12 Mar 2008

European Company: A new dimension to Multinational Corporations

Well this may not be new to those familiar with the European Corporate positioning and the accompanying law but then it is new for the reason that the time I am writing it, there is a conference going in Vienna upon the prospects and further developments in this area, which if successful, would lead to a new era of corporate planning in management in Europe. On these lines, I seek to introduce European Company Statute. Perhaps this is also the advent of multinational companies in the true sense of the term.

Origin

It began way back in mid-1960s when in 1965 the French Government presented a formal proposal in the then form of European Commission for a European Company. The idea has already been brought in vogue by the lecture given by Professor Pieter Sanders on the idea of a company that would sans national borders within Europe and would be a European Company rather than a UK Company, French Company or a German Company, for e.g. This led the Commission to require the assistance of Professor Sanders, who was commissioned with the task of formulating a European Company Statute in 1966. This he did and named the Company as SE, short for 'Societas Europaea' (Latin for European Company). Thus the concept came to be installed in 1960s itself, however, owing to lack of commitment on the issue it could not become a reality until for forty years on.

In between, in 1970 there the European Commission kept pondering over the idea of the federal corporation statute type model developed by Professor Sanders whereunder the proposed European Company would be subject primarily to the laws of the EC (now EU) rather than of the Member State. However much could not be done on that proposal. In 1975 the European Commission revised the framework but again there wasn't much progress on that as well. There was another revision in 1989 but there was not much headway until 1992 when the idea of internal markets found pace under the Maastricht Treaty.

The arguments for a European Company, as they were in 1960s, however remained the same across this period of forty years; more competitive European Enterprises in the wake of they being able to derive the maximum advantage by operating on a European level rather than being confined to a national one alone. A high level working group of EU's 'Competition Advisory Group' in 1995 came out with a report estimating annual savings of 30bn Euros with the SE coming to force. Thus began the crusade for having a supra-national company organization which culminated for the time being in 2001.

European Company Statute: The present

Amidst much hype and fanfare, the European Council adopted on 8th October, 2001 the 'Regulation on the Statue for a European Company'. This Council Regulation was accompanied by 'Council Directive supplementing the Statute for a European Company with regard to the involvement of employees', on the same day. This European Company Statute (ECS) came into effect after three years of its adoption i.e. on 8th October, 2004 and since than has the force of law in the EU.

This ECS provides for various dimensions relating to a SE. However the matters not provided for under the ECS (notably taxation, competition, intellectual property etc.) are still subject to the national laws of the Member State wherein the SE has its registered office. Thus as of now ECS can be said to be deficient in ways more than one but then as I write this, there are intense negotiations going on in Vienna to rectify them, as you shall see later on in this post.

The major thrust of the ECS is regarding the formation of the SE. It provides that an SE can be incorporated in four ways;
(i) Merger (of public companies operating in more than one EU Member States)
(ii) Formation of Holding Company (where there are public and private companies with their offices in more than one EU Member States)
(iii) Formation of Joint Subsidiary (where more than one company registered in EU Member States decide to form one together)
(iv) Conversion of a public company registered under a EU Member State but having atleast one subsidiary in another EU Member State.

Then there are other requirements for the establishment of an SE; a minimum capital holding need to be registered in a EU Member State where it has its central management and control; etc. But then the chief features of the Statute are much more.
(i) It gives the SE to have one single set of Accounts for its various operations in the different Member States (thus it does away with a lot of procedural and administrative costs required to be conformed to under the various national legislations in which the company previously operated).
(ii) It requires a single reporting of its activities in the Member State where it is registered (presupposing the use of 'information sharing' mechanism between the Members and relying upon the 'enhanced co-operation' provision between them)
(iii) It gives the company an option of a unified management and thus there is no need now for the companies to have a board of directors for each subsidiary in a different state.

This European Company Statue can also be considered to be on based upon a stakeholder model for it obliges the company to consider and report how its employees are affected by the shift to SE model. In fact this is what the supplementing directive is all about.

Rumblings in the future: The future of SEs

As I noted above, vigorous changes have been proposed to the existing SE model to make the idea really being adopted across the European Union. The major changes proposed are basically taxation oriented (which is a key consideration in establishment and running of any business). As of now the position is that the SE are liable for taxation in the respective Member States where they operate. Thus, for illustration, an SE with its registered office in Paris would be liable to account for its profits in UK, Germany etc. there itself through its branches or subsidiaries. Thus the taxation of SEs as of now is just like any other MultiNational Corporation. This is proposed to be changed with the idea of 'Common Consolidated Corporate Tax Base' (CCCTB) being seriously pondered over in this decade.

This idea behind this was conceived with the declaration by the European Council in March 2000 in Lisbon when it declared its vision of making European Union the 'most competitive and dynamic knowledge based economy in the world in ten years'. To this regard, a Working Group was established in 2004 to develop the concept of a CCCTB. Since then, the Working Group has come a long way and it has already brought upon 60 working papers on various issues facing the harmonization of the tax base. In a nut shell, these can be understood as follows;

+ Instead of the present system of calculation of profits in different Member States where the SE operates, under the new system there would be just one totaling of profit of the SE across EU, under one standardized system of rules (instead of various national laws that apply presently) and thus there would be just one group profit results.

+ Once these group (or SE) profits are determined, upon a basis of a formula these profits would be allocated to the various Member States from where the SE has derived its profits. (Therefore this approach has been hailed as a 'formulary apportionment approach'). This would save the system of potential disputes between the Member States on the level of profits attributable to them.

+ Once the profits are allocated to the Member States, they would apply their national tax rates on these profits and thus tax would be payable in these Member States on an individual basis.

To this regard this is a mulling that 'International Accounting Standards' might be adopted for the maintenance of accounts of the SE. There are other political and technical issues with the adoption of a CCCTB but then the above forms the crux of the matter in vogue.

Why I say relate CCCTB as the future of SEs is for a reason. The reason being the when CCCTB comes into operation (I am sure sooner or later it is bound to come), it shall mark the beginning of a truly multinational company, unperturbed by the diversity and differences in the national laws of various countries in which it operates. Further, the ability to do business across nations and employ the best of all would also give these SEs a significant advantage over their non-EU counterparts which would still be facing with the the Transfer Pricing issues etc. in the absence of similar provisions outside EU. Looks like EU is reforming itself in a competitive way !!!

Further readings;

1. From London Chamber of Commerce
2. From Institute of Chartered Accountants (UK)
3. Wikipedia
4. A nice Powerpoint presentation
5. A discussion paper from Department of Business (EU)
6. PWC update
7. EC Commission's official view (July 2007)
8. Position update on European Private Company
9. A detailed historical account of ECS
10. Report on SE submitted to French Government



And for the latest news on this topic, click here everytime and for CCCTB, click here for latest updates.

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