Explanatory Memorandum to COM(2016)683 - Common Consolidated Corporate Tax Base (CCCTB) - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)683 - Common Consolidated Corporate Tax Base (CCCTB). |
|---|---|
| source | COM(2016)683  |
| date | 25-10-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
On 16 March 2011, the Commission proposed a Directive for a Common Consolidated Corporate Tax Base (CCCTB). The proposal, which is still pending in Council, is one of the Commission’s REFIT initiatives and aims to provide companies with a single set of corporate tax rules for doing business across the internal market. The CCCTB proposal of 2011 would therefore allow companies to treat the Union as a single market for the purpose of corporate tax and thereby, facilitate their cross-border activity and promote trade and investment.
It has lately become clear to the international community that the current rules for corporate taxation no longer fit the modern context. Generally, corporate income is taxed at national level, but the economic environment has become more globalised, mobile and digital. Business models and corporate structures are more complex, making it easier to shift profits 1 . Furthermore, the divergence of national corporate tax systems has allowed aggressive tax planning to flourish over the last decade. Thus, when national rules are drafted without considering the cross-border dimension of business activities, mismatches are likely to arise in the interaction between disparate national corporate tax regimes. Such mismatches create risks of double taxation and double non-taxation and thereby distort the functioning of the internal market. In these circumstances, Member States find it increasingly difficult to fight effectively, through unilateral action, against aggressive tax planning practices 2 in order to protect their national tax bases from erosion and counter profit shifting.
Given that Europe's priority today is to promote sustainable growth and investment within a fair and better integrated market, a new framework is needed for a fair and efficient taxation of corporate profits. In this context, the CCCTB features as an effective tool for attributing income to where the value is created, through a formula based on three equally weighted factors (i.e. assets, labour, and sales). Since these factors are attached to where a company earns its profits, they are more resilient to aggressive tax planning practices than the widespread transfer pricing methods for allocating profit.
Alongside the anti-tax avoidance function of the CCCTB, the re-launched project would also retain its features as a corporate tax system which facilitates cross-border trade and investment in the internal market. Currently, businesses with cross-border activity have to comply with up to 28 divergent corporate tax systems. This is a burdensome process, both timing-wise and economically, and diverts the effort out of the main thrust of doing business. The re-launched CCCTB would continue to offer the advantages of the proposal of 2011 in terms of subjecting groups of companies with a taxable presence in at least one Member State to a single set of rules for calculating their tax base across the European Union (EU) and thereby, making them accountable to a single tax administration ('one-stop-shop'). Cross-border loss relief would still be an automatic outcome of consolidation and transfer pricing rules would not apply within the group, as the distribution of the group-wide revenues would be carried out through the formulary apportionment.
The difference, as compared to the proposal of 2011, is that the re-launched initiative would lay down mandatory rules for groups above a certain size, in order to enhance the resilience of the system against aggressive tax planning practices. Having said this, it would also be important that the rules be made available, as an option, to entities which are subject to corporate tax in the Union but do not meet the criteria that would subject them to the common framework.
The discussions in Council since 2011 have shown that the CCCTB proposal, being a very ambitious project, would be unlikely to get adopted, in its entirety, without a staged approach. Thus, various elements (especially, tax consolidation) have given rise to a difficult debate and could be holding back progress on other fundamental features of the system. In an effort to get round these delays in making progress, the Commission, in its Action Plan of June 2015, advocated a step-by-step approach to the CCCTB. According to this, it is suggested that work on consolidation be postponed until agreement is first secured on a mandatory set of rules for the common base, i.e. the common corporate tax base. This does not nonetheless change the fact that the Commission will submit the two proposals, i.e. for a common corporate tax base and a CCCTB, simultaneously and as part of a single initiative. The proposal of 2011 for a CCCTB, which is currently pending in Council, will be withdrawn at the same time as the Commission adopts the new proposals. In this regard, it is fundamental that tax consolidation remains an essential element of the CCCTB initiative, since the major tax obstacles faced by companies in the Union can most effectively be tackled within a consolidated group.
