New proposal on the Common consolidated corporate tax base project (CCCTB)
The European Commission has decided to re-launch the common consolidated corporate tax base (CCCTB) project in a two-step approach, with the publication on 25 October 2016 of two new interconnected proposals: on a common corporate tax base (CCTB), and on a common consolidated corporate tax base (CCCTB).
Companies operating across borders in the EU would no longer have to deal with 28 different sets of national rules when calculating their taxable profits. Consolidation means that there would be a ‘one-stopshop’ – the principal tax authority – where one of the companies of a group, that is, the principal taxpayer, would file a tax return. To distribute the tax base among Member States concerned, a formulary apportionment system is introduced.
- Problems in taxation of Multinational enterprises in the conditions of different tax law regimes.
Taxing multinational enterprises in a global market poses the challenge of factoring in economic reality when deciding upon a tax base. The C(C)CTB proposals are made in this context, against a backdrop of other corporate tax base- and anti-tax avoidance-related measures.
The term ‘multinational’ refers to an economic entity spanning different countries and legal systems, where different legal entities (such as subsidiaries and branches) connected to the multinational corporation operate. However, a multinational enterprise (MNE) is not considered as a single company from the point of view of tax rules; ‘the various affiliates making up an MNE are instead considered as independent entities (‘separate entity’ approach). In tax law, legal entities are taxed in different countries, based on their status and tax residence. This means that the income of the various affiliates is considered separately in several tax bases (treated by several tax jurisdictions), and not in its entirety (though the business may be run as a whole entity). In short, a corporate tax system based on a physical or legal presence does not recognise the actual economic link (substance requirement).
This issue may be tackled by a ‘unitary business approach’, that is, taxing MNEs according to the real economic substance of where they actually do business. The ‘allocation of profits between jurisdictions’ is part of this approach and includes the CCCTB.
- Existing situation. EU legislation.
When it comes to the anti-tax-avoidance directive, Member States have discussed anti-avoidance rules extensively in the context of the Commission’s 2011 CCCTB proposal: specific rules on interest limitations, exit taxation, switch-over rules, controlled foreign companies (CFC) rules, hybrid mismatches; a definition of permanent establishment; and a general anti-abuse rule (GAAR).
EU taxation law already includes elements that address some profit-shifting situations. The 2015 amendment of the Parent-Subsidiary Directive (2011/96/EU, or PSD), covering dividend payments between EU subsidiaries and EU parent companies, and the work of the Platform for tax good governance are two such examples. The 2015 amendment of the PSD allowed Member States to use unilateral measures against profit-participating loans and introduced a ‘common minimum anti-abuse rule’ for situations that fall under the Parent-Subsidiary Directive.
The Council adopted the Anti-tax-avoidance Directive (ATAD) on 12 July 2016. The deadline for its implementation is end-2018, with derogations set out. WIthin the corporate tax reform package, the Commission adopted a proposal to amend the ATAD in order to extend the rules against hybrid mismatches, so that mismatches involving non-EU countries would also be included. A Presidency compromise on the proposal was published on 17 February 2017 and agreed by the Council on 21 February 2017.
- Comparison with other tax systems.
Unitary taxation and formulary apportionment of taxing rights have for many years been in place in federal states such as Canada, Switzerland and the United States. Limited to the apportionment of corporate income among members of a certain federation, these systems do not deal with the division of income between different countries around the world, on the one hand, and the federation, on the other.
- Main elements of the Proposal
The Commission’s action plan of 17 June 2015 on a corporate tax system in the EU (COM(2015) 302) set out four objectives for such a system. These include measures to re-establish the link between taxation and the location of economic activity; ensuring that Member States can correctly value corporate activity in their jurisdiction; creating a more competitive and business-friendly environment; and protecting the single market and securing a strong EU approach to external corporate tax issues.
The Commission’s C(C)CTB inception impact assessment, published in October 2015, pointed to the need for the EU to promote sustainable growth and investment within a fairer and better-integrated single market. The inception impact assessment covers the re-launch of the CCCTB, and as such is relevant to both the CCTB- and the CCCTB proposal. The assessment argued in favour of a new framework for fair and efficient taxation of corporate profits. Some of the problems highlighted were that companies have to comply with 28 different corporate tax systems; the current transfer pricing rules have not proved effective; the divergence between national rules allows aggressive tax planning; and that mismatches distort the single market. The Commission held that Member States’ budgets have suffered from unfair tax competition practices to a significant degree, and that companies which engage in tax planning often put those that do not at an unfair competitive disadvantage.
From 8 October 2015 to 8 January 2016, the European Commission carried out a public consultation on the re-launch of the C(C)CTB. According to the Commission, all stakeholder groups were generally supportive of the initiative. NGOs, private individuals and other respondents, as well as some companies, especially SMEs, expressed strong support and were also in favour of making the C(C)CTB (partially) mandatory. Large enterprises were against this idea. The majority of stakeholders were in favour of creating an opt-in to the C(C)CTB. Both small and large companies supported the proposal to grant R&D activities favourable tax treatment, and to address the debt-equity bias with an allowance for equity.
