NEW YORK — An enlarged European Union on May 1, with the accession of 10 new members, mostly former Soviet bloc countries, certainly changes the macroeconomic landscape of the region: The EU’s population will grow 20 percent while the gross domestic product will swell by 5 percent.
But from a microeconomic viewpoint, such as the impact on value-added and consumer taxes, the changes are more subtle. And it is these subtleties that may catch many U.S.-based multinational companies that have operations in the accessioning countries off-guard, said Duncan Stocks, midwest area leader for the VAT Center at KPMG LLP.
Stocks said multinational companies “ignoring the tax implications of the accession” or simply leaving the handling of tax compliance issues to their local subsidiaries “may leave them open to undue risk.” He said the issues that need to be addressed range from changes in the value-added tax structure as well as consumer and payroll taxes. Also impacted is the tax paid on goods sold.
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“This is the largest group of countries to join the European Union at one time,” Stocks said. “These are countries that come from Communist backgrounds, and not free-market backgrounds.”
The 10 countries are the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia. Stocks said once these countries are folded into the EU, multinational companies with subsidiaries in these countries face a host of trade regulations. Noncompliance can garner hefty fines. “In some cases, as high as $35,000 a month,” Stocks said.
KPMG recently polled 60 tax decision-makers from U.S.-based companies, asking them about the EU enlargement. When asked if the EU enlargement would affect their business, 34 respondents said “no” while 26 said “yes.” The poll also revealed a large number, 33 respondents, who said they were not addressing any EU enlargement issues.
Stocks said he hopes companies initiate a strategy so business interruptions due to the enlargement can be minimized.
Aside from taxes, the enlargement affects other business issues that companies may need to consider — most notably the cheaper cost of labor and lower corporate tax rates. Corporate tax rates in some of the joining countries are as low as 15 percent, which compares with 30 and 38 percent in the U.K. and Germany, respectively.
From a broader economic perspective, the enlargement is expected to “yield major benefits to the new member countries in the long run,” according to a recent report by the IFO Institute for Economic Research.
“The new members will be able to capture gains from trade in goods and services and will moreover benefit from a continued inflow of financial and real capital,” the IFO said. “Without doubt, these processes will significantly accelerate the economic growth in Eastern Europe. However, even under optimistic assumptions, catching up with the [other EU member] countries will be a time-consuming process that will take several decades in most cases.”
— Arthur Zaczkiewicz