1. The aim of a harmonised EU system to make business easier and cheaper
On 16 March 2011 the European Commission published the much-anticipated draft directive on a Common Consolidated Corporate Tax Base ('CCCTB'). The CCCTB would allow businesses operating in the EU to calculate their tax base on a single set of rules.
The CCCTB has been on the European agenda since 2000. According to the European Commission, it EU should:
- contribute to the international competitiveness of EU businesses and make the EU a much more attractive market for foreign investors;
- ensure that tax considerations influence economic decisions as little as possible;
- avoid unnecessary or unduly high compliance costs and tax obstacles to cross-border economic activity; and
- tackle all harmful or economically undesirable forms of tax competition whilst not hindering the possibility of general tax competition.
The European Commission estimates that, every year, the CCCTB would save companies across the EU €700 million in reduced compliance costs, and €1.3 billion through consolidation. In addition, businesses looking to expand cross-border could benefit from up to €1 billion in savings.
A common EU tax base is likely to have a greater impact on corporate groups operating across the EU than on individual companies operating in a single Member State. Following introduction of a CCCTB such groups would have to comply with a single EU system for calculating taxable income, rather than different tax accounting rules in each Member State in which they conduct their business.
Groups applying the CCCTB would file a single consolidated corporate tax return for their business profits and losses across the EU. The consolidated group results would then be allocated to individual group companies by applying a specific formula allowing each Member State to tax the profits of the companies at its own tax rate.
When calculating the common tax base for companies under the CCCTB domestic tax laws, such as those in respect of the deductibility of interest and asset depreciation, would no longer be relevant. Under the CCCTB the domestic corporate tax rate in jurisdictions will not change but the effective corporate tax rate, both for the group and for each company could nevertheless be reduced.
A key element of the CCCTB is that profits/losses derived from intra-group transactions would be neutralised and would therefore remove transfer pricing issues and "arm's length" discussions with local tax authorities. The CCCTB may also simplify cross-border loss consolidation.
The CCCTB would be optional for companies operating in the EU, which means that if such companies could benefit from the harmonised EU-system they could opt-in. Notwithstanding the introduction of the Parent-Subsidiary Directive, the Merger- Directive, the Interest-Royalty Directive and the Arbitration Convention, the European Commission is of the opinion that an optional CCCTB for the EU-wide activities of companies would be the only way to overcome all remaining obstacles in the corporate tax area for such companies.
The CCCTB proposal will now be discussed within the EU Council where it will need agreement from all EU Member States before it can be introduced.
2. Highlights of the CCCTB
2.1 Eligible entities
Eligible entities are EU companies that have one of the legal forms referred to in the draft directive and are subject to a given [level of] corporate income tax.
Non-EU companies that are subject to such a tax can also benefit if they have a comparable legal form.
2.2 Group Consolidation
Under the CCCTB, group consolidation is possible where there are qualifying subsidiaries.
A "qualifying subsidiary" is anv direct or indirect subsidiary in which the parent company holds:
- a right to exercise more than 50% of the voting rights; and
- an ownership right amounting to more than 75% of the company's capital or more than 75% of the rights giving entitlement to profit.
A group would deal with a single tax authority only, being the tax administration of the Member State in which the parent of the group is resident for tax purposes.
2.3 Opting in
A company or group can opt into the CCCTB from the start of a tax year. A company or a group must apply the CCCTB for an initial period of at least five years. Participation can then be renewed for further periods of three years.
Opting-in to the CCCTB will not increase the base cost of a company's assets or its liabilities.
2.4 Calculation and allocation of common tax base
The CCCTB proposal contains detailed rules on the calculation of the common tax base. However, this calculation is not affected by whichever accounting rules (be they IAS/IFRS or local GAAP rules) apply to the respective companies.
The draft directive also contains extensive rules on the valuation of assets, 'trading books', hedging transactions and how assets should be depreciated. Specific rules apply to tax transparent entities.