This proposal for a Directive focusses on the so-called second step of the staged approach, i.e. after the elements of the common base have politically been agreed. Until this is achieved, the proposal for a CCCTB will remain pending for examination in Council. The CCCTB lays down the conditions for being in a group, sets out the possible forms that a group can take and includes rules on the technicalities of consolidation. In addition to providing for the necessary adjustments when entering and leaving the group, the text deals with business reorganisations, focussing on the particularities of cross-border groups and more precisely, the treatment of losses and unrealised capital gains. There are also provisions on the dealings between the group and other entities; these primarily relate to the treatment of withholding taxes and credit relief for double taxation. One of the principal elements of the proposal is the formulary apportionment, i.e. the mechanism of weights used for allocating the consolidated tax base of the group to the eligible Member States. Whilst, under the rules on the common base, companies may continue to apply, as a matter of principle, their national rules for administering their tax liability, the CCCTB would require a special administrative framework in order to accommodate the structures of cross-border groups.
• Consistency with existing policy provisions in the policy area
The re-launch of the CCCTB proposal lies at the heart of the Commission’s Communication on an Action Plan for a Fair and Efficient Corporate Tax System in the EU, which was adopted on 17 June 2015. The Action Plan identified 5 key areas for action 3 . It reviews existing corporate tax policies in the Union and sets out the aim of establishing a system of corporate taxation in the EU whereby business profits are taxed in the jurisdiction where value is actually created. The CCCTB is presented as an overarching initiative which could be an extremely effective tool for meeting the objectives of fairer and more efficient taxation.
Furthermore, the re-launched proposal for a CCCTB would include rules to address some of the key Actions of the OECD initiative on Base Erosion and Profit Shifting (BEPS). These elements have now been incorporated, in the form of minimum standards, in the recently adopted Council Directive 2016/1164/EU (also referred to as Anti-Tax Avoidance Directive (ATAD)) 4 . In fact, it should be expected that the CCCTB incorporate the anti-tax avoidance elements of the ATAD but within the new legal context. Namely, the norms would need to be part of a common EU-wide corporate tax system and lay down absolute rules, rather than minimum standards.
The present initiative of re-launching the CCCTB features prominently amongst the Commission’s envisaged projects in the field of fairer taxation. It is planned to be presented to the public on the same day as a proposal for a Directive on hybrid mismatches involving third countries (which will amend the ATAD) and a Directive on dispute settlement. Furthermore, the proposal builds upon recently adopted tax projects; in addition to the ATAD, that is the Parent-Subsidiary Directive (PSD) revisions (2014 and 2015) and the Recast Proposal for the Interest & Royalties Directive (IRD) (2011). The PSD initiative and some of the amendments discussed in relation to the IRD reflect the current political priorities for reinforcing EU tax legislation against aggressive tax planning practices.
• Consistency with other Union policies
The CCCTB falls within the ambit of the Commission’s initiatives for fairer taxation and would contribute to the elimination of obstacles which create distortions that impede the proper functioning of the internal market. On this premise, it is largely complementary to the EU-level legislation in company law and broadly fits with projects such as the Capital Markets Union and the several initiatives in tax transparency, the exchange of information and anti-money laundering.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal falls within the ambit of Article 115 of the Treaty on the Functioning of the EU (TFEU). The text stipulates that the measures of approximation under this article shall directly affect the establishment or functioning of the internal market.
The re-launch of the CCCTB initiative aims to facilitate business within the EU by subjecting taxpayers to a single rulebook of corporate tax legislation to apply across the internal market and also make the system more robust and resilient to aggressive tax planning. Both objectives impact decisively and directly on to the internal market, precisely as they aim to eradicate distortions in its functioning.
• Subsidiarity (for non-exclusive competence)
This initiative complies with the principle of Subsidiarity.
