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The EU Common Consolidated Corporate Tax Base (CCCTB)


By Tax-News.com Editorial
June 23, 2015


On June 17, 2015, the European Commission relaunched proposals for common corporate tax rules to apply across the EU. Known as the Common Consolidated Corporate Tax Base (CCCTB), the proposals have two objectives: to simplify the EU’s corporate tax framework; and to reduce opportunities for multinational companies to avoid corporate tax.

Introduction

The CCCTB is a single set of rules that companies operating within the EU could use to calculate their taxable profits. The idea is that a company 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.

Multinational groups using the CCCTB would be able to file a single consolidated tax return for the whole of their activity in the EU. The consolidated taxable profits of the group would be shared out to the individual companies under a formula to be agreed by the 28 member states. Each member state would then tax the profits of the companies in its state at their own national corporate tax rate.

Background

The harmonization of corporate tax rules has been discussed within the EU for a number of years. Policy to work towards a CCCTB was established in 2001 and confirmed in 2003. A public consultation was then held in 2003 concerning the use of International Accounting Standards as a possible starting point for a common EU tax base.

In July 2004 a non-paper on the common tax base was presented by the Commission and discussed at the informal Council of Finance Ministers (ECOFIN) meeting in September 2004. The discussions revealed broad support for the creation of a Commission Working Group to progress work on the common tax base.

On May 2, 2007, the Commission adopted a Communication on 'Implementing the Community Programme for improved growth and employment and the enhanced competitiveness of EU business: Further Progress during 2006 and next steps towards a proposal on the CCCTB.’

For the meeting on September 27-28, 2007 the Commission Services prepared a working paper on 'CCCTB: possible elements of a technical outline' which sets out a possible outline of the principles of a Common Consolidated Corporate Tax Base by beginning to bring the various structural elements of the base together into a coherent set of rules.

The Original CCCTB Proposal

This rather laborious process culminated in the formal unveiling of the CCCTB proposal by then European Commissioner for Taxation Algirdas Šemeta in March 2011.

The draft Directive would introduce is a single set of rules that companies operating within the EU could 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.

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 (assets, labor, and sales). 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.

At the moment, the tax base is generally calculated as the company's revenues, minus the amount that can benefit from tax exemptions and deductions such as wages and depreciation. Each member state has a different set of rules for calculating this tax base. The European Commission gives the following example: "Member state A may allow assets to be depreciated over 10 years while member state B might allow deprecation only over five years. Or member state A might allow all entertaining expenses to be deducted from profits whereas member state B might not. A single EU tax base would mean that companies only need to do their calculations in line with one set of rules."

Procedural rules are set out in the proposed Directive on how companies should opt-in to the CCCTB system, how they should submit their tax returns, how the relevant forms should be harmonized, and how audits should be coordinated. For each company or group, the tax return for the whole of their activities within the EU would be filed through the tax authorities in their principal member state, and this same member state would be responsible for coordinating the appropriate checks and follow up on the return.

The 2015 Relaunch

After four years of technical discussions in the European Council (the body representing the 28 member states) without agreement, the conclusion was reached that the original CCCTB proposal was too ambitious. With the tentative support of member states, the Commission has therefore proposed a less ambitious schedule for the adoption of a CCCTB, in a revised proposal announced on June 17, 2015.

Nevertheless, the ongoing global crackdown on corporate tax avoidance has seemingly granted the CCCTB a new lease of life. According to the European Commission, for member states, the CCCTB is expected to contribute to efforts to tackle base erosion and profit shifting (BEPS), consistent with the ongoing work of the Organisation for Economic Cooperation and Development (OECD). In addition, it would no longer be possible for member states to have hidden elements in their tax bases. The CCCTB would also 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.

The re-launched CCCTB proposal, which is due to be presented in 2016, will contain two important changes. First, the CCCTB will be made mandatory for multinational companies because, according to the Commission, large companies that benefit from the current loopholes are unlikely to opt in. Second, the original proposal will be broken into smaller, more manageable stages to make it easier for member states to agree. 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.

The CCCTB reform will include changes to rules on permanent establishment – namely to ensure that companies with economic activities in one member state have a taxable presence there – and controlled foreign corporation rules will be improved. The Commission has emphasized that the reform is not about tax rates; member states will retain the right to decide their own corporate income tax rates.

Importantly for multinational companies, the Commission will propose cross-border loss offset for companies in the EU. With cross-border loss offset, a parent company in one member state would be able to receive temporary tax relief for the losses of a subsidiary in another member state. The Commission said this is particularly important to support start-ups and business expansion in the Single Market, as it would ensure that their cross-border activities enjoy the same loss offset treatment as purely national activities.

