Do you ever wonder what an EU Finance Minister does these days? He or she can't decide foreign exchange policy-the Euro has taken care of that. Interest rates are now “signalled” every two months or so by a gathering of EU bankers. That leaves tax policy, but now the EU Commission wants to change that too-at least for companies.

The Commission has hatched a cunning plan. Under this plan Europe would tax related companies in the EU as a single group, and then divide out the spoils among the countries where the companies operate. There would be no need to worry about outdated concepts of tax sovereignty or equity any more. The Commission maintains that company tax doesn't work well in terms of international commerce within the Single Market, and therefore there is a need for a common company tax system, if only to make things easier. But is the Commission right about this?

To a great extent, “not invented here” taints the Commission view of company tax. Individual countries have had mutual agreements in place for many years dealing with how payments made and profits shared among group companies in their countries are to be taxed. These Double Taxation Agreements in effect split the share of company taxes between countries. Such arrangements are effective in their own way, but they didn't originate within the Commission.

Another factor which influences the Commission view is the influence of the European Courts. Both the Court of Justice and the Court of First Instance persist in issuing rulings (usually in the taxpayer's favour) where it finds EU member states have been playing hard and fast with the Treaty of Rome. Such rulings must be applied in domestic law-Irish Finance Acts have been littered with them in recent years. The Commission views this approach as ad hoc and haphazard. In reality there's a high degree of consistency in the Courts' rulings.

The combination of Double Taxation Agreements and the impact of court rulings, along with similar accounting principles being applied in many Member States when arriving at a company's profits have resulted in significant commonalities in company tax systems already operating across Europe. Layered on top of these systems is agreed EU legislation governing matters such as the tax treatment of interest and cross border payment of dividends. The system is far from perfect, but it does work. Equally to the point, companies know how it operates.

Perhaps the real motivating factor for the idea of a new company tax regime is the Commission's dislike of tax competition between member states.

The genesis of this lies in the Treaty of Rome, which provides for four basic commercial freedoms – freedom to move goods, services, capital and the freedom to establish business anywhere within the EU. Any unilateral measures to curtail these freedoms by any member state are contrary to EU law.

This approach is bolstered by a separate concept in the Treaty which prevents member states from giving some of their own industry sectors a leg up to the exclusion of other industry sectors – the so called State Aid rules. The supports which may be prohibited include direct assistance (grant aid, subsidies and the like), or less direct assistance such as targeted tax breaks. Between the freedoms and the State Aid rules, EU member states cannot discriminate in their tax treatment of home taxpayers and other taxpayers, nor can they discriminate in their tax treatment of one industry sector as against another.

Neither set of rules prevent one country offering a lower tax rate than another. So provided Ireland offers the 12.5% Corporation Tax Rate to all companies regardless of what they do or where they originate, we are not in contravention of any EC rules. If it is considered that low tax rate policies are undesirable, the EC rules themselves must be changed. Though they claim otherwise, this must be what the Commission is trying to do. Otherwise there is no convincing reason for the new proposals.

Somewhat surprisingly, the proposals haven't yet met with universal howls of outrage. Except, to be fair, from our Government, organisations such as the Institute of Chartered Accountants in Ireland, and from Commissioner McCreevy whose thoughts on the matter were reported on these pages last week.

Maybe this is because the consequences haven't been thought through. Would a new common tax system really make things simpler? Is it simpler for Irish companies to write a cheque to a Collector General in Luxembourg rather than Limerick? Or when dealing with a Revenue investigation, they'd also have to present an interpreter as well as presenting the company records?

The Commission argues that for companies operating across Europe, it is simpler to have to deal with one tax system, rather than with twenty seven? Maybe so, but twenty seven tax systems plus a new one is twenty eight tax systems.

Some groups of companies, even if they wanted to opt in, might have to opt out. This is because it is not clear what a European group might be. If a group of companies operating in Ireland, the UK and France also had a group company operating in the United States, would this be a European group?

Nor are groups of companies tidy things, cleanly represented by neat box diagrams on a page. Companies join and leave groups-they split, they merge, they form partnerships, they move, they go into liquidation. Any accountant will tell you that it's hard enough to determine the taxable profits of a company as a single entity. Devising a set of rules to determine fairly the taxable profits of a company in a group context, across borders, would be well nigh impossible. Even if it could be achieved, the system would have to be so different from any existing tax system that all the experience, legal precedents and knowledge built up over many years would have to be jettisoned.

Nevertheless, draft legislation which could make it all happen is being promised for delivery in a matter of months. All this to achieve simplicity? I don't think so.

Arriving at the set of rules is just the first hurdle. The next is to share out the taxable profits between the member states involved. A few suggestions have already been made for this step, including paying your share of tax calculated by reference to the Gross Domestic product of your home country!

And what about the critical issue for Governments across the EU – would a unified company tax system collect more or less tax overall than is currently being collected under the separate country systems? This should be exercising the attention of all member states, whether they operate high tax regimes or low tax regimes. It could well transpire that less tax would be collected from European companies overall – there is simply no way of knowing. If that were to happen, be assured that the life of any unified tax system would be nasty, brutish and short. What is clear is that the respective share of tax allocated to the member states would change, and there is no prospect that this would be in Ireland's favour.

I don't want to pour cold water on the European Ideal-Europe has been good to us and for us, but the Commission doesn't always get it right when it comes to tax policy. The great pity of the EU company tax project is that it is taking up so much time and resources from very talented people in the EU Commission who might well be better engaged in other things. Similarly, national governments are having to devote resources to monitoring the progress of a project which is becoming more unattainable and less practical as the months progress. There is much that can be achieved to simplify company taxation without diluting tax sovereignty.

While opposition to the EU company tax project is growing, Irish industry now needs to make its concerns better known in Brussels. A wait and see approach may have been appropriate up to now, but the proposals are sufficiently developed at this stage to understand the intention and possible outcome. The proposals are readily available on the Commission's website. The project is called the Common Consolidated Corporate Tax Base. Currently, at worst it is a distraction. It should not become a reality.

– Article in the Sunday Business Post of 15 April 2007 by Brian Keegan, Director of Taxation, ICAI.