CCCTB - The essentials and the path ahead
Deloitte Belgium Tax Quarterly, Issue 44 - June 2011
The Common Consolidated Corporate Tax Base initiative is at a crossroad.
After several years of formal and informal discussions between the different stakeholders, the EU Commission formally submitted the proposal on 16 March 2011. The Members States had until 18 May 2011 to formulate their remarks.
An ideal time for an interview with Michel Aujean, partner with the law firm TAJ in Paris and former director of Tax Policy at the Taxation and Customs Union DG, and Eric von Frenckell, tax lawyer at Laga, both of whom closely follow the CCCTB initiative. For a more in-depth understanding of the CCCTB, we refer to the Deloitte Tax Dbriefs webcast of 18 May 2011 “Taxation in the EU: Towards a Common Consolidated Corporate Tax Base", which is a complimentary webcast to the below interview. Click here to replay this Dbrief.
What is the Common Consolidated Corporate Tax Base (CCCTB) and how would it work?
M.A.: The CCCTB is a single set of rules that companies operating in different EU Member States could use to calculate their taxable profits. Under the CCCTB, companies would only have to comply with one single EU system for computing their taxable income, rather than different sets of rules in each Member State in which they operate. In addition, only one tax return would have to be filed for the group’s entire EU activities. This would be the responsibility of the group’s principal taxpayer (i.e. the parent company forming the group with its subsidiaries and/or permanent establishments).
The system would make it possible for companies to consolidate profits and losses from their operations across the EU. In this context, the single consolidated tax return would be used to establish the group’s tax base. After the tax base has been calculated, it would be apportioned among the relevant Member States in which the group is active according to a pre-set formula using three equally-weighted factors: assets, labor and sales. Members States would then tax, at their own domestic corporate tax rate, the profits allocated to the multinational company or permanent establishment residing for tax purposes on their respective territory. Importantly, each entity (company or permanent establishment) receiving its share of the CCCTB after apportionment would be able to impute tax credits or national taxes when these are deductible against such share.
The "principal tax authority", which is the competent authority of the Member State in which the principal taxpayer is resident, would administer this process, and this same Member State would be responsible for coordinating the appropriate checks and following up on the return (so-called "one-stop-shop system").
"The new system would
also be interesting for
companies planning to
expand into other Member
The CCCTB proposal sets out procedural rules to address other aspects of the system such as the way companies could opt-in to the CCCTB system (as this would be an optional system), the manner in which their tax returns could be submitted, the harmonisation of the relevant forms and the coordination of the tax audits that would need to be performed.
What would be the anticipated benefits of the CCCTB for multinational companies?
E.v.F.: The CCCTB, which is designed to eliminate tax obstacles to EU cross-border activities, would make things far cheaper and simpler for businesses by creating one set of rules for calculating the tax base of a group, and by setting up a one-stop-shop system for filing tax returns.
Currently, according to the separate accounting principle, companies have to deal with 27 different rules for calculating their taxable profits, and must file returns with the tax authorities in each Member State in which they are active. This usually results in high compliance costs, administrative burdens and complex re-adjustments. The complicated transfer pricing system, which is currently in place for intra-group transactions, is particularly expensive and burdensome for businesses operating within the EU, and can lead to disputes between Member State administrations and result in double taxation of companies.
Furthermore, by allowing the consolidation of profits and losses at EU level, the CCCTB would enable the cross-border activities of businesses to be fully taken into account and would potentially result in an immediate compensation of losses.
For businesses operating cross border in the EU, the CCCTB would translate into savings in compliance time and costs. It is estimated that the current compliance costs could be reduced by 7%, which is equivalent to a saving of €0.7 billion across the EU.
The new system would also be interesting for companies planning to expand into other Member States. Currently, it costs a large enterprise over €140,000 in tax related expenditure alone to open a new subsidiary in another Member State. The CCCTB would reduce these costs by €87,000 or 62%. Medium-sized enterprises stand to gain even more, with their average tax-related costs of expanding within the EU dropping from €127,000 to €42,000 (a decrease of 67%). Even if only 5% of SMEs were to decide to expand on this basis, overall savings would be of the order of €1 billion.
In addition, by allowing businesses to offset losses in one Member State against profits elsewhere in the EU for tax purposes (i.e. consolidation), the proposal could result in additional savings of €1.3 billion for companies across the EU.
In short, the CCCTB would save businesses €0.7 billion in reduced compliance, €1 billion in reduced costs to expand cross-border and €1.3 billion through consolidation.
In summary, the main benefits of the CCCTB would be as follows:
- It would provide a common tax base that would considerably reduce compliance costs because it would be possible to calculate the tax base in the same way in all the participating Member States;
- It would eliminate the need to determine arm's length transfer prices for intra-group transactions;
- It would provide a consolidation mechanism to offset profits and losses of the same company or group in various Member States; and
- A “one-stop-shop” system would be used to administer the CCCTB .
