EU’s Common Consolidated Corporate Tax Base

More on the EU’s Common Consolidated Corporate Tax Base

On Wednesday, October 25th, the European Commission set forth its proposal to establish a common consolidated corporate tax base (CCCTB) in an effort to “overhaul the way in which companies are taxed in the Single Market, delivering a growth-friendly and fair corporate tax system.”

According to a press release by the EC, this new proposal, built on efforts dating back to 2011, will strengthen “the pro-business elements of the previous proposal to help cross-border companies cut costs, red tape and to support innovation,” and help “create a level-playing field for multinationals in Europe by closing off avenues used for tax avoidance.”

Pierre Moscovici, the EC’s Commissioner for Economic and Financial Affairs, Taxation and Customs, said, "With the rebooted CCCTB proposal, we're addressing the concerns of both businesses and citizens in one fell swoop. The many conversations I've had as Taxation Commissioner have made it crystal-clear to me that companies need simpler tax rules within the EU. At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change. Finance Ministers should look at this ambitious and timely package with a fresh pair of eyes because it will create a robust tax system fit for the 21st century.”

The CCCTB, while not directly affecting corporate tax rates, will develop a unique system by which companies can calculate their taxable profits in the region.

More specifically, this new proposal will:

  • Apply to “large multinational groups which have the greatest capacity for aggressive tax planning, making certain that companies with global revenues exceeding EUR 750 million a year will be taxed where they really make their profits;”
  • Eliminate “loopholes currently associated with profit-shifting for tax purposes;”
  • Help firms in the region “finance their activities through equity and by tapping into markets rather than turning to debt,” and;
  • Promote “innovation through tax incentives for Research and Development (R&D) activities which are linked to real economic activity.”

The EC believes the CCCTB will allow companies to save both time and money when taking care of their tax obligations, suggesting that time spent on such “activities should decrease by 8% while the time spent setting up a subsidiary would decrease by up to 67%.”

Furthermore, the EC predicts a 3.4% increase in total investment in Europe as a result of the many incentives in the areas of research and development and equity financing awarded as part of the CCCTB.

Additionally, tools will be put in place to facilitate the solution of double taxation disputes and prevent firms from using hybrid mismatches between EU and non-EU countries.

Compared to the plan rejected back in 2011, this proposal will be split into two primary components.

As explained by Jim Brunsden in The Financial Times, “one would set common rules on the calculation of taxable profits — in theory the less contentious part of the plan — while the other “consolidation” part would detail where those profits should be taxed.”

According to Paulus Merks, Jian-Cheng Ku, and Jesse Peeters of DLA Piper in Amsterdam, the EU expects the CCTB to “enter into force as of 1 January 2020, provided that the member states adopt it,” keeping in mind that “both the CCTB and the CCCTB directive must be adopted by all EU member states unanimously.”

Speaking Out on CCCTB

Speaking Out on CCCTB

Following this definitive announcement, pundits, government officials and other interested parties spoke out on CCCTB, many of them criticizing this move by the European Commission.

Jim Brunsden, writing for The Financial Times’ Brussels Blog, wrote that there are two main concerns with what he believes is, “at least on paper, a very good idea.”

First, he says, there are general “fears about erosion of national sovereignty.”

Second, and more importantly, Brunsden writes that there are multiple issues that may arise from “re-writing highly technical parts of tax codes in a way that could do unforeseen damage, and ultimately not work.”

Sarah Collins writing for the Irish Independent says the CCCTB is controversial because, by defining where companies should pay their taxes, it might infringe upon Member States’ sovereignty and “potentially [eat] into some countries' corporate tax revenues.”

Furthermore, Tove Ryding and Julia Ravenscroft of the European Network on Debt and Development suggest that the CCCTB will do little to “fix the problem of transfer pricing and corporate tax dodging.”

Ryding says, “This proposal is a mixed bag of a few fixes to the current tax system, but also introduces some new loopholes, which is the last thing we need."

Peter Vale, a partner with Grant Thornton, expressed his concerns over how the CCCTB would affect Ireland, stating, “Of most concern to Ireland is the [consolidation] piece of the proposals, as the formula places emphasis on employee numbers, sales, and assets," adding that "this will likely see a relatively small amount of the enterprise's profits allocated to a small economy such as Ireland, thus significantly eroding the benefit of our low tax rate."

In a plenary session held by the European Parliament following the CCCTB announcement, most MEPs favored this move.

However, several of them expressed their desire for “the turnover threshold to be lower than the proposed €750 million” and that “the common tax base should go hand in hand with a minimum tax rate, which is not included in the proposal.”

To download the entire proposal, visit the European Commission’s page found HERE.

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