal market;
 sustainable reduction of overall tax burden in the European Union, by ensuring a balance between the tax reductions, the investment in public services and sustaining the fiscal consolidation.
Since Romania joined the EU recently, most studies have assessed the impact of the introduction of some measures to coordinate the corporate income taxes in the European Union failed to capture their effect on the tax revenue in Romania. As representatives of the Romanian Government have expressed so far, no pro opinions or views against the European Commission proposal we believe that an evaluation in this regard is useful.

Main issues in the “Common Consolidated Corporate Tax Base”

The “Common Consolidated Corporate Tax Base” system involves consolidated determining of taxable companies with cross-border activity income, as accounting rules.
Concrete actions for building this system started at the ECOFIN Council in September 2004, when most EU Member States have accepted the usefulness of some progress towards creating a common tax base and have decided to set up a working group of experts representing the Member States and chaired by the European Commission, which to examine in detail the possible solutions to implement this database.

The main objectives of the Common Consolidated Corporate Tax Base Working Group – CCCTB WG, established in 2004, are:
 -to discuss on the principles that will govern the “Common Consolidated Corporate Tax Base” system;
 -to examine the technical definition of a common consolidated tax base for companies doing business within the European Union Member States;
 -to establish fundamental structural elements of a consolidated tax base;
 -to formulate a mechanism for allocating the consolidated tax base between entitled Member States.
The resulting documents from discussions in the working group are prepared by the Directorate General for Taxation and Customs and are published on the Web site of the European Commission after each meeting. Until now there were 13 working group meetings.

In the late of 2008, the European Commission hoped to achieve the working group work in a legislative proposal, with effect from 2010, but this objective has not yet been reached (Matei and Pirvu, 2010).
Legislation on the common consolidated tax base will apply to companies paying tax in EU Member States (these will be specified in an annex to the regulation, the Annex will be amended annually) organized in groups, but operating according to individual economic strategies group. Corporations resident in the European Union countries may choose to impose on the “Common Consolidated Corporate Tax Base.” In order of allocating the consolidated tax base between Member State entitled to levy taxes on corporate income, the working group for designing the “Common Consolidated Corporate Tax Base” proposed a sharing mechanism, easy to implement and to verify for both taxpayers and tax administrations, fair and equitable for all Member States to not generate undesirable effects in terms of tax competition. To avoid the manipulation of the system by taxpayers, the working group turned to factors that cannot be artificially transferred between different tax jurisdictions: the assets, the workforce and the turnover. Calculations for the taxable distribution will be made annually. A positive consolidated tax base (net profit) will be allocated immediately, and a negative consolidated tax base (net loss) will be compensated in the future with the group earnings. When a company leaves the group of companies which opted for strengthening the tax base or when a company joins a group that has opted for strengthening the tax base, strengthening tax base and its distribution will be made for a fraction of the tax period in which the company was a member of the group (European Commission, 2007).
The problem for which at present was not found a convenient solution for solving relates to the accounting rules should be used to define the common base. Discussions at the level of the working group frequently targeted the idea of using International Financial Reporting Standards (IFRS). They have the advantage, in addition to their wide international recognition, of easy adaptation to taxpayers, because – with effect from January 1, 2005 – at Community level is applied a Regulation requiring listed companies on regulated capital market to prepare their consolidated balance sheets under International Financial Reporting Standards requirements.

The introduction of some measures to coordinate the corporate income taxes in the EU member countries is susceptible to have positive effects on some of those states, but also adversely affect others. Results of testing performed in 2004 in order to evaluate the effects of corporate income tax coordination at EU level (Nielsen et al., 2004) pointed the following aspects:
 -a total harmonization based on corporate income taxation rules determined through a weighted average of GDP of Member States will generate the greatest benefits to the EU level (an increase of GDP across the EU about 4% ), increasing the welfare of people throughout the Union by 0.1%, while maintaining the same level of tax revenues);
 -whatever the scenario applied, some Member States will record losses of tax revenues from corporate income tax harmonization, so that a compensation mechanism was necessary.
On the other hand, however, the states could obtain higher tax revenue (due to higher tax rate and / or tax base) will record a loss of GDP due to distortions occurring in the business, so the compensation mechanism has little chance of implementation.

