The EU Commission proposed on October 25, 2016 a package of major corporate tax reforms that will affect the tax environment of multinational corporations doing business in any EU Member State. The Commission’s reform package consists of three separate initiatives, namely a proposal for a directive implementing a Common Consolidated Corporate Tax Base (CCCTB), a proposal for a directive setting forth mechanisms to resolve double taxation disputes and a proposal for measures tackling hybrid mismatches between Member States and non-EU countries.
Changes in international taxation are happening at an unprecedented pace. It is less than a year since the Anti-Tax Avoidance Directive proposal, which was already considered monumental at that time, and only about six months since the US Treasury Department’s actions regarding tax inversion. However, initially proposed in 2011 and now-relaunched, the CCCTB might be one of the most ambitious tax reforms proposed in the EU. Requirement for consensus among the Member States has previously blocked many of the Commission’s efforts to harmonize corporate taxation in the EU. Yet, in the current tide of international tax policy and discussions – with tax transparency measures combatting aggressive tax planning and base erosion and profit shifting at the forefront of everyone’s minds – the possibility of the new package being adopted is more likely than ever.
The Proposal for CCCTB
The idea to harmonize corporate taxation in the EU dates back to the early 1980’s. The most recent unsuccessful CCCTB Commission proposal was introduced in 2011. The October 25, 2016 CCCTB directive proposal, however, for the sake of making the negotiation process more manageable and facilitating agreement, is divided into two separate directives; one concerning the common tax base and the other its consolidation. The proposal will thus be implemented in the foregoing two stages, alleviating accelerated comprehensive compliance.
Key features of the re-launched CCCTB proposal are as follows:
- Compliance to the system will be mandatory for multinationals with global consolidated revenues exceeding EUR 750 million annually. SME’s and start-ups will have the option of complying. This feature differs from previously proposed in 2011, as compliance was optional no matter the size of the company.
- The common tax base will offer one set of EU rules for companies to determine their tax base and compute their taxable income. The common base will ensure, for example, that all Member States exempt the same revenue from the tax base or allow the same particular expense to be tax-deductible.
- While trying to achieve the capital mobility goals of the European Commission’s Capital Markets Union plan and fortify the EU’s economies from shocks, the Commission included a tool called Allowance for Growth and Investment in the CCCTB. This tool provides a tax deduction to companies undertaking equity financing, similar in theory to the existing tax deductions when companies take on debt.
- R&D investment costs will be fully tax deductible. Furthermore, an additional 50% deduction for R&D expenses up to EUR 20 million and an additional 25% deduction for R&D expenses over EUR 20 million will be offered.
- Once the second phase of consolidation will be implemented, profits from operations in one Member State could be offset against losses in another. Because this benefit will only apply in the second step, a temporary system of cross-border offset is proposed until consolidation is in force.
- After establishing a company’s consolidated tax base, Member States will have the right to tax their proportion of this base. The proportion will be decided based on a formula where the company’s assets, labor and sales are equally weighted factors.
- CCCTB will not affect the national tax rates. Each Member State will tax their share of the company’s consolidated base by the national tax rate it has decided to apply.
Alongside the CCCTB proposal, the Commission introduced a proposal for resolving double taxation disputes in the EU and a proposal containing measures to stop companies from exploiting hybrid mismatches between Member States’ and non-EU countries’ tax systems.
The proposed double taxation dispute resolution mechanism expands the scope of cases currently covered by the EU Arbitration Convention and bilateral tax treatises. Companies will be able to access the new mechanism in all corporate tax issues where double taxation is a significant component. Under the new dispute resolution mechanism, Member States will have an obligation to make conclusive and enforceable bilateral resolutions to eliminate double taxation in cross-border situations.
The Commission’s third proposal on tackling hybrid mismatches between Member States and non-EU countries is an extension to the Anti-Tax Avoidance Directive which only addressed hybrid mismatches between Member States.
The proposed corporate tax reform package is now being evaluated by the Member States. For the Commission’s proposals on direct taxation, such as the CCCTB, to become effective, all 28 Member States must reach a consensus. Previously, this approval threshold has impeded EU-wide reforms on corporate taxation, and harmonization on direct taxation has come by way of precedents set by the European Court of Justice in their interpretations on conflicts of national tax laws and the Four Freedoms. However, this threshold may no longer present such a barrier, as we have seen the Anti-Tax Avoidance Directive agreed to in under six months, and subsequently, changes in international tax provisions that once would have considered politically unimaginable now seem realistic. As commissioner Pierre Moscovici put it in his speech at the press conference concerning the corporate tax reform package when encouraging Member States to act on the proposals: “Let’s seize this opportunity and let’s seize it quickly”.
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