Is Home State Taxation a step forward for SMEs? An SME’s ability for growth and integration in the EU after the HST tax reform

Sammanfattning: Small and Medium sized Enterprises (SMEs) within the European Union are currently facing many challenges one being access to financing due to high risk and probability of default, another being cross-border taxation issues with double taxation and information asymmetry. Since the aim within the EU is to be the most competitive and dynamic knowledge-based economy in the world with sustainable economic growth and social cohesion it is essential that the EU operates as a single market. Despite this need, harmonization continues to be far from achieved in the area of direct taxation which also affects the integration and growth opportunities for SMEs. In the Agenda for Entrepreneurship, the Home State Taxation regime, which is based on formula apportionment, has been proposed by the Commission as one option in order to mutually recognize the different Member States’ taxation systems to facilitate cross-border activities and reduce ‘red-tape’. The ‘red tape’ exists as there are currently 25 different tax regimes within the EU, with varying requirements, administrations and laws concerning the conduction of business in the country. By analyzing the current situation of SMEs within the EU using the SWOT- and 4 Risks- analyses, applied to the SMEs based on research, cross-border issues become apparent which hinder SMEs from growing and adopting cross-border activities. The Agenda for Entrepreneurship and the Home State Taxation proposal aims to improve cross-border activity through increasing financing opportunities for SMEs, and reduce pressing issues including transfer pricing, thin capitalization, the transfer of foreign losses and double-taxation which often lead to increased costs when operating cross-border. Although the proposed taxation regime indicates that these issues will be reduced or eliminated upon implementation, Member State reactions from EU case law including Lankhorst-Hohorst on thin capitalization, as well as institutional and academic criticism on the question of equal treatment and discrimination in regards to this regime, makes the actual implementation of Home State Taxation questionable. Furthermore, this proposed tax regime will not directly improve the accessibility of financing to SMEs, although, it will render cross-border activity less costly. In order to improve the financial situation of SMEs, more accessible debt financing must be made possible for small sized SMEs who are between start-up and being financially established. As there is a lack of harmonization of direct taxation within the EU, the Home State Taxation proposal is a feasible alternative for companies to the current use of 25 tax regimes. More accessible debt financing combined with the implementation of HST would ensure the smooth integration and sustainable growth of the SME community. However, the dichotomy between Member States wanting to retain the power to tax and the freedom of establishment under the EC Treaty makes the implementation of HST using an apportionment formula less likely. Therefore, in order to ease the burden of cross-border expansion for SMEs the focus ought to be aimed away from tax reforms and towards making debt financing more accessible.