The rules would provide that, once that subsidiary became profitable, the member state in which the parent company is established would "recapture" the taxes that it relieved during the loss phase. As such, no member state would have to carry the long-term burden of an unprofitable company in another member state.

The Commission said that "cross border loss offset would deliver many of the same benefits for businesses as the loss relief linked to consolidation in the CCCTB. However, consolidation is a much more substantial project that would fundamentally change how corporate profits and losses are allocated between member states, with a definitive effect on member states' revenues. As such, consolidation has been one of the most controversial aspects of the CCCTB for Member States, and will be postponed for the immediate future."

"Therefore, the purpose of the cross border loss offset will be to allow businesses a basic system for loss relief – which is less contentious for member states – until the ultimate goal of consolidation is achieved."

CCCTB – The Benefits

The Commission believes that a CCCTB will unlock benefits for both companies and member states. For companies, it would reduce the obstacles to operating cross-border, remove distortions to competition, and ease the compliance burden. A CCCTB would also, in theory, reduce the high compliance costs of dealing with up to 28 different sets of rules.

The European Commission has estimated that, every year, the CCCTB will save businesses across the European Union EUR700m (USD795m) in reduced compliance costs, and EUR1.3bn through consolidation. In addition, businesses looking to expand cross-border will benefit from up to EUR1bn in savings. The CCCTB will also serve to make the EU a much more attractive market for foreign investors, the Commission argues.

Unveiling the original CCCTB proposals in March 2011, Šemeta declared: "The CCCTB will make it easier, cheaper and more convenient to do business in the EU. It will also open doors for SMEs looking to grow beyond their domestic market. Today's proposal is good for business and good for the EU's global competitiveness."

Speaking in May 2015 ahead of the unveiling of the revamped CCCTB plan, current Tax Commissioner Pierre Moscovici said: "Our current approach to corporate taxation no longer fits today's reality. We are using outdated tools and unilateral measures to respond to the challenges of a digitalized, globalized economy. For fairer taxation and less fragmentation in the single market, we need to fundamentally review our corporate tax framework in the EU. Big, small, and medium sized companies should be able to benefit from the internal market on an equal footing."

CCCTB – The Problems

In spite of the claimed administrative and monetary benefits of the CCCTB for companies doing business in two or more EU member states, the proposal is not universally loved in Europe. Indeed, certain member states are outright hostile to the idea of a common corporate tax base, whether consolidated or otherwise, notably Ireland and the United Kingdom. These two member states have argued on numerous occasions that the CCCTB would further dilute national sovereignty, make their tax systems less competitive internationally, and violate some of the fundamental legal principles underpinning the EU.

Despite the Commission’s frequent assurances that the CCCTB would have no bearing on the ability of member state to set their own tax rates, the Irish in particular don’t see things this way. Ireland fears that a common corporate tax base is the first step towards the EU’s goal to fully harmonize corporate taxation, including tax rates. And Ireland, with its 12.5% rate the lynchpin of its competitive corporate tax system, stands to lose more than most if this becomes reality.

Ireland is attempting to argue that the CCCTB is actually illegal, and in May 2011, the Irish parliament passed a motion denying the legality of the proposals after a debate in which the measure was slammed as an attempted assault on the country's tax sovereignty. According to a report prepared by an interim committee ahead of this vote, the CCCTB proposals fail to meet with ‘subsidiarity’ requirements, as laid down in the Lisbon Treaty (which forms the constitutional basis of the EU). As defined in this document, "subsidiarity" means that the European Union will only act if and insofar as the objectives of its proposed action cannot be sufficiently achieved by the member states, but are better carried out at the Union level.

A similar parliamentary motion backed by the UK government in 2011 also concluded that the plan does not comply with the principles of "subsidiarity" and "proportionality" as set out in the Lisbon Treaty. Shortly after the motion was debated, Prime Minister David Cameron reiterated his government’s pledge in the Commons that it would refuse the EU further powers over the UK’s tax base and that he would “simply say no” to the EC’s CCCTB proposals.

A number of other member states, including the Netherlands and Sweden, have also indicated that they oppose the CCCTB on subsidiarity grounds.

The CCCTB has also been attacked on economic as well as legal grounds, with some critics warning that the system could distort taxes and investment, leaving some member states and companies in certain industries much worse off.

One study that found that there will be winners and losers under the CCTB was published by EY in 2011. While this report concluded that new system may reduce compliance costs and unlock some unconsolidated net operating losses, it would also redistribute corporate tax revenues among EU countries, and any benefits could be outweighed by the negative impact on economic growth and employment in certain EU member states.

The report showed that the CCCTB would subject the income from a new investment in one member state to a weighted-average tax rate reflecting the statutory tax rates in all EU countries where the group operates, as opposed to only the statutory tax rate in the investment country. So an investment in Ireland, for instance, could be subject to an effective tax rate in the upper 20 percent range, rather than the statutory Irish corporate tax rate of 12.5 percent.