In 2006, a number of specialists (Brøchner et al., 2006) said that the in EU-wide the necessary consensus of a major reform in the corporate income tax system (the introduction of harmonized rules) will not be achieved, because the corporate tax harmonization will generate antagonistic effect for individual Member States, the scale of changes in GDP (around 5 percentage points), the welfare level (about 0.8 percentage points) and the tax revenue (about 2 percentage points) is quite broad. Instead strengthened coordination between a number of relatively homogeneous countries (in terms of economic development level, tax rates and rules for determining the tax base) in corporate income tax was a viable solution. Such an approach will lead to less radical policy changes but smaller gains from harmonization.
In 2006-2008, the representatives of some member countries (UK, Ireland, Poland, Latvia) expressed against total corporate tax harmonization and also against the introduction of the common consolidated corporate tax base. Some of those politicians claimed the need to maintain the national sovereignty in tax and others have claimed the tax losses that are recorded.

Since the unanimous support of Member States to corporate tax harmonization is unlikely to be achieved, the European Commission decided that the proposal for a Directive which will introduce the “Common Consolidated Corporate Tax Base” could be the subject of an enhanced cooperation between Member States, provided that there are at least eight participating countries (DG ECOFIN Training and Community Assistance, 2008).
2010 was conducted a further simulation based on the model CORTEX which generated new results caused by changes in national tax systems (Bettendorf et al., 2010). In a first stage, the simulation analyzed the implications of introducing common rules for determining tax base for all companies (domestic or foreign owned) operating in the territory of the Member States. The simulation results show a modest gain of wealth across the EU: 0.006% of GDP, because the aggregate changes of the tax base were not recorded at EU level but only at individual states. However the absence of differences in the rules for determining the tax base generates an improvement in allocative efficiency of capital within the Union. In terms of living standards, the most important benefits of introducing the common tax base will be obtained from Poland and Spain, and the most disadvantaged countries are Belgium and Estonia. Romania would be located in a loser position. In the second stage were analyzed the implications of strengthening the tax base and its distribution among Member States entitled to collect income tax. Strengthening the tax base across the EU will create a reduction in the corporate income tax revenues of about 0.1% of GDP due to offset the revenue and losses for companies with cross-border activity. This reduction will have greater amplitude for countries with a high corporate income tax rate (i.e. Malta) or for countries where the corporate segment has a high importance (i.e. Belgium).
Other studies have estimated the impact of the use of the EU formula apportionment on corporate tax revenues.
Considering a simple example, we see the very significant impact that the common consolidated corporate tax base sharing will generate on revenue from income tax. We assume that there are a corporation formed by parent company and its subsidiary, which we know the following information:

Table 1 – Information about the parent company and the subsidiary

The situation described above, parent company will not pay anything (corporate income tax) because it has not been earning and subsidiary will pay the income tax in the amount of 80 thousand Euros.
Strengthening and sharing the tax base will generate the following situation:
The tax base of parent company = [1/3(1000000/1200000) + 1/3(200000/250000) + 1/6(1500/2700) + 1/6(30000/40000)] x500 thousand Euros = 381.02 thousand Euros
The tax base of subsidiary = [1/3(200000/1200000) + 1/3(50000/250000) + 1/6(1200/2700) + 1/6(10000/40000)] x500 thousand Euros = 118.98 thousand Euros
Therefore the parent company will pay tax in the amount of 95.25 thousand Euros (381 x 25%) to the resident State even if has not recorded gains in its territory and the subsidiary will pay tax in the amount of 19.04 thousand Euros (119 x 16%). Overall, the corporation will pay a higher tax, and the two states involved in the distribution will be positioned as a winner or loser.

The first study assessed the impact of the introduction and distribution rules to strengthen the tax base for corporations in the European Union was made by Fust et al. (2006). In the absence of a comprehensive database with information on companies in all EU Member States, the authors focused on the work undertaken by parent companies in Germany and their subsidiaries abroad between 1996-2001. Particular conditions of the analysis of the three German authors have generated the following results (Fuest et al., 2006):
– enhancing and sharing the corporate income tax base will generate losses of tax revenue for small states using tax incentives, because the attracted tax bases in these countries are high compared with real economic activity taking place on their territory (measured by assets, turnover and wage fund);
– compensation for loss of income in cross-border activities will generate a significant decrease in the total tax base. In the case of the analysis for 1844 parent company in Germany and 5827 foreign subsidiaries, reducing the total tax base was estimated at 20%.

Starting from the premise that the companies with cross-border activity will not change the location choices by introducing rules to harmonize corporate income in the European Union, Devereux and Loretz (2007) estimated effects of the EU formula apportionment on corporate tax revenues in the 22 Member States. They have done a complete analysis (for all Member States) because the database used did not contain the information on the number of employees and payroll for companies in certain states (essential for determining the tax base shared by Member States). The study was based on financial results provided by some 400 000 companies that had assets worth at least 2 million and carried on business within the 25 states in 2000-2004.