Although the problems and reasons for action, as explained in the previous sections, have distinct origins, it seems that their harmful effects can be tackled effectively only through a common solution: that is, the approximation of corporate tax regimes in the Union would mitigate distortions in the market by creating a fairer and more coherent tax environment for businesses to operate. It is evident that for this objective to come into fruition, action is necessary to be taken not separately by Member States in an uncoordinated fashion, but at the level of the Union instead. Initiatives, planned and implemented by each Member State individually, would only perpetuate, or even exacerbate, the current situation, as taxpayers would still need to deal with 28 diverse and sometimes, conflicting tax systems.
The envisaged re-launch of the CCCTB aims to respond to the need for increased growth and job creation in the internal market, as well as countering aggressive tax planning practices. All these objectives essentially seek to tackle problems beyond a single Member State and therefore, by nature require a common approach. In this light, any measures could only bring results if the rules were applied in a uniform fashion across the internal market. If not, the landscape in the field of corporate taxation would remain fragmented, allowing fiscal obstacles and unfair tax competition practices to continue to flourish.
What is more, tax avoidance practices are nowadays primarily set up in a cross-border context. It is indeed the interaction between different tax systems that generates opportunities for abuse or facilitates taking advantage of mismatches in the interaction of national corporate tax rules. In addition, the fact that the EU is an internal market with a high degree of integration presumes enhanced cross-border activity, which underscores the significance of agreeing to coordinated solutions.
Considering the scale and effects of the envisaged re-launch, its objectives, to attenuate the distortions resulting from the current interaction of 28 national tax regimes and create more favourable conditions for cross-border investment in the single market, would be better achieved at Union level.
Most key features of the CCCTB system could only be dealt with through collective action. For instance, mismatches in the legal qualification of entities or payments, leading to double taxation or double non-taxation, would be eradicated in relations amongst companies applying the common corporate tax rules. Separate action by Member States would only solve these issues bilaterally in the best case scenario. By definition, cross-border loss relief could work most effectively if all Member States engaged in giving it, even though one should neither exclude the bilateral approach as a second-best option. Furthermore, tax-free internal group restructurings, the elimination of complex intra-group transfer pricing as well as the apportionment of revenues by a formula at the level of a group have a cross-border underpinning and could only be addressed within a context of common regulation.
• Proportionality
The envisaged measures are both suitable and necessary for achieving the desired end. They do not go further than harmonising the corporate tax base, which is a prerequisite for curbing identified obstacles that distort the internal market. Furthermore, the re-launched CCCTB does not restrict Member States' sovereignty to determine their desired amount of tax revenues in order to meet their budgetary policy targets. In this regard, it does not affect Member States' right to set their own corporate tax rates.
Although the Commission has consistently promoted the need for coordinating national tax practices, it is clear that coordination alone would not be sufficient for eradicating tax-related distortions in the internal market. Experience has shown that coordination is a slow process and the results of past exercises have hitherto been modest. Moreover, tax coordination typically addresses only specific, targeted issues and cannot cater for the wide variety of problems faced by companies in the internal market, which require a holistic solution.
It is foreseen that the mandatory scope of the re-launched CCCTB be delineated in a way that it only targets the necessary categories of taxpayers, i.e. groups of companies above a certain size. This is because groups with high revenues tend to own sufficient resources which would allow them to engage in aggressive tax planning strategies.
It follows that the envisaged rules would not exceed what is necessary to achieve the objectives of the Treaty for a better functioning of the internal market.
• Choice of the instrument
The distortions to the internal market, as identified earlier, may only be tackled through binding legal rules and through a common legislative framework. Soft law would be a risky choice, as Member States could decide not to implement it at all or it could lead to a piece-meal approach. Such an outcome would be highly undesirable. It would risk creating legal uncertainty for taxpayers as well as jeopardising the objectives for a coordinated and coherent corporate tax system in the internal market. In addition, as the architecture of the common tax base should be expected to impact on national budgets, especially through the formula apportionment, it is critical that the rules which define its composition be applied consistently and efficiently. This is far more likely to be achieved through binding law.
