The Commission has re-launched its proposal for an EU-wide common consolidated corporate tax base (CCCTB). If enacted this would fundamentally change the taxation of multinationals operating in the EU.
However, the project is ambitious and achieving consensus among the 28 Member States remains challenging. Whether the measures will actually be implemented remains to be seen.
What is the CCCTB?
The proposal for a CCCTB is not new: it was first put forward by the Commission in 2011. However, the initiative failed to secure widespread political support, with concerns about the redistributive effect on tax revenues and the ceding of sovereignty over tax matters. The UK in particular was a vociferous opponent of the proposal.
The Commission is now seeking to secure progress by introducing the measure in two stages.
The first stage: a ‘common corporate tax base’
The first proposal is to create an EU-wide ‘common corporate tax base’ (CCTB). This would create a single harmonised set of rules for computing a company's taxable profits, to be implemented domestically by each Member State. In essence, the idea is that the basic rules regarding what income is taxable or exempt, and what relief is allowed for expenses and depreciation, would become the same in each Member State.
Whilst there has already been EU-wide convergence of tax laws in certain specific areas (including, most recently, through the Anti-Tax Avoidance Directive adopted in July 2016), the effect of CCTB would be to harmonise all aspects of domestic corporate tax regimes for companies within its scope.
Individual Member States would, however, remain free to set their own corporate tax rate.
The second stage: ‘consolidation’ of EU taxable profits
The second, more contentious, proposal is CCCTB proper. This would involve the consolidation or ‘pooling’ of all EU taxable profits of a corporate group (computed on the basis of the common corporate tax base described above) and the subsequent re-allocation of those profits among Member States on the basis of a formula determined by reference to the location of assets, employees and sales. Again, each Member State would tax the profits allocated to it at its own national rate.
This approach to allocation of taxing rights represents a fundamental departure from the current international tax system, where taxable profits are determined on an entity by entity basis and are allocated to particular jurisdictions based on traditional ‘independent enterprise’ transfer pricing principles. It is inevitable that there would be winners and losers amongst Members States as compared to the current system.
Only once the first stage is implemented will the Commission move to secure political agreement on the second ‘consolidation’ stage.
Rationale for CCTB and CCCTB
The stated rationale for the CCCTB is two-fold:
Tackling tax avoidance.The common tax base would reduce cross-border mismatches between national tax regimes. Supporters also argue that the consolidated approach, with its allocation of taxing rights based on assets, employees and sales, makes it more difficult to engage in profit shifting than under existing transfer pricing principles.
Facilitating cross border trade and investment. The intention is that CCCTB should reduce administrative burdens and compliance costs to improve investment and trade within the single market, and allow cross-border loss relief.
The Commission also intends to use CCCTB to achieve more specific secondary objectives, such as encouraging innovation through a generous R&D relief, and seeking to address behavioural distortions attributable to the tax-preferred nature of debt over equity (i.e. tax relief for interest but not for equity costs) through the introduction of a ‘tax allowance for equity’.
How does this interact with the BEPS project?
The proposals are not part of the implementation of the OECD’s BEPS project. The CCTB and CCCTB are much more fundamental than the BEPS changes and are not solely concerned with tackling tax avoidance.
However, there is a clear tax avoidance rationale, and the current political climate is undoubtedly a significant driver for the decision to relaunch these proposals.
Who will be affected?
Both the CCTB and the CCCTB proposals would be mandatory for large groups (being groups with consolidated global revenues in excess of €750m) that operate in the EU through either an EU subsidiary or an EU permanent establishment. Smaller groups would be entitled to opt into the regime. This optionality presents the prospect of Member States being required to run parallel tax systems, with the consequent administrative complexity for tax authorities.
How likely is it that CCTB and/or CCCTB will become reality?
The proposals are at an early stage and have not been adopted by the Council. ECOFIN Ministers are due to exchange first views on the proposals at the meeting on 8 November 2016, following which the prospects for implementation may become clearer.
However, consensus on full CCCTB remains politically challenging, even if Brexit diminishes the UK's opposition, given the ‘winners and losers’ problem of switching to a formula-based approach to the allocation of taxing rights.
Furthermore, whilst there seems to be support in principle for CCTB, in reality it may be difficult to achieve agreement on the detail. Each Member State is likely to consider that its own national tax rules should form the template for the common tax base.
Overall, the Commission’s timeline of January 2019 for implementation of CCTB and January 2021 for CCCTB seems ambitious.
The Commission's announcement and accompanying papers can be found here.