Small businesses looking to trade across Europe would be able to simplify the way in which they calculate corporate taxes under new proposals by the European Commission (EC).

Marking its continued drive to simplify Europe's regulatory framework, the EC announced a trial initiative through which companies operating across EU national borders could calculate all profits according to the tax rules of the home country in which the parent company is incorporated.

The pilot scheme will run for five years beginning on 1 January 2007.

The EC said the plan was spurred by its 2004 European tax survey, which found that firms engaging in cross-border activity often face higher company tax and VAT compliance costs. These costs are proportionately higher for smaller firms than for large companies.

Small businesses pressure group the European Association of Craft, Small and Medium-sized Enterprises (UEAPME) hailed the scheme as a "crucial initiative" which could empower smaller firms to take better advantage of the internal EU market.

"With the costs of complying with cross-border taxation systems as high as they are, it is little wonder that only 3% of [SMEs] have operations in states other than their country of origin," said Gerhard Huemer, UEAPME's director of cconomic and fiscal policy.

"Cross-border compliance costs can be up to 2.5% of turnover for small businesses, as opposed to just 0.02% for larger corporations; no small firm can absorb that type of cost."

Huemer said current compliance costs distort the internal market and put small businesses at a major competitive disadvantage to their larger competitors. Unlike large firms, he said, SMEs cannot engage in "tax shopping", or locating part of their operations in different jurisdictions that offer more favourable tax conditions.

Under the EC's proposals, the scheme would be open to companies with fewer than 250 members of staff, a turnover of €50 million or less and/or with a balance sheet of €43 million or less.

Eligible firms would volunteer to participate in the scheme by notifying tax administrators within their residence states, who would then inform tax authorities in the home state.

The scheme is voluntary and is dependent on member states agreeing to respect each other's tax systems.