Based on Article 115 TFEU, "the Council shall, acting unanimously … issue directives for the approximation of laws, regulations and administrative provisions of the Member States as directly affect the establishment or functioning of the internal market." The Treaty is therefore prescriptive that in direct taxation, legislation shall exclusively be in the form of directives. According to Article 288 TFEU, a directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods for achieving this result. In this vein, the directive should remain general in nature since technicalities and the minute detail should be left to Member States to decide.
3. RESULTS OF STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
The Commission organised a public consultation to involve all stakeholders and offer interested parties the possibility of providing their input to the re-launch of the CCCTB. 175 participants contributed to this consultation process. Registered associations contributed the largest share of answers (37%), followed by individual companies (32%), the majority of which are SMEs; this underlines the interest of smaller companies in the proposal.
Depending on the type of respondent, there are differences in views on whether the CCCTB is the appropriate instrument for addressing profit shifting and reducing administrative burdens. While the proposal is overall seen positive, the emphasis of NGOs and public bodies is more on the impact of the CCCTB on tax planning activities. Businesses rather emphasize the importance of reducing compliance costs and creating a business-friendly environment for investment. Yet, they also highlight risks in incurring higher administrative costs if the rules against tax avoidance dominate the system.
The input received in the public consultation is reflected in the impact assessment: it is referred to in various sections as well as a dedicated annex.
• Collection and use of expertise
The impact assessment includes the results from three studies.
1. The CORTAX study provided by the Joint Research Centre of the European Commission. The CORTAX model is a general equilibrium model designed to evaluate the effects of corporate tax reforms in 28 EU countries, using detailed data from various data sources.
2. Study by the Centre for European Economic Research (ZEW) on the effects of tax reforms on addressing the debt-equity bias on the cost of capital and effective tax rates. The study focusses on the current extent of the corporate debt bias in tax systems of the EU28 Member States and analyses whether different reform options could in principle manage to address the debt bias and promote investment.
3. Study by the Centre for European Economic Research (ZEW) on the impact of tax planning on effective tax rates. The study derives average and marginal effective tax rates that incorporate the possibility of sophisticated tax planning strategies by multinational companies, including the use of preferential tax regimes such as.
• Impact assessment
The main policy option that has been considered is a proposal for a common consolidated corporate tax base. A key choice to be made relates to the scope of such a tax base, i.e. to whom it would apply. The main options that have been considered are to make the CCCTB mandatory for all firms or just a subset of firms. A variety of options have been considered to address the bias towards debt induced by current tax systems. Two principal actions are available: allowing deductibility of both debt and equity financing costs or disallowing both. With respect to R&D incentives, the central options consider a tax allowance for expenses for R&D investments with varying degrees of generosity.
Valuing the different options has led to a preferred option: a CCCTB mandatory for large companies, equipped with an Allowance for Growth and Investment and with an allowance for R&D expenses. The Allowance for Growth and Investment grants deductions for financing costs for debt and equity within limits to avoid abuses and tax planning. The allowance for R&D expenses is designed to at least maintain existing R&D tax incentives. The analysis shows that the CCCTB has clear advantages over the alternative which would involve taking no action.
Implementing the preferred choice is expected to increase the fairness of tax systems and create a level-playing field as a result of effectively removing incentives for aggressive tax planning in the EU. This would facilitate to ensure that corporations pay their fair share of the tax burden and enhance taxpayer morale. Furthermore, cross-border tax obstacles would be effectively eliminated within the EU. The distortions in the financing decisions of companies are reduced with an Allowance for Growth and Investment, which puts equity and debt financing on similar footing. R&D tax incentives are not only maintained but also enhanced and streamlined.
The expected economic benefits of the proposal are positive. The common consolidated tax base with an Allowance for Growth and Investment would lead to an increase in investment and employment of up to 3.4% and 0.6%, respectively. Overall, growth would increase by up to 1.2%. Compliance costs are expected to decrease (10% in compliance time and 2.5% in compliance costs). The cost of setting up a subsidiary would decrease by up to 67%, making it easier for companies (including SMEs) to go abroad.