The report concluded that while some CCCTB proposals would be close to revenue neutral, substantial changes in country-by-country tax collections would occur. Five countries would lose at least 5% of their revenues, including Denmark, the Netherlands, Ireland, Finland and Germany. Ten would gain revenues, with France, Greece, Latvia, Spain and the UK all gaining at least 2 percent. It is also found that the CCCTB system would redistribute jobs, with Belgium, Spain and France seeing rising employment, and the remaining countries losing jobs. Ireland, Luxembourg and Poland all experience job losses of at least 1 percent under E&Y’s model. Adopting the CCCTB would have larger negative impacts on FDI, it is calculated, with seven countries experiencing FDI reductions of more than 4 percent.

The report also suggested that the savings that companies make in reduced administrative costs under the CCCTB will be offset by higher corporate tax payments. According to EY’s calculation, almost 24,000 corporate groups will face higher corporate income taxes under the new system, equating to increased taxes of around EUR2.5bn. The percentage increase in tax liabilities would be the greatest for agriculture and mining, financial services, real estate and transportation. However, taxes would go down slightly for manufacturers and more substantially for transportation companies.

A more recent blow to the credibility of the CCCTB proposal was delivered by BusinessEurope, the continent’s largest business association, which warned the EU that a mandatory system without consolidation will undermine Europe’s competitiveness.

“We have always been clear that to maintain the support of the business community, the CCCTB must both be optional for companies and encourage them to expand into new markets within the EU by allowing consolidation of profit and losses in different EU Member States,” said Business Europe President Emma Marcegaglia shortly before the proposals were relaunched. “We are concerned that the expected new CCCTB proposal will be mandatory for companies and will not allow for full consolidation. US companies are able to consolidate profit and losses between states; the CCCTB must offer this possibility for EU companies.”

Will The CCCTB Happen?

The European Commission seems very confident that it will. But, given the hostility to the idea in Ireland and the UK, it is difficult to foresee a unanimous agreement being reached in the Council, which is what will be needed to enshrine the CCCTB into law, especially now that the CCCTB (or perhaps just the “CCTB” in its initial stages) will be compulsory rather than voluntary. Indeed other member states are almost certain to object to certain aspects of the CCCTB’s design, even if they don’t reject the proposals wholesale.

If at least nine member states sign up to the CCCTB, then the draft proposals could be progressed using the “enhanced cooperation” procedure. This rarely-used mechanism is resorted to when unanimity on draft EU legislation can’t be achieved in the Council. However, even enhanced cooperation can be problematic, as the stalled plan for an EU financial transactions tax (FTT) shows. And surely a CCCTB legislated on the basis of enhanced cooperation would defeat the whole purpose of the exercise, which is to create a single corporate tax base?

In fact, the European Commission appears to have already rejected enhanced cooperation in this case. When asked recently whether the adoption of the enhanced cooperation procedure by a group of member states would help deliver a CCCTB, European Competition Commissioner Margrethe Vestager replied that "enhanced cooperation between a coalition of the willing is not a good idea, as it might scare member states away and because competition is important for all the EU member states."

So the Commission and the countries which support the CCCTB have their work cut out if they expect to see these reforms through. For a start, it will take a great deal of persuasion to get the Irish and British on board (although a so-called “Brexit” could make the task slightly easier as an obstinate UK Government would no longer be at the negotiating table). But there are also going to be detailed discussions between member states about various technical aspects of what is going to be a highly complex piece of legislation. It can be expected that the formula which dictates how tax revenue will be apportioned to each member state under the CCCTB will be one of the main sticking points. This is all going to take a considerable amount of time. And given that the actual new proposal won’t be officially unveiled until next year, we can expect many months, even years, of talks on the CCCTB after that.

Businesses shouldn’t completely write off the idea of the CCCTB, or even the CCTB. The OECD’s BEPS project and the EU’s own work to eradicate tax evasion and aggressive tax avoidance has given the common tax base fresh impetus, and member states have been keen to show that they support these efforts. Judging by its recent track record on pursuing key tax files, the European Commission is also unlikely to throw the towel in early, even if the negotiations reach an impasse. For example, Brussels had to go to great lengths to convince several non-EU jurisdictions to sign up to the Savings Tax Directive, and it is persisting with the FTT seemingly against the odds. But if the CCCTB does happen, it won’t be very soon, and the final version is highly likely to contain considerable changes to the original.

 

Tags: law | Luxembourg | Latvia | audit | Greece | legislation | transfer pricing | Austria | tax avoidance | Spain | Netherlands | investment | France | compliance | tax rates | Ireland | European Commission | business | Tax | Europe | tax

 

 

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