The objective of this re-launched project is to strengthen the internal market by making it easier and cheaper for companies to operate cross-border in the EU, increase the transparency of corporate taxation and counter corporate aggressive tax planning. The proposals follow a European Parliament resolution on tax rulings and other similar measures (TAXE 1), where it called for establishment of a mandatory CCCTB; repeating these calls in its resolution in 2016 (TAXE 2).
In short, the proposals are intended to bring about tax certainty, clear and stable regulatory framework and strong anti-tax avoidance rules including abolition of transfer pricing. The CCTB provides for a single set of rules for calculation of the corporate tax base and their application is mandatory for groups of companies established under the laws of an EU member state with consolidated turnover exceeding €750million (including its permanent establishments in other Member States). There is an opt in for companies remaining below the threshold, though they would still file a separate calculation and tax return in all Member States where they have a taxable presence.
The reforms address a deduction for R & D (to support innovation) and address debt receiving more favourable tax treatment than investment (through deductions from the taxable base). Deduction in the tax year of borrowing costs (exceeding revenues) would be limited to €3 million, or 30% of earnings before EBITDA.
In addition, the CCCTB introduces a consolidation element which would enable businesses to offset losses in one Member State against profits in another Member State. This builds on the CCTB and adds an apportionment formula, whilst adding new definitions for taxpayer (ie single, principal, tax authority etc). It also sets rules on parent company and qualifying subsidiaries; the effect of consolidation; timing; the elimination of intra-group transactions and on withholding taxes and other source taxation.
A withholding tax is introduced on interest and royalties paid by a group member to a recipient outside the group. The formulary apportionment system consists of three equally weighted factors, labour, payroll and number of employees, assets, and sales by destination. Specific provisions are inserted for the calculation of asset and sales factors for financial institutions and insurance undertakings, and for the oil and gas industry and shipping, inland waterway transport and air transport.
It is the current rhetoric of the EU that a potential decrease in UK corporate tax rate post Brexit, international developments or US taxation overhaul make the flexibility of the CCCTB of paramount importance. Modern tax systems must address specificities of a globalised economy and a digital economy and thus, businesses active in the EU without physical presence must still be captured and treated pari passu with those physically established.
However, MEP’s opposed to the CCCTB (in particular) have described it as lacklustre unacceptable policy-making creating a harmonised corporation tax through the back door. Smaller member states argue that it is they that have the most to lose from such reforms, it being no secret that numerous multinational corporations have set-up a base of operations in smaller member states such as Luxembourg, Ireland and the Netherlands.
MEPs such as Esther de Lange, Brian Hayes and Gunnar Hoekmark hypothesise that proportional country-by-country reporting would go much further than current proposals in tackling aggressive tax planning, with other commentators in Europe even going as far as to suggest that the CCCTB’s written agenda to curb tax avoidance is disingenuous in light of its likely actual effects.
The EU has not carried out a full country-by-country impact assessment prior to the proposals and member states are pushing for serious debate on the issue. The reforms are ambitious but potentially provide an advantage to businesses in following common EU-wide tax rules and completing a solitary tax return. This must be balanced with sovereignty (right to set the tax rate) to ensure a fair share is paid in each member state where the company is active. Many will continue to argue that the right to raise taxes is (and should remain) a core competence of sovereign states.
Draft Report on the proposal for a Council directive amending Directive 2006/112/EC on the common system of value added tax, with regard to the obligation to respect a minimum standard rate – Rapporteur Roberto Gualtieri
The minimum of 15% for the standard VAT rate has been prolonged six times since the Council agreed in 1992. Currently all Member States apply a standard rate of at least 17%. The intention of the proposal is to finally permanently set an agreed limit that ensures the proper functioning of the internal market whilst leaving flexibility for Member States in setting the standard VAT rate.