By: Diane Ring
On Tuesday, Shuyi mentioned the EU’s Common Consolidated Corporate Tax Base proposal (CCCTB) in her post, noting some interesting parallels between maritime/bankruptcy coordination and international tax efforts at coordination. This motivated me to take a look at the recent developments that have happened around the CCCTB proposal. The CCCTB would provide a single set of rules for calculating the income of businesses operating in the EU – and would allow for such businesses to file a single consolidated return for their EU activities. The group’s income would then be allocated across the member states. Under this scheme, individual EU member states would still be able to tax their portion of the group’s income at their own country-specific tax rate. But I was curious–the CCCTB proposal is not new; it has been around for more than a decade. What has been happening on this stalled cooperation front? And, more importantly, will the EU’s announced re-launch of the proposal have a greater chance of success than previous attempts?
By way of a little background, the European Commission (EC) began its work on the CCCTB fifteen years ago, in 2001. Finally, after preliminary drafts, public consultations, the creation of a working group, and outlines of principles, the EC released its proposal in 2011. In basic terms, the CCCTB would (1) create a single regime for determining a corporation’s taxable income, thus eliminating differences within the EU regarding the tax base, and (2) have related EU corporations consolidate their EU income and then allocate the group’s profit among the EU member states according to a formula (thus reducing transfer pricing disputes among member states). Having similar rules for determining the tax base is one thing; agreeing upon a formula for allocating the consolidated group’s income to member states is a very different matter.
Apportionment of the Consolidated Tax Base: Article 86 General principles
- The consolidated tax base shall be shared between the group members in each tax year on the basis of a formula for apportionment. In determining the apportioned share of a group member A, the formula shall take the following form, giving equal weight to the factors of sales, labour and assets:
Share A =(1/3 of Sales A/ SalesGroup + 1/3 (1/2 of PayrollA/ PayrollGroup + 1/2 of No. of employeesA/No. of employeesGroup) + 1/3 of AssetsA/ AssetsGroup) * Con’d Tax Base
- The consolidated tax base of a group shall be shared only when it is positive. 3. The calculations for sharing the consolidated tax base shall be done at the end of the tax year of the group. 4. A period of 15 days or more in a calendar month shall be considered as a whole month.
This formula may not be “complicated,” but to anyone familiar with allocation and apportionment of business income among the states in the U.S., the potential for interpretation and disagreement is great.
Following the release of the proposal in 2011, momentum for CCCTB’s adoption in the EU stalled. Some member states objected to what they considered infringement upon their tax sovereignty, including their ability to use to the tax system to respond to economic crises and to compete on the basis of their tax systems. In 2015, the EC reignited its focus on the CCCTB proposal with a consultation and request for input. But, acknowledging that the original proposal (which, as a direct tax measure, would need unanimous support from member states) faced significant opposition, the EC instead proposed a two-step approach to introducing the CCCTB. Specifically, round one would effectively be a CCTB (i.e., a common corporate tax base without the extra “C” for consolidation). Essentially, this step would simply offer the benefit of uniform rules in the EU for how to determine a corporation’s taxable income. Later, in round two, consolidated reporting of income by related EU corporations–and the allocation of the group’s income to individual member states–could be explored.
The big question is whether the time is ripe to reconsider the CCCTB (and whether bifurcation of the implementation process into two steps offers the CCCTB any greater chance for success).
The EC believes so; the EC Tax Commissioner Pierre Moscovici cited the trends towards transparency and disclosure, and the public response to the series of tax scandals in recent years, as providing renewed support for CCCTB action. The suggestion is that the CCCTB fits into that trend as a mechanism to prevent abusive corporate tax planning (particularly around transfer pricing). Certainly, the past two years have witnessed significant developments in cooperation, transparency and disclosure that would have been implausible only a few years before (including the OECD BEPS Project Country-by-Country Reporting by larger multinationals, and the automatic exchange of tax rulings within the EU). The success of these information sharing reforms may render the information exchange elements of the original CCCTB framework less objectionable: The CCCTB proposal anticipates the creation and use of a “central database” for storing tax returns and related documentation filed by the taxpayer, and it contemplates coordinated audits.
But there are many differences among the various types of cooperation, coordination, and information sharing. A few obvious points of difference include the following: (1) whether all major global competitors are participating, (2) whether the commitment is vague or very specific, (3) whether the primary burden is on the taxpayer or the state, and (4) how close the agreement comes to controlling a state’s tax policy making powers. Success in securing agreement in one arena is no guarantee of success in others. Moreover, the EC’s strategy of re-introducing the CCCTB in two steps does nothing to address the underlying objections to the heart of the plan–the consolidated reporting of EU corporate group income and the allocation of that group income according to a formula.
When the re-launch of CCCTB was announced last year, David Gauke, U.K. Financial Secretary to the Treasury, dismissively observed: “The CCCTB has been around a very long time. It is a proposal still looking for a justification.” Of course, if a Brexit occurs, perhaps the CCCTB will have held on long enough.