In addition, Devereux and Loretz (2007) considered the possibility that some of the companies included in the database to refuse participation in the “Common Consolidated Corporate Tax Base”, in view of its optional character. The authors concluded that consolidation and distribution of the tax base will generate a loss of tax revenues across the EU because the corporate income tax revenues would fall by 2.4% due to cross-border offsetting of losses in profits. Most new Member States will register growth of corporate income tax revenues, while the majority of Northern and Western Europe will face a reduction of these revenues.

In 2008, Devereux and Loretz expanded the analysis on the corporate income taxation coordination impact with focus to the effects of business efficiency. Observations made at the 4567 group of companies (323,442 companies) operating in 27 Member States in 2001-2005 allowed the measurement of change in the ratio of income taxes paid and the value of corporate profits before tax in the current situation, when voluntary consolidation and in the strengthen and sharing tax base situation. When there are different national tax systems (current situation), the tax burden of companies examined in 2001-2005 showed significant differences among Member States of the European Union (from 40.1% in Malta to 20.9% in Belgium). The introduction of some faculty consolidation rules on losses and income from cross-border activities will considerably diminish these differences (from 29.9% in Malta to 18.3% in Italy). And more favorable results in terms of reducing the tax burden were obtained in the strengthening and sharing tax base situation (from 28.6% to 19.7%). Also, the spread between countries is reduced significantly (from 21.6% in Cyprus to 18% in Italy), by creating the prerequisites to ensure a tax neutral conditions throughout the European Union. The average effective corporate income tax in Romania will be reduced by about 7 percentage points in case of the tax base consolidation and distribution, estimated thus a reduction in tax revenue collections (Devereux and Loretz, 2008).

Effect of corporate income tax coordination in the EU on tax revenue in Romania

In order to evaluate the effect of corporate income tax coordination in the European Union on tax revenue in Romania, we analyzed the existing situation in September of 2008 for 9 corporations (Carrefour, E.ON AG, France Telecom, Hewlett-Packard, OMV Aktiengesellschaft, Peugeot SA, Saint-Gobain, Siemens, Unilever N.V.) with 39 subsidiaries active in Romania. Subsidiaries are representative for non-financial companies with foreign stake in capital in Romania in terms of fields: industry, mining and processing, distribution and telecommunications. The subscribed capital of companies that are part of our sample is 9% of the total subscribed capital of financial and non-financial companies with foreign stake in capital in Romania.
Of the companies sampled are: Carrefour Romania SA (the retail company ranked in the top three retail companies in Romania), Petrom SA (the biggest company in Romania in terms of turnover – a member of the group OMV Aktiengesellschaft of Austria) and Orange Romania SA (the most profitable company in Romania). 18 companies of sample reported losses during 2008.
Information about the assets, the number of employees, the turnover, the taxable gross income and the corporate income tax obtained by consulting the consolidated financial statements of companies and the accounting surveys of subsidiaries.
In assessing the position held by companies of sample within the group we present the following information:

Table 2 – Information about Romanian subsidiaries

To obtain the necessarily processed information we designed an information system, which aims at achieving the comparative analysis between the existing situation in the corporate taxation and apparent situation based on the distribution of the consolidated tax base.
An information system can be defined as a set of interrelated elements or components that collect (input), manipulate and store (processing), and disseminate (output) data and information as well as a feedback mechanism.

Our software can be considered a management information system, characterized by the use of information systems to produce reports that help managers to perform their duties. As functional areas, the designed information system has the finance and accounting destination, the activity of analyze the investments and insurance that all financial reports and documents are accurate.

The main focal point of the research was to determine the tax paid by sample companies in the existing situation and the tax that would have to pay if the tax base was consolidated and divided. To determine the tax base divided of the sample branches, we used a formula which gives equal importance to the assets, the number of employees and the turnover (a share of 1/3). Because we had not access to information about the payroll, the labor factor took into account only the number of employees.
The processing of the information collected shows that the corporate income tax would increase in Romania by about 8% after the application of the EU formula apportionment on corporate tax revenues (see figure 2), thus contradicting the assumptions made by studying other research in the field (mentioned in the first paragraph of the paper).

Figure 1 – Corporate income tax differences before and after applying EU Formula Apportionment

Common consolidated tax base introduction should encourage companies to internationalize their assets, because they will no longer incur compliance costs and will have offsetting losses in profits. In this context, Romania who has been geared to only a few years in the process of transnational corporations’ expansion would have a double win:
– could become a more attractive market for investment;
– would benefit from increased tax revenues.

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