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By Editorial
November 8, 2017

The European Union Common Consolidated Corporate Tax Base (CCCTB) has been talked about recently as a solution to the problem of an imperfect pan-EU corporate tax system, which allows large companies, particularly those with a digital presence, to detach profits from value-creation, and pay tax in low-tax jurisdictions.

But what is the CCCTB? And what will it do? We attempt to answer the key questions here.

What Is The CCCTB?

The CCCTB is a single set of rules that companies operating within the EU would use to calculate their taxable profits. The idea is that a company or group of companies would have to comply with just one EU system for computing its taxable income, rather than different rules in each member state in which they operate. In addition, under the CCCTB, companies active in more than one EU member state would only have to file a single tax return for the whole of their activity in the EU.

When Was The CCCTB Proposed?

Although it may seem like a new initiative, the origins of the CCCTB go back many years. The policy was first presented in a European Commission Communication published on October 23, 2001, and subsequently discussed in various papers, non-papers, and working group meetings over the next few years.

A draft Directive incorporating the CCCTB finally emerged from Brussels in March, 2011. However, the proposals were put on hold after EU member states failed to reach a unanimous agreement on them.

The Commission revived the plan in 2015 against the backdrop of the OECD's base erosion and profit shifting (BEPS) work, and in June that year a revised proposal was outlined as part of its corporate tax reform Action Plan.

In October 2015, the Commission launched a public consultation on the proposals, before the CCCTB was officially relaunched a year later, in October 2016.

What Does Consolidation Mean?

The CCCTB would make it possible for companies or groups of companies to consolidate all profits and losses across the EU, thereby recognizing their cross-border activity. The single consolidated tax return would be used to establish the tax base of the company, after which all member states in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally-weighted factors (see below). This would all be done through the tax authorities of the company's principal member state, and companies would benefit from a "one-stop-shop" system for filing their tax returns.

What Is Formulary Apportionment?

This key element of the CCCTB will comprise three equally weighted factors (i.e. labor, assets and sales by destination)to ensure that profits are taxed where they are actually earned.

The labor factor will be divided into payroll and the number of employees (i.e. each item counting for half) in order to account for differences in the levels of wages across the EU and thereby allow for a fairer distribution.

The asset factor will consist of all fixed tangible assets. Intangibles and financial assets will be excluded from the formula due to their mobile nature and the risks of circumventing the system.

Where the outcome of the apportionment does not fairly represent the extent of business activity, a safeguard clause will provide for an alternative method of income allocation.

Adjusted formulae will be used to better fit the needs of sectors such as financial services and insurance, oil and gas as well as shipping and air transport.

Will The CCCTB Be Mandatory?

It was envisaged in the draft CCCTB directive published by the Commission in 2011 that companies would be permitted to opt in to the new system. However, under the revised directive, the CCCTB will be made mandatory for certain multinational companies.

The rationale behind this change is that large companies tend to benefit from tax loopholes the most, and would therefore have little incentive to opt in to the CCCTB.

Who Will The CCCTB Be Mandatory For?

The CCCTB will be mandatory for large multinational groups with global revenues exceeding EUR750m (USD880m). According to the Commission, these are the taxpayers that "have the greatest capacity for aggressive tax planning."

How Will The CCCTB Be Put Into Place

Harmonization of the EU's corporate tax base is a controversial idea, and obviously implies a major legal upheaval. Therefore, the Commission has proposed that the implementation phase be broken into two broad stages.

As a first step, a common base will be agreed. As a second step, the Commission will seek to consolidate corporate tax rules, which will eventually allow companies to more comprehensively and simply offset losses in one member state against profits in another.

What Are The Advantages Of The CCCTB?

Initially, the CCCTB was framed by the EC as a simplification initiative, and a natural extension of the Single Market. A common corporate tax base would, the Commission says, reduce the obstacles to operating cross-border, remove distortions to competition, and ease the compliance burden of dealing with up to 28 different sets of rules.

According to the Commission, the CCCTB will reduce time spent on annual compliance activities by eight percent while the time spent for setting up a subsidiary would decrease by up to 67 percent, making it easier for companies, including SMEs, to set up abroad.

The CCCTB would also boost research and development and innovation because R&D spending would be 100 percent tax deductible, the Commission says, boosting investment in the EU by 3.4 percent and economic growth by up to 1.2 percent. Furthermore, the Commission believes that the system would remove the current debt-bias in the corporate tax system, and contribute to greater financial stability in the EU.