There are no relevant environmental impacts expected from the preferred option. Social impacts will also be limited.
• Regulatory fitness and simplification
Tax compliance costs are an important burden for businesses and their reduction will be a major advantage in the implementation of the CCCTB. Estimated compliance costs for large companies amount to about 2% of taxes paid, while for SMEs the estimate was about 30% of taxes paid. Compliance costs are estimated to increase with cross-border activity and with the proliferation in the numbers of subsidiaries. Tax reform data show that numerous CIT reforms took place after the crisis and many measures were directed at reinforcing the international anti-abuse framework. In the light of this, the reduction of compliance costs when setting up an additional subsidiary remains a major advantage: Time costs for setting up a new subsidiary in a Member State are estimated to decrease by 62-67%. Focussing on recurring costs, i.e. ignoring one-off switching costs, the Impact Assessment estimates a decrease in time spent on compliance activities by 8% after implementation of the CCCTB. Based on these time reductions, one could endeavour a rough calculation of the order of total cost savings that would result under the CCCTB. If 5% of medium-sized companies expand abroad, a one-off cost saving of around EUR 1 billion could be expected. If all multinational entities apply the CCCTB recurring compliance costs could go down by about EUR 0.8 billion.
Tax administrations will benefit from reduced dealings with transfer pricing issues and a reduced number of cases to the extent that the tax affairs of a company group is mainly dealt with by the administration of the Member State where the parent resides. On the other side, as long as the CCCTB is not made mandatory for all firms, national administrations will experience additional compliance costs due to the required maintenance of two parallel systems.
To meet the objective of enhancing the fairness of the tax system in a proportionate manner, the preferred option for the CCCTB suggest to make it compulsory only for a subset of firms, based on their size. Thus, micro-enterprises as well as SMEs are exempted from the mandatory application of the CCCTB. Limiting the compulsory application to groups with a consolidated turnover above EUR 750 million serves the purpose of capturing the vast majority (ca. 64%) of turnover generated by groups while limiting the risk of including purely domestic groups. The threshold is coherent with the approach taken in other EU initiatives to counter tax avoidance. At the same time, the proposal offers those companies, for which the application of the CCCTB is not compulsory, the possibility to 'opt-in' to the CCCTB system. This allows for a maximum of flexibility for SMEs and micro-enterprises, offering to benefit from the advantages of a CCCTB without making it compulsory for this set of companies.
4. BUDGETARY IMPLICATIONS
This proposal for a Directive does not have any budgetary implications for the European Union.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will review the application of the Directive five years after its entry into force and report to Council on its operation. Member States should communicate to the Commission the text of the provisions of national law which they adopt in the field covered by this Directive
• Explanatory documents (for directives)
See Recital 18.
• Detailed explanation of the specific provisions of the proposal
This proposal is the second step in a staged approach towards an EU-wide corporate tax system with cross-border consolidation of the tax results amongst members of the same group.
• Scope: differently from the proposal of 2011, which laid down an optional system for all, this proposal will be mandatory for groups of companies beyond a certain size. The criterion for fixing a size-related threshold will refer to the total consolidated revenue of the group which files consolidated financial statements and to which a company belongs. In addition, the common rules will be available, as an option, to a wide scope of groups that fall short of the size threshold.
• Definition of group: (unchanged compared to the proposal of 2011) Eligibility for the consolidated tax group will be determined in accordance with a two-part test based on (i) control (more than 50 percent of voting rights) and (ii) ownership (more than 75 percent of equity) or rights to profits (more than 75 percent of rights giving entitlement to profit). The two thresholds for control and ownership or profit rights shall be met throughout the tax year; otherwise, the failing company will have to leave the group immediately. There will also be a minimum requirement of nine consecutive months for establishing group membership.
