The EU Commission has issued a communication to the Council and to the European Parliament setting out a method for SMEs to account for all corporation taxes under the rules of the country in which the holding company is tax resident.

Specifically, the Commission is inviting countries to pilot the home state taxation concept for small and medium enterprises. The gist of the scheme is that the tax return and computations – this applies to corporation tax only – are prepared by reference to the tax law of the parent state, irrespective of the tax jurisdiction applicable where the subsidiaries reside. The tax due is then divided out between the countries of residence of the holding company and the subsidiaries on the basis of criteria such as turnover, number of employees, and location of assets. No more tedious application of individual countries rules, worries over Double Taxation Agreements, transfer pricing and the like.

All this sounds great, but this ambitious proposal may have a number of fundamental flaws. Firstly the pilot is to extend only to Small and Medium Enterprises, as defined by the usual EU rules. In reality, this means it's going to miss quite a bit of the action as SMEs are not going to have significant multinational presence – if they did, they wouldn't be SMEs. This limitation perhaps confines the value of the proposal to entities in mainland Europe – relatively localized businesses with operations in adjacent countries. It could also have consequences here for businesses with subsidiaries operating north and south of the Border.

Secondly, because the scheme only extends to Corporation Tax, like cannot be compared with like across the different territories. Different VAT and Payroll rules will result in different profits assessable to Corporation Tax. There is no simplification involved in applying a common set of Corporation Tax rules to figures arrived at by different means.

The Commission's note on the proposal is reproduced at 2.04 below.