European Commission to overhaul corporate taxation
In late October, the European Commission released its proposal for major corporate tax reform. The package contains three areas: the common (consolidated) corporate tax base (CC(C)TB), mechanisms to resolve double taxation disputes, and measures to address hybrid mismatches with non-EU countries. In this article, we take a look at the first area – the CC(C)TB.
The Commission first presented the CCCTB project in 2011, under the flag of the single EU market and making the business easier for corporations. Because of differences in their taxation systems, member states did not support the proposal at the time, and it was sidelined for several years. Now it has been re-launched, this time not under the heading of corporate tax harmonisation but as a way to combat tax evasion. Tax harmonisation is considered a side effect of the measure.
The Commission proposes to launch the CCCTB in two steps. The first step will be to reach agreement on a single common set of rules to determine a corporate tax base (CCTB); the common consolidated corporate tax base, the CCCTB, is to be introduced only as a second step.
Compared to the 2011 wording, the Commission proposes the rules as mandatory, but only for groups of companies with a consolidated annual turnover exceeding EUR 750 million; other corporate groups could opt in. Some pro-growth measures – a ‘super’ deduction for research and development costs, and an allowance for growth and investment are also in planning.
The consolidated tax base of corporate groups would be divided among the member states where the group is situated based on three factors: sales, labour and labour costs, and finally, assets. The tax base thus apportioned would then be subject to a corporate income tax applicable in the given state.
The Commission emphasises that even the interim step – a common corporate tax base – will bring benefits to corporations, namely by reducing administrative expenses and compliance costs. Since any mutual offsetting of losses within the group will not apply at this stage, the Commission as an interim measure proposes allowing cross-border offsetting of a subsidiary’s loss against the parent’s profit; once the subsidiary generates profit, the parent company’s state will receive the relieved tax back.
The Commission considers the advantages of CCCTB primarily to be the simplification and unification of corporate systems, the removal of transfer pricing rules, and pro-growth measures. It also wants to demotivate companies from aggressive tax planning and from making use of differences in taxation systems.
In November, the Czech Ministry of Finance invited the professional public to consult on both proposed directives: the CCCTB Directive, and the CCTB Directive. The Commission has proposed the effective dates of the directives for 2019 (CCTB) and 2021 (CCCTB).