On 25 October 2016, the European Commission announced new proposals on a Common Consolidated Corporate Tax Base. The proposals seek to create a single system for calculating corporate tax bills in the EU, designed to simplify the EU Single Market for businesses, prevent tax avoidance and thwart exploitation of the mismatch of different tax systems. The European Commission first tabled proposals on a Common Consolidated Corporate Tax Base in 2011 but the proposals failed to gather unanimous Member State support. Formal Member State reaction to the new proposals is expected at the Economic and Financial Affairs Council meeting on 8 November.

Background

In March 2011, the European Commission first proposed a common system for calculating the tax base of businesses operating in the EU. Due to a lack of Member State support, the European Commission withdrew the proposals and on 25 October 2016, published new proposals to relaunch the Common Consolidated Corporate Tax Base (CCCTB). Under the CCCTB, the European Commission aims to “deliver a growth-friendly and fair corporate tax system” in two phases.

What is the CCCTB?

The CCCTB is a proposed single set of rules that companies operating within the EU would use to calculate their taxable profits, eliminating the need for companies to comply with different rules in each Member State in which they operate. The CCCTB would enable companies to file a single combined tax return for their whole activity in the EU, reducing cost and administrative burden. The CCCTB proposals aim to make it easier, cheaper and more attractive for companies to operate across the EU Single Market. By harmonising the tax base, the European Commission also suggests that loopholes could be removed from EU corporate tax frameworks, harmful tax competition could be reduced and transparency could be increased.

New proposals

The new proposals divide the CCCTB into two parts. The first part would address the question of the tax base in the EU as a whole and the second part would address the question of how to consolidate the tax liabilities that a company faces if it operates in multiple Member States.

Currently, companies deal with different corporate tax regimes across the 28 Member States. The first part of the new CCCTB proposals would result in Member States signing up to a common tax base, meaning companies’ profits would be taxable the same way in each Member State the company is located in, and that exemptions, deductions and losses would be also be treated the same way for tax purposes. The aim is to reduce costs for business that operate across the EU, especially SMEs.

Once a common tax base is established, the second part of consolidating tax liabilities would be introduced. A distribution formula would allocate and dispense taxable profits between the Member States in which the business is active. Companies would pay tax on its net profit for the whole of the EU while each Member State would tax their share of the profits at their own national rate. Under the CCCTB proposals, corporate tax rates remain an area of national sovereignty. The method of sharing profits would be based on labour, assets and sales rather than the Gross Domestic Product (GDP) and size of the Member State, which links to the Organisation for Economic Co-operation and Development (OECD) objective of connecting taxation to the place where business activity occurs.

The new proposals require companies with combined annual revenue of more than €750 million to sign up to the CCCTB, whereas smaller companies can choose to opt-in. This differs to the 2011 proposals, in which signing up was voluntary to all. The new proposals also include an incentive for companies to invest in research and development by offering EU-wide tax credits and making the costs involved tax deductible.

Reaction

Member States’ Finance Ministers will give their first response to the CCCTB proposals at the next Economic and Financial Affairs Council meeting in Brussels on 8 November. Ireland, Sweden, Malta, the Netherlands, Poland and the UK previously raised objections to the 2011 proposals. Estonia is expected to raise objections to the new proposals as it has a different tax system from the rest of the EU. Denmark’s Tax Minister has been reported as saying that he would consider leaving the EU over a CCCTB plan.

Irish MEPs have been responding to the new proposals. Brian Hayes (Dublin constituency) welcomed that the European Commission relaunched the initiative with a two-step approach. Regarding the second part concerning consolidating tax liabilities, he described it as “a bridge too far”, with Seán Kelly (South constituency) saying that Ireland would have “grave concerns”. Marian Harkin (Midlands-North-West constituency) has said that the CCCTB proposals have “real potential to reduce the amount of corporation tax that Ireland collects”, while Matt Carthy (Midlands-North-West constituency) has said that while the ability for Member States to set their own tax rates will not be affected, “the common rules on calculation of deductions and exemptions will infringe on the rights of Member States of the EU to set policies designed to best benefit their own people and economies”.

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