Tax To Go gives a snapshot of the latest political and legislative developments on taxation policy at the EU level. In this week’s issue we feature (1) CCCTB – Commission revives corporate tax flagship initiative (2) Besides CCCTB – hybrid mismatch and dispute resolution.
CCCTB – Commission revives corporate tax flagship initiative
European Commissioners had barely taken office in November 2014 when Jean-Claude Juncker confirmed his intentions to revamp the pending 2011 proposal for a directive on a Common Consolidated Corporate Tax Base (CCCTB). Two years and a few tax leaks later, the Commission proposed a new text on 25 October 2016. So what’s different in the 2016 CCCTB?
New context, new approach
First, the context. Initially promoted as an instrument aimed primarily to reduce administrative burden and tax compliance costs in the EU, the new proposal aims to “address, on an equal footing, both the aspect of business facilitation and the initiative’s function in countering tax avoidance.” This is part of the LuxLeaks and Panama Papers legacy; and this is essentially why the Commission believes that conditions are more favourable for an agreement to be found in the Council this time. The prospects of not having to worry anymore about the UK confronting CCCTB in the future may also give a new impetus to the negotiations.
The Commission is betting on a gradual negotiation approach, whereby EU member states would first need to find an agreement on the system for a common tax base (CCTB), before starting negotiations over the consolidation mechanism (CCCTB) considered more politically controversial. But the real benefit of the CCCTB project is consolidation, which would allow a multinational group to compute a single net profit or loss for all its operations in the EU, using an apportionment formula based on three factors (i.e. assets, labour, and sales), and would put an end to intra-group transfer pricing in the EU.
CCTB has for only purpose to take things slowly enough to accommodate the most sceptical member states, with Ireland (and the UK) in the lead. There are few identifiable benefits from a CCTB with no consolidation, and the risk is that EU countries reach an agreement on CCTB but fail to ever reach one on the mechanism of weights used for allocating the consolidated tax base of a group to the eligible member states under CCCTB.
In order to make up for the absence of the benefits of consolidation during the CCTB phase, the Commission proposed the possibility for a parent company or head office located in a member state to deduct from its tax base, in a given tax year, the losses incurred by its immediate subsidiaries (or permanent establishments) situated in other member states. This would be temporary since the parent company would add back to its tax base any subsequent profits made by the subsidiaries. Yet again it remains to be seen whether this temporary loss relief mechanism will survive the Council negotiations.
Super-deductions and tax avoidance
Other novelties in the 2016 proposal include a “super-deduction” for R&D costs to encourage innovation, an “enhanced super-deduction” for start-ups, and an “allowance for growth and investment” aimed to address the distortive preferential treatment of debt over equity. Currently, the asymmetry whereby interest paid out on loans is generally tax-deductible, whereas profit distribution is not, gives an advantage in favour of financing activities through debt as opposed to equity.
Another difference as compared to the 2011 proposal is that the system would be mandatory for multinationals with a group consolidated turnover above €750 million. The €750 million threshold is line with OECD BEPS and with the approach taken in recent EU initiatives to counter tax avoidance. Smaller companies are offered the possibility to “opt-in” to CCCTB too, though – a good enough reason for small companies to put their weight behind the proposal. The Commission estimates that CCCTB would cut the cost of setting up a subsidiary by up to 67%, making it easier for small companies to go abroad.
Finally the proposal includes provisions to address some of the OECD BEPS recommendations. These elements have been incorporated, in the form of minimum standards, in the Anti-Tax Avoidance Directive (ATAD) adopted last July. Ultimately CCCTB should incorporate the elements of ATAD within the new legal context; i.e. “the norms would need to be part of a common EU-wide corporate tax system and lay down absolute rules, rather than minimum standards.” Interestingly enough, and like in 2011, the new proposal features a switch-over clause very similar to the one rejected by member states in June this year during the ATAD negotiations. This would enable authorities to tax profits transferred from low or no-tax countries to the EU so as to prevent double non-taxation.
We are not there yet
There is a lot more to say about CCCTB – e.g. what possible indirect effect on tax rates? what transition costs from the current system to the new one? what implementation at national level? But we have plenty of time ahead of us. The Commission hopes CCCTB can be operational by 2021. The context may well be more favourable than in 2011, yet we can expect difficult and lengthy negotiations before member states can ever reach a unanimous agreement on CC(C)TB.