In conclusion, after having evaluated the different options, the Commission prefers a mandatory C(C)CTB for very large companies, an allowance for growth and investment (AGI) with well-designed anti-avoidance measures, and an R&D tax incentive designed as a super allowance for R&D expenses.
The proposal provides for the establishment of a system for the consolidation of the tax bases (Article 1). A company that applies the rules of the directive would in general no longer be subject to national corporate tax law. Companies operating across borders in the EU would therefore no longer have to deal with 28 different sets of national rules when calculating their taxable profits.
Contrary to the 2011 CCCTB proposal, both the CCCTB and the CCTB would be mandatory for groups of companies beyond a certain size, namely those with a consolidated turnover exceeding €750 million during the financial year and ‘established under the laws of a Member State, including its permanent establishments in other Member States’. The directive would also apply to ‘a company that is established under the laws of a third country in respect of its permanent establishments situated in one or more Member States’, under certain conditions (Article 2.1 and 2.2). Companies that remain under this threshold would have the possibility to opt into the system (Article 2.3).
Article 3 adds some new definitions, which do not figure in the CCTB proposal, such as: single taxpayer, principal taxpayer, group member, consolidated tax base, apportioned share, competent authority and principal tax authority. In Articles 5-10, rules are established on: parent company and qualifying subsidiaries; when a taxpayer should form a group; the effect of consolidation; timing; elimination of intragroup transactions; and on withholding taxes and other source taxation. Articles 11-21 concern, inter alia, fixed assets, long-term contracts, provisions, revenues and deductions when joining a group, timing for depreciation, fixed assets and losses when leaving a group, and rules on the termination of a group. A withholding tax is introduced on interest and royalties paid by a group member to a recipient outside the group (Article 26).
Articles 28-42 introduce the formulary apportionment system, which consists of three equally weighted factors (labour, assets, and sales by destination). All three factors would have equal weight. The labour factor consists of two parts, payroll and number of employees. The principal taxpayer or a competent authority may request the use of an alternative method for calculating the tax share (Article 29). Rules are also introduced on, among other things, the composition of the asset and sales factors; the calculation of the asset and sales factors for financial institutions and insurance undertakings; and on the oil and gas industry and shipping, inland waterways transport and air transport. Article 44 enumerates items that may be deducted from the apportioned share. Article 45 states that ‘the tax liability of each group member shall be the outcome of the application of the national tax rate to the apportioned share’.
Articles 46-68 introduce rules on: a notice to create a group, tax year, tax returns and tax assessments; the content of the consolidated tax return; failure to file a tax return; and on amended tax assessments. Article 51 specifies that ‘the principal taxpayer shall file the consolidated tax return of the group with the principal tax authority’.
The interest limitation rule, introduced by the CCTB, means that financial costs would be deductible up to the amount of financial revenues (interest and other taxable revenues). With CCCTB (Article 69), the deduction in the tax year of borrowing costs exceeding revenues would be restricted to the higher of €5 million (up from €3 million), or 30 % of earnings before interest, taxes, depreciation and amortisation (EBITDA), whichever is higher (cf. Article 13 in the CCTB proposal).
- Stakeholders’ views
A Business Europe position paper of 22 February 2017 holds that CCCTB could potentially improve the functioning of the single market. It could also facilitate and make it less expensive for cross-border companies to expand, and thereby to promote investment and jobs. Moreover, it could eliminate intraEU transfer pricing and diminish the risk of double taxation. However, without consolidation, businesses would not enjoy sufficient benefits to compensate for the reduction in competitiveness and the increase in administrative costs. Therefore, the CCTB should not become effective until the CCCTB has been agreed. Business Europe expresses concern about the potential economic harm to the economic climate in smaller Member States, and emphasises that many businesses would prefer an optional CCCTB for all companies. Some businesses would like the proposal to be developed further.
In a position paper of 20 February 2017, Insurance Europe questions the two-stage approach of the relaunched CCCTB project, since the possible advantages of CCCTB when it comes to reinforcing the European single market can truly be attained only through consolidation that ‘recognises a company’s cross-border activity within the EU’. It also calls for new VAT rules for financial services and believes that CCCTB ought to be optional, since companies that do not want to expand beyond national borders would not have to adopt the new system without reason, something that is important ‘as several insurers, particularly life insurers, focus only on the domestic market’.
In a position paper of 14-15 December 2016, the European Trade Union Confederation (ETUC) welcomes the re-launch of the C(C)CTB proposals, but argues that the two-step approach will unavoidably allow new loopholes to appear. ETUC holds that the threshold of €750 million is too high and that it should be set at a maximum of €40 million, in line with the accounting directives. It holds that there must be a consistent accounting base, as otherwise double or non-taxation of transactions may arise, and that both CCTB and CCCTB include the possibility of tax avoidance through accounting arbitrage.8 Only with the CCCTB will profit-shifting through transfer mispricing be eliminated.