New “federal” EU Tax rules on the table

In 2011, in response to public concerns over large multinational companies exploiting differences in national tax rules, the European Commission published a proposal for a Common Consolidated Corporate Tax Base (CCCTB) to unify tax rules throughout the EU. Individual countries would still be free to set their own tax rates, but anomalies between countries in terms of deductibility of expenses and recognition of income would be eliminated. The initial proposal met with considerable political resistance, particularly from the United Kingdom, and was not pursued. In October 2016, perhaps in anticipation of less resistance once Brexit was completed, the Commission issued a revised proposal to replace the earlier one. It aims to introduce a set of common rules for determining the tax base of companies with operations in several EU Member States and tax them in the country where their revenues are generated, and remove the anomaly of large companies paying what the public perceives as disproportionately low amounts of tax in countries where they have significant activities.

The new proposal

The 2016 relaunch differs from the initial proposal by adopting a two-stage approach, with two new interconnected proposals; one for a common corporate tax base (CCTB) and the other for a common consolidated corporate tax base (CCCTB), which would be mandatory for all groups with global consolidated revenues of more than EUR 750 million. According to the Commission’s announcements, companies operating across borders in the EU would no longer have the inconvenience of having to deal with 28 (soon to be 27) different sets of national rules when calculating their taxable profits. Consolidation means that there would be a ‘one-stop-shop’ – the principal tax authority – where one of the companies of a group, that is, the principal taxpayer, would file a tax return. Companies would be able to file one tax return for all of their EU activities, and offset losses made in one member state against profits earned in another. The consolidated taxable profits would be allocated between the individual member states using an apportionment formula devised by the Commission. Each member state then would tax its share of the profits at its national tax rate.

The apportionment formula

The apportionment formula put forward by the Commission is based on three factors, namely capital, labour and sales. The labour factor includes wages and employees (at equal weights). Under the proposed framework, cross-border activities in the European Single Market will be fully recognised and companies will be allowed to offset profits in one member state against losses in another, which the Commission presents as a strong advantage for new entrepreneurs and smaller startups. However, once the formula is in place, individual member states will be unable to make changes, via their annual budgets or tax laws, to the basic structure of the corporate tax system.

To promote innovation, under the proposed new rules research and development costs would be fully expensed in the year incurred, with an additional 50% deduction allowed for R&D expenditure up to €20 million and an additional 25% on any excess over that amount.

The EU Commission also argues that the introduction of the CCCTB would facilitate the prevention of tax avoidance, as the mandatory use of the CCCTB by large groups would remove their ability to exploit national loopholes in order to engage in aggressive tax planning. Companies that fall below the threshold would be able to opt in to the CCCTB, in order to benefit from the greater simplicity, certainty and cost-savings it is claimed to bring.

Member states’ approach

Member states whose economies are heavily reliant on the services sector believe that they would be disadvantaged by the proposed CCCTB. They point out that, while the proposal is presented as a mere administrative simplification reducing red tape and cutting compliance costs for companies in the Single Market, the reality is very different. In their view it actually represents a massive transfer of sovereignty in the area of taxes from national government to the European Commission, and a reduction in national governments’ ability to manage their economies. They also point out that the cross-border offset of losses is already available, following the Marks and Spencer case. Furthermore, OECD’s Base Erosion and Profit Shifting initiative is already delivering the benefits the CCCTB is claimed to bring in terms of discouraging tax avoidance, making the CCCTB redundant. Ireland, Holland, Denmark, Malta, Luxemburg and Sweden have already filed reasoned opinions against this proposal and Cyprus is understood to be doing the same.

The issue is essentially a political one: the CCCTB proposal represents a further step towards the deeper union between member states supported by the EU Commission and some of the larger member states, particularly France and Germany, but vigorously opposed by others, not merely on financial grounds, but also because of concerns over national sovereignty. Concern over this issue was the fundamental reason for the British decision to leave the EU and fear of precipitating further exits may well result in the CCCTB staying in legislative limbo for another few years.