There is a general anti-avoidance rule as well as specific anti-avoidance rules concerning the payment of interest to associated enterprises in third countries and controlled foreign companies.
A positive consolidated tax base would be allocated to the group members on the basis of a fixed allocation formula. The formula is based on 3 equally-weighted factors:
- Assets: all fixed tangible assets and certain capitalised costs such as R&D;
- Labour: with equal weighting to payroll expenses and the number of employees;
- Sales: on the basis of where the goods are sold and where services are physically performed.
In case of an overall negative tax base, the loss will not be allocated but will be carried forward indefinitely and will be set-off against a future positive tax base before the balance is allocated. There is no carry back of losses under the CCCTB.
Special rules will apply for financial institutions, insurance companies, the exploration or production of oil and gas, shipping and air transport.
A company that opts for the CCCTB is no longer subject to domestic corporate tax rules. There would also no longer be a need for transfer pricing documentation within a group. Cross-border loss consolidation would be simpler.
Applying a common tax base will also result in reduced compliance (and corresponding expenses) by way of a single tax return/tax base. The focus of compliance would shift to the allocation of assets, payroll and sales within a group.
However, administrative burdens may be greater, at least at the beginning, e.g. due to training requirements and the need to adjust IT systems.
2.6 Outstanding issues
As the proposed CCCTB directive is still in draft form, there are a number of uncertainties with regard to its actual implementation.
At present it is not clear whether there will be more rules restricting the deductibility of interest, other than the anti-abuse rules mentioned in the draft. There will be further discussion of the allocation formula (different weighting for different sectors, intangibles/risk issue, non-EU sales).
The effect on existing arrangements, such as tax rulings and tax treaties, also needs to be considered.
It is also unclear whether EU Member States will provide for a tax free entry into the CCCTB, without the application of domestic anti-abuse rules.
The draft CCCTB directive must be unanimously agreed by the EU Member States in the EU Council, following the opinion of the European Parliament.
3.1 Status in the Netherlands
The Dutch government has recently rejected the CCCTB referring to a number of key objections to the draft directive in its current form. It considers that the CCCTB may result in a reduction of its tax base [by] 30% due to cross-border loss compensation. In addition, the CCCTB ignores key value drivers such as intangibles and financial assets.
3.2 Status in Ireland
The Irish parliament has recently rejected the CCCTB as the proposal was seen as an assault on the Ireland's 12.5% corporate tax rate.
3.3 Status in Germany
The German government has issued a preliminary statement on the CCCTB on May 5, 2011. A working group is currently analysing the draft CCCTB directive in detail and is expected to report later this Summer.
Generally the German government welcomes the CCCTB as it alleviate applying the arm's length principles for cross-border transactions within the EU. However, it considers that the common corporate tax base should be compulsory in order to reduce the administration burden.
However, the German government is concerned that the CCCTB will result in a smaller tax base. The CCCTB does not currently stipulate minimum corporate tax rates whilst, in the German government's view, it also does not deal with intangible assets and transfer pricing sufficiently.
3.4 Status in the UK
The UK government rejected the CCCTB on the basis that it breaches the principle of subsidiarity, that decisions should be taken as closely as possible to EU citizens. The government also stated that it would not transfer any further powers to the EU during the current Parliament.
4. Way forward
Companies trading across the EU could achieve significant efficiencies by applying for the CCCTB. However in light of the lack of enthusiasm from Member States, it seems highly unlikely that this proposal will receive the required unanimous political support.
If no unanimous approval is obtained, a smaller group of EU Member States may choose to continue with the CCCTB project by means of enhanced cooperation.
It would be rather premature to advise companies to embrace the concept of the CCCTB. Nonetheless, the draft directive provides a tool for companies to analyse how their current group structure and their effective corporate tax rate could be influenced by the CCCTB and what adjustments could be made in order to fully benefit from it, if eventually introduced.