November 3, 2016 By FTI Consulting
In an ideal world every company would compete only on the quality of their goods and services and taxes would merely be a formality calculated on the same basis, irrespective of where business is conducted. However, currently this is not the case. Countries compete amongst each other to attract business, outdoing each other in proposing better deals, leading to ever more sophisticated tax structures, resulting in even the tax authorities losing track of the process.
This problem was identified, and possible solutions were presented, by the European Commission in 2011, with the initiative on a Common Consolidated Corporate Tax Base. However, the proposal did not succeed in overcoming the Council’s unanimous agreement test. Consequently, the Commission agreed to rethink the initiative.
Members of the European Parliament, alongside other stakeholders, urged the Commission to propose a corporate tax base system which would provide a more transparent way to tax companies, and would pre-empt tax base erosion and profit shifting. Indeed, one of the additional arguments in favour of a Common Corporate Tax Base is to minimise the tax administration burden for smaller businesses.
On 25 October 2016 the European Commission proposed a redrafted version of the proposal aiming to tackle tax avoidance and evasion, by creating a single Common Corporate Tax Base, and introducing, at a later stage, a consolidation element which would allow companies to offset losses from one Member State from the profits earned in another. The proposal on the Common Corporate Tax Base (CCTB) will first be examined, while the proposal introducing consolidation throughout the EU will start to be negotiated only after the CCTB is agreed.
If passed, the EC proposal on Common Corporate Tax Base will be mandatory for multinational groups with turnover above 750 million EUR and result in them calculating their corporate taxes on single set of measurements throughout the EU.
The proposal will now be sent to the Council for negotiations and adoption. The European Parliament will only have the right to issue an opinion.
The main aspects of the EC proposal introducing the Common Corporate Tax Base are:
The proposal on the Consolidation of the Common Corporate Tax base is set to be negotiated only once the CCTB proposal is finalised.
The dual proposal is not as flexible and attractive to businesses as its predecessor. In contrast to the 2011 proposals, the Commission proposes to make the CCTB mandatory for multinational companies above the threshold and only smaller companies can choose to opt in. Also in practice the biggest advantage of the proposed initiative is not going to be available, given that the consolidation part is unlikely to be accepted by Member States in the near future.
The anti-avoidance proposals in the CCTB proposals go beyond those set out in the ATAD, in many circumstances, and may impact genuine commercial arrangements – e.g. the introduction of a switch-over clause without any exemption for income generated from an active business. Key for industry will also be just how “common” the implementation of the CCTB will be and a more detailed explanation in order to avoid differing implementation in the 28 EU Member States would be welcomed.
These proposals introduce an additional corporate tax system that would lead to two parallel systems operating in each Member State resulting in extra administrative costs for authorities. Moreover, there is a risk of ‘gold-plating’ of certain measures and thus divergence when directives would need to be transposed to the national laws of Member States. Some of the Member States are thus quite sceptical about the benefits – the C(C)CTB in addition to competing with national regimes, would also require the national tax authorities to be able to administer the process smoothly.
Overall the proposal is not very beneficial to smaller Member States that have competitive corporate taxation systems (i.e. Estonia, Ireland, Hungary, or the Netherlands) and therefore are able to attract HQs of multinational companies. In particular, the apportionment formula for the C(C)CTB is challenging for a number of Member States with a small industrial but large service sector and/or significant concentration of research and development hubs.
However, during the negotiations on the initial version of the CCCTB, the most vocal Member State against the proposal was the UK. It fought against CCCTB because it saw it as a step towards a common tax rate, which none of the Member States really favour. Given the UK decision to leave the EU, the likelihood of the redrafted CCTB proposal being agreed to, will only increase.
During previous negotiations, the bigger Member States, such as Germany and France, as well as Italy, were quite supportive of the idea of a common corporate tax base, though the consolidation aspect was not widely accepted. They see such European legislation as a tool to fight tax competition inside the EU.
The proposal of 2011 was blocked primarily due to the consolidation requirement, given that this time the Commission proposed a revised two step approach, it remains to be seen if it will be more attractive to Member States.
However, the European Commission sees the fight against tax avoidance and evasion as one of the few areas where it can demonstrate the value of the EU to European citizens. A number of public stakeholders and MEPs are also supporting the CCCTB proposal. Therefore, Member States may struggle to justify any delay – as within the wider public the CCCTB is considered a ‘pro-growth’ and ‘anti-tax avoidance’ measure.’