Importantly, the CCCTB is now seen as a key plank of the EU's anti-tax avoidance agenda. And according to the Commission, the benefits are essentially two-fold. For taxpayers, the CCCTB would eliminate mismatches and loopholes in national tax systems and enable companies to adopt simpler transfer pricing approaches, thereby simplifying the administration and enforcement of transfer pricing rules for member states.

For member states, the CCCTB is also expected to contribute to efforts to tackle base erosion and profit shifting, consistent with the ongoing work of the OECD. In addition, it would no longer be possible for member states to have hidden elements in their tax bases.

What Are The Drawbacks?

Critics of the CCCTB warn that the system would merely replace one set of problems with another.

For example, it has been pointed out that in an era when governments are attempting to prevent profit shifting to low-tax jurisdictions, and the EU and the OECD are trying to dampen tax competition between states, the CCCTB would merely emphasize the importance of a member states' corporate tax rate. Some say this could accelerate the "race to the bottom" on tax rates.

While on the face of it these forces could benefit a member state like Ireland, which has one of the lowest rates of corporate tax in EU at 12.5 percent, this advantage could be neutralized by the consolidation aspect of the CCCTB, under which tax revenues are likely to accrue mostly to the EU's largest economies. Indeed, tax practitioners and business representatives have warned that the CCCTB could decimate the corporate tax base of Ireland.

Questions have also been raised about how the CCCTB will interact with the worldwide corporate tax system and the new approach to corporate taxation under BEPS. To illustrate the point, the Tax Executives institute (TEI) noted in its response to the Commission's 2015 consultation on the CCCTB that adoption of the regime on a compulsory basis by a large number of OECD-member countries before the full implementation of the BEPS project "would regrettably indicate [that] the arm's length standard (ALS) and BEPS approach has been discounted."

This means that far from reducing the incidence of avoidance, the unclear interaction between CCCTB and the ALS may create opportunities for aggressive tax planning. "The modifications created by CCCTB may affect the allocation of MNE investment between member states, as tax planning will now take place via resource allocation to those states with a lower tax rate," the TEI said.

Do All Member States Support The CCCTB?

In a word, no. The reason why the original 2011 proposal failed to progress was because certain member states were opposed to the idea of relinquishing so much tax sovereignty. What's more, the smaller member states are expected to lose out in revenue terms under the formulary apportionment approach.

Ireland in particular is hostile to the CCCTB. As mentioned above, Ireland is expected to be one of the member states which could see its corporate tax base substantially reduced under this system. Not only that, successive governments have opposed the idea on the grounds that a common tax base will inevitably lead to a harmonized corporate tax rate, which could severely damage Ireland's strong corporate tax competitiveness.

What's Next?

A great deal of talking! But not necessarily any progress.

The Commission is promoting the CCCTB hard, arguing that it represents a panacea for the problems of tax complexity in the EU, and tax avoidance by large multinational companies.

However, even though the proposals have been repackaged and resold as the answer to corporate tax avoidance, they are essentially the same as those that failed to find unanimous support among member states the first time around, and attitudes towards them are unlikely to have changed much.

The European Commission's new agenda on the taxation of digital companies may have given the CCCTB fresh impetus. But several member states have also spoken out against these as well, with many governments warning that diverging from the global BEPS project in such a way could be damaging for the EU's reputation among investors, and ultimately for its economy too.

Crucially, the CCCTB is backed by the EU's most influential member states, namely Germany and France, the latter of which has signaled its renewed enthusiasm for the European project under new president Emmanual Macron. However, the harmonization cause may be hindered by the presence of a slightly more euro-skeptic coalition government in Germany, which is expected to be finalized in the coming months.

Without a unanimous agreement on the CCCTB, the possibility remains that they could be introduced in a core group of supportive member states. Indeed, the Commission has already suggested that in future, further EU integration could be a two-speed process involving a "coalition of the willing," and excluding more independently-minded member states.

Whatever happens, for the foreseeable future, it is difficult to see the CCCTB getting very far off the ground. And if it does, don't be surprised to see it crash to earth quite quickly amid disagreements on the details.


Tags: tax | Ireland | BEPS | Tax | Europe | tax avoidance | tax planning | business | European Commission | compliance | investment | transfer pricing | Germany | agreements | financial services | payroll | oil and gas | tax reform | insurance | enforcement | services



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