Under the current international corporate tax system, groups operating in multiple locations are required to deal with the corporate tax rules of each jurisdiction separately.
In 2011 the European Commission proposed a dramatic departure from this established model, the common consolidated corporate tax base (CCCTB).
Essentially, the CCCTB sought to adopt a single set of rules across the EU for calculating corporate taxable profits. This would involve qualifying groups that elected into the regime calculating their locally payable corporate taxes through a formulary apportionment of profits based upon certain suitably weighted prescribed allocation keys.
Had these provisions been adopted then, EU member states would have had little say in the corporate tax regime that applied to groups that elected into the regime.
Most of the rules would effectively have been written for them, though member states would still have been required to legislate the detailed CCCTB rules and would have continued to set local rates of corporate tax.
This would have meant that the EU corporate tax system for such groups would have looked a lot like the current VAT system, where an EU directive sets the overall framework for the individual member states to follow.
Back in 2011 the proposals did not move forward due to member state objections, but recent developments have brought the CCCTB back onto the agenda and have re-energised the EU’s corporate tax agenda.
What has changed?
In October 2016 the European Commission relaunched its amended proposals for the CCCTB, and split the elements which related to a standardised set of corporate tax rules from the cross-border consolidation element, into a related proposal for a common corporate tax base (CCTB). In March 2018 the European Parliament approved the text of the two resulting proposed directives to be presented to the European Council.
To become law the proposals require the unanimous approval of all member states acting through the European Council.
This is perhaps unlikely as many are still uncomfortable with the ideas underlying the proposals, citing concerns about complexity, unfairness, the absence of any detailed impact analysis, and preferring to see corporate tax reform taking place through globally coordinated efforts rather by the EU acting alone.
However, the European Commission and European Parliament appear firmly committed to the proposals, and the UK’s upcoming departure from the EU will mean that the voice of a substantial dissenting member state will no longer be part of the debate.
In addition, two remaining EU powerhouses, France and Germany, are increasingly looking at ways to harmonise their corporate tax systems, most notably in response to the threats posed by a newly competitive US corporate tax system.
Both France and Germany have recently been supportive of the idea of the CCCTB and the influence they wield across the EU is considerable.
What are the latest developments?
Following input from the European Parliament, the proposed directives are radical and go beyond what was published by the Commission in 2016. The proposals include:
- the adoption of the CCTB on a mandatory basis, initially for consolidated groups with turnover exceeding €750m, but reducing to a zero threshold within seven years;
- reference to many of the provisions contained within the EU anti-tax avoidance directive (ATAD), but also seek to place restrictions on the future use of losses and interest deductions, and on the nature and quantum of relief available for R&D expenditure;
- the formulary apportionment of the taxable profits calculated under the CCTB to member states based on locally declared sales, asset, labour and the collection and use of personal data - this would effectively abolish the current use of established transfer pricing methodologies for determining the taxable value of connected cross-border activity within the EU; and
- the adoption of concept of digital permanent establishment to extend the circumstances in which profits are apportioned to a member state and thereby subject to tax.
What will happen next?
If adopted, these proposals would make the federal EU institutions the key policy makers for corporate income taxes across all EU countries.
It is likely that the major hurdle to implementation will remain the European Council, which is comprised of the leaders of each of the member states, who will need to unanimously agree the proposals before they proceed.
Although it is perhaps unlikely that these provisions will be enacted as drafted, the EU’s robust approach to corporate tax reform is a clear indicator of the direction of travel.
From a UK perspective, although it is unlikely that these provisions would directly impact the UK corporate tax system as a consequence of Brexit, they would remain important to UK groups with operations across the EU, so developments should be closely watched.