• Business reorganisations & taxation of losses and unrealised capital gains: (unchanged compared to the proposal of 2011) The proposed framework chiefly involves the treatment of losses and unrealised capital gains on entering and leaving the group.
When a company enters the group, pre-consolidation trading losses will be carried forward to be set off against its apportioned share. When a company leaves the group, no losses incurred during the period of consolidation will be allocated to it. This proposal comes forward with a refinement of the rule of 2011: in cases of more extensive reorganisations where more than one company has to leave a loss-making group, a threshold is fixed, to determine under which conditions companies will no longer be leaving a group without losses but there will instead be a loss allocation across the consolidated group.
There are rules to deal with unrealised capital gains which have accrued to fixed assets where the assets are disposed of within a short period after their entry into, or exit from, a group. A Member State (in the case of an entry into a group) or the group (in the case of an exit from a group) are given the right to tax underlying capital gains to the extent those were created in their taxing territory. Moreover, the tax treatment of capital gains engrained in self-generated intangible assets calls for a customised approach, which will involve assesing them on the basis of a suitable proxy, that is to say research and development, marketing and advertising costs over a specified period.
• Withholding taxes: (unchanged compared to the proposal of 2011) The proceeds of withholding taxes charged on interest and royalty payments made by taxpayers will be shared according to the formula of that tax year. Withholding taxes charged on dividends will not be shared since, contrary to interest and royalties, dividends are distributed after-tax and do not lead to any previous deduction borne by all group companies.
• Preventing circumvention of tax exemptions: (unchanged compared to the proposal of 2011) The tax exemption in favour of disposals of shares will be disallowed if this is illegitimately extended to sales of assets other than shares. This occurs if assets are moved within the group, without tax implications, to a group member which is then sold out of the group. The assets will then benefit, under the cover of a sale of company, from the tax exemption which is provided for share disposals. A similar treatment is provided for intra-group transfers of assets which are then sold out of the group within the current or following tax year. In this case, an adjustment will be made in order to treat the asset as having left the group from the Member State where it initially was located, i.e. prior to the intra-group transfer.
• Formulary apportionment: (unchanged compared to the proposal of 2011) It will comprise three equally weighted factors (i.e. labour, assets and sales by destination). This combination reflects a balanced approach to distributing taxable profits amongst eligible Member States. The labour factor will be divided into payroll and the number of employees (i.e. each item counting for half) in order to account for differences in the levels of wages across the Union and thereby allow for a fairer distribution. The asset factor will consist of all fixed tangible assets. Intangibles and financial assets will be excluded from the formula due to their mobile nature and the risks of circumventing the system. These factors and weightings should ensure that profits are taxed where they are actually earned. By exception, where the outcome of the apportionment does not fairly represent the extent of business activity, a safeguard clause will provide for an alternative method of income allocation.
As the general scheme of the formulary apportionment cannot address the specificities of certain industries, there will be rules on adjusted formulae, in order to better fit the needs of sectors such as financial services and insurance, oil and gas as well as shipping and air transport.
• Administrative procedures: differently from the proposal of 2011, the common administrative rules are limited to the consolidated group. As a matter of principle, single taxpayers, who opt to apply the rules under the first step, continue to fall within their national administrative provisions.
Groups will deal with a single tax administration ('principal tax authority') in the EU; this is also referred to as the one-stop-shop. This will be based in the Member State where the parent company of the group ('principal taxpayer') is resident for tax purposes. Audits will be initiated and coordinated by the principal tax authority. The national authorities of any Member State in which the profits of a group member are subject to tax may request the initiation of an audit.
The competent authority of the Member State in which a group member is resident or established may challenge a decision by the principal tax authority concerning the notification that there is a group or an amended assessment. For this purpose, an action will be brought before the courts of the Member State of the principal tax authority. Disputes between taxpayers and tax authorities will be dealt with by an administrative body which is competent to hear appeals at first instance according to the law of the Member State of the principal tax authority.