New plan for Europe-wide corporate tax base unveiled

In the latest clampdown on aggressive tax planning by multinationals, new proposals for a Europe-wide corporate tax base

were unveiled yesterday.

Pierre Moscovici, the EU's economics commissioner, presented a proposal for the common consolidated corporate tax base (CCCTB) in Strasbourg.

The relaunch of the CCCTB – an idea that has been mooted for more than a decade but which never garnered sufficient support from member states – marks the latest attempt by the European Commission to legislate on corporate tax matters.

In a bid to progress the proposal through the EU legislative system, the commission plans a two-phased approach.

The first would introduce a common corporate tax base by harmonising the rules by which companies calculate their taxable profits across the European Union. The aim is to significantly reduce costs for businesses that operate across borders.

The second, more controversial aspect of the proposal, which has been deferred until a later date, is the consolidation element. This would oblige companies to aggregate their profits across the EU and then divide out the taxable profits among member states.

Each country would tax their share of the profits at their own national rate.

Under the revised proposal, the methodology by which profits are shared out would be based on labour, assets, and sales, rather than GDP or size of country, as had previously been suggested. This fits into the EU and OECD’s broader objective of linking taxation to the place where the actual business activity occurs.

While the proposal must go to member states and the European Parliament for approval, MEPs are expected to overwhelmingly back the plan.

Under the proposals, which would be mandatory for companies with a turnover of more than €750 million, firms would work out their taxable profits using a single set of EU rules, rather than the specific tax regime of a member state.

Proposals

Among the proposals being suggested as part of the first phase are new EU-wide tax credits for research and development activity, as well as incentives for companies to fund themselves through equity rather than debt.

The latter fits with the commission’s broader objective of developing a “capital markets union” to wean EU businesses off their dependency on debt financing.

Another element of the proposal is a temporary cross-border loss relief mechanism, which would allow companies to offset a loss in one member state against a profit in another. The objective is to incentivise big companies to buy-in to the first element of the package while the consolidated element is being developed.

The commission believes the new proposal will eliminate transfer-pricing. However, transfer-pricing issues between companies with a presence in the EU and other non-EU jurisdictions – including the US – will not be addressed by the proposal.

While the first phase will be mandatory for companies with revenue above €750 million, smaller companies can choose to opt in to the proposals.

But the introduction of a common EU-tax base is likely to lead to two parallel systems operating in each EU member state, which could lead to extra administrative costs for authorities.

New front

The Irish Government is understood to be relatively comfortable with the first element of the proposal, which draws on many of the elements already agreed at OECD level. However, the move towards common EU tax rules marks a new front.

A spokesman for the Department of Finance said Dublin "will engage constructively with all of the proposals in the commission package . . . while critically analysing the proposals to ensure they are in line with Ireland's long-term interests".

Fine Gael MEP Seán Kelly said that while big corporations should pay their fair share of tax, Ireland would have "grave concerns" about the consolidation proposal.

“With suggestions from the UK that it may reduce its corporate tax rate to 10 per cent,” he said, “it is important that member states have the flexibility to change their tax rate as needed, particularly small countries that depend on foreign direct investment. There are concerns that consolidating corporate tax across the union could lead to a harmonisation of tax rates through the back door.”

EU finance ministers will give their first response to the proposal at the next Ecofin Council meeting in Brussels in two weeks, but experts say it could be years before the first part of the proposal is agreed.