Would Member States’ tax revenues be impacted as result of the CCCTB?
M.A.: The European Commission (EC) has initiated a few studies investigating the likely impact of the CCCTB in terms of running the new system, compliance costs, and effect on tax payments and public finances. The EC has concluded that for most Member States, the CCCTB would be broader than the existing national tax base, and that on average, the common tax base would be broader by 7.9%. This would compensate for the loss of tax revenue caused by the consolidation of losses and profits. In some cases it would induce governments to lower their tax rate in a "broad base/low rate" type of reform. The EC has further noted that, if implemented, the CCCTB system would stimulate growth and employment in the Member States, enable them to attract foreign investment and allow the EU to become a more competitive global player.
In contrast to the EC, some experts and national governments consider that substantial changes in country-by-country tax collections would occur as a result of adopting the CCCTB. The following concerns, for instance, were articulated by the Dutch government against the proposed CCCTB (although without substantiated evidence):
- The CCCTB will result in a reduction of investment and in a reduction of GDP;
- Compliance costs for governments will increase as EU countries will have to run two tax systems at the same time, i.e. the local tax system and the EU tax system;
- The allocation keys ignore key value drivers such as intangibles and financial assets; and
- Concerns about the proposed rule that the country of the EU top holding is responsible for the CCCTB administration of the relevant group. If this country is not capable of performing in-depth tax audits, it will have an effect on the entire European taxable income.
Some have also mentioned the risk that the CCCTB would also lead to a reduction of domestic tax rates as a result of tax competition between the Member States. This could result, at least in theory, in the loss of tax revenues for some Member States.
How have Member States reacted?
E.v.F.: By virtue of the Treaty of Lisbon, each national parliament has eight weeks from the publication of proposed new EU legislation to formally consider whether the legislation complies with the principle of subsidiarity. May 18 was the deadline for the Member States to submit a reasoned opinion on the subsidiarity aspect of the CCCTB proposal, which the EC released on March 16.
The U.K. and Ireland have each concluded that the proposal, in its current form, does not comply with the subsidiarity principle. Some other Member States -- Bulgaria, Malta, the Netherlands, Poland, Romania, Slovakia, and Sweden -- have submitted reasoned opinions to EU officials expressing concerns over the subsidiarity aspect of the proposal. Italy has expressed no concerns about subsidiarity, while Belgium, Luxembourg, and Portugal have sent comments on the substance of the proposal without specifically referring to the subsidiarity issue. Germany has also recently come out against the proposal through a response by the Minister of Finance to a parliamentary question.
On the whole, the total number of votes expressing concern regarding the subsidiarity principle is only 13 so that it does not reach the threshold of 18, at which the Commission would have to review its proposal.
"For businesses operating
cross border in the EU, the
CCCTB would translate into
savings in compliance time
Although it is difficult at this stage to determine what changes would need to be made for the proposal to be accepted by all Member States, the German Minister of Finance (in the response to the parliamentary question referred to above) has stated that Germany opposes both the consolidation aspect of the proposal (because it would result in the loss of tax revenues) and the optional character of the system (because it would make corporate taxation in the EU too complicated). The Minister has however indicated that it would support a CCTB approach (Common Corporate Tax Base, without consolidation).
What is the current status of the CCCTB? What is the next step to move forward with the proposal?
M.A.: The concept of a CCCTB has been on the EC’s agenda for a number of years already and it is likely that the proposal made on March 16 is just the start of a long procedural process, which would necessitate further technical analysis and political debate.
The proposal will now need to be considered by the European Parliament which, along with the Member States through the Council of Ministers, can suggest (it is indeed only consulted in this respect) that the EC make amendments to its proposal. The proposal emerging from such a process will then be put before the Finance Ministers in the ECOFIN Council for agreement. The proposal can be adopted by the ECOFIN Council only if it is acting unanimously. However, if there is no unanimous support among the Member States (which is very likely given the latest reactions), the CCCTB proposal may be discussed under the "enhanced cooperation procedure", under which the proposal could be adopted by a smaller group of at least nine Member States, provided that a "qualified majority vote" of the ECOFIN Council is achieved. Other Member States can subsequently join if they wish.
As already mentioned, it is extremely unlikely that this proposal will be adopted unanimously. At this time, it is difficult to say whether the proposal has sufficient support for it to be adopted within the enhanced cooperation framework. Even among the Member States that did not issue a negative opinion concerning the compatibility of the proposal with the EU subsidiarity principle, many indicated that they still needed to examine the content of the proposal before accepting or rejecting it.
An interesting element can be found in the very recent report from the French Court of Auditors who, at the request of President Sarkozy, have studied the possible convergence of the tax systems between France and Germany, concluding that the only area of common interest is in the adoption of a common corporate tax base on which the two tax administrations are continuing to work. This could result in new impetus being given to the subject by the two countries and could have substantial impact on other potential participants.